HOW TO MANAGE CUSTOMER CHARGEBACKS: PART ONE, INTRODUCTION
THE SETUP
As a small manufacturer, you may have started courting large retail Big Boxes (Dick’s Sporting Goods, Kohl’s, Target, etc.). If you haven’t, then it is time to start. You’ll work long hours going to meetings, calling buyers, and preparing tons of documents. Finally, the big sale comes. You just landed your first Big Box store. There is celebration, … maybe even bubbly?
You get your purchase order and begin the flurry of activity associated with the first big order. Everyone works hard and with some overtime and extra help you get the order shipped out. The process, like your business, was bootstrapped and some corners cut, some liberties taken but the order shipped. Now it is time to sit back and wait for the money to roll in.
After the interminably long wait to receive payment, you get the check. Cue the second round of celebration and bubbly. This is when the Clark Griswold moment happens. You open the check only to find that it is far less than you expected. Reading further, you find that the customer has taken several deductions from the check listed with cryptic numbers and incomprehensible definitions.
Following a succession of vague emails from the buyer the customer’s logistics department suggests you look at the routing guide. There you find, to your horror, you missed the “Chargeback Schedule”. A number of your mistakes during pack-out and shipping have resulted in your customer charging you to recoup the costs of your mistakes. Suddenly, that thin margin you took for this big customer just got a lot thinner.
Bubbly exchanged for a stiff drink.
CHARGEBACKS DEFINED
Chargebacks are a four-letter word for any small business supplying Big Box retailers. To save money and maintain slim margins, Big Box retailers are increasing the sophistication of their distribution centers (DCs). Sophisticated systems have sophisticated requirements. Small vendors are now subject to routing requirements that may be completely new to them. The new complexity also places greater pack-out burdens on small vendors.
Chargebacks were created by businesses looking to recoup the costs of fixing labeling and pack-out mistakes made by vendors. These costs can be small and apply to the entire shipment or they can be much larger and apply to every box or even each unit. Understanding and managing the pack-out requirements and chargeback schedule for your largest customers can be costly but it is incredibly valuable.
Chargebacks and their associated dollar values are different for each customer. Every Big Box has an extensive routing guide that is provided by the company’s logistics department. Study this document like you did your textbooks. Know it in and out, highlight every important aspect, and print copies for everyone in your organization because you will be tested on the information every time you ship.
This routing guide will give you the basic information needed to properly ship your product. If you have any questions, contact your customer’s logistics department immediately. They are much less helpful once the chargeback has been incurred.
Chargeback systems are often paired with vendor scorecards or some type of vendor rating system. Target, for instance, has an entire system where vendors can drill down into every metric that Target monitors. It is a system that is both overwhelming and insightful.
Combining the information in the routing guide and the vendor scorecard will provide a picture of how to correctly ship product, how your performance will be judged, and how much it will cost you to make a mistake.
MANAGING CHARGEBACKS
So, what is the trade off for a small manufacturer?
It is hard to get the attention of a buyer who may be managing hundreds of brands. One way to make sure that your buyer appreciates your company is to keep an immaculate vendor scorecard.
This has two effects. First, it reduces chargebacks, which look bad and cost your company money. Second, some buyers are paid year-end bonuses based on the performance of their vendors’ scorecards. Good news for you because good performance pays your buyer.
A third benefit is the improvement of your own supply chain. Big Box retailers have invested millions of dollars in creating efficient supply chains. Adhering to the requirements of a routing guide gives your company a glimpse into effective supply chain management tools. There is far more benefit to appreciating these lessons than constantly lamenting them.
How do you manage your chargebacks, keep costs down, and buyers happy?
Spend the time to properly understand your routing guides. This is one place where you won’t know what you don’t know until you have put the time in to completely understand the routing guide.
I have outlined some important areas to concentrate on when looking at a routing guide. These guides are complex and often have specialized language that is particular to the customer’s logistics department. Creating a definitions section for each routing guide will help to translate the specialized language into something your employees can understand.
The items that I touch on in the following entries are areas that you should pay attention too. Every customer will have particularities that make their routing different. Use theses categories to put together comprehensive lists you can use to double-check each shipment to the customer. Maintaining your own routing guidelines for each customer will prove invaluable as you add customers.
Putting the work in up front will greatly improve your performance as a vendor and the profit from Big Box customers. You will also learn critical lessons about supply chain management that you can use with other customers.
In the next post, I will discuss how to handle pack-out based chargebacks. These are the easiest chargebacks to fix because they do not require any expensive equipment or technical knowhow.
