Retailers get tough on vendors with fines for late deliveries

Bloomberg

Large retailers grappling with supply-chain snarls, inflation and increased automation are cracking down on orders from their vendors.
Stores such as Walmart Inc. and Target Corp. have long fined suppliers that fail to deliver products on time, in the right amount or with the correct specifications. But after the pandemic allowed for some leeway, US retailers are now coming back with tougher standards and tightening expectations on how goods are received.
Anything less than exact compliance can result in penalties from fines to losing shelf space when contract negotiations come up — a particular challenge for small brands that often have limited resources to scrutinise shipments.
It’s something Marta Cros, who owns a natural skincare company called Apto, experienced firsthand after Walmart started selling some of her products last year. A mishap with the barcodes on an order of lip balms triggered penalties and delayed payments that led to about $200,000 in losses, she said. She recouped roughly 90% of that, but only after about 10 months of back-and-forth with the retailer.
The changes among retailers are varied. Target is beefing up the team in charge of policing orders. The number of companies levying supply-chain charges also is growing, said David Friedler, managing partner at consumer-goods consultancy Simpactful. And Walmart recently rolled out extra
levies for suppliers using its transportation services.
Walmart is telling suppliers that their shelf space will be reviewed more frequently than in the past, and that vendors with persistent out of stocks could see their products quickly replaced. The retailer also is looking to capitalise on trends, including those sparked by social media, by quickly swapping items in and out.
For suppliers, charges can be make-or-break and eventually affect prices for consumers. Fines and fees can cost sellers as much as 12% of the amount they bill to Walmart, according to SupplyPike, a software company that helps vendors track and fight retailer deductions.
Store operators that grappled with empty shelves over the past three years say that penalties encourage vendors to get their supply chains in order to avoid out of stocks, which in 2021 cost consumer-goods retailers $82 billion, according to NielsenIQ.
The fines are costly for manufacturers. McKinsey estimated in 2018 that sanctions for faulty shipments could rise collectively to $5 billion a year in the US if consumer-packaged goods companies didn’t get their act together — and that was before the pandemic-fueled supply chain chaos and higher retailer expectations.
Along with Walmart’s new fuel surcharge, the retailer also implemented a pickup fee assessed as a percentage of cost of goods received. The charge ranges from 0.01% for eyewear to 5.51% for some fabrics-and-crafts materials, according to an internal document.
Walmart also is rolling out automated warehouses where robots receive, store and retrieve products. That means labels and barcodes must be correct and placed in the right spot or machines won’t be able to read them.
Some vendors argue that charges aren’t about ensuring products are on shelves, but rather about shoring up retailer margins. When Walmart introduced the fuel and department-based fees, it said it wanted to “share cost accountability” so it could continue offering its signature “everyday low prices.” The retailer expects earnings per share to decline as much as 11% this year in part because of inflation.
Suppliers agree to potential fines when they sign contracts with retailers, said Jonathan Greenway, global leader of the consumer-products practice at consulting firm AlixPartners. Still, the magnitude of the penalties can surprise smaller companies looking to expand sales, since they often focus on getting into as many stores as possible rather than the quality of their supply chain.
Looking back, Apto’s Cros said it might have been a good idea to start off with fewer than the 3,500 Walmart stores her brand is currently in. But she was eager to do business with the retailer, which helped reach her target audience of busy moms and smooth the path to other chains.