Understanding Retail Chargebacks: Causes, Prevention Tips, and Revenue Recovery Solutions

Retail chargebacks are a significant concern for suppliers. As businesses aim to optimize their financial performance, fully understanding the root causes of deductions becomes mission-critical.

What are Retail Chargebacks?

Retail chargebacks are fees a retailer imposes on a supplier, typically in the form of a deduction on an invoice, when the supplier doesn’t meet the retailer’s specific standards and requirements. Retailers issue chargeback deductions to recover lost revenue or time. Depending on the retailer, chargebacks take various forms, including fines applied per case, order, or shipment. Deductions can also be a flat fee, sometimes as high as 20 percent of the cost of goods sold (COGS). For suppliers, deductions represent revenue leakage due to inefficiencies in internal processes. Over time, chargebacks can lead to significant—and often unnecessary or avoidable—revenue losses.

Why Retailers Issue Chargebacks

Retailers issue chargebacks to suppliers for many problems, including product discrepancies, shipping delays, and inconsistent paperwork. The common denominator of all issues is the disruption of a retailer’s planned schedule and the efficiencies of its well-organized operational processes. Retail chargebacks or deductions are the penalties retailers issue to promote maximum efficiency and profitability for themselves and their CPG partners. As a result, it’s essential to understand revenue leaks and fix internal processes to prevent losses. Below are the four most common reasons for retailer chargebacks.

1. Shortage Claims

Perhaps the most common retail deduction is a shortage claim, which occurs when there is a discrepancy between the quantity shipped by the supplier and the quantity received by the retailer. Some shortage claims are easily identifiable, with entire cases missing from a shipment. Other instances include concealed shortage claims, where the shortage is contained within a case of product. For example, a case that is supposed to contain 36 books contains only 24, resulting in a concealed shortage of 12 books. Retailers manage inventory costs, and they deploy Just-in-Time (JIT) inventory models to ensure the right amount of inventory is available at any one time, ideally without any stockouts or overstocks. Not only do shortage claims strain supplier-retailer relationships, they often lead to additional chargeback penalties. It’s vital for CPGs to make proactive, continuous process improvements to eliminate quantity discrepancies and prevent unnecessary chargebacks.

2. Order Fill Rate

Another reason for chargebacks is the order fill rate. You may have heard of OTIF (On Time In Full), OTFR (On Time Fill Rate), or ORAD (Original Requested Arrival Date). A supplier’s order fill rate is the percentage of orders it fulfills entirely and on time according to the Must Arrive By Date (MABD). Product shipments that arrive past the MABD are problematic because they lead to retailer stockouts. However, shipments that arrive too early are equally problematic because they lead to overstocks. Both situations affect a retailer’s inventory costs and are grounds for chargebacks or AR fines. Some delays by carriers are unavoidable. However, many delays occur simply from using the wrong carrier. Retailers often have preferred carriers, particularly when working with Less-than-Truckload (LTL) shipments. Some LTL carriers travel to distribution centers (DCs) daily; others less often. Partnering with the wrong carrier can result in delivery delays and, in turn, missed delivery deadlines. Ensure preferred carriers are engaged to avoid unforeseen obstacles. Equally important is refining internal processes to ensure shipments are picked and shipped, and therefore likely delivered, within expected date ranges. You may also choose to ship Collect using your retailer’s trucking company instead of a Prepaid carrier.

3. Packaging Specification Violations

Product quantities and delivery dates are not the only considerations in order fulfillment. Packaging specifications are important, too, and discrepancies can be problematic. Some retailers require shelf-ready packaging with features like easy-to-open flaps, clear product displays, and labels designed for immediate store shelf placement. To ensure protection against damage, others might require sturdy, rigid boxes with proper strength for the product weight and adequate cushioning material to prevent damage during transit. You may see a chargeback for not properly labeling your packages’ edge crush test (ECT) specifications. Additionally, aggregating product packaging onto skids and other pallets is an important consideration to avoid deductions. For instance, some retailers don’t allow odd-sized pallets. Still others don’t allow pinwheeled pallets or those loaded onto trucks with alternating orientations.   Adjusting off-loading and shelving processes to accommodate violations of packaging specifications is time-consuming and negatively impacts a retailer’s operational productivity and related costs. Therefore, you can expect chargebacks.

4. Advanced Shipping Notice (ASN) Errors

An Advanced Shipping Notice (ASN) is an electronic document that informs retailers their shipments are in transit. Notifications are typically sent via electronic data interchange (EDI) as EDI 856 transactions. Failure to send or sending a late, duplicate, or otherwise invalid ASN to a retailer are all grounds for a retail chargeback. All those situations create unnecessary disruption for a retailer, and all can be easily avoided with finely-tuned internal operations. Target, for example, will notify suppliers when an ASN is incorrect. Walmart, on the other hand, will issue a Supplier Quality Excellence Program (SQEP) fine for ASN errors. Send ASNs as soon as shipments are processed and tracking information is available to avoid chargebacks. If you use fulfillment partners, have them submit ASNs to your retail customer on your behalf, eliminating any miscommunication that might lead to errors.

Revenue Recovery and Reducing Retail Chargebacks

Chargebacks seriously impact retail suppliers, including decreased cash flow, thinner profit margins, and strained relationships with retailers. Effectively managing deductions requires two distinct approaches: one proactive and the other reactive.

A Proactive Approach

Audit your operational processes to identify potential retailer compliance challenges early—ideally before the retailer does. Effective compliance prevents chargebacks from happening in the first place, resulting in a stronger retailer relationship. Additionally, less time and resources committed to managing AR fines and deductions means more attention can be focused on core business operations. However, even a fully compliant operation will experience retail chargebacks. It’s simply the nature of the beast.

A Reactive Approach

Actively manage the chargebacks you receive and act professionally to recover chargebacks made in error by the retailer. Although deductions may appear small individually, they can produce significant financial losses in aggregate. Comprehensive claim management solutions like Vendormint™ cover all claim categories and manage cases through each retailer’s specific claim processes until resolution. The end result is a 3–8% recovery-to-revenue ratio.

Summary

Chargebacks and deductions are fees retailers impose on suppliers when they fail to meet specific standards, such as product discrepancies, shipping delays, or packaging violations. These fees, which can range from fines per shipment to flat percentages of the COGS, can lead to significant revenue losses for suppliers. Chargebacks are issued to maintain the retailer’s operational efficiency, ensuring products arrive on time and in proper condition. Common causes for invoice deductions include shortage claims, mistimed deliveries, packaging errors, and EDI mistakes. To reduce chargebacks, proactively streamline your internal processes and compliance practices and actively manage and dispute errors when chargebacks occur. To learn more about your deductions, sign up for a free audit to see opportunities for deductions disputes and get your money back.