Key takeaways:

  • Chargebacks can end up costing anywhere from 1-20% of the gross invoice amount. 
  • The best way to prevent chargebacks is to resolve the root causes and implement continuous improvement programs.
  • Internal production processes can be improved by getting your team on the same page, inspecting problem areas, fixing problems at the root, collaborating with your supply chain, and using technology tools that fit your organizational needs.

When you’re working to ensure quality, compliance, and on-time deliveries in your supply chain, a chargeback is the last thing you want to deal with.

Retailers might deduct money from a vendor’s invoice for problems like delays, inconsistencies, defective products, or shipping damages with the order. No matter the cause, chargebacks mean money lost.

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Their most common causes include:

1. Poor quality
Products that don’t meet clients’ expectations account for 47% of chargebacks. This can include items that are defective, damaged, or simply not as described. With limited access to quality monitoring, vendors struggle to ensure good performance and keep up with quality requirements from multiple buyers.

2. Low supply chain visibility
Because full supply chain visibility is rare — only 6% of companies currently have it — most supply chains are full of hidden fees.

3. Failure to meet production requirements
Many chargebacks happen because of production mistakes, such as problems with quantity, size, or other specifications. Misunderstandings often occur when stakeholders rely on a single meeting instead of continuously collaborating during production.

4. Late or early delivery
Retailers’ sales forecasts rely on timely delivery — they typically need new inventory in a narrow window just before their shelves are empty to avoid becoming over- or understocked. Failure to deliver on time can result in buyers issuing chargebacks.

5. Documentation mistakes
Documentation mistakes within invoices, custom clearances, and packing lists can cause problems for both parties and lead to chargebacks.

The effects of chargebacks on vendors

Chargebacks have an immediate impact on your company’s revenue.

Every major retailer has chargeback policies. These place penalties on suppliers for certain non-compliances in their shipments. Such penalties typically range between 1% and 5% of the gross invoice amount, though for multiple penalties, these fines can easily add up to 20% of an invoice — a significant hit to your company’s revenue.

Even for a relatively small vendor, this penalty can mean thousands to millions in lost revenue over the course of a year.

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When vendors fail to meet quality standards or maintain scheduled shipments, it costs. Vendors also continue to feel the impact as problems persist due to faulty internal processes. A single product defect can lead not only to chargebacks, but also to additional freight costs, losses in sales, a damaged brand reputation, and additional operational costs.

If the root causes of the issues are not addressed, chargebacks will continue to happen. Thus, it’s important to have the proper processes in place to drive continuous improvement.

Five ways to prevent chargebacks

Chargebacks cost money, but they also highlight opportunities to fix problems within your supply chain.

Fixing the issues also improves your organization’s relationships with brands and retailers, leading to better long-term collaborations. Remember the 1-10-100 Rule: if a problem costs $1 to prevent, correcting it would cost $10, and failure (such as a dissatisfied client returning the product) would cost $100.

Prevention is the only real way to stop chargebacks. Here are five ways to keep them out of your operations:

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1. Get your team on the same page.

Don’t receive or process a single purchase order until you’ve held a pre-production meeting (PPM) with all involved stakeholders. Brands and retailers should work closely with vendors at this meeting to make sure everyone fully understands the product’s technical requirements — as well as where the potential risks lie.

2. Inspect the problem points.

Identify where chargebacks are coming from — this could be shipping quantity, delivery dates, defects, and so on. Prevent those problems by setting up a special workflow focused entirely on preventing chargebacks, performing targeted inspections at the points where each type of failure has occurred.

3. Fix problems at the root.

Once a quality problem has been identified, use reporting, Corrective Actions/Preventive Actions (CAPA), and Analytics to address it.

  • Reporting will help you know where the problems are and identify patterns.
  • CAPA lets you strategically fix the root causes of the problems.
  • Analytics provide insights into problem areas and data to make better decisions.

This practice creates an atmosphere of continuous improvement within your supply chain.

4. Collaborate with your supply chain using data.

The remedy against chargebacks is collaboration, and true collaboration across a manufacturing workforce requires real-time data. To be effective, that data needs to be actionable and accessible to all parties.

Data improves your supply chain visibility, lets you monitor the entire production process, and creates faster coordination speeds as you problem-solve with other stakeholders. This allows you to fix problems before they become millions of dollars in lost revenue.

5. Use technology to your advantage.

A tech solution helps you optimize your quality processes and simplify complex problems. Today, companies are adopting tools and improving their productivity.

“Supply chain investments aimed at strengthening processes via technology will result in a 15% productivity boost by the end of 2021.”

Prevent chargebacks with a digital solution

More and more companies are using technology to reduce chargeback costs. With a supply chain tech solution, you can:

  • Set up unique workflows and inspection schedules targeting specific problems
  • Monitor supply chain inspections in real-time
  • Use artificial intelligence to predict and prevent quality defects
  • Automate reports, CAPAs, and analytics, saving you time while more effectively fixing root problems
  • Give every stakeholder access to the same high-quality data for better collaboration.

Reach out to the Inspectorio team to learn how our software can revamp your supply chain and protect you against chargebacks.

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Brooke Dong
Customer Success Operations Director
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