Wal-Mart continues to find ways to seek and destroy sources of Supply Chain Risk. In a recent development, they want to take the driver’s seat, gain greater control over exogenous factors and achieve further cost reductions by controlling all transportation activities.
In February 2010, Wal-Mart announced a new “Supply Chain Reliability Program”. This initiative was designed to ensure that goods did not arrive too early or too late into over 100 of their US Distribution Centers (DCs), as defined by a four-day window leading up to a “Must Arrive By Date (MABD)”. You may recall from this earlier announcement that suppliers who fall below a 90% monthly threshold for compliance with this program would incur invoice deductions that equal 3% of cost of goods sold (COGS) for shipments arriving before or after this 4-day MABD window. Wal-Mart has now gone one step further to achieve timely and cost-effective deliveries.
This past week, Wal-Mart initiated the process to take over responsibilities for all US transportation activities from their suppliers. Suppliers currently make deliveries using their own transportation providers to over 100 Wal-Mart Distribution Centers. Wal-Mart then leverages its fleet of 6,500 trucks and 55,000 trailers to ship goods between these DCs and 4,000 stores nationwide. With this move, Wal-Mart wants to own and operate all transportation – all the way from the supplier’s factories to the retailer’s DCs and stores. Wal-Mart has started reaching out to the first set of its suppliers to take over transportation routes that it believes it can handle more efficiently than they can. Wal-Mart will require price cuts from suppliers for taking transportation costs off their hands, resulting in lower prices for consumers as well as increased margin and sales. They expect to gain efficiencies by better truck utilization while further improving on-time deliveries. Wal-Mart’s current transportation strategy focuses almost exclusively on their DC-to-Store network and presumably results in significant empty miles on return trips. This new move to own the entire transportation network can help create back-haul strategies out of empty miles. This is but one example of how securing control over logistics and transportation can reap significant rewards for Wal-Mart.
Five Points for Suppliers
While this is clearly an advantageous move for Wal-Mart, I can think of at least five ways in which this development could impact suppliers.
- Suppliers that were concerned about penalties and financial impacts of not complying with Wal-Mart’s MABD stipulations can take comfort in passing this burden on to the retailer. They will however have to continue evolving their transportation acumen and fully expect Wal-Mart to hand this responsibility back to them at short notice down the pike.
- Wal-Mart is said to be demanding significant price cuts – reportedly as much as 6% from suppliers in exchange for taking over transportation. Initial reaction from suppliers is that this may be up to twice as high as what it costs them on average. It becomes imperative now for suppliers to be able to demonstrate accurate transportation costs, as a component of current total costs to accurately negotiate this price cut with Wal-Mart.
- Suppliers will lose flexibility and will likely have to accede to Wal-Mart’s schedule to pick up goods from their factories. Collaborative transportation planning and actionable supply chain visibility between suppliers and Wal-Mart would significantly help alleviate some of these challenges. Having access to an automated, timely, cost effective and error free platform to exchange critical business transactions with Wal-Mart is a critical imperative for success.
- Shipments to Wal-Mart frequently take up the lion’s share of many a supplier’s transportation needs, helping them secure attractive volume-based rates from carriers. Without the bulk discounts they accrue from shipments to Wal-Mart, suppliers will be burdened with higher transportation costs for their other retail customers.
- This would result in higher prices that suppliers will likely be forced charge their non Wal-Mart retail customer base. The possibility of higher shelf prices for consumers shopping at these retailers is real. Lower sales, margin and revenue for these other retailers and for suppliers is also something that will need to be reckoned with.
Image courtesy of and sourced from the Wal-Mart Image Library.
