Execution quality and chargeback penalties in retail supply chains

Abstract

Retailers procure inventory by placing purchase orders (POs) with suppliers. POs specify product price, quantity, quality, delivery times, and other aspects of the fulfillment process, such as carton labeling requirements and packaging formats. When servicing an order, a supplier may fail to meet the fulfillment terms, thus committing a fulfillment error and triggering a chargeback penalty. We collect supplier compliance manuals from 111 retailers to characterize fulfillment errors and chargebacks in practice. The majority of chargeback penalties listed by retailers pertain to execution quality: aspects of the fulfillment process beyond product price, quantity, quality, and delivery time. We use an empirically grounded analytical model in combination with game‐theoretic analysis to demonstrate that the chargebacks most commonly used in practice do a poor job coordinating supply chains around execution quality.

Empirically grounding analytics (EGA) research in the Journal of Operations Management

“…The model reproduced the observed behavior and also suggested a risk of oscillation: Although the reshoring decision brought richer information into the decision process, there was no evidence that offshoring decisions were updated to consider more than per-unit landed cost. Craig et al (2021) began from the observation that the majority of chargebacks used by retailers to penalize supplier fulfillment errors arose from execution errors rather than product-related factors. Mechanisms in place tended to prioritize simplicity over accuracy and might not take into consideration the type of error encountered.…”

“…Craig et al (2021) began from the observation that the majority of chargebacks used by retailers to penalize supplier fulfillment errors arose from execution errors rather than product‐related factors. Mechanisms in place tended to prioritize simplicity over accuracy and might not take into consideration the type of error encountered.…”

A review and analysis of service level agreements and chargebacks in the retail industry

“…We feel the fee is fair and the intent isn’t to generate fees; it is to change the behavior so we can receive the inventory on the same day the carrier committed to delivering it.” It turns out that benchmarking other retailers’ chargebacks and adopting the industry norm seems to be one way that a retailer may set its on-time chargeback penalty. As a result, there could be little connection between retailers’ on-time chargeback penalties and their financial performance (Craig et al , 2016).…”

“…An explicit chargeback (hereafter “chargeback”) is some financial penalty either deducted from the payments or separately charged to the vendor to discourage the vendor’s demand-fulfillment errors (Craig et al , 2016). Albeit undesirable, chargebacks are supposedly the most straightforward way to motivate vendors to adhere to SLA requirements (Frazelle, 1998; Putka, 2000).…”