Dive Brief:

• Grocers have begun fining suppliers for late and incomplete deliveries, according to The Wall Street Journal. Kroger charges suppliers $500 per day for deliveries made past a two-day window, while Walmart levels monthly fines against companies that are worth 3% of the value of each late or incomplete shipment. Walmart also charges for deliveries received too early.
• On average, suppliers deliver goods on time to retailers 75% of the time, according to analysts interviewed by The Journal. Major companies like Hershey and Pinnacle Foods are updating their supply chains, but these expenditures can be time consuming and cut into profits.
• According to the Food Marketing Institute, grocers lose $75 billion a year in sales — 10% of the industry total — due to out-of-stocks and unsaleable goods.

Dive Insight:

As industry competition continues to build from Amazon, discounters and other channels, and as online shopping places increasing demands on product supply, a few retailers have started fining manufacturers for late and incomplete deliveries.

The company that’s really driving the practice, though, is Walmart.

In recent months, large-scale suppliers have become all-too-familiar with Walmart’s strict new policy, known internally as “on time and in full,” or simply OTIF. Since the retailer announced the policy, manufacturers have been scrambling to update their systems, while logistics consultants have made a fortune helping them do that.

Currently, Walmart 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, according to Bloomberg, Walmart will require those deliveries to come in on time and in full 95% of the time. Manufacturers that fail to hit that percentage could find themselves out of a contract with the world’s largest retailer.

As strict as policies are, they address a very real problem for both retailers and suppliers: lost sales. Many packaged good companies already under pressure from declining sales and slimming margins now have to make further investments in their operations. Proctor & Gamble, Walmart’s largest supplier, has spent billions to further consolidate and automate sorting and shipping capabilities.

This is one more in a series of industry-changing demands Walmart has made through the years. In the 1980s, it championed bar code technology. Since then, the mega-retailer has pushed for lower prices, packaging changes and other updates from its manufacturers. Razor-sharp delivery could become the new industry standard.

As nice as that sounds, getting there will be a rough road, and the system seems to have its share of potential problems. Walmart says it won’t fine suppliers for off-target deliveries if it’s at fault — however, it also says disputes “won’t be tolerated,” which means the scales will likely be tipped in the retailer's favor.

It’s also unclear how Walmart — and other retailers, for that matter — will get higher delivery performance from small suppliers, which often don’t have the money for pricey updates. One consultant interviewed by Bloomberg this summer said many small manufacturers don’t even know what “OTIF” stands for. Walmart could still cut underperformers, but given the company’s growing interest in local and niche brands, this could create another problem for the mega-retailer.