Supply Chain Management: Why Retailers Impose Chargeback Fees

hundred dollar bills

By Molly Goad

A chargeback fee — also known as an expense offset — is a service charge retailers assess when their suppliers don’t comply with certain predetermined requirements.

This is part of the deal because non-compliance disrupts the supply chain and can be costly for the customer. If a delivery is late or products are damaged, it costs your partner money, and the chargeback is how they offset these unanticipated costs. Oftentimes, the accumulated fees are deducted from the supplier’s final payment.  

Critics say these chargebacks are becoming another money grab for large retailers, which is a debate for another blog post. In the meantime, the best course of action is to educate yourself on this issue and become set up with an EDI provider who has a proven track record for nipping chargeback problems in the bud. 

Types of Chargebacks

There are many ways you can be charged these penalties; some of the most common ones stem from invoice and advance ship notice errors. (The EDI 810 invoice is sent in response to a purchase order. The EDI 856, or ASN, is sent to retailers and contains shipment date, carrier information, packing information, PO number, and more.) 

Home improvement giant Lowe’s has a 10-page guide dedicated to ASN best practices and common errors.  I think this statement from the guide could be a good mantra, no matter what retailer you working with: “Above all, the ASN must match the shipment.” (Repeat after me: The ASN must match the shipment. The ASN must match the shipment.) 

Here are some specific issues that often result in a chargeback: 

The list is endless, and no two retailers are an exact replica when it comes to chargebacks. You have to understand what each unique partner is expecting. In the next sections, I’ll go over a few specific examples from the list above.  

ASN Not Received on Time

Trading partners can issue a chargeback if the ASN isn’t received in a timely fashion. Amazon vendors, for example, are required to send ASNs to the Amazon Fulfillment Center within 30 minutes of the shipment’s departure or six hours prior to delivery, whichever is sooner. Amazon needs this document in hand so employees can schedule and prioritize the receipt of the items to their warehouses. The fee falls somewhere in the range of 1-6% of the product cost, depending on the ASN error type. Also, Amazon takes into account your compliance rate; a low compliance rate equals higher chargebacks. Ouch. 

Labeling Errors

Suppliers to Walmart may receive chargebacks for items that are not in compliance with the Walmart eCommerce Packaging and Labeling Guide. The Supplier Help section of Walmart.com says, “These charges include all inbound items not labeled or packaged as outlined in the guide and result in rework and/or additional research before our fulfillment centers can receive them.”

Walmart’s Vendor Correction of Error Compliance team is on the case, issuing a $200 admin fee for each applicable PO with an error plus $1 per unit for each unit affected. 

Suppose you have the same error within the same PO in a package of 56 units. Your chargeback will be $256 — one $200 admin fee plus $1 per unit affected. 

Let’s say the same package of 56 units has two unique errors to be fixed across all units. Now the chargeback will be  $512 — $400 (two $200 admin fees for the errors) + $112 ($2 per unit affected because there are two errors). 

Using Wrong Carrier

Retailers often assess a chargeback when an order arrives via a different ship method from the method that was transmitted in the order. If the order says FedEx Ground, and you send it via the U.S. Postal Service, you can be charged for that.

How much? It depends. Walmart’s fee “is assessed at the higher of: $5 per non-compliant package or the rate difference between the Walmart-selected carrier method and the vendor-selected (non-compliant) carrier method.” 

Delivery to Incorrect Location 

You may wonder, “does that happen very often?” And the answer is, yes! The wrong location doesn’t necessarily mean the wrong address altogether. Many times the mistake is delivering to building 4 instead of building 7 on campus. Even if the proper drop point is in view, having to repack and redeliver results in more labor and the retailer will pass those charges on to you via a fee. Furthermore, the time to repack, redeliver, and unpack could result in the order being received late, adding on another chargeback for the error. Double whammy. 

Shipment Not Packed Correctly

Retailers require that the trucks be packed a certain way. If you don’t follow these directions, it can be costly.

For example, some warehouses do not allow pinwheeled pallets. “Pinwheeling” is when pallets are loaded on a truck in an alternating fashion, and is used to maximize space on the truck. The problem: This method can take an hour or longer to unload. So if your stuff comes pinwheeled when it wasn’t supposed to, it puts all subsequent deliveries off schedule for that day. It’s a big disruption. 

Take a Deep Breath

Overwhelmed? It’s ok. This is a lot to think about. Take a breath, and repeat the mantra: The ASN must match the shipment. The ASN must match the shipment.

And take a look at our Distribution Enablement System, where you can track orders the moment they come in from one interface. DES also allows you to schedule, manage, and gain insight into carrier dock times, and view the various specifications for each of your customers.

Stay tuned next week when I will cover how to minimize chargebacks.

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