In today's apparel environment, chargebacks are alive and well. For manufacturers that's not the best news, since chargebacks are not only expensive but can be the difference between making or losing money. Fortunately they are avoidable…read on and we'll tell you how.

Chargebacks are a fact of life for any manufacturer. They occur for four main reasons according to Brian Franks, manager at Kurt Salmon Associates (KSA).

The first has to do with invoices that are sent from an apparel manufacturer to a retailer containing incorrect prices on the pieces.

Another chargeback is related to shipping. Most retailers will create a shipping window that contains early and late dates within which they expect to receive goods. Any shipments delivered outside that window are subject to a fee. Another window is often set up according to a retailer's ability to have apparel available on the floor.

The third type of chargeback deals with purchase order problems, such as having the wrong terms listed (not related to price). This includes issues with invoice information, such as whether payment is due in 30 days or other terms that may cause confusion if incorrect.

The fourth is shipping and packing requirements that aren't met by the manufacturer. Are the pieces floor-ready? Are the correct hangers included? Were the correct number of items shipped?

There are many components involved in calculating how much of a fee will be deducted from a manufacturer, but the total will either be at the line item level or as a percent of the invoice. In addition to the actual payment, manufacturers may also assume responsibility for costs associated with follow up or activities related to resolving chargebacks.

Retailers look at how long it took them to resolve the particular issue that warranted a chargeback, as well as other intangible questions, like was it something the manufacturer could have avoided. Or, is it a legitimate chargeback? Time is often a large cost, along with other indirect costs involved in tracking down problems.

How to minimise chargebacks
Franks says KSA estimates that chargebacks usually hover around 1 per cent of selling, general, marketing and administrative (SGMA) expenses for an apparel company.

He also says despite the significance and impact of chargebacks, most manufacturers can minimise or eliminate their hit to the bottom line by taking one of four approaches that are a mix of technology and process changes.

On the technology side, instead of having to buy a specific package, more of the
electronic transfer of orders is basic.

Second, manufacturers can implement the approach of integrating their order management systems to planning tool systems. With a planning tool, as the season takes shape you're planning product sold, where it's sold and your up-front processes, which eventually translates into an order. Although planning is normally done, it's not usually integrated into an order, which means translation mistakes can be made.

"If a manufacturer is able to provide its retailers with what they expect an order to be it would cut down on many errors," Franks says. "Manufacturers then compare expected orders from actual orders. This ability to minimise the amount of errors will lead to a minimisation in chargebacks. This is a pretty big process change that involves true partnering with retailers."

Automating business rules is a third approach to reducing chargebacks. Retailers have their own sets of business requirements and rules that often are not automated in a manufacturer's system.

For example, retailer A is to receive a discount of 25 per cent and retailer B receives 30 per cent. These details are very specific to retailer orders, and errors often exist when orders are manually entered into a manufacturer's system.

"Automating these different business rules in a manufacturing system will significantly reduce or highlight where errors occur," Franks says.
For larger manufacturers with many retailers, a good way to approach chargebacks is for a manufacturer to focus on building a system that handles exceptions and alerts back to order entry managers when a discrepancy exists. This is a change toward managing orders by exception, and often requires companies to have a custom-built solution.

Integration tools require a shift in how people handle orders. Manufacturers begin managing by exception, having problems or issues presented back to them by a customer or by an order. That means time is focused on exceptions to the rules, rather than entry or order, which enables a manufacturer keep a record of issues and resolve those problems with retailers. It also enables companies to really shift their approach from handling situations reactively to proactively, and identifying any complications before they spin out of control, Franks says.

Solutions geared to large and small firms
The good news is that these solutions aren't just for large manufacturers. Although Franks has implemented these approaches with large, well-known apparel companies, they work on small-to medium-size manufacturers as well.

"Manufacturers of all sizes should be able to handle the workflow and exception approach, but they need to automate other processes such as business rules by customer," Franks says. "A lot of time just needs to be spent investigating rules, documenting what they find and getting a handle on rules before working on a solution. Those are critical pieces to the puzzle."

He says there are also many benefits to be gained from making chargebacks an initiative. Another easy step for all sizes of companies is providing orders to retailers electronically such as through EDI transfers. While it seems like a large task for smaller companies, it may serve to level the playing field by allowing them to work with retailers according to the unique guidelines each different retailer implements.

"The challenge for the smaller manufacturer is just their ability to be able to create a true partnership with large retailers," Franks says.

"Learning curves can be intimidating, especially since here we're talking not just about technology, but also about revamping your entire approach and processes for handling orders to being proactive rather than staying traditionally reactive."

There's the time it takes up front just getting a handle on your current order entry system, your order management approach, then there's shaping a future process to follow and finally moving into technology after you've done your homework.

The upfront analysis piece will take some time, a couple of months at a minimum. One major apparel manufacturer Franks is working with now is more than a year into the revamping process.

"There are many steps to take along the way," he says. "It's an ongoing process of evaluating how you're being charged back and working with retailers on a large-scale basis to examine how you handle orders."

You can be up and running with a new chargebacks-minimising approach in just three to six months depending on where your company is starting from. If you already have rules documents, you've got the groundwork for making changes. "It should be a simpler process. If you don't have any rules into order management, implementation will take more time," Franks says.

Benefits for manufacturers and retailers
Manufacturers naturally are more motivated to get the chargebacks situation remedied, but there definite benefits to both parties.

Retailers need to field calls from an apparel company when a chargeback is dispensed so it takes time and energy, but you also need to consider the margin benefit for retailer when it comes to issuing chargebacks fees.

A difficult retail environment - like the one we have today - makes the task of creating a true retailer-manufacturer relationship much more challenging. Franks advises apparel manufacturers to not feel they need to build a true partnership before starting to make changes on their own.

"It's true that the most benefits are gained if you are able create a solid partnership, but don't wait for retailers," Franks advises. "Manufacturers can reap great benefits for both parties by initiating and implementing changes on their own to their internal systems."

What is the first step for someone wanting to implement a change? Have a handle where most chargebacks occur for your company; and what types of situations and pricing, such as you're not able to ship in the window or you have delivery issues. Look at the nature of chargebacks and the retailers that provide the highest level of chargebacks while also examining your current systems and your ability to manage business rules.

Things to assess about your company? It's a mixture of your process, organisation and the systems that support your order management process. So you're not just looking at technology, but also consider how you take orders and manage processes.

By Stacy Baker