Explainer: Finding the Right Cost

Ensuring that products are delivered at the right cost means that the right root-cause analysis needs to be performed to discover why some costs are occurring and then decide the best course of action for remediation. Runaway costs eat away at money that could have been used for the benefit of the company like upgrading software systems, hiring additional employees, or training the employees you already have.

Related: The Perfect Order: Right Cost

Retailers take money off the invoice for two primary reasons. The first reason is deductions, which are contractual allowances usually related to co-op marketing and damages. The second reason is chargebacks, which are financial penalties for non-compliance to the technical (e.g., EDI) and operational (e.g., floor-ready requirements, logistics, barcode labeling) mandates imposed by the retailer. The technical and operational requirements are often known together as “vendor compliance.”

(Before I continue, here’s the disclaimer: I am not providing financial or accounting advice.)

These two invoice subtraction reasons (deductions versus chargebacks) should be recorded on the vendor’s general ledger separately; the two are not the same. Next, within the chargebacks ledger category, it would make sense to sub-ledger technical versus operational chargebacks differently for a more insightful reporting analysis. There is no reason to go into much more detail than this in the ledger, though one more layer of distinction wouldn’t be unreasonable. Technical reasons can be further distinguished as those related to EDI versus master data management. Operational reasons can be those related to shipping/logistics, labels, product, etc. Optionally, instead of this lower ledger level, establish a spreadsheet for recording the chargeback characteristics and resolution.

I often find little if any collaboration between the accounting function and the technology and operations areas in the discussion and resolution of chargebacks at the retail vendor companies that I assist, and this is a big mistake. The accounting department often has a different perspective and data view than IT and operations based on the information that they have available to them, making the accounting department a valuable voice in vendor compliance problem awareness and correction.

When a retailer pays (X12-EDI820 Payment Remittance) an invoice (X12-EDI810 or X12-EDI880) for less than the full amount and provides supporting documentation (X12-EDI812 Credit/Debit Adjustment) as to the reason, there needs to be an understanding as to the why, and whether there was justification for it. Deductions should be verified against the terms of the contract. Chargebacks should be investigated to ensure that the vendor was actually at fault and, if confirmed, the remedy for the problem implemented as soon as possible to avoid another financial penalty for the same issue. If the vendor does not believe that it was at fault, it should use evidence—such as EDI transactions—to support its case for chargeback reversal.

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