In this article, learn about:
Definitions of chargebacks, fines, and deductions
Common reasons suppliers are hit with deductions
Disputing invoice deductions
Deductions, chargebacks, fines, post audits, compliance infractions—these are just a few reasons suppliers lose revenue to retailers. But what do these terms mean? How do they differ from one another? And what can suppliers do to prevent them?
This guide will provide an overview of definitions and examples of chargebacks and deductions, as well as a list of common reasons why suppliers are hit with chargebacks and deductions, and how to dispute invalid deductions.
The Difference Between Chargebacks, Deductions, and Fines
The terms chargeback and deduction are commonly used interchangeably by retailers and refer to the reason the retailer pays less than the supplier invoiced.
Fines, while sometimes used interchangeably with chargebacks or deductions, can also refer to bills sent by the retailer to the supplier as a penalty for an infraction. Chargebacks may also be used to refer to charges received after the invoice is paid.
Post audits encompass a completely different process from both deductions and fines, though they still result in loss of revenue by the supplier. These are organized audits, usually performed by a third party hired by the retailer, to collect on old deductions that were missed.
Chargebacks and deductions can occur due to any number of errors on the part of the supplier: shortages, scheduling, compliance, damages, etc. Sometimes, the deduction can even come out of receiving errors on the retailer side and are no fault of the supplier.
Retailers will not always provide an explanation for the chargeback or deduction on the invoice. Suppliers should be vigilant to review all documentation, and their vendor portal, to ensure they know exactly where the deduction is coming from.
For example, a Walmart supplier failing to adhere to SQEP standards, such as PO accuracy or labeling compliance, will receive a deduction on their invoice.
Related Reading: Walmart Post Audit Survival Guide
Common Reasons for Chargebacks and Deductions
Some of the most common reasons suppliers are hit with chargebacks, deductions, and/or fines are:
Compliance
Compliance is the broadest reason given for invoice deductions from retailers and often encompasses the chargeback reasons listed below. Every retailer will define what falls under compliance differently. However, most retailers will have some sort of compliance program that suppliers are expected to adhere to. For Walmart, there are the OTIF (On-Time and In-Full) and SQEP (Supplier Quality Excellence Program) programs. For Target, this is the Perfect Order Program or OTFR (On Time Fill Rate).
Retailers track supplier compliance through a vendor scorecard. This scorecard provides a threshold that suppliers must attain in order to either receive perks, like priority shipping, or to avoid deductions.
Documentation
Without proper documentation, a supplier won’t only get hit with retailer deductions, but they will also hinder the entire supply chain process. Documentation is the backbone of keeping things running smoothly.
Deductions associated with incorrect, missing, or late documentation are common. The primary documents that fall under scrutiny are:
Bill of Lading (BOL): Retailers expect the shipping numbers listed on the BOL to match what is listed on the Purchase Order (PO).
Advanced Ship Notice (ASN): The ASN should be sent on time and should match both the PO and the contents of the shipment.
Other important documents include Proof of Delivery (POD), Purchase Order Acknowledgement, as well as legal documents and declarations.
Ensuring that all documents are submitted on time, include all required information, and are submitted in the right format will help prevent suppliers from receiving invoice deductions.
If a retailer requires its suppliers to use Electronic Data Interchange (EDI) for proper documentation, it is important for suppliers to understand what this means and how failing to use EDI can result in deductions.
Shortages and Overages
Short shipping or over-shipping is a very common reason suppliers receive deductions on their invoices. These are often preventable and costly. They are also one of the most commonly invalid forms of revenue loss, so actively performing validity checks and disputing them is important.
Sometimes suppliers have no choice but to ship more or less than what the purchase order requested, in which case it is imperative that suppliers contact the retailer early to avoid possible deductions. Retailers will often be lenient in the case of an unavoidable error like weather incidents.
Ideally, suppliers should ensure that they have an efficient and up-to-date system for inventory management to avoid shortages or overages on the front end. However, if the error is unavoidable, then the next step to avoid deductions is to contact the retailer.
Shipping, Routing, and Delivery
Once the product is ready for shipping and delivery, there are many issues that can result in chargebacks or deductions for the supplier. Most notably:
Shipping with an unauthorized carrier
Failing to schedule a delivery time, when shipping through a retailer Distribution Center (DC)
Late delivery to the DC
Delayed or canceled shipments
Damaged or destroyed products
Every retailer will have different expectations and requirements for proper shipping. It is important that suppliers know what is expected of them when shipping product, as well as who to contact should things go wrong.
Sometimes shipments will be delayed or damaged en route due to circumstances outside of a supplier’s control, such as inclement weather and natural disasters. In these instances, suppliers must know who to notify in order to avoid deductions. Additionally, should a deduction be taken under such circumstances, suppliers should be prepared to dispute.
Packaging, Palletizing, Labeling, and Barcodes
In addition to errors in shipping, issues can occur in the packaging process itself:
Mis-labeled products
Using unauthorized packaging materials
Using incorrect or unauthorized barcodes
Damaged cartons or packaging
Damaged pallets
Products incorrectly packed on pallets
Similarly to shipping, sometimes products and their packaging can be damaged through no fault of the supplier’s. Suppliers should always know how to properly pack their products to retailer specifications, as well as who to contact when things go awry. Incorrectly, or inadequately packaged, labeled, or palletized products result in deductions that can add up quickly.
Disputing Retailer Deductions
While retailers impose deductions based on supplier error, sometimes retailers will impose deductions that are invalid. Deductions may be issued incorrectly for many reasons: from the retailer’s errors to failure to acknowledge legitimate reasons for a supplier’s “error”—such as natural disasters causing late delivery.
When suppliers are hit with invalid deductions, they should dispute as soon as possible to make sure they get their money back. Some best practices for disputing are:
Suppliers should know how long retailers allow for disputing, so that they don’t miss the window.
Suppliers could benefit from using a third-party to handle disputing or have specified personnel for the process.
Suppliers should make sure they know which deductions, chargebacks, or fines are disputable or not.
For non-disputable chargebacks, suppliers should know who to contact and how.
Additionally, suppliers should make sure that all their documentation is well-organized and easy to access for successful disputing. Common documents that are required for disputing are:
Copy of PO
BOL
ASN
POD
Copy of invoice
Other proof documentation as needed, such as photos or emails
When suppliers have a successful system in place for quick and efficient disputing, they can have peace of mind when it comes to recovering their revenue from deductions piling up.
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