Merchant Innovation

How Far Can Retailers Push Supply Chain Partners?

Supply Chain Politics Get Messy

The squeeze is on in the supply chain world. It might have been enough for retailers to have come to a collective agreement last year that consumer demand for express delivery was here to stay, but the pressure of keeping shelves stocked has turned some old friends against each other.

After all, it's a dog eat dog world, and retailers are making sure their suppliers know it.

That's the lesson coming out of Target's latest announcement - an official revision to the fee schedule for its agreement with its supply chain partners. New in the fine print this time around are some hefty fines designed ostensibly to keep these companies running tighter ships. Gone is the grace period for late shipments, as are the 1 to 3 percent fines for each day after. In their place are less flexible timetables and 5 percent across the board.

The costs of some of these punitive measures — a $10,000 fee for inaccurate deliveries, 5 percent of order costs for incorrect data, etc. — are certainly enough to strike fear into the heart of any delinquent supplier, but the more they try to push the pressures of modern retailing onto their suppliers, it becomes a matter of time before they push back.

“Suppliers have to make both short term and long-term choices about how to best relate to a customer in order to meet its demand,” Dr. Chad Autry, professor of supply chain management at the University of Tennessee, told Forbes. “Does it make sense to spend the extra money to meet a service level and prevent a penalty if that concession is going to cost the supplier more down the road in terms of excess inventory, more expedited fees, or more overtime costs? It really boils down to a math problem, and usually, the short-term approach becomes the most expensive in the longer-term."

Like Autry said, steeper punishments for suppliers might seem like a solution to whatever is ailing Target at the moment, but several months out, there could be just as many headaches to deal with. Look no further than Walmart, which took a similar stance with its suppliers back in fall 2015. The retailers are now retaining legal counsel and could be tying Walmart up in more legal fees than they ever would have made through fines on supplier tardiness.

Leon Nicholas, senior vice president of Kantar Retail, a consultant to several Walmart suppliers, told Bloomberg in 2015 that Walmart - and, by extension, Target - better think two steps ahead if fines and supplier punishments really are the best way forward.

“What is so shocking this round is that they are being aggressive not in asking suppliers to take costs out of the system so the supplier can lower prices, but instead adding cost into the system,” Nicholas said. “It looks as though they are trying to have it both ways and trying to pad their own margins where they are facing cost pressure.”

Walmart didn't have a great 2015 by any stretch of the imagination, and with such a sprawling empire to keep afloat with constant revenue, it is perhaps halfway understandable why they might want to be so heavy-handed with fines to poorly performing suppliers. However, the fact that Target is now getting into the blame game and pointing its finger directly at its supplier partners seems to set a clear adversarial mood in the markets.

It's not as if logistics doesn't already have an issue with skyrocketing warehousing prices, and the addition of a ticking powder keg between merchants and suppliers can't help things either.

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