Abstract
The paper explores an efficiency hypothesis regarding the contractual process between large retailers, such as Wal-Mart and Carrefour, and their suppliers. The empirical evidence presented supports the idea that large retailers play a quasi-judicial role, acting as “courts of first instance” in their relationships with suppliers. In this role, large retailers adjust the terms of trade to on-going changes and sanction performance failures, sometimes delaying payments. A potential abuse of their position is limited by the need for re-contracting and preserving their reputations. Suppliers renew their confidence in their retailers on a yearly basis, through writing new contracts. This renovation contradicts the alternative hypothesis that suppliers are expropriated by large retailers as a consequence of specific investments.
Like all complex relationships, those established between suppliers and retailers suffer from substantial conflicts. Claims of faulty performance, either intentional or unintentional, are the main source of conflict. Other common discrepancies concern prices and deliveries. Discussion frequently arises about whether the invoiced prices are or are not in accordance with the previously agreed levels. There are also delivery delays that are punished by the retailer when they cause stock outs and losses of sales. Clarification of these arguments is difficult. Price schedules are intricate and it is hard to evaluate the cost caused by imperfect performance. Opportunism is possible on both sides. For instance, it is possible for a return of merchandise with the allegation of late delivery to be due to opportunistic behavior on the part of the retailer because sales did not go as well as planned when ordering the goods.
Errors in the administration circuits are also a main source of conflict. Examples of these are differences in the quantities and prices between the time of ordering and delivery of the merchandise, or accounting errors, where the quantity in the invoice and the delivered quantity do not correspond. Retailers claim that administrative problems are common because the administrative systems of small-size suppliers are underdeveloped. There are cases when the supplier issues the invoice and the delivery note at the same time so, if the delivery suffers from some defect, this is only discovered when the whole invoicing process has started. This makes fixing the problem cumbersome and slow. In other cases the transportation agent may fail to return the delivery notes to the supplier, causing administrative chaos. The importance of the supplier’s administration is supported by the fact that some retailers refuse to work with suppliers that lack reliable administrative systems.
How important contractual and administrative factors are becomes clear when we observe the empirical relation that exists between the average duration of the payment periods in each country and the importance attributed to the different kinds of phenomena that cause payment delays. It has been observed that the average payment period is positively correlated with the importance of debtors’ financial difficulties resulting in delays and negatively correlated with the importance of both disagreements between creditor and debtor and administrative errors. In other words, in countries with longer payment periods, debtor insolvency is more important while disagreements and administrative errors are less important, arguably because there is more time to solve both problems before the end of the contractual credit period (Table 2). This can mean that a longer payment period worsens problems with a financial origin, while it lessens those related to contractual and administrative issues.
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