Suppliers Reject Zales' "Big Squeeze" Play

Consumer goods suppliers have complained for years about "the big squeeze," where they're at the mercy of their major retailer customers (the big-box retailers in particular), who issue mandates and compliance requirements that squeeze the life out of the extremely thin margins the suppliers are already getting. The carrot the retailers dangle, however, keeps the suppliers in check: a steady stream of orders, in impressive quantities.

What would happen, though, if a major retailer flipped the whole concept on its ear and asked its suppliers to purchase some of its inventoryeven products they didn't manufacture themselvesfor cash, with the carrot being a promise to double the amount of orders in the future? That's exactly what's happening with Zales, a national jewelry chain that has fallen on hard times, and many of the suppliers are having none of it.

According to this article in the Wall Street Journal, one of the many problems with this scheme is that "Zales didn't want to swap new merchandise for old products, which sometimes happens in the jewelry business. Zales wanted the vendors to write a check for what Zales had spent on the jewelryan almost unheard of practice in the industry."

Vendor-managed inventory, of course, is a supply chain concept with a long and noble history. As I relate in my book on supply chain best practices, VMI is a replenishment practice that involves the supplier, rather than the retailer, being responsible for maintaining the retailer's inventory based on transactional data shared by the retailer. The retailer provides regular inventory updates to the manufacturer, who's responsible for replenishing that supply as needed. The manufacturer benefits by having more reliable sales data to base its forecasts on; the retailer benefits because it no longer has to maintain its inventory levels.

In the case of Zales, however, the retailer is attempting to put the squeeze on its vendors from a position of weakness rather than strength. As the WSJ article points out, Zales has posted losses in seven of the last eight quarters, and in fact is seeking a white knight to bail it out. One diamond vendor who spoke with the WSJ rejects the idea of vendors buying back old merchandise from a retailer: "Historically vendors don't write checks, especially to take back something you don't want and you know you'll lose money on."

Sounds like the concept of vendor-purchased inventory is doomed to quickly pass into the ranks of "what were they thinking?"