Chargebacks: Walmart Raises the OTIF Stakes

Stephen DeAngelis

August 9, 2017

Retailers and suppliers have a symbiotic, but often tense, relationship. One source of tension is retailer chargebacks (or fines). Last year, the staff at Supply Chain 24/7 reported, “Vendors like Target and Walmart continue to increase vendor chargeback fines, leaving shippers exposed, and some retailers count these fines as up to 13% of their account revenue.”[1] Suppliers and retailers view chargebacks from very different perspectives. Suppliers view them as punitive and retailers see them as a way to ensure they have products on the shelf to sell — without being overburdened by inventory. Walmart recently raised the stakes by announcing, “Beginning August [2017], items that are fast-turning must be delivered 100% full on the correct date, 75% of the time. If items are late or missing during a month period the supplier will be fined 3% of the value. Early shipments are fined as well or will incur a fine of 3% of the values. But 75% of the time isn’t the final goal, by February [2018] that number jumps to 95%. … The program, known as OTIF, aims to add $1 billion in revenue while solving a problem the company has faced with overcrowded back rooms. The company has been reducing inventory at its 4,700 U.S. stores.”[2]

 

On-Time In-Full

 

On-Time In-Full (OTIF) programs are a refinement of past supply chain metrics like Must Arrive By Date (MABD). Wikipedia states, “OTIF is a measurement of logistics or delivery performance within a supply chain. Usually expressed as a percentage. It measures whether the supply chain was able to deliver the expected product (reference and quality), in the quantity ordered by the customer, at the place agreed by the customer, at the time expected by the customer (in many cases, with a tolerance defined in conjunction with the customer).” According to Kendall Trainor, a Wal-Mart senior director of operations support and supplier collaboration, the company is raising the stakes because variability from its top vendors is putting a huge stress on supply chain efficiency. According to Trainor, “OTIF scores for Wal-Mart’s top 75 suppliers — including P&G and Unilever — had been as low as 10% and not one reached the 95 percent long-term target.”[3] That variability speaks volumes about the complexity of the logistics system.

 

Colby Beland, Vice President of Sales and Marketing for CaseStac, told the MH&L staff, “One of the biggest adjustments suppliers need to prepare for is scheduling. Under OTIF, Walmart tracks deliveries in a smaller time period than done previously. OTIF is measured on a monthly basis, whereas Supply Chain Reliability was measured on a quarterly or 13-week period. The Walmart 13-week schedule is gone, and it’s now measured on a monthly basis. So if you have one bad week over a four-week period, it’s very difficult to recover. With Supply Chain Reliability, it was spread out over 13 weeks. You could have one or two bad weeks and still recover to not be penalized. With OTIF, over a four-week period, if you have one bad week, at 95% versus 90%, there’s really no way to recover, and you’re more than likely going to receive a penalty.”[4] The best way to reduce variability and increase OTIF performance is to manage complexity in an intelligent way. A few years ago, Murray Sellars wrote about the pieces of the puzzle that need to be coordinated.[5] They are:

 

  • Sales – Every Salesman is focused on Growth. Whether you KPI them on Turnover or Profit Margin, having them buy into OTIF is crucial to managing the customers’ expectations.
  • Purchasing – The KPI most used in Purchasing Departments is Stock Turn. However, the value of your stock is meaningless unless you take other factors such as growth into account. By monitoring Stock Turn in conjunction with OTIF you will find dramatic improvement in both the timing of orders and also the carrying of the correct stock items.
  • Customer Services – (or Internal Sales as it is sometimes known) resist the temptation to deliver at any cost when their performance is measured using Profit Margin and OTIF together.
  • Warehousing – finds Stock Accuracy and OTIF combined a winning combination!
  • Dispatch – This is undoubtedly the area where OTIF is owned and this KPI alone is enough to keep this department focused.
  • Logistics – To control one of a business’s largest costs after wages, why not use Transport as a Percentage of Sales with OTIF to ensure service levels remain while costs are driven down?

 

Adding to the complexity is the fact that every major retailer has its own compliance requirements. There are no industry-wide standards. This has been a challenge for years. Back in 2003, Norman Katz, CEO of vendor-compliance consulting firm KatzScan Inc., told Anne Zeiger, “There’s no standard for vendor compliance manuals. Everybody is presenting this in a different way, from one retailer to another. It’s a very painstaking, time-consuming process to understand what changes.”[6] To address this “painstaking, time-consuming process,” Enterra Solutions® developed the Compliance Management System (CMS). The CMS can continuously monitor retailer websites for updates, imports updates into the system, and applies analytics to the order fulfillment process. As a result, the CMS eases the pain of keeping up with changing compliance requirements. This is important because, as Zeiger notes, “Suppliers have little choice but to figure out ways of meeting vendor standards, even if they’re unhappy about them.” A good compliance system can also monitor and take into account the variables discussed by Sellars.

 

The Supply Chain 24/7 staff recommends that every vendor implement a chargeback program.[7] The staff explains:

“If it’s not on your radar already, you’ll want to watch how vendor chargebacks impact your supply chain spend. Walmart, Target and other retailers have been putting together plans to impose tighter controls on suppliers. It’s part of a growing trend and it underscores a very, very significant business reality: if your company doesn’t have an effective program for handling chargebacks, you’re going to lose a lot of money.”

Zeiger adds, “There’s no doubt about it: manufacturers who fail to meet a retailer’s vendor standards can get into financial trouble. After all, shave off $20 here for a short lot, $5 there for a cracked pallet and $10 over here for a mangled shipping label, and before long, it can run into real money.”

 

Summary

 

Joel Graham, Director of Client Services for 8th & Walton, believes that Walmart’s OTIF program can be beneficial for everyone in the long run. “OTIF is a good move for everyone,” he states. “Honestly, the new On Time In Full scorecard is one of the best tools for measuring inventory flow that we’ve ever seen. Actually, it’s more than a scorecard; it’s a dynamic reporting mechanism. Giving suppliers this tool shows that Walmart wants the flow of product to be smooth and steady — and in the stores for customers. Ultimately, that’s what we all want.” I agree that reducing variability in the supply chain will benefit everyone. Nevertheless, that is easier said than done since there are many variables involved. A cognitive-based compliance management system can help deal with that complexity.

 

Footnotes
[1] Staff, “Why Every Supply Chain Today Needs a Vendor Chargeback Program,” Supply Chain 24/7, 23 May 2016.
[2] Staff, “Walmart Suppliers Will Be Fined for Both Early and Late Deliveries,” Material Handling & Logistics, 13 July 2017.
[3] Ibid.
[4] Ibid.
[5] Murray Sellars, “OTIF – On-time, in-full!” LinkedIn, 8 December 2014.
[6] Anne Zeiger, “Retailer chargebacks: is there an upside? Retailer compliance initiatives can lead to efficiency,” HighBeam Research, 1 October 2003.
[7] Jarrod Davis, “Mastering the Challenge of On Time In Full (OTIF),” Retail Details, April 2017.