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

• Pages: 1325-1345
• DOI: https://doi.org/10.1108/IJLM-09-2016-0205
• Published date: 18 June 2018
• Date: 18 June 2018
• Author: Chun-Miin (Jimmy) Chen
• Subject Matter: Logistics,Management science & operations

A review and analysis of service

level agreements and chargebacks

in the retail industry

Chun-Miin ( Jimmy) Chen

Freeman College of Management, Bucknell University, Lewisburg,

Pennsylvania, USA

Abstract

Purpose –The purpose of this pape r is to examine service level agreements (SL As) in the retail industry

and uses empirical data to draw conclusion s on the relationships b etween SLA parameters a nd retailer

financial performan ce.

Design/methodology/approach –Based on prior SLA theories, hypotheses about the impacts of

SLA confidentiality , choice of chargeback me chanisms and chargebac k penalty on retailer in ventory

turnover are tested.

Findings –Retailer inventory turnover could vary by the level of SLA confidentiality, and the variation of

retailer inventory turnovers could be explained by chargeback penalty.

Research limitations/implications –The research findings may not be readily applicable to SLAs

outside of the retail industry. Also, most conclusions were drawn from publicly available SLAs.

Practical implications –The significant relationships between SLA parameters and retailer inventory

turnover imply that a retailer could improve its financial performance by leveraging its SLA design.

Originality/value –Not only does this study contribute to the understanding of retail SLA design in

practice, but it also extends prior theories by investigating the implications of SLA design on the retailer

inventory turnover.

Keywords North America, Supply chain management, Retailing, Supplier relations, Mixed method,

Order fulfilment

Paper type Research paper

1. Introduction

“Vendor compliance is imperative to our collective success”(Macy’s, 2017). Retail supply chains

are increasingly reliant on vendors’demand-fulfillment compliance (Craig et al., 2015).

Many retailers improve the effectiveness and efficiency of inbound logistics by maintaining a

vendor compliance guide that clarifies the expectations of order fulfillment (Terry, 2013). For

example, Tiffany & Co. implemented a vendor complianceprogram to provide a single-source

reference for packaging, routing and documentation procedures for a large number of small

craft shops that had little logistic expertise (Bradley, 2001). In practice, the key aspect of a

vendor compliance guide is often the service level agreement (SLA), a host of requirements with

key performance indicators for demand-fulfillment expectations (Douglas, 2006; Friedman and

Yazdi, 2010; Douglas, 2012; Inbound Logistics, 2014). The expectations often include, but are

not limited to, on-time delivery and fill rate measured over some finite time horizon (Whipple

and Russell, 2007). In recent decades, more and more retailers have designed requirements

based on their needs and penalized noncompliant vendors. Professional journals in the areas of

supply chain management and logistics are never short on topics about retailers’use of SLA

parameters or chargebacks (Katz, 2003; Manrodt and Vitasek, 2008; Gilmore, 2010; Douglas,

2012; Terry, 2013; Inbound Logistics, 2014; Attain Consulting Group, 2015). Retailers have no

The International Journal of

Logistics Management

Vol. 29 No. 4, 2018

pp. 1325-1345

© Emerald PublishingLimited

0957-4093

DOI 10.1108/IJLM-09-2016-0205

Received 8 September 2016

Revised 1 January 2017

8 September 2017

9 February 2018

Accepted 29 March 2018

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0957-4093.htm

The author is grateful to the editor-in-chief, associate editor and three anonymous referees for their

insightful and constructive suggestions which have helped significantly in improving the quality of the

paper. The author also thanks Dr Doug Thomas, Dr Mihai Banciu and Dr Craig Nathan for their

valuable feedback on the paper. All errors are the responsibility of the author.

1325

Service level

agreements

and

chargebacks

restrictions when designing SLA parameters, and from th e vendors’perspective, chargebacks

are out of control. The purpose of this studyis to analyze, in the presence of chargebacks, how

a retailer’s design of SLA parameters might in return affect its own financial performance.

In general, SLAs stipulate a retailer’s minimum standards for acceptable shipment

arrival dates and shipment completeness. Additionally, retailers often specify contingent

penalties in SLAs as a motivation for vendors to follow any mutually agreed-upon

standards (Simatupang and Sridharan, 2002). As such, retailers believe that SLAs

can improve the efficiency of inbound logistics and material handling processes

(CVS/Pharmacy, 2016). For example, if shipments arrive after the required date or if the

fill rate is less than the required target, then the retailer could reduce the vendor payment

according to the penalty specified in the SLA, a vendor chargeback, which is, essentially,

revenue for retailers. Noncompliant vendors often fight chargebacks in order to recover

revenues deducted by retailers (Retailing Today, 2014). Attain Consulting Group (2015)

surveyed more than 500 companies and found that on-time or on-target requirements in an

SLA are common triggers of vendor chargebacks. On-time requirements typically refer to a

due date by which shipments must arrive, whereas on-target requirements typically refer to

the percentage of the purchased quantity filled over a finite review horizon. The retail

industry relies on SLAs and vendor chargebacks to ensure uniformity in receiving inbound

shipments from vendors. For example, Dollar Tree (2015) stated that failures to comply with

the SLA, such as an inability to ship on time, could result in penalty on the vendor. Boscov’s

Department Store (2015) kept an expense-offset list of routing guide violations; failure to

comply with the shipping requirements would result in the violation fees indicated.

The objective of this empirical study is two-fold. First, this study aims to offer an overview

of SLA parameters in the retail industry. A vendor compliance document is often classified as

confidential becausethe document mayinclude the retailer’sproprietary information. Thus, the

actual design of SLA parameters and chargebacks in the retail industry is not commonly

known to researchers. An initial review of some sampled SLAs indicates that SLAs tend to

differ with respect to requirements and chargebacks. Considering that consultants and

organizations offer tutorials to vendors on how to navigate increasingly complicated SLA

requirements, the uniformity of SLA parameters does not seem to be the case in practice

(Katz, 2016; Retail Value Chain Federation, 2017; Boyle, 2017). The second objective is to

investigate the implications of SLA parameters on retailer financial performance. Prior studies

theorized that well-designed SLA parameters can effectively coordinate a supply chain. In this

study, we explore another facet of SLAs by investigating the implication of SLA confidentiality

and parameters on retailer financial performance and how much can SLA parameters and

chargebacks help explain the variation in retailer financial performance.

This paper is organized as follows. In Section 2, we contextualize the empirical background

of vendor compliance. In Section 3, specific SLA parameters considered in this study are

explained. In Section 4, we introduce relevant theories and develop hypotheses to be tested.

In Section 5, we describe the methodology for data collection and processing. In Section 6, we

conduct data analysis and report the results. In Section 7, analysis results are discussed to offer

insights into improving SLA design. In Section 8, implications of the study results are presented

to offer some guidance on improving SLA design, along with the conclusion of this study.

2. Empirical context

Dating back to the 1970s, the first vendor chargeback appeared in the apparel business (Hays,

2001). Since then, the practice of vendor chargebacks has become increasingly common in many

other industries, while vendors were usually at a weaker position to dispute any questionable

chargebacks (Hays, 2001; Roubos et al., 2012). This seemingly unfair chargeback practice

between retailers and vendors was prevalent until 2005, when the famous apparel retailer Saks

Fifth Avenue was involved in high-profile federal investigationsinitiated by its clothing vendors

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