In a post earlier this month I discussed the topic of deductions and chargebacks in the retail supply chain. Billions of dollars of waste and inefficiency are created annually from the inability to comply with retailer guidelines for carrier routing, shipment labeling, product packaging, item ticketing and EDI transmissions. With significant margin pressure on both retailers and manufacturers due to the recession you may be wondering why the industry has not been able to significantly reduce these “preventable deductions.” The answer is that enforcing compliance is a like a complex game of Battleship for suppliers, which requires them to keep pace with an average 50-150 business rules for each of their 75 to 100 retail customers. Retailers do track compliance towards similar types of performance criteria such as on-time delivery, accurate documentation and carrier routing. However, there is very little consistency between retailers on the actual metrics being tracked.
The Vendor Compliance Federation (VCF) performed a study in 2006 of the compliance guides being utilized by 30+ retailers. The most frequent deduction category was “late shipment,” which was utilized by 85% of the retailers. Consistency in measurement criteria typically simplifies processes for suppliers. However, even in the case of consistent performance measurements, differing interpretations of the results leads to further complexity. For example, there is widespread disagreement on how to measure whether a shipment is late. The Warehouse Education Research Council (WERC) conducted a study in the spring of 2005 to understand how companies measured “On Time Delivery” to warehouses and distribution centers. 42.7% believed that On Time Delivery means product delivered on the “requested” day. But the remainder of survey participants cited more specific windows:
- 16.8% stated “on time” is on or before the appointed time
- 15.9% stated “on time” is on the “agreed upon” day
- 11.2% stated “on time” is +30 minutes from the appointed time
- 9.1% stated “on time” is +1 hour from the appointed time
- 4.3% stated “on time” is +15 minutes from the appointed time
Different interpretations of “on time” by retailers complicate manufacturer’s efforts to comply. Challenges are compounded by supplier’s lack of visibility to outbound freight, most of which is transported via the retailer’s preferred carrier. In many cases, once the shipment leaves the supplier’s dock visibility is lost. The goods are in the hands of the transportation provider. Increasingly carriers are providing “electronic proof of delivery,” which can help to resolve disputes.
I first heard the comparison to Battleship in a Presentation by VCF back in 2007
Experts have likened the process to a game of Battleship in which suppliers are forced to create a grid with deduction types on the vertical axis and retailer names on the horizontal axis. The varying compliance guidelines are charted on the grid revealing a complex pattern of rules which must be followed to avoid deductions. In case you hadn’t heard Universal Studios are in the process of filming a movie called Battleship which is adopted from the popular board game. The filming is taking place in Hawaii and Baton Rouge, Louisiana with a projected launch date of May 25, 2012. No, you are not the only one who thinks it this is a bad idea.
Battleship – The Board Game
Another dimension which complicates the management of deductions is the fact that retailers make changes to the compliance guides. Some chains update the rules every 3-5 years. However, others publish changes 10-12 times per year. Some retailers will send proactive e-mail notifications to the supplier community while others will more passively post changes to a PDF on their vendor portal. In either scenario, suppliers must invest time to regularly monitor retailer communications and web sites for changes. To help ease the burden on suppliers, organizations such as VCF have established forums to discuss mechanisms for reducing deductions. One of the more innovative VCF programs is called “the Clearinghouse.” The Clearinghouse tracks compliance guides for over 140 retailers. Suppliers can subscribe to a service under which suppliers can be notified of any changes to retailer compliance guides. In the last 30 days alone there have been over 500 changes reported by VCF.
A Scene from the Upcoming Movie or an Artistic Depiction of the Effect of Deductions on Earnings?
Monitoring compliance is not only challenging for the suppliers, but for the retailers as well. Compliance guides are not effective if they are not enforced. Consequently, retailers have to staff small teams of compliance managers to track the activities of 2000-3000 suppliers for potential infractions. Retailers must monitor incoming shipments and electronic transactions for evidence of non-compliance. The tracking process is resource-intensive and time-consuming creating additional indirect labor costs associated with the deduction.
Suppliers must also form cross-functional teams to validate the authenticity of the deductions that the retailer compliance management teams are assessing. Individuals from the sales, warehousing, shipping and accounts receivable department must collaborate to review retailer deductions. In the case that a manufacturer believes a deduction is not authorized, a formal and time-consuming dispute process with the retailer will ensue. To overturn a dispute the supplier must submit digital photos, histories of PO changes and scanned copies of other documentation.
Changing ERP – Like Ripping Up Concrete
How can technology reduce the complexity of managing deductions for retail suppliers? The logical place to address deductions would be in the manufacturer’s ERP system. However, many suppliers prefer to avoid making changes to ERP applications as they liken it to “ripping up concrete.” Consequently, a number of startup vendors are introducing specialized applications specifically designed to help with chargeback avoidance and deduction management. In addition to the VCF Clearinghouse mentioned above, enterprise community management vendors such as Rollstream have specialized dispute management capabilities. One of the pioneers in the area of deduction management was Between Markets, which was acquired by Inovis (now part of GXS). There are a number of additional educational materials on this topic available on our web site.
One Response to “Chargebacks – The Supply Chain Version of Battleship”
Making matters worse, the deductions are often negotiated months after the event occurs – making it that much more difficult to figure out what really happened with a shipment. Some of these new tools, when used properly, can allow resolution within days of delivery – making it easier for both parties to find resolution.