Execution quality: An analysis of fulfillment errors at a retail distribution center

Abstract

a b s t r a c tPurchase orders specify many aspects of a fulfillment process, including item quantity, delivery time, carton labeling, bar coding, electronic data interchange, retail ticketing, and others. These fulfillment terms are instrumental for highly optimized retail supply chains employing automation and techniques such as pack-by-store. When fulfilling a purchase order, a supplier may commit a fulfillment error, i.e., the supplier may fail to adhere to the terms specified by the retailer. The retailer may then penalize the supplier for the fulfillment error via a chargeback deduction, which reduces the supplier's revenue. We present a study of the fulfillment errors and chargebacks that occur in practice using data collected from a major retailer's distribution center. While fulfillment errors involving incorrect product quantities and delivery times have received the most attention in the literature, we find that the majority of fulfillment errors in the context we study involve documentation, bar coding, and retail ticketing. We refer to these as correctable fulfillment errors, since they are amended at the retailer's distribution center through rework. We develop a model of inventory management with correctable fulfillment errors and use the retailer's data to assess the cost of these correctable fulfillment errors to the retailer's inventory system. Our research provides guidance to managers in identifying products and suppliers that impose large fulfillment error costs as well as in setting appropriate chargebacks for fulfillment errors.

Inventory Allocation in the Presence of Service‐Level Agreements

“…That work as well as Craig et al. () investigate the connection between fulfillment errors and inventory policy. Relative to our work, Craig et al.…”

“…The authors also point out the mismatch between common chargeback cost and true cost of correctable fulfillment errors. That work as well as Craig et al (2015b) investigate the connection between fulfillment errors and inventory policy. Relative to our work, Craig et al (2015b) studies a simpler inventory system-one with deterministic demand and single supplier and single retailer-but considers many more dimensions to potential non-compliance including incorrect labeling, documentation, and failure to transit an advance ship notice.…”

Execution quality and chargeback penalties in retail supply chains

“…Craig et al (2015) found that over half of fulfillment errors related to execution quality. These execution‐quality errors included invalid reference numbers or incorrect labels or tickets (Ma, 2013).…”

“…Fulfillment errors are common in practice. Craig, DeHoratius, Jiang, and Klabjan (2015) find fulfillment errors associated with nearly 7% of the POs of a large retailer. Retailers penalize suppliers for fulfillment errors by issuing chargeback penalties, or chargebacks.…”

“…Execution‐quality errors require the retailer to incur costs associated with rework: for example, inspecting a shipment that arrives without an ASN to determine the shipment's identity, or affixing corrected tickets (i.e., price tags) if a supplier uses incorrect tickets. Craig et al (2015) find that chargebacks for execution quality account for 60% of the dollar value of all chargebacks issued by a retailer.…”