It’s kind of like getting a ticket for speeding. You get a fine and you have to pay it, because you broke the rules.
But here’s the area of charge-backs that I have an issue with. First, think about the way that many people – maybe even you, the reader – have issues with traffic cops and the “meter maids” that give out parking tickets. Not a very good view. I remember hearing people really complain and have negative things to say about traffic cops and meter maids… There was some show that I caught a few minutes of a few months ago; it was one of those “let’s follow this person around on their job for a day”. The person they followed was a parking enforcement officer (aka meter maid) on her rounds.
The abuse that was heaped upon this woman, day in, day out, just for doing her job; there was even this one girl that parked illegally every day of the week and always got a ticket and paid it, but complained each and every time about the tickets.
Think back to the 80s when we had the TV show “CHiPs” on … oh, whatever channel it was. We followed the adventures of “Ponch” and “Jon” as they rode their way around the highways and streets of Southern California, giving tickets, fighting crime and trying to keep the roads safe for everybody. But some episodes showed how some people feel about those cops doing their job.
Even now, you can see that show “Cops” on … Fox? And in it, you often hear a lot of verbal abuse towards an officer when they pull somebody over for some violation – speeding, running a stop sign, drinking, whatever.
Now that I’ve gone WAY off topic, we’ll steer back on the right road. Charge-backs… And how they’re used (and abused?) for “Vendor Management”.
There are times I can understand using a charge-back to enforce compliance on your EDI processes. The vendor sends the wrong data in the wrong field and you hit them for a fee. Or the ASN is sent the day AFTER the shipment arrives at their warehouse or DC; let’s fine them for the error. There are many reasons for a retailer to hit the vendor for a charge-back to enforce compliance.
But there’s a dark side to charge-backs that retailers neglect. Or, sometimes, the go hard for the dark side of the charge-back and almost make it a “profit center” – a source of income – and then really enforce their charge-back policies; this often gets the retailer a bad name in the EDI community or leaves a sour taste with the vendors they do business with.
And, this negative view can have an impact on their future purchases, too.
In a recent article, I’d mentioned one way that a charge-pack policy can affect your pricing and what you do with your vendors and the allowances you may be able to get from them. I’d used an example that we’re all likely to come across one day:
“You have to package in cartons that are 24 inches long, 24 inches wide and 24 inches high or we’re going to charge you $5.00 for every carton that does not match those dimensions!” A simple order of 100 cartons now costs the vendor an additional 500 bucks!
One of the things that I never seem to understand about the “all-mighty” charge-back is if anybody contemplates how that charge-back may affect your trading partner relationship down the line…? I’m guessing that the answer will probably be “NO”.
Charge-backs are, as far as I’m concerned, an unneeded way to “enforce” the rules. If every time a vendor messes up the document, you charge them some fee – whether a percentage value of the order or a flat dollar amount for each error occurrence – it’s all going to add up and may even add up to a feeling of “ill-will” between you and your trading partner.
Let’s use the idea that I mentioned above – about that $500.00 charge back on that 100 carton shipment. And you nail them with that a few times; we’ll say for 4 shipments. That’s a total of $2,000.00 that this vendor has to pay you for oddball cartons.
Let’s look forward a few months to a pricing negotiation between you and the supplier. They have to raise the prices of the widgets you’re buying because the cost of plastic has risen (a primary ingredient in widgets, you know?) and they need to pass those costs along. But you’ve been buying widgets from them – very steadily to the tune of tens of thousands of units per year – for over 10 years. Kind of like those McDonalds signs – over 1 Million Sold! So ABC Company now has the choice of limiting the cost increase to you – as a very valued client – by charging only one dollar more per widget instead of two dollars.
All is going well until somebody in accounting does some crunching of numbers and comes up with the fact that they paid you two-thousand bucks in these charge-backs. They say that additional cost needs to be covered somehow and, guess what? You’re getting the two-dollar increase in cost – all because you charged them for something that they have only minor control over and, in reality, is a minor compliance offense.
Now you’ll have to raise your retail prices, which means your customers will be unhappy, you’ll end up selling less widgets and the vicious cycle will continue.
But let’s imagine you did NOT charge that two-thousand bucks to them and you just made a few changes to your processes and allowed the disparate cartons to come in. Maybe – just maybe – when that price increase comes around, ABC Company gives you the lower price increase and you can absorb that into your costs and not raise your prices and not lose sales.
Another instance could be that you’re planning on a special event for ABC Company products. In your normal advertising circular, you’re going to take the front page and list all of ABC’s products and have a special sale on them. So you go to the vendor with this idea and you ask for something … special. You know that you’re going to pump up your inventory of those products you’re looking to advertise, and you want to know if ABC Company will give you a special “advertising cooperative” allowance and maybe, just maybe, an “extra cash off” allowance. We’ll say that these allowances are five percent each.
If these allowances are granted and applied, a ten dollar item is now only going to cost you $9 each and an order of 1000 units will now only be $9000 instead of $10,000. And while $1000 may not seem like a lot, it does give you some offset and help with some of the costs of the planned promotion. But then they remember that you charged them those charge-backs earlier in the year. And maybe there’s a good chance you’re going to hit them with a charge-back if the shipment doesn’t come in just perfectly.
So, where’s the vendor’s incentive to give you that special discount? What reason should they do this?
There are some valid reasons for the charge-back – don’t’ misunderstand the way I’m thinking. But, like so many things in our lives, what’s the “big picture” cost or affect going to be from this action? By charging some fee or fine, how will this affect the future you have with the vendor? Look at the “ill-will” that many feel towards those meter maids and traffic cops I’d mentioned before.
I have mentioned in other articles about how a bigger vendor of ours – camping gear – sends us some extra information on the ASN. They send us the PID and a PO4 segment for each line item on the ASN (the PO1). Now this is maybe an extra few hundred characters per document. Span 200 characters across 5 documents, and we’re talking about a KC – the typical billing “unit” for network/VAN traffic. Over the course of a month, maybe they’re sending us 2 or 3 KCs of “unwanted” data.
Now, take a look at your current EDI communications contract and how much you’re charged per KC for your transmissions. Maybe you’ve got 8-cents per KC charge up t a limit and then it is 5-cents per KC over that limit. Basically, these extra few KCs that the vendor sends monthly are costing about as much as a phone call from a payphone. A tenth of the cost of a cup of coffee; some percentage of something that you buy or consume…
I remember when a candy bar (a Butterfinger or an Almond-Joy, a Payday or a 5th Avenue bar) used to cost a quarter; twenty-five cents; that’s what this vendor is “costing” us a month for the extra data. Each year we could get a candy bar or two for these “extra costs” and data. Big deal! Of course, each month that they do this, I can charge them the same as a pizza-party in fines.
I could hit them with a charge-back for the extra data – but to what end? How does that extra data cause any problems for our system? It doesn’t. And the costs (in man-hours and ill-will) far outweigh the benefits we may get from enforcing any rule about ‘additional data’ and the charges we pay to our network.
Is the charge-back really worth it? It may give a short-term “ouch” and get compliance on some issue, but how will it affect your long-term relationship with the supplier of the goods? Will it truly help your trading partner relationship in the long run? Does the couple of cents we spent per month really make a big difference? Would it do much good to harm our good relationship with that vendor by fining them?
It would be much easier and cheaper for us to get with our partner and work with them to come to some kind of understanding about what our needs are and what they’re able to do. Maybe we can get farther in the “wrong size box” example, but how does the few KCs per month hurt? Yes, one is far more important than the other, but… One can truly impact the way we do business and cost us a chunk of change each month and the other is just small change.
So think carefully when you think about charge-backs. The short term results may not be worth it in the end.
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