Great Business Ideas: Fight Unnecessary Chargebacks

Great Ideas for your Small Business: Fight Unnecessary Chargebacks

Every year, hundreds of small apparel manufacturers are charged millions of dollars for failing to ship clothing to stores in “floor ready” condition. Retailers, contending that without specifications there would be chaos in their stores, deduct funds for items that are not packed in the right kind of box, hung on the right hangers, or properly tagged.

Smaller manufacturers have the most trouble meeting these demands, and while they can protest these deductions or chargebacks, it’s a long and tedious process. Major retailers publish telephone book–sized packing and shipping guides for vendors who want to do business with them.

There is little consistency; every retailer has a different set of specifications. Bill Chapman, accounting manager for Seattle Pacific Industries Inc., offered an example: “We were charged $150 for putting a piece of tissue paper in a carton.”

Seattle Pacific, which sells trendy casual wear to Sears, Mervyn’s, and Federated, among others, is trying to reduce its chargebacks from about $10 million a year to $2 million. Company executives have made reducing chargebacks a top priority, and the company’s 250 employees are working hard to reduce problems caused at their end.

John Metzger, founder and chief executive officer of Creditek, a financial services outsourcing company based in Parsippany, New Jersey, said U.S. retailers have grown so huge through consolidation that it’s difficult for a $10 million clothing company to do business with an $8 billion retailer.

“I fear that in five to ten years, the innovative, small fashion houses are going to go out of business,” said Metzger. “It’s a scary scenario for the apparel industry.” Metzger said small companies find that dealing with chargebacks “is gruesomely technical, detailed, and labor-intensive work.”

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Sandi Wolf, chargeback manager for Gabar Inc., a Farmingdale, New York, maker of resort and swimwear, agrees. Plus, she said, the penalties have become “beyond outrageous.” On the day we spoke, Wolf was dealing with a $2,000 penalty for shipping too many swimsuits to a store. She said chargebacks can equal 2 to 5 percent of total annual sales, which is significant for smaller companies like Gabar, with sales of under $50 million.

Ken Green, president of the Internal Audit Bureau in Hamlin, Pennsylvania, helps companies like Gabar recover chargebacks and provides other accounting support services. IAB is paid a percentage of the funds collected, usually less than 50 percent.

Green said the big guys win most battles in the charge- back war. “It used to be a 65/35 percent split in favor of the retailers,” said Green. “Now, it’s 75/25 percent in favor of retailers.” To their credit, several major retailers, including Federated, are involved in an industrywide effort to make life easier for small manufacturers.

“The wave of the future is the website, where, with the proper security codes, manufacturers could find out what’s wrong and correct the problems in advance,” said Kim Zablocky, president of the New York Credit and Financial Management Association (NYCFMA), which represents credit managers in many industries. Henry Gerstman, a NYCFMA member and treasurer of Century Business Credit Corp. in Manhattan, which finances apparel transactions, agrees that better computer systems can simplify the com- plex relationships between manufacturers and retailers.

He served on a high-level industry committee revising the standardized computer codes used in the apparel industry. Gerstman said small companies who want to sell to major retailers have to become computer literate. Sears, Penney’s, Dillard’s, and Wal-Mart already require vendors to use electronic data interchange, or EDI, to transmit purchase orders and/or invoices and payments.

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“We are also developing a prototype Internet facility for retailers,” said Gerstman. “We recognize the tremendous value of the Internet.” He cautioned that it could take five to ten years for electronic commerce to solve the problems.

Meanwhile, back in Seattle, Seattle Pacific’s Chapman said the company is taking a new approach to the chargeback dilemma. “We are going after the specialty stores,” which have much friendlier shipping and receiving policies, he said. “With smaller retailers you [the manufacturer] are in the driver’s seat.”