Yes, I did say in my last piece that the suppliers “shorted” Circuit City out of business. I don’t think that the suppliers intended to “kill” Circuit City, but they did intentionally short ship Circuit City .And the pressure was not just from the increase in sales at Best Buy, but the increase in electronic market penetration by a much more “disciplined” retailer, Wal-Mart.
Consumer Product manufacturers really try hard to not make enough product to meet all of the demand that there could be for a type of item. There is always the competition for the item from other manufacturers. You have to “retire” a widget and replace it with a “new & improved” widget. Your widget needs to have one or two more “features” that are a benefit than the competitor’s widget so that you have a perceived additional value. But the last thing that these manufacturers want is excess inventory that they have to markdown or sell into the secondary market. So, if you think the demand is X, and you think that you and your two competitors are going to split the demand for the widget, you make a little less than 1/3 of your forecasted market demand.
Then you start to “sell” your widget to the retailers. If you have the “hot” widget for the season that is the right package of features with the “right” retail price point and the “right” wholesale price point that gives the retailer a good margin, you are in the race, and you may need to ramp up production. Or better yet, you don’t ramp up production, but limit production so there is unfulfilled demand for your widget. That is a nice problem to have.
So, now you have orders from the retailers. You have 50,000 units ready to ship, and orders for 75,000 units. What do you do? Some retailers are either not getting everything they ordered so you can ship some to each one who ordered, or you are going to fill some and not ship some others. If one of those retailers is the Bentonville gang, you are shipping them complete because they have a supplier compliance program that has no mercy and will take a rather large chunk out of your profits if you miss. Looking at the remainder of the orders, you see that there are orders for a few other retailers that have gone to the compliance school and are just as adamant about complete shipping, so you fill those folks too.
So, now you have allocated 35,000 units to the “strong compliance gang” and have 15,000 units to fill the remaining 35,000 units of demand. Now it is time to look at the “ship by” dates and set some priorities. OK, so the on-order demand that has to ship before you have more production completed is 14,000 units. Take a breath and wipe your brow, and start shipping. Let the unfilled guys know that you are making more and that they may ship a few days late.
That is until you get the replenishment orders from the big 3 or 4 retailers. You know, the ones that order up big and have that strong compliance program. You tell the sales exec to get the orders pushed back, or reduced in size, and he screams that you are killing his commission. You start to cut back on the smaller retailers, or the retailers who do not have the strong compliance program. Hey, those sales execs scream too, but they know that short shipping those customers will not hit their margin, and those retailers are happy to get “any” product. They start to get calls from the retailers who have “scorecard” programs with no penalties to talk about your fill rate, but other than being polite (or perhaps not even returning the call), they tell the retailer that your company is doing the best they can.
This is not a pretty picture, is it? And it happens. It happens in the “fast fad” world of Consumer Electronics, in apparel, in grocery, and in long tail application-specific industries, like auto parts. The retailer who has the buying volume AND has the fill rate compliance programs always gets to the top of the allocation list. And any supplier that tells you that it is not true is not being completely honest. It is the way the business works.
All sorts of things have been tried to fix this issue. Forecasting was the “new” savior; it didn’t work. Collaborative Planning did not work either. One of the arguments for strong fill rate compliance rules is to drive more predictability into the performance of the supplier and the retailer, and retailers who really embrace a compliance program as a collaborative tool to improve performance (and not as a pure profit enhancer) can attest to how they improve stock-outs with a strong on-time and full-fill program. Different retailers have different ways to skin the cat, either a penalty for failure or an incentive for performance above the line. In either case, the retailers who have either a carrot or a stick are the ones that “win” in the in-stock game. The ones that depend on the “scorecard” and “jawbone” programs get shorted.
The Circuit City philosophy was to not charge for fill rate performance. I know that the intentions of the management team at Circuit City were to work with their suppliers as “partners." But unless the suppliers and Circuit City were sharing the P&L sheet performance of the relationship, it was never a partnership from the supplier’s eyes.
In the end, as a supplier, would you ship your widgets to a retailer who did not look like they would survive? I know I would not without some guarantee that I was getting paid. Dating would shorten up, perhaps become COD terms. No retailer can survive those terms for long.
Based on the logic that I have outlined above, do you agree with me that the “no charge back” philosophy had a role in “shorting” out Circuit City? I would be interested in your comments.
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The retailer who has the buying volume AND has the fill rate compliance programs always gets to the top of the allocation list.And any supplier that tells you that it is not true is not being completely honest. 
