Cleo estimates that late and incomplete deliveries cost U.S. and Canadian consumer packaged goods (CPG) and food and beverage manufacturers about $100 billion a year. The supply chain software company released the figure Tuesday in a report on on-time, in-full (OTIF) performance.
Direct costs such as retailer chargebacks, expedited freight and dispute management make up $10 billion to $11 billion of that total, according to The $100 Billion Supply Chain Penalty: OTIF’s Total Economic Impact. Cleo attributes the other $85 billion to $90 billion to losses that rarely appear in financial reporting: lost shelf space, smaller retailer orders, excess inventory and manufacturing inefficiencies.
Retailers fine suppliers when orders miss the delivery window or arrive short. Walmart requires suppliers to deliver on time and in full on 98% of orders or pay a fine of 3% of the cost of goods, when the retailer tightened its standard in 2020.
“A missed delivery can cost a manufacturer its next order, its shelf space, and ultimately its standing with a retailer. The chargeback captures only a fraction of that damage,” Cleo President and CEO Mahesh Rajasekharan said in the release.
How retailer OTIF programs work
Walmart’s U.S. OTIF program began in July 2017, and Amazon and Target have similar standards, according to the 2020 FreightWaves article. Retailers do not measure OTIF the same way. A 2019 McKinsey study found no standard industry definition.
Cleo’s report counts a delivery as successful only if it arrives by the agreed date or within the delivery window and contains the full quantity ordered. It says retailers including Walmart, Kroger, Target, Costco and Publix set thresholds often above 95%, while industry benchmarks put many manufacturers at 85% to 91%.
A supplier at 99% against a 95% requirement generally earns no extra financial benefit, according to the report, while one at 94% can face chargebacks and lower scorecard ratings. Strong performers can win better shelf placement or promotional support, but the report says those benefits are rarely written into contracts, so suppliers often invest only enough to meet the minimum.
Most of Cleo’s $100 billion estimate comes from what follows a miss. Retailers use supplier performance to decide shelf placement, promotions and order allocation, the report says, so a weaker scorecard can shrink a supplier’s future business.
Larger suppliers pay more in penalties
Cleo’s model shows direct costs rising as a share of revenue with company size. They run 0.5% to 1% of revenue for manufacturers with $100 million to $500 million in sales and 2.5% to 3% for those with $3 billion to $5 billion. Indirect costs move the other way, from 15% to 16% of revenue at the small end to 10% to 11% at the top.
Midsize manufacturers, with $300 million to $1 billion in revenue, face the greatest risk-adjusted exposure, the report says, because they carry high indirect costs and fast-rising direct penalties.
Freight costs peak in the fourth quarter
Cleo estimates that 40% of expedited shipments happen in the fourth quarter, when promotional and holiday demand peaks. Between 5% and 15% of shipments to major retailers need expedited logistics, the report says.
Many OTIF failures start before a truck is loaded. Inaccurate forecasts, purchase orders sent late and promotional spikes push suppliers into expedited shipping or last-minute production changes, according to the report.
Air freight costs five to 10 times the standard rate, team drivers 1.5 to two times and less-than-truckload consolidation two to three times, according to Cleo. Suppliers should lock in capacity reservations and carrier commitments 90 to 120 days before the fourth quarter, the report advises.
What chargeback disputes cost
Cleo puts annual spending on chargeback disputes at $1.16 billion across the U.S. and Canadian CPG industry, covering deduction analysts, compliance managers, third-party platforms and recovery consultants.
Citing industry estimates, the report says 60% to 70% of disputed chargebacks are written off, and 20% to 30% of successful recoveries can go to recovery-service fees. It puts the fully loaded cost of a deduction analyst dedicated to a single retail channel at $80,000 to $120,000 a year.
Cleo’s recommendations
The report estimates that a 5- to 10-percentage-point improvement in OTIF performance could recover $11 billion to $23 billion across the market. It recommends that manufacturers measure direct and indirect OTIF costs together and give one executive with profit-and-loss responsibility ownership of the total.
Of the five approaches the report weighs, dispute-recovery and reporting tools require limited investment but do little about root causes. Logistics technology such as routing optimization and carrier visibility can significantly reduce on-time failures but may leave demand-planning problems unresolved, it says.
Cleo sells software in another of the five, supply chain orchestration. In February it launched Chargeback Prevention, which flags orders, shipments and invoices at risk of missing trading-partner service levels. The release says the research draws on industry benchmarks, publicly documented retailer programs, labor and logistics cost data, and scenario-based modeling.
Organizational fragmentation is the most common failure in OTIF programs, according to the report.
“The deeper problem is fragmented accountability: logistics tracks delivery performance, finance tracks deductions, and sales tracks lost business, while the connections between them go unaddressed,” Rajasekharan said. “CEOs need to make OTIF a shared business priority, with clear ownership of its full financial impact.”
Why it matters: Cleo’s estimate places about 90% of the cost of missed retail deliveries outside the chargebacks suppliers track, in lost shelf space, orders and inventory. The figures come from modeling by a company that sells chargeback-prevention software.
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