Report points to Walmart upping stakes for supplier shipping requirements

Retail bellwether Walmart Inc. recently announced it is upping the delivery stakes for its supplier partners, for supplier shipment requirements, that are set to take place in May, according to a recent Wall Street Journal report. A major driver for these changes is to lower inventory levels, according to the report.

The report stated that Walmart will have its suppliers that ship full trucks of products to deliver orders within a specified two-day window 87% of the time, which is 2% more than the previous target of 85%. And it added that suppliers filling part of a truck with their goods need to reach a 70% on-time threshold, which is up from 50%, as well as also change how it penalizes suppliers that make partial deliveries to make sure products make it to shelves when they need to be there.

This penalty will be in the form of a 3% fine for the cost of goods sold for each case that does not meet the company’s on-time, in full (OTIF) requirements. OTIF is viewed by Walmart as a critical component and part of the efficiency effort geared towards its goal of reducing inventory levels.

In a recent interview with Mike Regan, chief relationship officer for TranzAct Technolgies, Tracy Rosser, former SVP Transportation and Supply Chain for Walmart, explained that there are different vantage points to look at OTIF from.

“It is very easy [for a supplier] to look at it and say ‘this could be a burden on my business,’” he said. “But there is a huge opportunity for them to increase their sales. Think about a world in which OTIF business was not being managed very well. When we started looking at this to see how we were performing, our baseline was about 29% for all of the stuff coming into Walmart accounting for billions of dollars in inventory. I don’t think anyone would want to run their business that way. When we were at 29%, we had a four-day receiving window, or a tolerance level, into our distribution centers, and we were actually receiving merchandise across ten days, when we were asking for four. If you were really early, that merchandise went right into the store. If it was late, it increased the high likelihood of running out of stock.”

Now, with a tighter delivery window requirement for suppliers to 48 hours, Rosser said that led to Walmart getting most of its shipments now in that smaller range, which resulted in Walmart having far less inventory in its system and more precision, with the company able to plan the flow of inventory significantly better. And he said Walmart buyers, suppliers, warehouses, and carriers are also able to better plan processes, because they have a plan to execute against.

“There is far less inventory in the stores,” said Rosser. “If you are a supplier, that means the likelihood of your product making it from truck to shelf is significantly greater, and sales will improve. We have suppliers in the upper 80s and low 90s for fill rates. They have paid close attention to their total supply chain and are very good at collaborating with Walmart and are having conversations about where they see the gaps and how to get better.”

TranzAct’s Regan said that this development is emblematic of what he calls an “efficiency teeter totter,” in the form of adhering to these Walmart OTIF standards and reducing inventory levels results in a major bump in efficiency in distribution center inventory throughput.

“This is what I see being played out across the transportation spectrum, with the efficiency teeter totter basically saying up or down,” explained Regan. “If you are less efficient, then costs go up, but why should the [shippers’] costs go up, if a supplier is inefficient? Retailers are not wanting to get rid of these fines, because they want things done right. Walmart is giving suppliers a day on either side. Adjustments continue to need to be made as a company by suppliers to respond to future logistics and transportation expectations.” 

Andrew Lynch, co-founder and president of Zipline Logistics, a Columbus, Ohio-based 3PL focusing on retail and consumer products, said that Walmart’s moves can be viewed as another tightening of the screws that are already in place on CPG shippers.

“But I don’t see it being significantly disruptive to suppliers that already have their act together,” he said. “If a supplier is already struggling to meet compliance, then this just put a taller hurdle in front of them. I think the most significant change here is clarity around a supplier’s performance which should improve decision making on the ground around how to operate under a supply constraint – if the shipper has a decision to make whether to ship an order a few cases short vs. shipping the full order a day late, the shipper can now nail down exactly what the financial repercussions are of each side of the coin.”

What’s more, Lynch said what is happening can clearly be viewed as the new normal, as retailers absolutely cannot allow out-of-stocks to happen at the rate in which they are happening in today’s hyper-competitive retail environment.

“Almost every grocery and retail chain in the country has some version of fine or scorecard that measures fulfillment performance and holds suppliers accountable to on time delivery,” he said. “At the same time, there is so much competition for shelf space from both emerging and established brands in every category that failure to meet fulfillment can result in a brand being completely removed from a retailer’s assortment. An absolute disaster. The pressure coming from both the retailer and sector competition is putting brands in uncharted waters where logistics performance is the difference between being the category winner and just another also-ran. That is why we put so much emphasis on maintaining control, flexibility and visibility of logistics and transportation functions in our guidance to clients.”