Walmart recently made headlines when it toughened delivery demands for its suppliers. Reporting on this development, Jennifer Smith (@jensmithWSJ) and Sarah Nassauer (@SarahNassauer) write, “Looking to cut inventory while meeting e-commerce demands, the retailer wants more of the goods it orders delivered on time and in full. … Walmart also is changing how it penalizes suppliers when they make partial deliveries, an effort to make sure products are on shelves when needed, a particular focus for Walmart as it ramps up online grocery pickup and delivery services that pull from store inventory to fulfill orders.”[1] These types of penalties are known as chargebacks and they have been the bane of suppliers for years. Over a decade ago, Anne Zeiger wrote about the financial burden chargebacks create for suppliers.[2] She wrote:

“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. Manufacturers, consultants and trade groups supplying retail businesses are up at arms over these chargebacks, arguing that their profits are being slashed unmercifully — and sometimes unfairly — by retailers claiming noncompliance.”

Walmart’s latest move is likely to increase supplier angst.

Walmart’s latest move

Over the past several years, Walmart has continued to raise the delivery bar for suppliers. In Walmart’s latest move, report Smith and Nassauer, “The retailer wants suppliers that ship full trucks of products to deliver orders within a specified two-day window 87% of the time, up from an 85% rate it targeted previously. Suppliers that fill part of a truck with their goods must hit a 70% on-time threshold, a significant jump from the previous target of 50%.” The changes are set to take effect by May 2019. The editorial staff at Supply Chain Digest reports Walmart will penalize suppliers a 3% chargeback relative to an invoice for each case that fails to meet its new “on time, in full” requirements.[3] They further explain:

“For example, a milk delivery containing 19 of the 20 cases ordered would get a 95% in full rating, below Walmart’s 97.5% threshold for food consumables. That supplier would incur a 3% fine on the missing case. Two cases short would trigger a 6% chargeback versus invoice. … The only good news for suppliers: they won’t be fined twice for non-compliance, the company said. That means a shipment that arrived two days late would incur a 3% chargeback against the full invoice, but wouldn’t also be fined for cases shorted from the order.”

According to Steve Bratspies, Chief Merchandising Officer for Walmart U.S., the company is raising the stakes to improve sales. He states, “When we receive the product that we ordered, we see better sales.” He also told Smith and Nassauer, Walmart has previously evaluated suppliers “on how consistently orders arrived on time, combined with how complete their orders were. Now Walmart will evaluate suppliers on each part separately so the performance of each piece of delivery can be evaluated more easily.”

Meeting the chargeback challenge

Although Walmart is making headlines for raising its delivery standards, it’s not the only retailer establishing standards and using chargebacks. Dan Sanker, president of logistics service provider CaseStack, told Smith and Nassauer, “Companies might have to track 30 major retailers and they’re all changing things.” If the supply chain weren’t complicated enough, having to track delivery standards for 30-odd retailers adds to the confusion. Back in 2003, Zeiger wrote, “In some cases, [suppliers insist], the requirements are petty, arbitrary or even illogical. What’s more, retailers may change the standards regularly, making it difficult to keep up with what’s required. ‘Even though retailers will swear to you that chargebacks aren’t a profit center, the candid opinion in the industry is that retailers intentionally make compliance difficult to make it a profit center,’ says Norman Katz, CEO of vendor-compliance consulting firm KatzScan Inc., of Deerfield Beach, Fla.” Katz added, “Simply keeping up with standards changes, much less meeting the standards consistently, can be difficult. 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.”

To help suppliers deal with this challenge, Enterra Solutions® developed the Compliance Management System (CMS). The CMS was designed to continuously monitor retailer websites for updates, import updates into the system, and apply analytics to the order fulfillment process. The objective of the CMS was to ease 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.” Being able to keep up with changing standards places manufacturers/distributors in a better position to negotiate with retailers, especially if requirements are arbitrary or illogical. Another benefit of “playing the game well,” as Zeiger puts it, is that compliance feedback can be used “to improve its supply practices.” 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 – “[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 – “[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?”

A good compliance system can monitor and take into account the variables discussed by Sellars as well as keep track of paperwork in case a supplier wants to challenge the validity of chargeback penalties.

Concluding thoughts

Not surprisingly, retailers and suppliers have different views about delivery standards and the chargebacks they can incur. Joel Graham, Director of Client Services for 8th & Walton, believes delivery standards can be beneficial for everyone in the long run because they improve overall logistics quality. He asserts, “Suppliers just need to figure out the best way to improve their supply chain and logistics so that they can hit a metric to improve the flow of inventory.”[5] It would be easier for everyone involved if universal delivery standards were adopted by the retail sector.

Footnotes
[1] Jennifer Smith and Sarah Nassauer, “Walmart Toughens Delivery Demands for Suppliers,” The Wall Street Journal, 6 March 2019.
[2] Anne Zeiger, “Retailer chargebacks: is there an upside? Retailer compliance initiatives can lead to efficiency,” HighBeam Research, 1 October 2003.
[3] Staff, “Supply Chain by the Numbers,” Supply Chain Digest, 14 March 2019.
[4] Murray Sellars, “OTIF – On-time, in-full!” LinkedIn, 8 December 2014.
[5] Jarrod Davis, “OTIF: Mastering Walmart’s On Time In Full Guidelines,” Retail Details, April 2017.