Research spotlight: The hidden price tag of supplier reliability

nate craig
N. Craig

by special contributor Nathan Craig, asst. prof. management sciences, Fisher College of Business

The retail shopping experience today is one of incredible convenience for customers and extraordinary complexity behind the scenes.

Customers have grown accustomed to the seemingly sleight-of-hand ease with which many retailers stock shelves and fill online orders, while their supply chains are under increasing pressure to keep up. For suppliers and retailers alike, a blip that keeps a shelf empty or stalls a shipping date is an invitation for competitors to creep in—or for customers to take aim on social media.

Retail, in short, has never been better positioned to deliver the multi-channel experience customers crave. But the stakes have never been higher. One slip in the journey from factory floor to customers’ hands costs time, money and brand loyalty.

Major supply chain disruptions—natural disasters and strikes, to name a few—might catch headlines, but they’re rarely the culprit behind empty shelves. The kinds of problems that wreak the most havoc, we’ve found, might surprise you.

Correctable and costly

warehouse
Courtesy Argentus.com

Our research, published in the Journal of Operations Management, comes after years of examining how retailers can better leverage their vast supplier networks to improve the end consumer experience. These opportunities are exciting and lucrative. An earlier collaboration that examined supplier management practices at Hugo Boss found that increased supplier reliability can increase both demand for a brand and the supplier’s profit, even in the face of expense-adding measures that strengthen the supply chain.

Modern retail techniques such as online ordering, in-store pick-up, and pack-by-store distribution pay dividends in a fast-paced industry with razor-thin margins. But executing these practices is challenging, creating chances for suppliers to miss the mark. Even if the retailer properly forecasts demand, products can get stuck in supply chains.

We spent months scouring data on supplier errors at a major distribution center (DC) for a 700-store retailer—for anonymity’s sake, we’ll call this big-box chain Omega. Examining a full year of Omega’s orders from its suppliers, we found about 7 percent of all orders suppliers delivered deviated from Omega’s specifications. Less than half of these, however, were “classical” errors such as late delivery and short quantities. The majority of the errors involved the complex labeling, packaging, and information exchange requirements that support modern retail supply chains.

These errors are correctable, but doing so costs time and money. If a supplier doesn’t properly document an inbound shipment, it can’t run through the retailer’s automated receiving system. Instead, the retailer’s employees must manually inspect and identify the shipment. Products with incorrect price tags, packaging, or display elements (like hangers) must be adjusted by the retailer’s employees before hitting the selling floor.

Research in the retail arena has paid little attention to these correctable errors, which we’ve found are more frequent than others and come with substantial costs. Rework time and labor hours for correctable errors alone, we calculated, could cost around 5 percent of the Omega DC’s annual operating budget. That’s close to $25 per product per year on average across hundreds of thousands of items. Extrapolating from Omega to the retail industry suggests that these errors cost retail supply chains billions of dollars annually.

Chargeback, move forward

If retailers have had difficulty determining the financial impact of these frequent, correctable errors, they’ve had even more when it comes to properly recouping costs from errant suppliers.

Retailers’ chief weapon in reducing the immediate cost of supplier errors is the so-called chargeback, which docks supplier revenue after errors and can shave up to 10 percent off the supplier’s top line. Our research found the Omega DC’s supplier chargebacks often under- or overestimated the cost of rework, even when doling out millions of dollars in penalties per year.

Hitting the mark on chargebacks not only could stabilize retailer revenue but avoid the contract disputes endemic in these arrangements. To help retailers get there, we’ve analyzed the kinds of products most harmed by fulfillment errors and found a way forward for retailers working to balance fluctuations in supplier performance with their own inventory holding policies.

Margin matters

The answer for each product is far from clear-cut and entails a number of factors, all of which have a complex interplay. How much does it cost to hold the product? How tight is the margin? How damaging to the retailer is it to have pent-up, unsatisfied demand?

Understanding how all these factors interact lets the retailer maximize its improvement efforts and helps prevent knee-jerk reactions to improving supplier performance. Depending on the product and supplier, a retailer might benefit more from simply padding inventory than burning time and money on boosting reliability.

With a global network of hundreds of thousands of suppliers making the modern retail machine run, it pays dividends for retailers to be efficient and effective as they keep apace with customer demand. Especially when one wrong bar code can do so much damage.

Leave a Reply

Your email address will not be published. Required fields are marked *