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How to eliminate the major sources of EDI chargebacks
For retail brands, establishing relationships and integrations with major retailers like Nordstrom, Target, Sephora, and REI (to name just a few) can be an important sales channel: In addition to providing a significant channel for revenue growth, utilizing these sales channels can also be a very powerful customer acquisition tool. While the benefits abound, working with major retailers often also brings with it considerable challenges to navigate.
Working with major retailers generally means using an electronic data interchange (EDI) platform to allow the two businesses to communicate using a standardized format. Beyond associated technology and integration challenges within EDI programs, brands are also confronted with headaches in the form of complicated packaging and shipping requirements enumerated in vendor guidelines and routing manuals for each major retailer. Adding to this complexity is that no two retailers have identical requirements, so retail brands must diligently track specific shipments set to be shipped to each major retailer to ensure compliance with the corresponding sets of often very specific packaging and shipping requirements.
What are some examples of these EDI requirements? Some retailers have strict restrictions on which box sizes can be used; others do not. Some retailers require boxes to be sealed with brown kraft tape; others require clear plastic tape. Some retailers require a date format of "yyyy-mm-dd" while others require "mm-dd-yy". And specifically for apparel brands, each retailer has a specific type of hanger that must be used for each garment to remain in compliance. If it seems like a lot to keep up with - it is!
The worst part: failure to adhere to EDI requirements comes at a significant price to the retail brand. For every instance of noncompliance, the brand - known in this situation as the vendor - will be hit with hefty "EDI chargeback" fees for its failure to comply.
Chargebacks are financial penalties levied by a retailer in response to a vendor’s failure to comply with the requirements the retailer has laid out for trading or selling with that retailer. There are two main categories of chargebacks: chargebacks related to software and technology issues, and chargebacks resulting from packing and shipping related processes.
Ostensibly, the requirements are designed to ensure the smooth and efficient operations of the retailer's distribution network and stores, and the chargebacks are levied to offset the loss of efficiency incurred by the retailer. In theory, this makes perfect sense: the retailer needs to ensure a certain level of efficiency to ensure their business is profitable. In practice, it’s not always as easy to understand the business case for these requirements, or the process for levying chargebacks. As a result, retail brands can often feel overwhelmed by this confusing and costly system of policies and penalties.
At Mochila, we aim to support our clients navigating the landmines of EDI chargebacks by designing processes and systems that dramatically reduce the possibility of getting slapped with chargebacks, rendering the likelihood of incurring chargebacks as close to zero as possible.
There are several ways a vendor could trigger chargebacks that are related to software and systems integration.
First, it's important that the PO placed by the retailer with the vendor is transmitted accurately and on time into the system used for fulfilling the order. This means translating the PO to ensure that the items for each store are sent to the right distribution center, and ensuring that any errors in receiving that PO are responded to in a timely manner.
Timely importation of POs is critical to ensure that a Form 855 – a PO acknowledgement – can be sent within the allotted time with any necessary corrections. Sometimes, there may be a miscommunication regarding what is being ordered or, more importantly, the price of the items being ordered. Sending a PO acknowledgement to correct any errors quickly, therefore, is important to avoid both chargebacks from a PO that can not be fulfilled completely and also any loss of revenue from an incorrect price.
It is with the transmittal of the form 856 – the advance shipping notice (ASN) document – where we see the most chargebacks issued to brands.
First, the ASN must be sent “on time” - which in this situation means within an optimal timeframe that is neither too early nor too late, based on when the inventory will be arriving. If the ASN is sent too late, then the receiving distribution center may have difficulties receiving the inventory. If the ASN is sent too early, the distribution center will believe the inventory is arriving soon, and when it does not arrive, the retailer will be confused.
Second, the ASN must be complete and conform to the retailer's specific guidelines. Not only must all of the information provided be accurate - including PO number, item identifiers, and quantities - but all elements must also be properly entered in the format required by the specific retailer. For example, if the retailer specifies a data format of "yyyy-mm-dd" and an ASN contains a date entered as "08-05-2024," that will result in a chargeback.
The second category of chargebacks relates to how the items are prepared, packaged, and shipped to the retailer. These activities are performed by the warehouse or 3PL. Like other fulfillment related activities, the success rate of these processes is a result of several inputs: thoughtful process design, management expertise, and intelligent software that supports strong quality controls.
Before packing items to be shipped to the retailer, a retailer may require that the items be prepped in a very specific manner for receipt into the retailer's distribution centers or stores.
Many retailers require their own hang tags or barcode labels, often displaying the retailer's logo and the agreed upon retail price. In addition, for inventory being sent to a retailer for direct-to-consumer distribution, additional prep (such as polybags) may be required.
Finally, for many apparel items being sent to a store location, items are required to be shipped on hangers. Importantly, the hanger used must be of a type and size designated by the retailer. Each retailer has its own guidelines regarding which hangers are to be used for each specific item, making this step a particularly complex and challenging requirement. Using the wrong hanger can be a frequent source of chargebacks.
Once the items are prepped, they need to be packaged for shipment to the retailer.
Most retailers will specify the range of box sizes that can be used, as well the minimum and maximum allowable weights. These requirements of course differ from retailer to retailer based on how their specific distribution centers are operated and run. To avoid chargebacks, it is important to have quality controls in place to ensure that each package conforms to the receiving retailer's requirements.
In addition to the box dimensions and weight, each carton typically requires a UCC-128 label ("UCC" label). This label contains a unique code – that must be transmitted within the ASN – that tells the receiving retailer the contents of the carton, as well as the PO number against which the items should be received, and other relevant information like the final store destination. Each retailer has strict requirements for the UCC label, detailing the information contained on the label, the layout of that information, and the readability of the barcodes and information printed. If any of these requirements are missed, the vendor can receive chargebacks from the retailer.
In addition, the UCC label must be placed in very specific locations on the carton to ensure the labels can be scanned by that retailer's automated scanning sorters in the distribution center. Misplacement of the UCC label, even by as little as half an inch, can result in chargebacks.
In addition to the UCC labels, retailers may also require other packing documents such as: master packing lists, carton packing lists, lead carton labels, carton numbers to be displayed on each individual carton (e.g. carton 1 of 25), or mixed carton labels. The list of required documents varies by retailer, and vendors may also have specific arrangements beyond this with a particular retailer. To avoid chargebacks, it's important to have strong mechanisms for ensuring the required documents are included with each PO and with each carton.
Finally, it is important to eliminate mis-picks/incorrectly picked items: the physical contents of each carton must exactly match the electronic description, as detailed on the UCC label and the ASN (or form 856).
Once all of the items have been prepped and packed, a brand’s final cartons must be shipped to the retailer. This last step introduces two common areas for chargebacks.
The first big area is routing: each PO must be routed correctly according to instructions provided by the retailer for that shipment. This means contacting the retailer's routing departments with accurate details of the shipment, meaning the number of pallets and cartons, as well as their associated dimensions and weights. The retailer then provides instructions regarding the required carrier and method to be used for shipping the product. If the shipping-related information (cartons, dimensions, weights) provided to the retailer is not correct, or their instructions are not followed correctly (the wrong carrier is used, or the shipping documents, such as bills of lading, are not prepared correctly), then the vendor may incur chargebacks.
In addition to the shipping information and subsequent routing being accurate, the shipping itself must also be done on time. In practice, this means routing shipments well in advance of the cancel date since unexpected delays often occur. For example, it may take longer than expected for the retailer's routing department to respond – and in some cases these later than expected responses will be accompanied with instructions that prompt additional questions or requests for clarifications.
Another situation that sometimes arises is that the carrier selected for pick up by the retailer's routing department may not show up at the selected time. Sometimes, the carrier (or their designated driver) will believe they went to the appropriate pick up location – and will notify the retailer to that effect – when in fact they went to the wrong address. If the cancel date has passed, the retailer will issue chargebacks – even if the missed pickup was due to no fault of the vendor or the vendor's 3PL. Taking precautions to account for unexpected delays is critical.
Due to the frequency of changes in routing guides, the complexity of managing dozens or hundreds of individual chargebacks, and the internal, cross-functional team effort required to combat EDI chargebacks, eliminating them entirely is often a tall order. Having a robust software and EDI platform and a flexible system that can quickly adapt to changes is critical.
Having a fully automated system for importing and validating POs in real-time is incredibly important for ensuring all POs are processed without delay. At Mochila, we partner with the modern EDI platform Orderful that provides an always-on connection with automated alerts for incoming POs. By connecting thousands of vendors with thousands of retailers, Orderful's platform leverages this scale to continually and proactively adapt to retailers' changes in the PO EDI form. More importantly, it provides Mochila with a mechanism for instant validation and real-time alarms if there are any problems so they can be resolved immediately.
If there is a problem with the 850 when importing the PO, sending a PO acknowledgement in a timely manner with the appropriate corrections – or sending a rejection of the entire 850, if need be – can reduce and eliminate chargebacks.
Again, leveraging Orderful's EDI platform, Mochila is able to instantly validate the ASN to ensure compliance with the retailer's requirements. Any errors are automatically flagged in real-time, allowing Mochila's skilled developer team to fix the errors before passing the ASN to the retailer. This dramatically reduces the chance of an error in the EDI form, thereby significantly reducing the possibility of chargebacks.
It is important to not only send the ASN in a timely manner, but also to look for an acknowledgement from the retailer that the ASN has been received. The ASN will be handed off several times once it is sent from the warehouse, usually passing through one or two intermediaries that specialize in EDI services, before it reaches the retailer. This means that situations may arise where a warehouse believes that the ASN has been transmitted and successfully received by the retailer – but in actuality something has gone awry in the transmission and the ASN has not yet made its way to the retailer.
To ensure that the ASN has not gotten "stuck" somewhere along the chain, it is important to receive and record an acknowledgement from the retailer (via Form 977) that the retailer has received the ASN. That way, if no acknowledgement has been received, the vendor can proactively follow up with the retailer to ensure the ASN is received and no chargebacks are incurred.
Reducing chargebacks related to prep, packing, and shipping starts with a thorough review of vendor guidelines and routing manuals. At Mochila, we will highlight any areas that are unclear and ask for a written clarification from the retailer to ensure we have an accurate understanding of the requirements. This is a collaborative effort between Mochila and our client (the vendor), as we often find that our clients will have specific and unique arrangements with a retailer, as well as an ability to influence the requirements to be applied to their shipments.
The key to reducing prep-related chargebacks is deploying our proprietary software to ensure accuracy – treating the EDI prep-related process (including applying hangers, hangtags, labels, selecting boxes, and scanning items into that box) with the same software-powered precision that we use in our direct-to-consumer pick and pack process. Everything is scanned, and our proprietary software will not allow the operator to continue working when the software flags a mistake made in the prep-related process.
Thoughtful process design also plays a significant role here – we have strategically designed the entire prep and packing processes for EDI retail orders. This includes developing guides and quality control checks to monitor things like placement of the UCC label and its accuracy, as well as how the operator's packing station is set up, to most effectively and efficiently eliminate errors and defects.
There are two key elements to reducing shipping-related chargebacks:
First, we route all shipments well in advance of the cancel date, leaving plenty of time to account for and absorb any delays with pick up. If there is any doubt, we will request an extension with the retailer.
Second, we have software tools devoted exclusively to quality control before the shipment information is sent to the retailer's routing department, ensuring not only that the information is accurate but also that the presentation of the shipment will conform to the retailer's guidelines. Having a dedicated and independent quality check of our own design helps ensure that any rare defects can be identified before releasing the shipment to the appropriate carrier for delivery.
While it is generally not possible to completely eliminate chargebacks, in our experience we have seen firsthand that the occurrence of chargebacks can certainly be dramatically reduced – and almost completely eliminated – when partnering with a smart 3PL partner that provides the necessary tools to effectively navigate the challenging EDI landscape.
Why can't chargebacks be completely eliminated? For the same reasons that no system or process is 100% defect-free: the resources and costs necessary to achieve such an incredible level of performance often outpace the costs of managing a very small amount of chargebacks - especially in a system where retailers are constantly updating and changing routing guidelines in so many different ways.
But the key to reducing these defects is having a system and a team that can respond incredibly quickly to new chargebacks. As soon as you receive notification of a chargeback, it is critical that you identify all of the potential root causes and then develop and implement multiple corrective actions for each one.
This is one of the reasons why we built and use a proprietary software platform at Mochila: our software keeps us nimble and always growing smarter. We take pride in the fact that our platform can rapidly build and deploy software enhancements to adapt to retailers’ evolving requirements and our clients value our ability to add new, automated quality control steps to further reduce chargebacks.
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