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Produce or Else: Wal-Mart and Kroger Get Tough With Food Suppliers on Delays

The country’s biggest grocers are increasingly demanding their suppliers deliver on time, imposing fines for late shipments as they try to keep customers satisfied and better compete with online retailers like Amazon.com.

Kroger Co. is fining suppliers $500 for every order that is more than two days late to any of its 42 warehouses, and Wal-Mart Stores Inc. is charging suppliers monthly fines of 3% for deliveries that don’t arrive exactly on time, according to the retailers. They began issuing most fines in August.

Retailers used to give suppliers more leeway, since any number of factors—bad weather, a surge in demand, technology malfunctions—can foil deliveries. But sales of some $75 billion a year are lost because products are out of stock or unsalable for other reasons, according to the Food Marketing Institute, a trade organization. That is about 10% of annual grocery sales industrywide at a time when margins are squeezed and sales growth is hard to come by.

“It’s a massive opportunity from a financial and customer standpoint,” said Robert Clark, senior vice president for merchandising at Kroger, the second-largest U.S. grocer by sales.

The issue is a costly one for suppliers, as making necessary improvements to meet tighter delivery windows is time-consuming and complicated. Sellers, such as Kraft HeinzCo. , HersheyCo. and Procter & Gamble Co., have made significant investments in their supply chains that in some cases are squeezing profits in the short term.

Wal-Mart has signaled it could do more than levy fines if problems persist. Charles Redfield, executive vice president of food for Wal-Mart U.S., told suppliers they could also lose shelf space if they don’t solve their delivery issues, according to people in attendance at a supplier meeting earlier this year. Retailers can threaten suppliers with loss of promotional space in stores, analysts said.

Most large suppliers average around 75% of orders on time and complete, analysts say. “An out-of-stock on an important product can lead to thousands of lost consumers in a given day,” said J.P. Morgan food analyst Ken Goldman.

New tracking capabilities and data give retailers even more leverage to press their suppliers, said Foster Finley, head of logistics consulting for AlixPartners. Some of them are using that information to issue report cards that measure service levels, including timeliness.

Packaged-goods companies are straining to keep up with the demands and remain in the good graces of retailers. They need GPS trackers and software to adjust routes in real time. Filling full orders fast is also challenging, since many manufacturers house items all over the country. That is particularly true for refrigerated items needing costly cold storage—which has fueled investments in more fulfillment centers, industry consultants said.

At Hershey, significant supply-chain investments will hamper the company’s profit margin likely through the first half of 2018, according to Chief Executive Michele Buck. “That is an overall theme in the industry,” she told analysts on a conference call last month.

Mark Clouse, chief executive of Pinnacle Foods Inc., maker of Duncan Hines and Birds Eye brands, said the delivery issue is getting “a heightened level of focus,” with retailers now consistently demanding better customer service in tighter delivery windows. “The investments that we’re making are going to better position us for that in the future,” he said.

Wal-Mart executives say a more-precise delivery window keeps shelves stocked and the flow of products more predictable, while reducing inventory—all of which are increasingly important to the retailer as it invests heavily to compete online. The change could create $1 billion in additional sales over time, they said. “We hope we don’t have to collect any fees from suppliers. We would much rather have all the product we ordered on time,” said Wal-Mart spokesman Kory Lundberg.

Wal-Mart wants general merchandise from manufacturers sending full truckloads of large orders to arrive within a two-day window 75% of the time, down from four days, and it wants shelf-stable food and household items to arrive within a one-day window 75% of the time, down from four days, a spokesman said.

The retailer will fine suppliers for shipments that arrive late and for those that arrive early or incomplete. Too-early arrivals can crowd tight backrooms with excess inventory. Because fines are a percentage of the missed order value, large suppliers that ship to warehouses can rack up monthly fines of over $1 million, according to people familiar with the matter.

Kroger’s Mr. Clark said the company eventually will fine for any shipment that isn’t received on the due day. “If it was an occasional issue, it wouldn’t have been worth the time and effort” to police deliveries, he said.

A spokeswoman for Smart & Final, a California-based warehouse-style grocer, said: “It’s imperative that our suppliers provide full orders, on time.”

yer hot dogs, 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 U.S. operations, said that in the past, “once the truck was on the road, we knew it would get there. Now, we’re focused on when it arrives.”

P&G, Wal-Mart’s largest supplier, 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, company executives said. It consolidated hundreds of offices and warehouses across North America into eight facilities and set up six so-called mixing centers, where computer algorithms work with robots and humans to load trucks with the optimum mix of products to ship to retailers.

Many other suppliers don’t have the necessary warehousing infrastructure. Steve Matthesen, CEO of Acosta, Inc., a sales and marketing agency for consumer packaged goods, said: “Shipping complete orders on time is a completely reasonable request but turns out it’s harder than it sounds.”

Originally featured in the Wall Street Journal.