Photographer: Christopher Dilts/Bloomberg
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 percent 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 percent depending on the product. This could mean increased penalties of up to 5 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” 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 percent from 90 percent, according to another Reuters article. Wal-Mart is also cutting the window for deliveries to within 1 to 2 days of a target date, depending on the product category, from 1 to 4 days previously.
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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.”