BY ROBERT PRATHER, FOUNDER AND OWNER OF DEDUCTION MANAGEMENT SERVICES

As part of my services, I am sometimes asked to come in and help small to midsize companies set up departments, train employees and create processes that will maximize the efficiency of the Credit/Accounts Receivable Department.   If that company is selling or will be selling the Major Department Stores, the topic of whether they need to become EDI Compliant eventually comes up.  Most, if not all Major Department Stores require their Vendors to be EDI Compliant.  This means orders are sent via EDI (850), ASN’s are sent before the shipment so the store can prepare to receive the merchandise (860), and the invoice for the merchandise sent must be sent electronically via EDI (810).  These are just the most basic communications between a retailer and vendor that are handled via EDI, there are many more.   For the topic of this discussion, let’s keep it at these 3 only.

Sometimes a Vendor is so excited about that first “Big” order from a major retailer that they pay no attention to the Vendor Routing Guides.  They are simply worried about producing the goods, getting them out the door on time, and getting paid.   The problem is, many companies are not prepared for the chargebacks that will accompany that payment because they did not ship according to Vendor Guidelines.   That is the worse case scenario.  Many companies do read these guidelines, only to find they are not equipped to follow them.  Now what? Well, you can contact the Retailer and ask for an exemption from certain requirements.  For this article, we will focus on the difference between receiving exemptions from the 3 EDI requirements detailed in the first paragraph vs. investing in becoming EDI Compliant. 

A Major Retailer will give an exemption from EDI requirements for anywhere from 3-6 months usually.  They do this, so the vendor can become compliant.  This includes but is not limited to, purchasing a SKU catalog from the retailer so your individual style #’s can be mapped to a particular SKU on the Retailers Catalog, the purchase of a GS1-128 Label printer, as well as determining whether the software your running your company on (ERP System), is capable of doing its own EDI or if the process needs to be outsourced.  You have a decision to make.  Do you make the investment into becoming EDI Compliant now, or wait, hoping that the you can extend the exemption period indefinitely or at least until you can afford to become compliant? 

Here are some things to consider when making that decision:

1. Getting an “exemption” simply avoids the chargeback for not being compliant.  On the surface, this seems like a good thing, and it is in the short term.
2. You may still get charged back.  The exemption will allow you to get that chargeback reversed, but it will still take work.
3. The exemption period will eventually expire, and you will begin to receive chargebacks.  If you’ve waited too long, those chargebacks will hit hard and fast.  You may lose more money than you expected because you were too busy running your company and didn’t realize the exemption period had expired. 

Even if you could get an exemption indefinitely, and avoid chargebacks forever, the question is, would this be the best way to run your company when selling to a Major Retailer?   Let me explain why I believe it is not.

The obvious benefits of the EDI process are the automation of the Order Processing, Allocation, Shipping, Receiving, Distribution and Invoicing of the merchandise.  In short, EDI was created to increase the speed and accuracy of processing inventory from the shipper to the seller and get merchandise to the sales floor as quickly as possible.  This maximizes sell through at full price.  If you’re not using EDI processes, your shipment will be held up at the Retailer’s Distribution Center for anywhere from 1-5 days because they must process it manually.  If there are mistakes, it could take even longer.  This is a cost that most Vendors do not factor in when deciding to become EDI Compliant.   Most Vendors do not consider the value of having the merchandise on the sales floor for 3-5 days more on the front end of the sales cycle.  This can save thousands of dollars in Markdown money later. 

So clearly, it is my humble opinion that becoming EDI compliant sooner, rather than later is the best course of action.  There are companies out there that can easily set you up and manage the complete process, so an EDI Coordinator is unnecessary.   Once your sales warrant it, you can bring the process in-house.  That’s a topic for another time.

I hope the tips I shared with you helped.  If so, let me know! I like to hear from companies and people I’ve helped.  If you have any further questions or would like to inquire about our services, you can send me a message or call (626) 736-3588.

Until next month…

BY ROBERT PRATHER, FOUNDER AND OWNER OF DEDUCTION MANAGEMENT SERVICES

In my over 30 years of managing chargebacks, I am still surprised at the number of times I hear some recurring misconceptions on why companies do not pursue unauthorized chargebacks more aggressively.  By “unauthorized”, I am not talking about allowed discounts, allowances or returns that have been agreed to.  When I say “unauthorized chargebacks”, I am primarily referring to the large number of shortages, vendor violations, post audit and various other claims that have not been accounted for when costing the merchandise or profitability planning.  A manufacturer invoices a retailer with the expectation that all or at least most of those invoices will be paid in full.  When the manufacturer receives the remittance detailing payment of these invoices, they are surprised that it contains multiple claims which can wipe out or seriously dilute their profit.  You’d think that most companies would not only want to research and recover this money right away, but also determine why it happened in the first place and take any means necessary to insure that it doesn’t happen again!  Left unchecked, this “dilution” problem can put a company out of business (unfortunately, I’ve seen it happen more than once). 

However, when I speak to Owners, Presidents, CFO ‘s and Accounting Managers, I am shocked that the issue isn’t taken more seriously.  I understand that in the overall scheme of things, sales drive the business, but as someone that looks at the entire picture, my motto is and has always been, “it is not a sale until it’s paid for”.  In an age where companies are looking at any way possible to increase profitability due to industry competition and retail uncertainty, looking at recovering more of your sales dollars can be the best, least expensive way to do it.   So why aren’t more companies attacking this issue more aggressively?  In my experience, I find that it comes down to two simple reasons:

1. Not knowing the facts
2. Fear

When you don’t know the facts, you base your decisions on what you “think” you know.  This can be very dangerous. Let me start with a few of the “myths” surrounding not knowing the facts:

1. I’m Factored and my Factor handles it – This is not true.  Your Factor may give you a credit guarantee on the invoice, advance you on the sale and offer collection services when they purchase your receivables, but they do not and will not work on your chargebacks/deductions.  This responsibility falls on the Manufacturer to handle.
2. If I push too hard I’m going to upset my Retailer – The truth is, the Retailer expects you to validate the claim and if invalid, dispute it.  The Retailers main goal is to get the goods from the Distribution Center to the sales floor in the fastest time possible. They abhor claims for label issues, invalid SKU Ratios, ASN doesn’t match carton count and the other million other violations you can be charged back for. In fact Kohl’s is an example of a company that rewards you for not getting these types of chargebacks.  They have a grading system for their vendors.  A & B Grade – You’re given a discount on your violations, C Grade – the full claim amount is deducted, D & F Grade – You’re charged an administration fee of up to twice the value of the claim.  They do this because the Vendor has failed to address the issues.  Retailers WANT YOU TO FIX THE PROBLEMS and will often reward you with some type of compensation (reversal of some valid claims) when they’ve verified the issues have been resolved.  The long held notion that the Retailer uses these chargebacks as a “Profit Center” is just not true.  The fact is, the Retailer knows that many Vendors will not fight these chargebacks and take that into account when creating their budgets for the year.  I’ve spent years working with the RVCF (Retail Value Chain Federation), an organization that brings Vendors and Retailers together to collaborate on issues such as this, and many of the Retailers say that they want their Vendors to become more involved with resolving problems that cause deductions/chargebacks. If you’re interested in learning more about the RVCF, send me an email.
3. Other types of claims like, Post Audits, Shortages and Pricing can be successfully researched, validated and recovered by knowing how to present the package to each individual Retailer, who to send it to, and how to follow it up.

I hope the tips I shared with you helped.  If so, let me know! I like to hear from companies and people I’ve helped.  If you have any further questions or would like to inquire about our services, you can send me a message or call (626) 736-3588.

BY ROBERT PRATHER, FOUNDER AND OWNER OF DEDUCTION MANAGEMENT SERVICES

“Post Audit Claim”.  Just that phrase can cause the most seasoned A/R or Chargeback person a great deal of anxiety.  Most major retailers employ in-house Audit Departments as well as Third Party Audit Firms (who get compensated by earning a percentage of what they find and charge back).   It’s important to understand, they are both rewarded by how aggressive they can be in finding things that were not taken previously.  The issue with these types of claims is the fact that in most cases, these claims are for transactions that occurred one, two even three years ago.  How are you supposed to research that? The first step in understanding how to fight these claims is knowing what research process the Post Audit team is using to determine the amount due.

The retail audit team uses a process called “data mining”.  Data mining is a process where algorithms that use certain key words or transactional circumstances are applied to sales, payment and claim histories, hoping that they find allowance or violations that were missed initially. It’s important to remember that they are looking for certain key things:

1. Specific TYPES of allowances or violations. (See Case Study 1 below)
2. Whether the allowances or violations were TAKEN PREVIOUSLY
   (See Case Study 2 below)

The are many ways to research and dispute these claims.  For this article, I will share 2 situations where my clients were charged for Internal Audit claims, and we were able to get them reversed (paid back). 

Case Study 1:

A major Dotcom retailer charged our client almost $40K for Freight and Damage Allowances not taken from sales that were over a year ago.  Our client was a multi-divisional Houseware vendor that sold to more than one department at this retailer.  When this Post Audit was deducted, it was originally considered valid.  They remembered that this customer did in fact have terms that were consistent to the ones being referenced on the claim, and the purchase orders/invoices listed on this claim did not have the Freight and Damage Allowance deducted previously.  I wanted to be sure that the client was correct, so I researched the Vendor Agreements and Terms for every department this vendor sold the retailer.  I came to find out that the department these purchase orders were written for DID NOT have the same terms & allowances as other departments they sold.  After much back and forth we got the claims reversed. 

Case Study 2:

A major chain store retailer charged my client over $23K for Vendor Violation claims that they claim were not deducted previously.  The claims were against deliveries that were more than a year old and referenced “Late Ship” and “Carton contents not being the same as ASN” as the reasons for the violation.  Again, when the client checked their internal records, these claims appeared to be valid and were written off.  We were skeptical and began our research.  Luckily, this particular retailer had a vendor portal that allowed us to research claims by purchase order.  We found that these exact claims were taken previously 9-12 months previously under different reason codes.  We presented our findings to the retailer and secured a reversal of the claim for our client. 

Conclusion

These claims are never easy to fight.  Even when you research and find they are invalid, it can take weeks or months to get them to reverse the claim unless you know exactly who to contact and how to present the dispute.  Luckily, our experience and familiarity with the inner workings at these retail stores allowed us to get the claims reversed.   In both cases, we used these situations to train their in-house A/R & Chargeback Departments, so they’d be better prepared to handle future Audit Claims. 

I hope the tips I shared with you helped.  If so, let me know! I like to hear from companies and people I’ve helped.  If you have any further questions or would like to inquire about our services, you can send me a message or call (626) 736-3588.

Until next month…

– PART 1

BY ROBERT PRATHER, FOUNDER AND OWNER OF DEDUCTION MANAGEMENT SERVICES

I trust that this monthly editorial will provide readers with practical information that can be used to increase profitability and reduce dilution.  This month’s editorial is about a subject that is probably the most requested topic I’m asked to speak about in my seminars next to Vendor Compliance/Packing Violations. I sincerely hope you find it helpful.  I welcome your feedback (via email) and am here for any assistance or support you may require.  Let’s get started!

Years ago, it was a pretty safe bet that when you received a “shortage” claim, that claim meant that there was a quantity shortage in your shipment.  If you did ship all the merchandise (6 units ordered, 6 units shipped) but some of the merchandise happened to be different from what was ordered (wrong size, color, or style), you received either a “substitution” or “not ordered” claim.   You knew if you were short or if you shipped the wrong item. 

These days most retailers require their orders be filled exactly by SKU.  The SKU on the order MUST be the same SKU Invoiced, Shipped, and Received.  If it is not, you more than likely will not receive a “substitution” or “not ordered” claim.  You will more than likely receive a Shortage Claim.  Therefore, shortage claims have risen in instance and in dollar amount over the last few years and you need to be aware of this to effectively research and recover them.  Another thing to consider is how shortage claims affect other types of allowances and claims that are based on total sales (Damage/Warehouse/Co-Op Allowances and Markdowns are just a few that can be affected)

The increased dependence on overseas production has contributed to the large rise in shortage claims.

Many times, the Vendor does not even open the box.  It is received in their warehouse, a label is slapped on the box and it is shipped to the retailer.  The supplier relies solely on the information provided by their overseas factory.  The ASN and Invoice is based on what is supposed to be in that carton.  This is what is commonly referred to as “cross-docking” the merchandise.  This process, although extremely cost effective on the front end, can cause a great deal of problems in the back end, leading to massive chargebacks and reduced profitability.   It’s not just the shortages that are at risk.  There can be a myriad of packing issues that can cause huge dilution issues.  Issues ranging from “wrong prepack ratio” and “wrinkling” to “labeling” and “ticketing” issues.  We will get to these issues and how to avoid/dispute them in a future article.  For now, I want to focus strictly on shortage problems. 

As stated above there are several reasons a Retailer can charge you back for a “Shortage”.  Here are the most common:

1. Unit Difference (In Carton “concealed shortage”)
2. Wrong SKU (In Carton “concealed shortage”)
3. Missing Carton (Entire Carton(s) Missing)
4. Non-Receipt of Merchandise (Full Invoice)

Keep in mind that it is imperative that you know how the item was shipped before you can even begin to effectively work today’s shortage claims.  HOW the invoice was shipped will dictate how you research and dispute the claim.  Merchandise is usually shipped one of 3 ways:

1. Packed and shipped from a warehouse the vendor owns and is responsible for
2. Packed and shipped from a 3PL (Third Party Logistic) warehouse that the Vendor has contracted
3. Packed at an overseas factory and shipped from either a 3PL or the vendors warehouse

Next month we will begin with each “reason” and I’ll discuss the best way to handle it based on each way it could have been shipped.  This will give you a “cheat sheet” for reference.  Keep in mind that nothing beats a strong Retailer relationship (which I’ve worked very hard to establish in my 30 years in business) and good old fashioned tenacity.  Knowing who to talk to and how to present the information can be the difference between having to write a claim off and getting it recovered.  The Retail Value Chain Federation (RVCF), a member group consisting of Retailers such as Kohl’s, Stage Stores, JC Penney, etc and Vendors such as Sketcher’s, Levi, Polo Ralph Lauren, and others has helped develop Vendor/Retailer relationships for years and may be worth considering. 

If interested in further assistance, send me a message and I’ll put you in touch with the right people. However, the outline I will be providing you on these pages will be a great place to start and should get you results most of the time.

Continue to Part 2