Are chargebacks necessary for supply chain collaboration?

Discussion
Feb 09, 2018
Tom Ryan

According to a survey from Supply Chain Digest, both retailers and vendors rate their current levels of supply chain collaboration as strong. But 43 percent of retailers and 58 percent or vendors expect chargeback levels to rise over the next five years. Only 21 percent of each group predict chargebacks will decline.

While many vendors believe retailers use chargeback programs as a profit center, responses from retailers contradict that. Twenty-three percent of retailers admit their programs are “dollar-oriented,” while 35 percent say their programs are primarily focused on supply chain improvement. The plurality (42 percent) said the focus of their programs was a mix of improvement and dollar objectives.

Yet the study notes that both Target and Walmart announced programs in 2017 designed to reduce supply chain variability associated with vendor shipments, essentially tightening requirements and increasing penalties for underperformance. On-time and fill-rates are primary focuses. HEB and Kroger launched similar initiatives, a first for the grocery sector.

Both retailers and vendors agreed that the quality and available of data was the primary inhibitor to improved collaboration, although both felt their ability to collaborate was significantly better than their partners. Vendors also saw trust, the ability to share gains and ROI as bigger challenges to collaboration than retailers.

Probing the different aspects of retailer compliance programs on a scale of one (least satisfied) to seven (most satisfied), vendors’ biggest beef was the lack of detailed information on what triggered a chargeback (average score of 2.7). That was barely ahead of “Appropriateness of Chargeback Levels” (2.8) and “Timeliness of Communications” (3.1). Vendors had the least concern relative to the clarity of the rules (average of 3.7).

Supply Chain Digest wrote in the study, “We will note that the level of detail in communications about chargebacks and the timeliness of those communications is something that is very much in the control of retailers and can be improved with relatively little investment. We wish more of them would put some focus in these areas.”

DISCUSSION QUESTIONS: Are chargebacks a necessary evil for driving vendor compliance or do they undermine supply chain collaboration? Do you see improving data quality/availability, trust levels, tools or some other aspect as the best way to improve collaboration? What’s your overall take on chargebacks?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Chargebacks are the symptom, not the problem. The problem is compliance, and it has to be fixed at the root."
"There are two types of chargebacks. One is very legitimate and the other is simply robbery that retailers institute for themselves doing a poor job."
"Because there seems to be a widespread reluctance to raise retail price, these internal margin swaps have become important to retailers’ bottom line."

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8 Comments on "Are chargebacks necessary for supply chain collaboration?"


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Bob Amster
BrainTrust

Chargebacks are the symptom, not the problem. The problem is compliance, and it has to be fixed at the root. Chargebacks should be used exclusively to drive home the need for vendors to comply with agreed-upon requirements. The financial hit has impact on compliance. Conversely, collaboration can be achieved only between highly ethical, disciplined businesses. If either side of the transaction lacks those qualities, there will be chargebacks.

Chris Petersen, PhD.
BrainTrust

Today’s omnichannel marketplace is evolving to new a “real time” retail ecosystem. This creates unprecedented pressures on having reliable inventory with rapid replenishment. Retailer charge backs are not the answer. They are punitive in nature, not collaborative. Chargebacks look backward at “offenses” and do nothing to address the root causes to optimize the supply chain.

Data is the new currency for strategic collaboration. Most don’t have the tools to exchange it on a daily basis required to adjust inventory to real-time needs and demand. The real answer hinges on the fact that inventory must become real-time in order to prevent out-of-stocks and enable overnight home delivery.

There are some major innovations occurring outside of the U.S. Ace Turtle in India has built a platform for managing and tracking inventory all the way down to the store shelf. Ace Turtle’s platform enables shipping from the closest points, even if that is a store. Distributors are the retailers and suppliers new best friend and business partner.

Gene Detroyer
BrainTrust

There are two types of chargebacks. One type is very legitimate and the other is simply robbery that retailers institute for themselves doing a poor job.

Three examples: My company sold to Walmart, Target and Walgreens among others. We never had a chargeback from Walmart. They gave us specific instructions of how to service them as a customer and we met their needs. Target was another story. They, of course, priced our product higher than Walmart. Every so often they would claim we were selling our products to Walmart for something less than Target so they would deduct what they thought we were charging Walmart. We were not a huge CPG company. We would fight and often lose.

Then there was Walgreens. They ran a huge nationwide promotion on our product. Bought more than we recommended. When it didn’t meet their expectations, they didn’t pay us.

Chargebacks to a vendor are OK and deserved when a vendor doesn’t comply. But chargebacks to a vendor when the retailer makes the mistake is as bad as robbery.

Camille P. Schuster, PhD.
BrainTrust

These numbers are low, especially the ones about knowledge or skill to successfully collaborate. Unless chargeback fees are tied to a level of performance metric, they are not helping collaboration. This is just more evidence to support the claim that companies do not understand collaboration.

Jeff Sward
BrainTrust

I was a department store DMM back in the ’80s when chargebacks for this kind of compliance started. It was a nightmare for the relationship with the vendors. The merchants complained to top management. We were invited to the DC for a tour. We started at the receiving dock and were taken through the whole building, step by step. We saw what happened to a shipment with proper packing and paperwork. We also saw what happened to a shipment that didn’t comply. Nightmare in the DC. I can only imagine the same scenario 30+ years later. Good guidance + good compliance = table stakes in this day and age. No room for error.

Dan Raftery
Guest

Chargebacks have become part of the financials for both sides of the table, so from that perspective they are difficult to dislodge but certainly not necessary. Because there seems to be a widespread reluctance to raise retail price, these internal margin swaps have become all too important to many retailers’ bottom line. Chargebacks are retailers’ opioid addiction. Those who use chargebacks to improve operations will see lower levels of this revenue stream, but will also have more efficient supply chains which could mean they live longer than those who don’t kick the habit.

Ralph Jacobson
BrainTrust
This study shows that both parties feel the other party doesn’t have the skill needed to collaborate, both parties feel there is a need for better tools and data visibility and they also both feel there’s little interest in collaboration in general. Hmmm. So, we don’t think our trading partners have the skills required, we need better data & tools, but aww, heck, we’re not really all that interested in this collaboration thing, anyway. LOL. Seriously?! These barriers are not all that new. I can remember at least back to the ’90s when we also had little overall interest in collaboration. Everyone has talked about it for years. But talk is cheap. Investing in the right tools available today to capture that “dark data” and reap real-time supply chain insights must require significant skills and budget on both parties’ parts, right? Not necessarily. I think this is more of an awareness issue, than a level of interest issue. Chargebacks are probably necessary as long as we continue to operate in the way we have been… Read more »
Sara Mays
Guest

The goal of any chargeback program is to drive sales which is mutually beneficial for the vendor and retailer. Understanding and responding to supply chain issues requires a collaborative audit routine that allows for the identification of root cause issues.

Technology can provide enhanced visibility but without a trusted partnership, the finger pointing will continue. Chargebacks ensure that the vendors remain partners in the selling process until the goods are in the customer’s hands.

wpDiscuz
Braintrust
"Chargebacks are the symptom, not the problem. The problem is compliance, and it has to be fixed at the root."
"There are two types of chargebacks. One is very legitimate and the other is simply robbery that retailers institute for themselves doing a poor job."
"Because there seems to be a widespread reluctance to raise retail price, these internal margin swaps have become important to retailers’ bottom line."

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