KMART GETS TOUGH WITH SUPPLIER LAGGARDS
Byline: Brad Barth
NEW YORK — Kmart Corp. is taking punitive measures to make sure its customers stop bearing the brunt of supply-chain mismanagement.
The Troy, Mich.-based retailer is assessing major chargeback penalties — as much as $25,000 for repeat offenders — to suppliers that fail to meet its standards for electronic communication, accurate order management and efficient shipping.
According to Leonard Maida, Kmart’s director of vendor services, the company has been closely tracking suppliers’ performance and has detected a marked improvement in their overall compliance over the past two years.
In fact, a recent study conducted by Kmart showed that, from 1999 to the end of 2000, the number of times vendors failed to transmit electronic advance-ship notices for their shipments dropped by 42 percent. Additionally, incidents of failed Universal Product Code standards declined 72 percent and the number of paper invoices received — as opposed to electronic — fell by 51 percent.
“More and more, it seems that there’s a drive toward trying to instill a level of discipline that will allow supply-chain flow paths to operate as efficiently as possible,” said Maida last month at the National Retail Federation’s annual convention. Kmart developed a set of stringent vendor policies beginning in 1998, posting them on its Web site for all of its suppliers to study.
Many of these policies require suppliers to conform to Kmart’s supply-chain and order-management technology. “The bottom line is,” said Maida, “retailers have put a lot of time and effort and money into systems that will allow an automated-[order] process, and when they can’t utilize it, it becomes very cumbersome.”
When suppliers do undermine Kmart’s automated-order process, said Maida, “there will be some sort of cost-recovery mechanism that will be put into place. That’s a fancy way of saying that you’re going to be whacked with a chargeback.”
Among the rules that Kmart emphasizes to vendors: “We expect that we’re going to communicate our purchase orders to you electronically,” said Maida. Invoices must also be communicated through an electronic data interchange connection and all shipments must be preceded by an advance-ship notice, which details a shipments contents. According to Maida, because of Kmart’s get-tough policy with suppliers, the retailer’s distribution centers currently receive advance-ship notices for 96 to 97 percent of all merchandise received. “That’s real important, because our studies have shown that if you do not have that ASN [advance-ship notice] and you’ve geared your labor pool to have that ASN available, it quadruples our cost of receiving,” said Maida. “That’s why you see chargebacks when you don’t have an ASN.”
Kmart has also been receiving more advance-ship notices for its direct store deliveries — although this statistic dropped by more than 15 percent during December 2000. Typically, however, “we’re tracking right in the 60-70 percent range,” said Maida, “which is good, but not anywhere near where we need to be.”
Maida explained that when advance-ship notices aren’t communicated, receiving at the store level becomes a highly manual process, and therefore more inefficient and error prone. Such problems often negatively impact both product selection and customer-service levels at the store.
“We have an automated forecasting and replenishment process and it takes into account [data] from the time of order to the time of receipt,” said Maida. Back orders, split shipments and substitutions foil this process, and Kmart does not want to disappoint customers by not having the right product at the right time, nor does it want to be overstocked.
“We are an advertising-driven company, and as such, when we pull people into our stores and we don’t have advertised product available, or the product that has the greater margin associated with it+then we not only lose, but the customer is losing,” said Maida.
Furthermore, when orders are not fulfilled exactly as requested, the billing process becomes more difficult for Kmart’s accounts payable department.
Within its stores, Kmart values a positive customer shopping experience, including speedy checkout. Therefore, said Maida, Kmart is not about to let suppliers ruin this experience by not conforming to UPC standards.
“They’re ready to give us their money, and we worked hard to get them to that point, he said. “To have them wait in line while we have to go for a check of something that’s not on file or not scannable is not going to make them happy.” To prevent such unpleasantness, Kmart also assesses chargebacks for UPC violations.
To insure continued compliance to its demands, Kmart expects suppliers to visit its Web site and access an application called Kmart Merchant Workbench. There, “we have the online capability for vendors to see information that’s related to their company.”