One of the most controversial issues in the food and beverage industry are compliance fines. Retailers appear to be moving more in this direction and suppliers believe they are unfair. These fines have created more animosity between retailers and suppliers than any other issue. Google can provide definitions, but it does not always help you understand the importance of the term or perhaps even a specific meaning in our industry. We are going to share some food and beverage industry terms and explain how they can benefit or impact your business.
Compliance fines are dollars deducted from payments to suppliers, when they do not meet specs and standards created by retailers. Often, they are related to warehouse deliveries where product does not meet specs, is late, does not include the correct paperwork or some other reason the retailer has stipulated.
Retailers create the rules of the game
There are two significant (there are others we will discuss below) frustrations for suppliers with compliance fines:
1) Retailers make the rules
2) Retailers change the rules arbitrarily
It is true the supply chain network is paid for by the retailer and when products do not arrive when they are supposed to arrive, in the condition they are supposed to arrive, it causes issues. It is hard to argue with that. The issue becomes when retailers create rules that are slanted in their favour and some of the fines are related to issues that can be beyond a supplier’s control. They get very frustrating when a truck arrives on time but cannot get into the warehouse and then the retailer determines it was late. Suppliers do not have much choice if they want to ship into these networks, controlled by the retailer.
We also know there are examples where retailers change the rules or create new compliance fines. It is possible to arrive at the conclusion they have a number they are trying to reach and they will create fines to get there. No one has ever proven that, but it does get consideration.
Other frustrations
Aside from the two major issues there are other problems suppliers have with these compliance fines:
1) There is no recourse. The amount is deducted and trying to get any answer from a retailer about these issues is a daunting task. There are options but they are time consuming, require perseverance and can be challenging to ever get a person to respond. I do know examples where people have gone to battle with issues and ultimately can get an answer but it can be a long and frustrating road.
2) The fines do not relate to the value of the shipments. There are many examples where the fines levies exceed the value of the goods. They definitely can exceed the profit in the shipment but sometimes they exceed the total value. There is no real way around this except to work on getting your minimums as large as possible. Easier said than done but as your volume grows try to push these numbers.
3) It is difficult to find a definitive list. The retailers have to make these available, but they do not seem to make it easy. They are in the supplier agreements but then they update the agreement and you have to really stay on top of the list.
What suppliers can do
I am not defending these fines, but they also will not change them because I think the current model is wrong in our industry. I believe if suppliers and retailers both want to sell more, fines are not a productive part of that relationship. However, as I say, they do not ask me, so I try to help people work within the constraints of the industry.
The first and most important thing to do is understand the rules of the game. The person in your business who owns the customer really needs to be close to this issue or it can cost you a lot. They need to be very current with the communication from the customer and understand what these compliance fines are and how you can avoid them. If any are unclear, they (retailers) have a responsibility to explain them and make sure you understand.
It is also important your entire organization understands these. They will not like them but they do need to know how their work can impact the profitability of different customers and also the relationships you have. For example, if your shipping department understands the impact of mislabelled pallets hopefully they can implement some processes to reduce or eliminate issues.
Discuss in advance how far you are willing to go to fight issues you believe are unjust. As we discussed earlier there are avenues, but they are not easy. It requires time and resources so make sure everyone is in agreement with your approach. Similar to any negotiation you need to know your position before you start. How far are you willing to go and make sure your argument is sound. Every retailer has people who ultimately have to deal with these. The structure seems to be designed to wear down suppliers but in the end, there is a person. If you are prepared to go the distance, make sure you have a solid case when you get there.
Do not let these issues go unaddressed for long. If you believe something is not fair or just wrong, get on it very quickly. The longer you wait or procrastinate the tougher it will be to get a resolution.
It is important to understand the process of challenging them. If you see a smaller example, it can be a good time to challenge and learn the process before a big amount of money is tied up. Keep track of any contacts you have as you work through the process, you might need these people down the road.
Different departments can have different rules. Make sure you know what is happening in your part of the store.
Watch your accounts receivable very closely. It is not always easy to understand what they are doing or why. Compare what you expect to be paid with what you are actually paid. Check discrepancies as soon as possible and determine what you will do if there are gaps.
Measure profitability by customer. These fines can impact or even eliminate the profit you are making with a retailer.
I am always a proponent of developing relationships with people throughout the retailer’s organization. Your key point of contact is always in merchandising and procurement but it can be very helpful to know others within their organization. This can happen if they are looking to test new things or different opportunities. It can be work to be involved but you never know when those relationships can help you later. For example if you can be part of the backhaul program you work with transportation and the distribution network. No promises but sometimes these people will understand your perspective differently.
There is no doubt these fines are very divisive. Unfortunately, the stores and the networks belong to the retailers and they leverage their position. Once one does it, they all seem to see it as an opportunity. They are a reality in our industry today and they can justify the fact that when a supplier shorts product or is late it can cost them sales.
If you have any questions or require help with compliance fines, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
As we start into the new year we are going to focus on some terms in the food and beverage world for upcoming weeks. I am going to select a different term each week and give you a good definition and also some insights into why it could be important for your business. If there are any terms you would like me to focus on just let me know.
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