Late and incomplete deliveries are costing food and consumer packaged goods (CPG) manufacturers in the United States and Canada an estimated $100 billion annually, according to supply chain software provider Cleo. In a report released Tuesday, the company examines the financial consequences of poor on-time, in-full (OTIF) performance, highlighting losses that extend well beyond the penalties imposed by retailers.
According to The $100 Billion Supply Chain Penalty: OTIF’s Total Economic Impact, direct expenses, including retailer chargebacks, expedited freight and dispute management, account for approximately $10 billion to $11 billion of the annual total. The remaining $85 billion to $90 billion stems from less visible operational and commercial consequences, such as lost shelf space, reduced retailer orders, excess inventory and manufacturing inefficiencies.
Retailers increasingly hold suppliers accountable for deliveries that arrive outside agreed time windows or contain fewer products than ordered. Walmart, for example, requires suppliers to achieve a 98% on-time, in-full rate across orders, with a penalty equivalent to 3% of the cost of goods when the requirements are not met. The retailer tightened its standard in 2020.
Mahesh Rajasekharan, Cleo’s president and CEO, said the financial deductions imposed by retailers represent only a fraction of the damage caused by delivery failures. A missed delivery can jeopardize subsequent orders, reduce product visibility on store shelves and weaken a manufacturer’s commercial standing with a retail partner.
Retailer OTIF has very little margin for error
Walmart launched its U.S. OTIF program in July 2017. Amazon and Target also have similar supplier-performance programs, but there is no standard on-time, in-full delivery definition across retailers. A 2019 McKinsey study found that one of the biggest challenges for the consumer sector is the lack of a standard industry definition.
Cleo’s methodology does not consider a delivery successful unless it arrives on the date agreed upon, or within the specified delivery window, and contains the full quantity ordered.
Retailers like Walmart, Kroger, Target, Costco and Publix frequently set compliance benchmarks that exceed 95%. However, Cleo’s report shows many manufacturers’ actual performance at between 85% and 91% – a significant gap between operational results and retailer expectations.
The financial consequences can be disproportionate to apparently minor performance differences. If a supplier is consistently 99% OTIF against a 95% requirement they will tend to not get any additional direct financial benefit whereas a company who falls to 94% may get chargebacks and lower supplier scorecard ratings.
Strong performers may be able to get better placement and promotional support from manufacturers. But such benefits are rarely spelled out in contracts, the report said. Thus suppliers could spend on meeting the minimum requirements, not on continually improving the reliability of deliveries.
Lost deliveries are especially costly because of the wider commercial implications. The supplier scorecard is a tool used by retailers to make decisions on shelf allocation, promotions and future order volumes. So poor performance can mean declining sales opportunities, even when the immediate penalty seems to be relatively modest.
Bigger makers have bigger direct penalties
According to Cleo’s analysis, the direct OTIF-related costs for larger manufacturers grow as a percentage of revenue, and indirect costs grow as a percentage of revenue for smaller companies.
For manufacturers with annual sales between $100 million and $500 million, direct costs are estimated to be 0.5% to 1% of revenue. The range is 2.5% to 3% for companies with revenues between $3 billion and $5 billion.
For indirect costs, the pattern is the opposite. Smaller manufacturers have estimated indirect costs to be 15% to 16% of sales, versus 10% to 11% for the largest firms.
“Mid-sized manufacturers are most at risk-adjusted exposure,” Cleo said, especially those with annual revenue between $300 million and $1 billion. These companies have a hard balancing act between operational investment and financial performance. The former is the large indirect losses, while the latter is the fast-rising direct penalties.
Fourth-quarter demand fuels expedited freight spending
Seasonal demand adds another layer of pressure on supplier delivery performance. Cleo estimates that 40% of expedited shipments are in the fourth quarter when holiday shopping and promotional activity kick in.
According to the report, between 5% and 15% of shipments to large retailers need expedited logistics. Additional movements mean increased transportation costs, and can hurt manufacturers’ margins when reliable product availability is especially critical.
Often the root causes can be seen before the freight is shipped. Poor demand forecasts, late purchase orders and dramatic spikes in promotional demand can force manufacturers to speed up production schedules or arrange for urgent transportation to meet commitments to retailers.
Standard and expedited transport have a considerable price difference. Cleo estimates that air freight costs five to 10 times the standard rate, team driver use costs 1.5 to two times as much and less-than-truckload consolidation costs two to three times the standard rate.
The company recommends locking in capacity reservations and carrier commitments 90 to 120 days ahead of the fourth quarter to help control these costs. Manufacturers can benefit from planning earlier to reduce exposure to last-minute capacity constraints and costly emergency shipments.
Chargeback disputes cost $1.16 billion annually
Retailers make deductions, but the financial burden doesn’t end there. Cleo estimates that the CPG industry in the U.S. and Canada spends approximately $1.16 billion annually on chargeback disputes.
These costs include deduction analysts, compliance managers, third party platforms and external recovery consultants . It can be a significant resource drain, as manufacturers often lack the documentation or operational visibility needed to successfully challenge deductions.
According to Cleo, industry estimates put the chargeback write-off rate on disputed items at 60% to 70%. Even when the recovery efforts are successful, service fees can consume 20% to 30% of the amount recovered.
Staffing costs are another consideration. The fully loaded annual cost for a dedicated deduction analyst per retail channel is estimated to be between $80,000 and $120,000.
These numbers illustrate how chargeback management can become a costly activity that takes up a lot of resources without necessarily addressing the delivery problems that cause the deductions in the first place.
OTIF performance improvement could recapture up to $23 billion
“A five to 10 percentage point improvement in OTIF performance could deliver between $11 billion and $23 billion across the market,” says Cleo. But to capture those savings, manufacturers need to consider the full cost of delivery failures, not just the penalties imposed by retailers.
The report recommends measuring direct and indirect OTIF costs together and assigning overall responsibility to one executive with profit-and-loss accountability. The idea is to merge logistics performance, financial deductions and lost commercial opportunities in a unique management framework.
Cleo evaluates 5 ways to improve OTIF performance. Dispute-recovery and reporting tools involve a relatively low investment but also have little impact on the root causes of missed deliveries.
Logistics technologies, such as route optimization and carrier-visibility solutions, can greatly reduce delivery failures. However, they may only be effective if the inaccurate demand forecasts and weaknesses in planning are addressed.
Supply chain orchestration is another approach discussed in the report. This segment features Cleo, which launched its Chargeback Prevention solution in February. The software alerts companies if orders, shipments and invoices are at risk of missing trading partners’ service-level requirements so they can act prior to potential violations that could result in penalties.
The report is based on research that includes industry benchmarks, publicly documented retailer programs, labor and logistics cost data, and scenario-based modeling.
Fragmented accountability remains a major challenge
Organizational fragmentation is the most common weakness in OTIF programs, Cleo says, despite the availability of technology and performance-management tools.
Responsibility is often shared between departments that keep an eye on different parts of the same problem. Logistics teams measure delivery performance, finance departments deal with deductions, and sales teams tally lost business opportunities. Meanwhile, the financial relationships between these outcomes often remain unaddressed.
Rajasekharan believes that OTIF should be viewed as a shared business priority by manufacturers with clear executive ownership of its overall financial ramifications. Without coordination across departments, businesses risk managing individual symptoms and allowing the larger costs of poor delivery performance to continue.
The findings suggest that for food and CPG manufacturers, the economic costs of unreliable deliveries go well beyond visible retailer penalties. Cleo estimates that about 90% of the annual $100 billion burden is due to indirect losses such as reduced shelf space, reduced order volumes, excess inventory and operational inefficiencies.
But put the numbers in context: They are estimates based on modeling work by a company that sells chargeback-prevention software, not an independent, audited measurement of actual industry-wide losses.
