Last summer Walmart announced, “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.”[1] The company also indicated that the 75% target was not the ultimate goal. The company indicated that by February of this year the target number would jump to 95%. The staff at Material Handling & Logistics reports, “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] Apparently, Walmart executives have decided the 95% target remains unrealistic. Sarah Nassauer (@SarahNassauer) and Jennifer Smith (@jensmithWSJ) report, “Wal-Mart executives plan to announce that large suppliers need to deliver full orders within a specified one- or two-day window 85% of the time or face a fine of 3% of the cost of delayed goods. … For smaller suppliers the on-time threshold will move to 50%, up from 33%. The change will take effect in April.”[2]

The challenge of chargebacks

Retailers and suppliers have a symbiotic relationship; but, chargebacks increase the natural tension that exists between them. A couple of years ago, 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.”[3] Suppliers and retailers view chargebacks from very different perspectives. Suppliers view them as punitive and a way for retailers to increase profit margins at their expense. Retailers see them as a way to ensure they have products on the shelf to sell — without being overburdened by inventory. Steve Bratspies Chief Merchandising Officer for Walmart U.S., recognizes fines can be a source of tension. He told Nassauer and Smith, “This is not a ‘Hey, let’s see how unreasonable we can be,’ [situation]. We need the product that the customer wants when they want it.” The On-Time In-Full (OTIF) program implemented by Walmart is 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).”

Chargebacks are not a new challenge. Fifteen years ago Anne Zeiger 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.”[4] Zeiger adds, “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. In some cases, they say, 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.”

Dealing with chargebacks

Chargebacks aren’t going away. In fact, if Walmart’s tightening of the delivery windows is an indicator, things are only going to become more complicated. 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 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.” To address this “painstaking, time-consuming process,” Enterra Solutions® developed a testbed Compliance Management System (CMS) to demonstrate how cognitive computing could be used to address the chargeback challenge. The CMS monitored retailer websites for updates, imported updates into the system, and applied analytics to the order fulfillment process. A system like 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 asserts, “Great chargeback programs can identify the root cause for the chargeback.” Identifying root causes is essential if chargebacks are going to be avoided. A great chargeback program can also help reduce costs by:

• Reducing penalties through the identification of issues before an order leaves the warehouse and by continuously monitoring and updating retailer requirements and routing guides.
• Increasing recovery through the automated collection of information from carriers and retailers that aids in the research of data involving penalties/shortages and through the automated creation of dispute packages.
• Reducing compliance department costs by removing the manual, time-consuming task of continuously monitoring retailer and carrier websites and by providing templates for penalty and shortage dispute submission.

Chargebacks are here to stay and addressing the root causes of these chargebacks can save manufacturers millions of dollars. It can also help retailers by ensuring they have the products they need, when they need them.

Footnotes
[1] Staff, “Walmart Suppliers Will Be Fined for Both Early and Late Deliveries,” Material Handling & Logistics, 13 July 2017.
[2] Sarah Nassauer and Jennifer Smith, “Wal-Mart Tightens Delivery Windows for Suppliers,” The Wall Street Journal, 29 January 2018.
[3] Staff, “Why Every Supply Chain Today Needs a Vendor Chargeback Program,” Supply Chain 24/7, 23 May 2016.
[4] Anne Zeiger, “Retailer chargebacks: is there an upside? Retailer compliance initiatives can lead to efficiency,” Highbeam Research, 1 October 2003.
[5] Murray Sellars, “OTIF – On-time, in-full!” LinkedIn, 8 December 2014.