The Supply Side: Suppliers of Wal-Mart and Jet at risk for audits, chargebacks

The low cost mission of Wal-Mart is similar to that of Jet.com, and the recent purchase of Jet by Wal-Mart could spell audit trouble for suppliers who have done business with both.

A new report from Bentonville-based Harvest Revenue Group outlines several risks for suppliers now that Wal-Mart knows the price Jet paid suppliers for like products.

Harvest Revenue President Boyd Evert, told Talk Business & Politics the suppliers facing the biggest audit risks could be those companies that have used distributors to unload remnant products at closeout prices.

“Say a company has undergone a new packaging change at Wal-Mart’s asking and there are remnant products in the old packaging that the supplier uses a distributor to sell as close outs. If Jet purchased those items at closeout prices and that was better than the price Wal-Mart got, the third party auditors could see that as a violation of the supplier agreement and trigger an margin audit,” Evert said.

He said anytime Jet got a better price for an item than Wal-Mart, an auditor will be likely to write a claim for the difference. Given the number of stores Wal-Mart has and the amount of volume it sells that could be a huge dent to suppliers’ accounts in the form of chargebacks.

Just 50-cents difference in Jet’s favor for something like laundry detergent could be multiplied by thousands given the product volume Wal-Mart does each week. Wal-Mart’s 2015 policy changes that imposed a 1% surcharge on any merchandise moving through a distribution center, a 10% surcharge on all merchandise shipped to a new, expanded or newly remodeled store, and the 90-day payment option Wal-Mart has on invoices to still get a cash discount, are proof the retailer is being more adversarial when it comes to costs.

The report estimates Tyson Foods, who does roughly $6.95 billion of business with Wal-Mart and Sam’s Club, is paying as much as $35 million in added costs to do business with Wal-Mart since the 2015 surcharges began.

The report also states that Wal-Mart continues to push suppliers to help underwrite its most recent price perception efforts with lower up front prices. At the supplier summit held in Bentonville earlier this year suppliers were reportedly told Wal-Mart expects them to help it beat competitors in head-to-head pricing 80% of the time.

Evert said the dynamic pricing strategy and Wal-Mart eagerness to be the low cost leader in retail has subjected more suppliers to margin audits since 2015. He said some suppliers have been told to pay the claims or risk losing shelf space. He also said it’s the retailer that has sole responsibility for setting the selling price of items.

Jet’s smart cart pricing formula essentially can take the final sales price lower than Wal-Mart and thus trigger an audit, according to the report. Evert said it’s unlikely Wal-Mart’s internal auditors would choose to pursue a cross-channel claim. However, he said, third party auditors are more “aggressive and “creative” in filing claims based on assumptions. He said when these claims are filed it’s up to the supplier to disprove.

“In the Wal-Mart environment, the company can automatically deduct the amount in question, up to $100,000, until the supplier is able to prove its case,” Evert said.

He said there is no foolproof way for suppliers to Wal-Mart and Jet to inoculate their company from an audit by adopting a defensive game plan. He said retailers and third parties can initiate those as they so chose, but he outlined steps suppliers can take to be in a better positions to defend their bottom lines.

Following are some of the tips recommended by Harvest Revenue.
• Research your company’s relationship with Jet.com prior to the acquisition by Wal-Mart. If you (supplier) had a contract with Jet, expect the terms most favorable to Wal-Mart to applied to all of your transactions of related merchandise.

• Understand the combined buying function implemented across the online and brick and mortar channel. Seek out specifics from your buyer about how your product line is affected and what to expect going forward.

• Redefine or negotiate the terms and conditions of your supplier contract. Carve out exclusions affecting sales via an online channel.

• Be very specific when writing sales orders. Make sure that any pricing or profit guarantees are narrowly worded to reduce the likelihood of a creative interpretation.

• Define all the variables in writing. Suppliers’ relationships with their buyers have changed with decisions increasingly being pushed to the Shared Service function when it comes to payment and pricing disputes.

• Align with organizations that allow you to benchmark with other suppliers. Given Wal-Mart’s size it is easy for them to lean on an individual supplier but, with shared knowledge, suppliers can resist a heavy hand.

• Require transparency. Hold Wal-Mart to the same standards to which it holds your company, requiring complete supporting documentation to decide if a claim is valid or invalid.

• Revisit Form 100. Many suppliers filled out this request for information without recognizing the implied commitments contained within it. (In Form 100 suppliers were instructed to provide not only the cost and available discount information, but also divulge its funding allocations for co-ops, trade spending, supply chain reliability and post audit claims – any of which could used to formulate claims or demands seeking additional revenue from the supplier.)

• Establish consensus between your sales and finance teams. Observe and define the balance between protecting what’s rightfully yours and enhancing your business with an important customer.

• Consider seeking out professional deduction management expertise.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.