Part 1: The Rise of Chargebacks
There are some distribution operational situations that have a direct impact on the cost of order fulfillment that tend to increase the cost of goods that you and me, the consumers, pay.
One of these is what is known as a “chargeback” that occurs frequently and for which a good amount of money is spent to prevent occurrences.
In logistics, a chargeback is a post-transaction financial penalty or cost recovery that one party (usually a retailer, shipper, or customer) deducts from payments owed to another party (usually a supplier, carrier, warehouse, or 3PL (third party logistics) provider to recover costs caused by an error or non-compliance.
It is not a credit card dispute. It’s an operational cost-reallocation mechanism used in supply chains.
Put another way, a logistics chargeback is money taken back by a company from a vendor or service provider because they caused extra cost, delay, or failure in the supply chain. The cost of each instance can be high, which is why companies add people to do pre-shipment audits to ensure that a mis-shipment does not occur.
The net effect of this additional auditing “insurance” eventually leads to higher processing fees in warehouses and distribution centers fees, which ultimately get passed along to you and me as consumers.
Let’s look at some common examples.
Supplier to Retailer
Retailers charge vendors when shipments don’t meet routing guides or compliance rules:
- Incorrect quantities (shorts / overs).
- Late or premature delivery.
- Wrong pallet configuration.
- Missing or incorrect ASN (advances shipping notice).
- Improper labeling or packaging.
- Non-compliant carton sizes.
- Wrong carrier used.
For example, a supplier ships 95 units instead of 100 to a retailer, which, because of this error, incurs store handling and inventory reconciliation costs. As a result of these incurred costs, the retailer deducts $250 as a chargeback from the supplier’s invoice. In the food distribution business, where profit margins are already slim, this charge can make a significant dent in the profitability of the transaction.
Carrier to Recipients
Recipients such as retailers’ warehouses and distribution centers operators charge carriers for service failures:
- Missed pickup or delivery appointment.
- Transit delay.
- Damage due to handling.
- Temperature excursion (cold chain).
- Failure to follow instructions.
For example, a carrier misses a delivery window. The recipient’s warehouse incurs overtime charges to process a late shipment. The recipient issues a $500 chargeback to the carrier to cover the cost of the overtime.
Chargebacks emerged in the 1960s but were rarely applied through the 1970s. At that time, the term “chargebacks” wasn’t used consistently and when they occurred, they were mostly done on a case-by-case negotiated basis. The origin was when large retailers began issuing manual deductions for obvious errors (short shipments, damage).
Retail logistics chargebacks became standard in the U.S. beginning in the 1980s as big retailers scaled and automated. With the mass introduction of UPC barcodes and EDI (electronic data interchange) technology, big-box retailers like Walmart, Kmart, and Target scaled rapidly as a means to reduce their distribution processing costs. These retailers started enforcing vendor compliance rules with fixed penalties. As a result, chargebacks become systematic, not discretionary.
In the 1990s, chargebacks became standard with retailers publishing formal routing guides and vendor compliance manuals. They became an expected deduction as a part of the risk of doing business. The manuals established predefined “triggers” initiating chargebacks, which were automated and done without prior approval. Service level agreements otherwise known as SLAs, codified these as KPIs (key performance indicators).
From the early 2000s to the present day, chargeback enforcement processing has become highly automated, and data driven. Current WMS (warehouse management systems) and TMS (transportation management systems) have automated chargeback triggers based upon realtime data management. Advance shipping notices or ASN, carton labeling, appointment compliance fully enforced, especially with the comprehensive deployment of e-commerce.
As you would expect, with the rise of chargeback application, the efforts of companies that are the recipients to dispute and reverse them have also intensified. In Part 2, we will explore these efforts.
About the Author
Tim Lindner develops multimodal technology solutions (voice / augmented reality / RF scanning) that focus on meeting or exceeding logistics and supply chain customers’ productivity improvement objectives. He can be reached at linkedin.com/in/timlindner.
