Inventory Manager Software

Is Wal-Mart Sub-optimizing Its Extended Supply Chain?

Wednesday, February 3, 2010 by Chris Goldsmith

In a recent letter to their suppliers (full letter here courtesy of ARC), Wal-Mart outlined a new policy about the enforcement of the MABD (must arrive by date). The gist of the policy is that all purchase orders (POs) must arrive within a four day window preceding the MABD. If a supplier is out of compliance over a period of time, they will be subject to a fine which equates to 3% of the cost of goods sold (COGS). How is that for a chargeback? While it is common place for retailers to have some chargebacks in place if certain conditions are not met (labels, timing, packaging, etc.), this new program raises the risk and cost exposure to shipping to Wal-Mart. Wal-Mart’s go to market strategy is largely competing on price, and to achieve their price superiority they lean heavily on suppliers to lower their COGS so they can pass some of that savings onto consumers. Many suppliers will have no choice but to accept these terms since Wal-Mart represents so much of their business, but this new policy will make it less profitable to sell their wares to Wal-Mart.

I wonder if Wal-Mart cannot see the proverbial forest for the trees when it comes to their extended supply chain costs? Anytime we chose to measure/manage/incent on a metric it is quite likely to improve. I have no doubt that the number of POs that arrive within the MABD window will increase, but at what cost? Just last Spring when Best Buy was reporting their Q1 financials they stated they lost potential sales because some vendors had simply not supplied the expected merchandise. I can see a similar situation unfold in the case of Wal-Mart. The more constraints that are introduced into a situation, the less the situation can be optimized. If the supplier has these strict delivery windows they might be less inclined or dis-incentivized to consolidate loads. This could result in out-of-stock conditions on the store shelf, something that clearly costs Wal-Mart money. To the degree this new policy raises the overall cost for the suppliers the less they will be able to work with Wal-Mart on additional price concessions or Wal-Mart could push them to the brink of bankruptcy, neither of which is a good outcome for Wal-Mart.

While I am all for management of key metrics, it is always important that the metrics enforced in one division/department support the overall corporate strategy otherwise a sub-optimal result is likely. This new policy is now in effect as of February 1, 2010. It will be interesting in the coming months to see the impact this has on Wal-Mart’s extended supply chain and if it goes the way of the RFID mandates…

Comments for Is Wal-Mart Sub-optimizing Its Extended Supply Chain?

Thursday, February 4, 2010 by Wayne Castrovinci:: I couldn't agree more! I read the 'letter' and was even more alarmed by the following: ..."•Walmart and Sam’s Club require domestic replenishment, promotional and new modular purchase orders (PO) to be delivered, in full, within a four day window" It's the 'in full' part that caught my attention. This will cause additional challanges for vendors who rely on freight forwarders and brokers to move 'imported' product through the supply chain. Certainly a 'ship complete' mandate is not unusual, but adding the mandated shipment window, else pay up, is unreasonable and could cause smaller vendors to seek alternative outlets for their products. Just try getting a freight forwarder to 'guarantee' the delivery of multiple containers of the same PO coming from Chna within the same delivery window! Seems to me, Wal-Mart's alterior motive is simply to create yet another 'reason' for vendor chargebacks!
Friday, February 5, 2010 by Howard Zajicek:: There are other costs to doing business with Walmart that will ultimately be built into supplier costs. "Trade funds" (slotting in any other retailer) that are being extracted from vendors are being built into the cost of goods. That amount is higher than any 3% of late trucks.
Friday, February 5, 2010 by Chris:: Howard, Thanks for your comment. You do highlight a very important point regarding slotting fees. Slotting fees can represent substantial costs, far in excess of 3% COGS, to the supplier. This cost needs to get built into the price they charge to the retailer. My point is suppliers generally have an extremely hard time raising prices to retailers and this new policy potentially adds an additional 3% cost which is not an insignificant risk given the slim margins many suppliers operate under.
Monday, February 8, 2010 by Ranjan Prasad Singh:: This story of squeezing suppliers is in line what I hear from Walmart suppliers in China and India. I am not sure whether Walmart is going the way GM and Ford have gone, i.e. making suppliers go bust first and then follow.
Monday, February 8, 2010 by Joe Capzick:: As a retailer it is frustrating to see vendors accept PO’s which have a defined delivery window and then ignore it. Wal-Mart exempts vendors from this charge-back with a minimum score of 90%- this allows for a 10% failure rate. Accept the PO and deliver it on time. This will optimize the collective supply chain! Vendor’s sales will increase if Wal-Mart or any retailer’s in-stocks increase. Let’s all work together and focus on on-time delivery! I would expect any shipper’s on-time goal be 95%, minimum. If you cannot hit 90% then I suggest you change carriers.
Thursday, February 11, 2010 by Chris:: Joe, I appreciate you voicing in with the retailer perspective. I agree that vendors that blatantly disregard suggested delivery windows should incur some penalty. What I am primarily advocating for is some give and take between the vendor and retailer (i.e. evaluate if it is more optimal to combine shipments and have one PO get there a day ahead of the delivery window).