Optimizing your supply chain to avoid distributor chargebacks

To reach the largest market possible, many middle market businesses use distributors to take their goods from a warehouse or factory to retailers. After signing an agreement that states the terms of the relationship, the distributor will then send over vendor compliance requirements that middle market businesses must follow, along with a fine and fee schedule if they don’t. These requirements can often be pages long and any violation on the business’s part results in massive chargeback fees that can sometimes be almost as much as the cost of the service provided. Because an agreement has already been signed, vendors have no choice but to adhere to these rules.

Much like accessorial fees, chargebacks are hidden fees associated with very specific requirements, which can be anything from how the product is wrapped, sorted, or labeled to the size and type of pallet used to whether or not the shipment arrived on time. Any hiccups in process and businesses are slapped with a chargeback fee.

“If a distributor receives a damaged product, your business will obviously need to pay for the damaged goods,” says Amy Green, Transportation Consultant with FortéOne. “But you’ll also pay a chargeback fee that covers the distributor’s time spent dealing with the issue. And those fees can be massive. What’s worse is that most companies don’t account for these fees when setting their product pricing.”


Distributor chargebacks and your bottom line

Initially, chargeback fees were put in place to drive behavior. With limited time and resources, distributors needed manufacturers to eliminate any mistakes that the distributor would need to clean up. However, many distributors have realized the potential of chargebacks and are now using them as an additional revenue stream. Individuals are bonused on collecting these fees and are rewarded for pushing costs upstream of the supply chain.

“These revenue generating programs are unreasonable,” claims Green. “They’re being punitive and it’s causing a lot of problems for middle market companies who feel blindsided by the fines they’re being hit with.”

The biggest issue for middle market business, of course, is that when distributor contracts and pricing are negotiated, they don’t have any knowledge of these fees; that comes later. And because the fees are so substantial, profit margins are reduced to almost nothing and it becomes very challenging for businesses to appropriately set prices.


Built in safety net to counteract chargebacks

Knowing that so many variables exist in your supply chain, it’s important to understand and accept that things will inevitably go wrong. You can optimize internal process to avoid repeated errors, but you still need to be ready for some margin of error that will result in chargeback fees.

To minimize the damage of these fees, you first need to know what those fees are. Ask for the vendor compliance requirements in advance of negotiating your contract and read through them carefully. Then build those fees in to your product pricing if you find they are non-negotiable.

If your distributor won’t send the compliance requirements before you sign a contract, then you need to go back and renegotiate your contract given the new fee schedule if your original pricing won’t cover the number of fees you might pay in a year.

To protect yourself even further, middle market businesses should create their own set of requirements and expectations of the distributor that are based on the vendor compliance agreement.

“One of the biggest issues I see is that the distributor will charge a company a fee 60 days after an error occurs,” explains Green. “At that point, it’s too late for the company to look at why the error occurred and fixed the problem. So I advise my clients to create requirements saying they need picture proof of the issue within 24 hours or they won’t pay the fee. Not only does that allow them to make the necessary process changes to avoid future error, but it also ensures the distributor can’t sneak in unnecessary fees.”

Finally, once you have the vendor requirements, look at internal processes to make sure they’re optimized for meeting those requirements with minimal error. As you adjust processes, communicate those changes internally and be sure to enforce them. Document errors and why they occurred and continue to streamline processes as new requirements come in.

If you need help navigating chargeback fees, optimizing internal processes, or gaining the confidence to negotiate costs and communicate expectations to your clients, call in the experts at FortéOne. With years of experience in supply chain management, we’re ready to help you save money.


Contributor: Amy Green