What the OTIF Mandate Means for Walmart – and What it Means for You

The Bentonville, Arkansas, based retailer now requires consumer packaged goods (CPG) companies that ship to its distribution centers (DCs) in full truckloads to deliver on-time, in-full (OTIF) 95 percent of the time within a one-day delivery window.

The penalty for non-compliance is three percent of the order value assessed monthly, and early deliveries are penalized as much as late or short ones. Requirements for less-than-truckload shipments have been made more stringent as well.

CPG companies are having trouble keeping up, with compliance reported to have reached only 70% by August 2017. The accumulating fines show that the usual short-term measures and localized interventions have not been enough.

Companies need a way to understand what’s going on at Walmart and a framework to relate the changes to their own long-term transformation projects.

What OTIF means for Walmart

When Walmart first started discussing OTIF in 2016, it may not have known what the future held for Whole Foods, but there’s no doubt that these changes are driven by pressure from Amazon.

To compete successfully, Walmart needs to free up capacity all around and deploy it for innovation. We have to look beyond the backlots of Walmart DCs to what’s happening in Walmart stores to predict what’s on the horizon.

The physical storefront imitates the digital storefront

Paradoxically, to compete with online retailers, Walmart needs to become like them. Amazon offers consumers low prices and great convenience, but where it really dominates brick-and-mortar stores is in product selection.

Always available, the website has an endless assortment of products, seldom runs out of stock and takes orders around the clock. In contrast, the store is limited by shelf space. What Walmart needs to do is get maximum revenue out of its finite shelf space.

Walmart’s world is more challenging because online retailers benefit by separating demand capture from demand fulfillment. The one hour to two-plus days available for delivery give Amazon time to react after order capture. In contrast, a delay in stocking shelves at Walmart with the right product in anticipation of demand means that demand is lost — or worse, that a customer is lost to another retailer.

For Walmart, continuously refreshing its assortment based on what’s selling and what’s not depends not just on having inventory in the back of the store or DC but also on the absence of wasted effort spent handling materials that are not needed. When this is done successfully, the primary purpose of the store becomes to capture demand for the largest selection of products possible, just like a website.

A true demand-supply match and nothing more

Walmart DCs and stores are largely getting out of the inventory-holding business. Alongside OTIF, Walmart’s “top stock” program, where backroom inventory is placed on top of shelves, is another attempt to free up space for job training and team building while keeping shelves full.

It’s a subtle shift from push to pull. Instead of reliably having in stock what Walmart thinks it can sell, it shall quickly make available what is selling. Just as stores serve to match demand and supply, DCs too are becoming pass-throughs for the supply of materials and information on demand.

As Walmart orders more frequently in smaller amounts, the rate of flow increases so the retailer has physical space in DCs, in the back of stores and on shelves, as well as more flexibility to switch the assortment without leaving large amounts of unused inventory to be backhauled or marked down. More efficient inventory management translates directly into lower prices as well.

Meeting customers wherever they are

While the physical store experience cannot follow consumers everywhere, the goal is definitely greater proximity – to be present at more locations, especially in urban centers with smaller format stores, so that the faster delivery offered by Amazon is counteracted with the convenience of a shorter drive to a neighborhood Walmart store.

Replenishing smaller stores from Walmart DCs can only be done through smaller, faster and more frequent deliveries. Likewise, DCs too need to be replenished by a fast-moving and quick-changing flow of materials.

With more flexibility, urban stores and traditional larger-format stores can be geared up to provide more services to customers, such as more associates to help customers locate products and finish their shopping faster, local deliveries from stores, convenient drive-throughs for “buy online pickup in store” (BOPIS) merchandise, or convenient returns without long lines. This would only be possible when products can flow more rapidly through DCs and stores, freeing up space, labor, time and cash for innovation.

In summary, Walmart’s OTIF mandate is driven by the goal of serving customers better by having the greatest assortment on the shelves of conveniently located stores. By making the supply more reliable, OTIF lets Walmart do so with less inventory, which lowers costs and translates into lower prices for consumers.

As CPG companies determine how to respond to Walmart, they must keep in mind not the drop-off point at the DC but the demand-driver at the store: the end consumer.

What OTIF means for you

Until recently, the supply chains for CPG companies used to end with their distribution centers (DCs) serving Walmart DCs. The demand from a Walmart DC or another retailer’s DC was lumpy by definition. Store demand in general was a theoretical concept, sometimes heard about and seldom utilized.

Now, however, since Walmart’s DCs and stores won’t be storing inventory in excess of optimal levels determined by demand and supply characteristics, they’ll effectively be passing the end consumer demand through to CPG companies. If the loss of inventory is a challenge, the filtering through of real demand is an opportunity.

Let the data enable your supply chain

Traditionally, data from Walmart and other retailers has been used by account teams to confirm the achievement of metrics and service-level agreements (SLAs), cross-check penalties computed by retailers and identify root causes of shortfalls such as inadequate supply, insufficient forecasts, or warehouse or transportation delays.

While such findings have been shared with other functions, the data itself has rarely been utilized deeper within the supply chain. At most, account teams have provided a monthly forecast to demand planners and measured performance against it.

Walmart is now sharing more data — such as on-shelf customer availability (OSCA) — more frequently. Whether the month-ago forecast was accurate or not, the current on-shelf availability and point-of-sale (POS) information is likely to be invaluable. If the demand planning process were geared to run faster, this daily information feed could be utilized to better sense demand and better stage supply.

The first step is to establish a repository to cleanse, normalize and standardize the data in a central location that would allow multiple stakeholders like account teams, corporate demand planners and others to view the data in the context that they require it in. The environment should also allow that data to be consumed by systems for demand planning, demand sensing and inventory management. New demand streams like Walmart’s forecast of end-consumer demand will improve forecast accuracy and lead to leaner, more efficient inventory replenishment.

Do what Walmart says – and what Walmart does

Establishing flow takes more than the best forecast. Companies need to be able to respond smoothly with the help of all internal and external stakeholders. This takes end-to-end planning and execution, including the sensing of demand; the optimization of inventory; real-time collaboration with suppliers, co-manufacturers and other partners; and prioritized replenishments.

In depleting inventory at DCs and stores, Walmart has taken the first step to reduce buffering, lumpiness and the bull-whip effect by making its own orders more representative of end-consumer demand. Following Walmart’s example, CPG companies must enable their own partners and internal functions by sharing more information with them to streamline the material flow. Walmart is not just a demanding customer but also a role model for the digital transformations of CPG company supply chains.

Manage variability instead of expediting

Tight delivery windows and the inability to ship early mean that expediting alone will no longer suffice to avoid penalties. Companies must allocate the variability in their supply chains where it is needed most. For example, if shipments managed by a third party logistics (3PL) provider are sometimes early and sometimes late, then the window for goods to be picked up is tighter still.

However, this also suggests where interventions can add the most value. Companies investing in forecasting shipment needs by lane, mode and day can secure capacity with preferred transportation providers early.

Enabling 3PLs and others to do their job better by giving them more and timely information is preferable to hoping to change performance through passed-on penalties, because the margins of 3PLs, co-manufacturers and other partners are typically too low to absorb all of Walmart’s late fees.

The best way to manage variability is by closely monitoring all parts of the end-to-end supply chain in real time. Insights gained from such shared visibility and joint root-cause analyses can be used to help all functions and all partners become more consistent and reliable in their commitments and responses.

Your supply chains are converging

As the physical takes on characteristics of the digital, all your channels will start aligning in terms of their influence on your supply chain. Looking outside from within your company, the way you service your end consumers is effectively going to be the same, whether it’s through Walmart or another retailer, Amazon or your own website.

Looking in from outside, what your customers perceive will be a unified brand experience with its attributes perpetuated across channel boundaries.

Ultimately, CPG companies can use this season as an opportunity to guide their digital transformation efforts. Walmart just made it easier to build a solid business case.

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