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Target, the sixth-largest U.S. retailer by sales, plans to tighten deadlines for deliveries to its warehouses, hike fines for late deliveries, and could institute penalties of up to $10,000 for inaccuracies in product information beginning today – May 30.
A letter to Target’s suppliers stated domestic suppliers will no longer have a "grace period" to ship a few days after the promised date without penalties. This grace period for shipments is currently two to 12 days, depending on product category.
Target will also increase fines on late shipments to 5% of the order cost, according to the letter, which adds that the retailer is considering “escalating charges of $5,000-$10,000” for suppliers who fail to provide complete and accurate product information. Currently, late fines range between 1-3% depending on the product. This could mean increased penalties of up to five times more for some suppliers.
A Reuters report said the retailer is “cracking down on suppliers as part of a multi-billion dollar overhaul to speed up its supply chain and better compete with rivals including Wal-Mart Stores Inc. and Amazon.com.” The Reuters’ article noted these are the first major steps Target has taken since COO John Mulligan was appointed to that position late in 2015 to “fix supply problems that emerged after it expanded product offerings, including fresh food, several years ago.”
Target Not Alone
Target isn’t alone in its hardball approach. Reuters also reported that at an annual vendor conference in February, Wal-Mart informed suppliers that it was raising its standard for on-time delivery to 95% from 90%, according to another Reuters article. Wal-Mart is also cutting the window for deliveries to within one to two days of a target date, depending on the product category, from one to four days previously.
Logistics expert Adrian Gonzalez calls Target’s new strategy an “all stick approach to supplier relationship management. It’s the same old same old approach to supplier relationship management. In the past you might have called it a "carrot and stick" approach, except today the carrot keeps shrinking or is missing altogether and the stick keeps getting bigger and harder.”
The real question is will Target’s and Wal-Mart’s hardball approach be effective in the long term?
All Stick – No Carrots Approach Suboptimal
Most research into incentives show that negative incentives (penalties) get great results in the short term, especially for younger individuals. Adrian Gostick and Chester Elton – authors of the best-selling book The Carrot Principle – suggest that a more positive approach gets better longer terms results.
But what about incentives and penalties for companies? Gonzalez believes the all stick, no carrot approach is causing more harm than good with suppliers: “It’s one thing to have robust supplier performance management, but it is another thing when it is enforced with an adversarial, penalty driven mindset. Continually squeezing suppliers is not a viable long-term strategy and only makes company-vendor relationships more adversarial.”
Of course it’s expected suppliers are not excited about Target’s announcement. One supplier (remaining anonymous) shares his perspective. “Of course we want to make the right short term tradeoffs for our customers. However, in most cases, we don’t miss a shipment because of something in our control – but rather it’s due to uncontrollable risks or not having insight into unpredictable demand. In the long term, we have to factor in these risk and incremental cost of penalties into our prices. And this means we will likely raise our prices to factor in these added risks, or begin to offer tiered pricing based on service levels.”
But pricing increases are not the only ramification. Gonzalez believes that an adversarial approach with suppliers is also detrimental to innovation in the long term . “Suppliers put their best people and ideas on their best client accounts. Buyers who use adversarial approaches are short-sighted. Why would a supplier want to invest in a client that is adversarial? There is no innovation with adversarial relationships. None.”
Experts Agree: Collaboration, Not Sticks
Dr. Chad Autry—the William J. Taylor Professor of Supply Chain Management at the University of Tennessee at Knoxville —believes a better approach is for companies to work more collaboratively with their suppliers. Dr. Autry is an authority on supply chain integration and buyer-supplier relationships.
“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,” he says. “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. The best companies realize that by working collaboratively and transparently with their suppliers in the short term – even at terms that would seem less advantageous from a revenue perspective at first – they can make greater long-term profits. Supplier performance management is an important component, but it’s only one part of the larger picture.”
Dr. Karl Manrodt, Professor of Logistics at Georgia College and State University, agrees collaboration is the way to go. Manrodt has been studying buyer-supplier relationships for nearly two decades. “Using penalties definitely works, in the short term. But it is myopic and ineffective in the long term.”
He cites several examples of examples of successful supplier relationships that consciously promote a positive win-win environment. His book, Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships, points to real-life success stories where companies are turning to more strategic relationships with shared risk/shared reward economic structures. One of his case studies is McDonald’s, which fosters highly collaborative Vested relationships with its most strategic suppliers. The result? McDonald’s is consistently ranked as having the one of the world’s top supply chains.
“We are definitely seeing companies experiment with the use of positive incentives in supplier relationships, and are seeing excellent results,” explains Manrodt. “While some of these relationships may still have penalties, the vast majority of have powerful counterbalancing positive incentives that reward suppliers for achieving desired outcomes. Others are eliminating penalties altogether, finding that incentives have a much more powerful effect than penalties.”
Manrodt recommends that firms looking to reduce cost in the buyer-supplier relationship should consider using a highly collaborative sourcing business model – such as Vested – which operates with a “What’s in it for We” mindset using transparency and shared risk/shared reward economics to align interests.
He sums it up nicely: “ By focusing on true ‘win-win’ relationships, companies can drive innovation and increase their competitive edge , with their suppliers and still reduce costs in the process. After all, you get what you pay for.”
