The biggest US grocers are increasingly demanding suppliers deliver on time and imposing fines for late shipments as they compete with online retailers like Amazon.
Kroger, the second largest US grocer by sales, announced it has started fining suppliers $500 for every order that is more than two days late to any of its 42 warehouses.
Robert Clark, senior vice president for merchandising at Kroger, said retailers used to give suppliers more leeway, since any number of factors, including bad weather or technology malfunctions could stall deliveries, but now it was crucial to keep customers satisfied to compete with online retailers.
“It’s a massive opportunity from a financial and customer standpoint,” he said.
According to the Harvard Business Review, when a customer finds that a desired item is out of stock, 21%-43% of shoppers will leave the store to buy the item elsewhere.
Ken Goldman, JP Morgan food analyst, said shippers who fail to deliver “an important product can lead to thousands of lost consumers in a given day”.
Sales of around $75bn a year are lost because products are out of stock or unsalable for other reasons, according to trade organisation the Food Marketing Institute (FMI).
The amount equates to around 10% of annual grocery sales industry-wide, at a time when margins are squeezed and sales growth is hard to come by.
Since August Wal-Mart Stores has been charging suppliers monthly fines of 3% for deliveries that don’t arrive exactly on time or are incomplete as part of their “on time and in full” policy.
The policy requires general merchandise suppliers to hit a two-day delivery window 75% of the time, while food suppliers need to deliver within a one-day window 75% of the time.
By February, Wal-Mart will require those deliveries to come in on time and in full 95% of the time and manufacturers that fail to hit that percentage could find themselves out of a contract with the world’s largest retailer, according to Bloomberg.
At a supplier meeting earlier this year, Charles Redfield, executive vice president of food for Wal-Mart US, warned suppliers they could also lose shelf space if they did not solve their delivery issues, after the company found the issue was escalating.
“If it was only an occasional issue, it wouldn’t be worth the time and effort to police deliveries,” he said.
Foster Finley, head of logistics consulting for AlixPartners, said new tracking capability and data are giving retailers even more leverage to press their suppliers, with some of them using the information to issue report cards that measure service levels, including timeliness.
FMI said the issue has become costly for suppliers, since making necessary improvements to meet tighter delivery windows is time-consuming and complicated.
Procter and Gamble, Wal-Mart’s largest supplier, said it has spent billions of dollars in recent years overhauling its supply chain, in part, to meet retailers’ more precise shipping windows and boost its ability to ship online orders directly to shoppers.
Kraft Heinz recently invested in a supply chain visibility provider to help it predict shipment arrivals, monitor truck temperatures and make adjustments in real time.
Troy Shannan, head of Kraft Heinz US operations, said that in the past, “once the truck was on the road, we knew it would get there but now we’re focused on when it arrives”.