Wal-Mart’s on-time, in-full (OTIF) shipping mandate for suppliers comes at a time when a perfect storm is brewing in the transportation and logistics sector. Tight truckload capacity is raising shipping costs as much as 9%, according to Colby Beland, vice president of sales & marketing for Fayetteville-based CaseStack.
Throw in the added holiday rush and hurricanes that crimped the supply chain, and there is a perfect storm brewing at precisely the time Wal-Mart wants suppliers to hit a 95% on-time ratio using a one-day window, he said. For less-than-truckload carriers like Fort Smith-based ABF Freight and FedEx, the bar was set lower, but all suppliers began facing fines in August if they missed the retailer’s new OTIF guidelines.
Wal-Mart has discussed its OTIF initiative many times since first announcing the changes in February, and each time executives say the agenda is needed because customers expect products to be on the shelf. Tighter delivery windows also help Wal-Mart control inventory costs and clean up its back rooms.
It became clear from a recent conversation between two top Walmart executives overseeing OTIF that full implementation will take more time. During the Nov. 13 Walstreet Fireside Chat held by the Greater Bentonville Area Chamber of Commerce, Ed Oldham, vice president of flow at Walmart U.S., told suppliers the retailer is making progress, but there’s a long way to go.
“We feel pretty good about we are. The average vendor scorecard is about two times better than it was before we started,” Oldham said.
The 95% goal is still in play, Oldham said. He admits the 95% on-time and one-day window is ambitious, but if the retailer hadn’t set the high goal it would not have seen the improvements.
Oldham said instituting fines motivated suppliers to follow the new OTIF guidelines. He said Wal-Mart began piloting OTIF with a few large suppliers for about a year before rolling it out, and the improvement with on-shelf is better, with availability as good as it’s been in a long time.
HURRICANE IMPACT, PROGRESS REPORT
When asked about the impact of Hurricanes Harvey and Irma on OTIF scores given Wal-Mart had at least three distribution centers closed at times which could not take deliveries, Oldham said the retailer removed the fines in September because it was the right thing to do.
Wal-Mart created an exception for “acts of God” and Jeff Gruener, senior vice president of finance and strategy, said all the fines were removed. Beland said that shows the retailer is eager to work with suppliers, rather than than ding them for cash.
Oldham said there are physical assets in the network that need upgrades, and more investment is needed in Wal-Mart’s consolidation network. Oldham said Wal-Mart is also trying to clean up the paperwork. He said the reason different goals were set for truckload and LTL is because it is going to take Wal-Mart more time to work on its consolidation center, known as Center Point.
Oldham said last summer Wal-Mart looked at all items sold in stores and ranked them according to days on shelf — also known as velocity. The analysis was used to cut through the clutter of merchant and marketing teams wanting more on the shelf, and supplier manufacturing teams and finance teams that know some of the items don’t get turned.
Wal-Mart tagged items into A,B,C & D groups. Oldham said C & D items don’t get filled at nearly the same rate as A & B items. Oldham said that has to change if Wal-Mart is going to get near its goals. He said 15% of the items that contribute 70% of sales are in group A.
Beland said A & B items are likely full truckload, and C & D items are smaller shipments transported via LTL. He said issues for LTL are more complex, and that is why Wal-Mart gave the suppliers a lower threshold than the 95%. He said Wal-Mart’s admission that consolidation is a problem for its collect customers and plans to invest in this area are clear indications the retailer understands the challenges.
JOURNEY TO 95%
Gruener said multiple times during the Nov. 13 conversation the 95% OTIF goal was a journey from where the retailer is now. He said it’s going to take time and more investment to get there, which is why he and Oldham told suppliers there would be another briefing on the OTIF protocol at the supplier growth summit in late January.
Gruener said Wal-Mart is investing in OTIF, and it has to be a collaborative effort with suppliers if the 95% goal is ever to be realized.
Oldham said Wal-Mart is also piloting a way to help distribution centers be more successful. He said the retailer understands it is a real problem for suppliers who have a one-day window to deliver on Tuesday but can’t get an appointment at the distribution center until Thursday.
“We are working on a system that would give you an appointment at the same time you get the purchase order,” Oldham said.
Beland expects Wal-Mart will likely delay the full 95% OTIF implementation well into next year given the perfect storm brewing. He said Wal-Mart is not building additional regional distribution centers and that means it’s going to have to improve the flow in the 42 it already operates.
Beland was encouraged by Oldham and Gruener and said the goal is going to stand, but when it conflicts with Wal-Mart’s everyday low cost strategy, there will likely be some compromise. Beland said suppliers who are hitting the 95%, one-day delivery requirements are paying an additional cost to do so, giving the tight capacity in the supply chain. That cost can range from 6% to 20% more in higher shipping rates.
Suppliers paying more to hit the goal will no doubt want a better margin from the retailer who is determined to get the absolute lowest cost and that will drive up costs in the supply chain, a direct conflict with Wal-Mart’s mission to drive costs out, he said.
“Shipping rates are outside Wal-Mart’s control, and I see them making some adjustments in short- to near-term. We will find out when they share the new guidelines after the first of the year,” Beland said.