An article in Bloomberg BusinessWeek recently announced that Walmart “wants to grab control of deliveries from manufacturers” [“Why Wal-Mart Wants to Take the Driver’s Seat,” by Chris Burritt, Carol Wolf and Matthew Boyle, 27 May 2010]. There is certainly nothing remarkable about that. What is remarkable is that the article also claims that “suppliers’ shipping costs ‘more than likely will be passed on to other retailers.” That’s a neat trick if you can get away with it and the authors explain how it could happen later in the article. First, the authors explain why Walmart wants to assume responsibility for transporting manufactured goods:
“Wal-Mart Stores, the world’s largest retailer, has become famous—and at times infamous—for the power it wields over its suppliers. With its $408 billion in sales for the fiscal year ended Jan. 31, the retailer has plenty of clout to persuade makers of goods sold in its big-box stores to create environmentally friendly packaging and exclusive product sizes, and to participate in joint advertising promotions. Now, Wal-Mart wants to be their chauffeur as well. The retailer aims to take over U.S. transportation services from suppliers in an effort to reduce the cost of hauling goods. Wal-Mart is contacting all manufacturers that provide products to its more than 4,000 U.S. stores and Sam’s Club membership warehouse clubs, says Kelly Abney, Wal-Mart’s vice-president of corporate transportation. The goal: to handle suppliers’ deliveries in instances where Wal-Mart can do the same job for less, then use those savings to reduce prices in stores, Abney says. Wal-Mart believes it has the scale to allow it to ship everything from dog food to lawn chairs more efficiently than the companies that produce the goods. ‘It has allowed our suppliers to focus on what they do best, manufacturing products for us,’ he says. ‘With lower costs usually comes increased sales.’ Manufacturers would compensate Wal-Mart by giving the retailer lower wholesale prices for the goods it transports. Wal-Mart isn’t saying how much it hopes to save. However, in a slim-margin business such as retailing, even small efficiencies can help the bottom line; in 2009, Wal-Mart trimmed expenses by almost $200 million by packing and scheduling its U.S. truck fleet more efficiently, according to spokesman Lorenzo Lopez.”
The down-side to Walmart’s latest efficiency drive, besides putting a tighter squeeze on supplier profit margins, is that “consumer-product manufacturers may face increased transportation costs on deliveries to other retailers as they lose economies of scale on their own delivery fleets.” Those higher transportation costs would have to be passed along to retailers (creating a real win-win situation for Walmart but a lose-lose scenario for suppliers and other retailers). Burritt, Wolf and Boyle explain how Walmart has historically handled its supply chain and how that differs from the new approach.
“Until now, suppliers made most deliveries to Wal-Mart’s distribution centers. The retailer then used its fleet of 6,500 trucks and 55,000 trailers to ferry goods between the regional centers and individual stores. Under the new program Wal-Mart will increase its use of contractors, as well as its own vehicles, to pick up products directly from manufacturers’ facilities. That will allow Wal-Mart to carry more per truck and improve on-time delivery rates, says Leon Nicholas, a director at consulting firm Kantar Retail. Wal-Mart also would have more sway in negotiating fuel prices, thanks to its larger purchasing volume, he says.”
With sales in its U.S. stores declining over the past year, Walmart believes it can lure customers back through its doors by reducing prices even further. As a result, “Wal-Mart has sharpened its focus on transportation expenses, escalating talks to take over trucking from suppliers this year.” Burritt, Wolf and Boyle conclude:
“The retailer also has sought to offer goods like cereal and laundry detergent for less to lure shoppers back to stores; lowering transport costs provides room to do that. The strategy is part of what Wal-Mart calls its ‘productivity loop’—efficiency reflected in lower bills for shoppers at the cash register. As for suppliers, they may have to go along with the plan even if their other remaining transport expenses rise because Wal-Mart is so big, says Vic Gallese, an independent retail consultant based in Fort Worth. ‘The vendors might say, “My other overhead costs will rise,”‘ said Gallese, who has spent 25 years in the retailing industry. ‘And Wal-Mart will say, “That’s your problem.”‘ The bottom line: By attempting to take over the transportation from its suppliers, Wal-Mart hopes to achieve efficiencies to cut its own prices.”
A quick tutorial in Supply Chain Digest explains how a company with transportation flexibility can make significant savings by implementing dynamic routing [“Savings Impact of Dynamic Routing,” 28 May 2010]. The tutorial highlights the fact that supply chain management involves managing trade-offs and it advances the idea that the use of more “dynamic routing” is one way to help manage that balancing act.
“In an outstanding videocast … on The Supply Chain Television Channel, Dr. Mike Watson of IBM went through a number of case examples of how supply chain optimization technology is being used, including the one illustrated below, in which a retailer looked at various options for its store delivery strategy. (To view the on-demand videocast, go to: Supply Chain Optimization and Network Design Videocast.) As shown in the graphic [click to enlarge], the retailer, using network design tools, looked at comparing its existing strategy of promising store deliveries on a specific day each week against giving stores a 1-2 day window for the week and making it variable each week. The latter strategy especially would enable to the retailer to use more dynamic routing, leading to tremendous reductions in transportation costs, taking the existing costs of $88,000 per week down to just under $30,000 per week. Ultimately, said Watson, this is the choice the retailer made. However, this lowest cost approach could have an impact on store inventory levels and stock outs, as well as store labor planning, etc. Which answer is right? It depends, of course, on a company’s strategy, business success drivers, risk tolerance and more – and that’s the fun of supply chain!”
By assuming responsibility for transporting goods, Walmart increases the number of strategies it can utilize to save money. It may or may not use dynamic routing as one of those strategies. Unfortunately for suppliers and distributors, the big retailers dictate when they will accept deliveries and orders received outside prescribed windows result in significant penalties. That means that dynamic routing may be an alternative they have available. Commenting on Walmart’s latest move, supply chain analyst Bob Ferrari wonders if the giant retailer is approaching the limit of what can be squeezed out of the supply chain [“Yet Another Wal-Mart Supply Chain Efficiency Initiative- Will it Ever Change?” 1 June 2010]. He writes:
“Wal-Mart wants to become its own freight forwarder, with plans to assume transportation services for a select group of U.S. based suppliers. The goal is to handle supplier deliveries when Wal-Mart’s transportation teams feel that they can do the same job for less, most likely having its private fleet take maximum advantage of backhauling opportunities at supplier sites. As with all initiatives related to Wal-Mart, there is a bit of catch. Target suppliers will have to provide Wal-Mart a lower wholesale price to compensate for savings in paying their own transit freight costs to Wal-Mart distribution centers. The article notes that in two instances Wal-Mart sought a 6 percent price reduction for the goods it orders, while these same suppliers estimated that the actual expense savings was closer to 3 percent. The rest, of course, is subject to negotiation, but many of Wal-Mart’s suppliers are well aware of the one-way negotiating tactics that a Wal-Mart procurement official can muster. … I however remain a bit of a skeptic as to whether this strategy is a win-win for many in the existing supply chain, including Wal-Mart. For suppliers who opt-in, they stand to lose volume, and potentially rate leverage with their existing transportation providers. In scheduling production runs, an uneven or altered production output schedule can be buffered by the flexibility that suppliers may have with a transportation carrier in changing pick-up or consignment dates. A Supply Chain Matters commentary in February noted that Wal-Mart had already tightened its delivery windows, threatening to impose a 3% penalty if a supplier shipment arrives at a regional DC outside of a prescribed four day window, either early or late. One wonders how much schedule flexibility these suppliers will now have when fleet managers back down the schedule and now proscribe when the Wal-Mart truck will show-up for pick-up. What about missed or partial shipments, or changes to Wal-Mart’s fleet schedules? Will Wal-Mart alter its penalties for missed appointments at the supplier dock? The bottom line for suppliers is once again re-iterated to the need for more sophisticated production planning and scheduling processes and systems. … These past several months have provided many large-scale Wal-Mart initiatives, all directed at bringing more consumers into its U.S. stores. A massive store simplification and re-layout program, and direct regional purchasing among others, were all directed at increasing same-store sales, but the results to date have been disappointing. One wonders when Wal-Mart will reach the wall of gaining efficiency in its overall supply chain and perhaps turn attention to other internal cost containment measures. Perhaps the Walton family could afford a simpler overall lifestyle!”
The real take-away from Ferrari’s post is that “sophisticated production planning and scheduling processes and systems” are needed to operate successfully in the increasingly complex order fulfillment climate. One of those systems is the Enterra Supply Chain Assurance Platform (ESCAPE™). It can help reduce retailer penalties by proactively keeping up-to-date with changing requirements in the retailer compliance sector. To learn more about ESCAPE, listen to the recorded webinar Enterra Solutions sponsored entitled Retailer Compliance: Accentuate the Positive, Eliminate the Penalties.