Chargebacks Part 1 – What Are Chargebacks?

The post last week was about vendor scorecards and the feedback they give to suppliers. In addition to scorecards, many customers have chargebacks that provide cost incentives for compliance with their requirements.

This post is the first in a four part series. Today I’ll be covering an explanation of chargebacks. Next week in Part 2 we’ll look at the motivations for why your customer has chargebacks. Part 3 the following week will explain how chargebacks and vendor scorecards can help you improve your business. I’ll wrap up the series in Part 4 by reviewing best practices to prevent chargebacks.


A chargeback is a fee that a customer assesses a supplier for errors in not following the customer’s business rules. The chargeback offsets the extra expense the customer incurs as a result of the supplier’s non-compliance.

Every customer has specific requirements that their suppliers have to meet. As a supplier, being unable to meet those requirements comes at a cost. Supplier noncompliance can be due to a simple mistake in paperwork on your end, incorrect information transmitted on an EDI transaction, negligence on the part of a department head or employee, or a deep-rooted problem within your organization.

Understanding Chargebacks

Chargebacks have been around for quite some time. They first gained prevalence back in the 1980s, though the implementation of the practice certainly raised a hue and cry with suppliers. However, cost recovery is legal because it is written into the supplier’s contract with the customer. Today, chargebacks for errors are a common practice with most large customers.

Chargebacks are leveled as a strong incentive for the supplier to manage the key aspects of their relationship with the customer. It might help to think of them as “fees” assessed due to errors within the supply chain. Those errors cost the customer in time to market and additional labor. Sometimes the errors can harm their reputation.

What Incurs Chargebacks?

Chargebacks are assessed when supply chain mistakes occur. Those errors can take many different forms, including:

  • Using the wrong shipping provider
  • Early, late, or non-authorized partial delivery
  • Incorrect shipping location
  • Missing, incorrect, or non-scannable shipping labels
  • Shipping labels not placed in the correct position on the carton
  • Unauthorized product substitutions
  • Apparel not on hangers or on incorrect hangers
  • Product not in correct individual packaging or packed incorrectly in carton
  • Damaged merchandise not damaged during transit
  • EDI invoice with incorrect terms, discounts, or quantities that do not match receipts
  • EDI invoice does not match purchase order number, item number, item unit of measure, or price
  • EDI ASN (Advance Shipping Notice) is late or not sent at all
  • EDI ASN contents do not match items in cartons received
  • EDI ASN store number, DC number, bill of lading number, or carrier number are incorrect

Those are only some of the reasons for customer chargebacks. Refer to your contract with your customer for exactly what infractions they consider to be an error.

How much are they?

Chargebacks fees are typically assessed per occurrence and can add up fast. Here are some examples:

  • Using wrong shipping provider – all of the freight costs plus $50
  • Missing or Incorrect shipping labels – $100
  • ASN does not match cartons – $10 to $100 per carton
  • Shipment received too early or late – all of the freight cost plus $50

Chargebacks are common, but there’s no reason you should have to suffer from them. Thoroughly understanding what your customer wants, eliminating supply chain errors and communicating with your customer can help you minimize or eliminate them all together.

The right EDI platform makes avoiding EDI chargebacks much simpler and ensures that document transfer is timely, accurate and can be managed by human experts. CovalentWorks is trusted by thousands of small businesses to provide turnkey EDI solutions that meet the compliance requirements of their customers. Contact us if you have questions.

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