Execution Quality and Chargeback Penalties in Retail Supply Chains
33 Pages Posted: 30 Jul 2015 Last revised: 22 Jun 2017
Date Written: May 31, 2016
Retailers replenish inventory by placing purchase orders (POs) with suppliers. POs specify product order quantities and delivery times as well as many other aspects of the fulfillment process, such as bar code standards and placement, carton labeling requirements, hanger styles, and product packaging. Retailers expect suppliers to adhere to these fulfillment terms in order to optimize their supply chains, employ automation, or manage pack-by-store product flows. When fulfilling an order, a supplier may commit a fulfillment error, i.e., the supplier may fail to adhere to the specified terms. Although fulfillment errors are common, retailers can correct the majority of fulfillment errors through rework. Herein, we study the cost impact of correctable fulfillment errors. We demonstrate that the commonly used incentive to prevent fulfillment errors - chargebacks - do not impose penalties aligned with the true cost of fulfillment errors in this retail context. Overall, our research provides guidance to managers seeking to mitigate fulfillment errors.
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