ERRORS INVITE CHARGES
Byline: Thomas J. Ryan
NEW YORK — Despite the hue and cry among vendors over chargebacks, many midsize companies are bringing these charges on themselves with errors in shipping their goods.
These self-induced administrative chargebacks include myriad penalties for logistical missteps such as shoddy labeling, lost billings, wrong-size boxes or hangers, missing items and late shipments. And they can wind up taking a chunk out of a vendor’s bottom line.
A recently compiled study by consulting firm Emanuel Weintraub & Associates, Fort Lee, N.J., determined that such logistical errors can cost an apparel vendor up to 2 percent in annual sales in chargebacks, or about $900,000 for a firm doing $50 million in sales.
Emanuel Weintraub, president of the consulting firm, said medium-size firms in the $50 million-$200 million range “have been slow to accept logistical changes, and it’s costing them, unnecessarily.”
Megafirms such as Liz Claiborne, Jones Apparel Group and Tommy Hilfiger Corp. “are working hell-bent for leather to take away the malfunctions that are causing these chargebacks,” said Weintraub.
Weintraub conceded consolidations have spawned mega-retailers with greater clout to force chargebacks on vendors. However, he said retailers need to find vendors able to work with their highly automated receiving systems to move goods quickly to the selling floor.
“Shipping mistakes shut down major retailers’ receiving lines and make the whole stocking process complicated. Vendors need to run very professional operations in the distribution center,” Weintraub said.
Gus Pagonis, executive vice president of logistics at Sears, Roebuck & Co., said chargebacks for logistical errors are necessary to keep inventory flowing and insure the stores are stocked with the right items in the right colors and sizes.
“Our objective is to never collect on anything,” said Pagonis. “We view our vendor relationship as a partnership, and we try to be very fair with our vendors. We call a spade a spade. We ask them for input and train them, and if we screw up, we tell them.”
Pagonis said Sears issues a report card to each of its vendors, grading their shipping performance. Sears provides extensive training to a new vendor, and a grace period in which a new vendor that incurs a chargeback will be reimbursed if it fixes the violation within 90 days.
“We have a terrific partnership that we built up with our vendor relation side,” Pagonis said. Pagonis said more than 90 percent of shipments are now in line with Sears’ standards.
Wesley R. Card, chief financial officer at Jones Apparel Group, concurred that the biggest ingredient in avoiding chargebacks in these areas is establishing tight relationships.
“I think we’re working so closely with the customer that there’s really no room to unfairly charge us,” said Card. “Immediately, when we see a chargeback, they know to call us. We got such a good dialog going that we don’t really believe anyone is trying to take advantage of us.”
Card noted Jones Apparel has made major efforts to improve the scanning of goods coming in and going out of its systems, and the company is shipping with more than 99 percent accuracy.
“Everything we have is fully customer-compliant now,” Card said. “The last three years, we put major effort into improving our accuracy, and this last year it really paid off.”
According to Weintraub’s study covering 1995 and 1996, the biggest mistake of the some 20 intermediate-size apparel companies surveyed was shipping the wrong quantities by pieces or cartons. Such mistakes represented 56.3 percent of the violations by vendors.
Missing and improperly placed packaging slips accounted for 14.3 percent; failing to provide proof of delivery, 9.4 percent; using an unauthorized carrier, 9.2 percent; early or late shipment, 5.2 percent; multiple invoices per store, 2.7 percent, and wrong carton size, 1.4 percent.
Nathan M. Lubow, at Mahoney Cohen & Co., an accounting firm specializing in apparel firms, noted vendors, particularly small to midsize ones, often become flabbergasted trying to comprehend many retailers’ phone-book-thick shipping guidelines.
Also, some retailers seem to arbitrarily tack on these chargebacks to improve their bottom line, and others engage in “almost entrapment” by changing requirements every few months, according to Lubow.
However, Lubow said many smaller vendors are slow to invest in improving shipping departments.
“Most retailers want to get the goods to the floor as quickly as possible with as little cost to them. Whether it’s right or wrong, the vendor should comply if it wants to keep the retailer as a customer,” Lubow said.
“Many of these firms have Moe, Larry and Curly in the back room. They have to reconcile themselves that they have to increase their levels of accuracy and sophistication so they can conform to the requirements of the retailer,” Lubow added.
Pagonis said Sears will work with newer, smaller vendors to make sure the added costs of being fully compliant under its shipping guidelines aren’t too arduous.
“We as a company try to figure out how much that cost is to our vendor, because it eventually comes back to you in the vendor raising its prices. If you really have a partnership, you’ll find a way to make it work,” Pagonis said.
Weintraub said that in addition to upgrading systems, companies should provide extensive training for employees and test them for literacy and even for color blindness to assure that the order for black sweaters doesn’t arrive in charcoal or indigo blue.
Retailers are particularly motivated to improve flow-through of merchandise because of the significant cost savings in not holding inventory, according to Weintraub.
For example, Weintraub said Wal-Mart, which delivers more than $1 billion in merchandise to its stores weekly, has taken more than two weeks out of supply chain by automating its distribution systems, saving it more than $2 billion annually in inventory holding costs.
“To the extent that a retailer can shrink its inventory down, it’s better for their balance sheet,” Weintraub said.
Pagonis noted that Sears’ switch to primarily a one-scan system for receiving goods has not only aided in “getting goods to the stores as fast as possible” and saved inventory holding costs, but has also freed back-room space in stores to create more selling space.