Chargebacks: The Hidden Costs Lurking in the Supply Chain | Supply & Demand Chain Executive

By: Mark Bell | February 26, 2021

Chargebacks: The Hidden Costs Lurking in the Supply Chain

With cost management top of mind for CPOs and other c-suite executives, it’s time manufacturers eliminate chargebacks as a line item and start leveraging the supply chain as a competitive differentiator – not a cost center.

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2020 will be remembered as the year of supply chain disruption and economic volatility. One of the most important lessons businesses learned is that resiliency, visibility, and financial control are intrinsically linked.

Consider that a recent survey by Deloitte found that cost management is now the top priority for chief procurement officers. Deloitte also found that organizations are spending nearly eight times more time on spend management than other areas of their business. With procurement and finance laser-focused on cost savings, supply chains leaders need to do their part as well, without impacting effectiveness and service levels. One key strategy is eliminating hidden costs that have been long accepted as the cost of doing business.

The costly, overlooked line item impacting financial health 

Veiled under contractual agreements, chargebacks from late/early/incorrect deliveries are costing organizations much more than they should – and the c-suite is demanding answers. On average, 1% of manufacturers’ and distributors’ top line revenue goes to pay chargebacks, often caused by late shipments or payments.

The penalties are no simple slap on the wrist. The fine for non-compliance is 3% of the cost of goods. Large manufacturers and distribution warehouses are not the only ones feeling the heat. Small and medium-size enterprises (SMEs) are also forced to adhere to these strict policies despite sometimes not having the resources to see the complete lifecycle of an order – from purchase order to invoice – to identify what went wrong.

The catch is, these costs are 100% preventable, no matter the size of an organization and its resources. In order for supply chain leaders to get ahead and truly eliminate these costs, they must establish a new level of visibility that breaks down barriers across the supply chain and enables teams to consolidate information that’s critical to ensure successful, accurate, and on-time deliveries.

Reducing costs starts with increasing visibility

When the current pandemic crisis was at its peak, 75% of organizations reported disruption in their supply chains, yet 44% lacked a clear strategy to deal with it. Perhaps that’s because only 6% of companies have full visibility into their supply chain – an alarming statistic when you consider how critical supply chain health is to the bottom line.

With such little visibility, there’s no wonder so many hidden fees lurk in the supply chain. Establishing greater visibility is the most important lever for reducing chargebacks, fines and fees while ensuring maximum service.

The key to establishing visibility and combating hidden charges is leveraging technology that breaks down siloed data across your supply chain, makes complex electronic data interchange (EDI) and supply chain data accessible and actionable, and enables you to see critical information in real-time. This allows supply chain planners and managers to get ahead of potential problems and proactively address the issue before it costs the company millions of dollars. Simply put, manufacturers and distributors that lack full visibility or rely on outside services or manual processes for EDI requests don’t stand a chance, as they are unable to identify or fix root causes in a timely manner.

The right tech strategy overcomes these challenges by automatically calculating fill rates and lead times for both orders and shipments and reconciling invoices against purchase orders, shipments and receipts to identify quantity, service and price discrepancies. This empowers suppliers to monitor obligations, prioritize initiatives, take real-time action and carry out an improvement plan – all of which help reduce chargebacks by correcting errors before they occur.

Eliminating chargebacks today

According to IDC, supply chain investments aimed at strengthening processes via technology will result in a 15% productivity boost by the end of 2021. Furthermore, having access to the right tools to help analyze supply chain data, and gain further supply chain visibility, were among the top strategic priorities of companies worldwide in 2020.

But, driving real change fast doesn’t mean having to wait for executive buy-in and large-scale tech investments. Businesses can start now by ingraining compliance into their company’s culture and empowering their team with easier access to information exchanged via EDI. By empowering your supply chain team with the ability to search, review and interact with the necessary data and identify exactly why a chargeback occurred, departments can collaborate to discuss root causes and the effects on profitability.

When disaster strikes – such as economic turmoil due to a global pandemic – businesses can’t afford to pay costly and unnecessary fines or fail to take advantage of saving incentives. With cost management top of mind for CPOs and other c-suite executives, it’s time manufacturers eliminate chargebacks as a line item and start leveraging the supply chain as a competitive differentiator – not a cost center.

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