Why Wal-Mart Wants to Take the Driver's SeatBy , , and
Wal-Mart Stores (WMT), 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.
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.
The price cuts Wal-Mart is seeking are twice as much as the cost of transporting goods in some cases, say officials from two suppliers. In two instances, Wal-Mart asked for a 6 percent reduction in the price it pays for products based on its own cost calculation, while suppliers estimated the actual expense was equal to about 3 percent, the people say.
"There may be a disconnect when we walk into the room on what that cost might be," Wal-Mart's Abney says. "But we work collaboratively. As soon as a supplier shares the data, almost always those differences are quickly resolved."
Abney says Wal-Mart has thousands of suppliers and he has taken part in talks with more than 100. Some manufacturers have already shifted their deliveries and associated costs to Wal-Mart, he says.
One side effect of the Wal-Mart plan 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, says Randy Huffman, a former Wal-Mart executive who now runs GBD 360, a Bentonville (Ark.) consulting firm that works with suppliers.
"That aligns with Wal-Mart's taking cost out of the supply chain for their benefit and not their competitors," he said. "Suppliers are going to have to apply that increased freight cost somewhere, so it's more than likely it will be passed onto other retailers."
Bentonville-based Wal-Mart is eager to reduce expenses after announcing on May 18 that sales at its U.S. stores open at least a year fell for a fourth straight quarter. Mike Duke, who took over as chief executive officer last year, pledged in October that costs would rise slower than sales. Since then, Wal-Mart has sharpened its focus on transportation expenses, escalating talks to take over trucking from suppliers this year, Abney says.
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.