Wal-Mart Will Punish Its Suppliers for Delivering EarlyBy
Also penalties of 3% of value for items that arrive late
Retailing giant warns that disputes “will not be tolerated’’
Long known for squeezing its vast network of suppliers, Wal-Mart Stores Inc. is about to step up the pressure.
The focus this time is delivery scheduling, and the company’s not messing around. Two days late? That’ll earn you a fine. One day early? That’s a fine, too. Right on-time but goods aren’t packed properly? You guessed it -- fined.
The program, labeled “On-Time, In-Full,’’ aims to add $1 billion to revenue by improving product availability at stores, according to slides from a presentation obtained by Bloomberg, and it underscores the urgency Wal-Mart feels as it raises wages, cuts prices and confronts a powerhouse rival in Amazon.com Inc. that’s poised to grow with its planned purchase of Whole Foods Markets Inc.
“Wal-Mart has to find efficiencies wherever it can,’’ says Laura Kennedy, an analyst at Kantar Retail. “They’re trying to squeeze and squeeze and squeeze.’’
The initiative builds on progress Wal-Mart has made in reducing inventory and tidying its 4,700 U.S. stores after the back rooms became so cluttered it often stored surplus products in cargo trailers parked out back.
Wal-Mart isn’t the first big retailer to tighten the deadline for vendor deliveries. Target Corp. implemented a similar policy last year as part of a broader supply-chain overhaul. But Wal-Mart’s vast logistics network of more than 150 U.S. distribution centers dwarfs that of any other retailer, and the company typically accounts for a sizable chunk of its suppliers’ sales: 27 percent for bleach maker Clorox Co., for instance.
The new rules begin in August, and the company said they will require full-truckload suppliers of fast-turning items -- groceries, paper towels -- to “deliver what we ordered 100 percent in full, on the must-arrive-by date 75 percent of the time.” Items that are late or missing during a one-month period will incur a fine of 3 percent of their value. Early shipments get dinged, too, because they create overstocks.
By February, Wal-Mart wants these deliveries to be on-time and in-full (known as “OTIF”) 95 percent of the time. Its previous target was 90 percent hitting a more lenient four-day window.
“Variability is the No. 1 killer of the supply chain,’’ Kendall Trainor, a Wal-Mart senior director of operations support and supplier collaboration, said in a presentation to vendors earlier this year.
Those variations can be extreme: OTIF scores for Wal-Mart’s top 75 suppliers -- including Procter & Gamble Co. and Unilever -- had been as low as 10 percent, according to Trainor’s presentation. And not one had reached the 95 percent long-term target.
Unilever declined to comment. Damon Jones, a spokesman for P&G, said his company and Wal-Mart “share a joint commitment to superior consumer service –- including on-shelf availability.”
“The goals are aggressive and will require new ways of working,’’ warned a slide at another Wal-Mart presentation to suppliers. A company spokesman was more sanguine, saying the retailer is “working closely with our vendors to help reach these targets. We know that when products we’ve ordered arrive on time, it results in happier customers.’’
That’s been a challenge, though. Under previous Chief Executive Officer Mike Duke, stores suffered from a lack of manpower to keep shelves stocked, and missing products drove customers to rivals including Dollar General Corp., Walgreens Boots Alliance Inc. and German discounter Aldi. When Doug McMillon became CEO in 2014, one of his goals was to improve what the company calls “on-shelf availability.” It has gotten better, although Wal-Mart declined to provide specific figures.
While big suppliers should be able to invest in fancy inventory-management systems to get up to speed with the new rules, smaller businesses will feel more pain. Some don’t even know what “OTIF’’ stands for, according to Colby Beland, vice president of sales at CaseStack, a logistics provider that bundles supplier shipments for delivery to retailers’ warehouses.
That confusion has created a brisk business for consultants, who are busy crisscrossing the country delivering tutorials on the program.
“OTIF is the hottest subject out there right now,’’ according to 8th and Walton, a consultant based in Wal-Mart’s hometown of Bentonville, Arkansas, that has conducted OTIF seminars in New York; Portland; Ontario, Canada, and other cities.
“Everybody has come to the stark realization that OTIF is here and it’s real and they better get ready for August,’’ Beland says.
The program is the latest chapter in Wal-Mart’s history of badgering suppliers to improve efficiency and performance. It was the first big retailer to embrace bar codes in the early 1980s to track inventory and sales, mandating precise locations on packages for easy scanning. Vendors that refused were kicked off the shelves.
“Suppliers went crazy at first, but they all figured out how to implement it and it helped them as much as it helped Wal-Mart,’’ says Dale Rogers, a logistics professor at Arizona State University. “This is just the next one of these things.’’
In some cases a problem will be Wal-Mart’s fault, so the retailer has developed a scoring system that breaks down reasons for non-compliant deliveries and will fine suppliers only if they’re responsible. If suppliers don’t agree with the fine, too bad: Disputes “will not be tolerated,’’ Wal-Mart says.
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Even a freak snowstorm, like the one that paralyzed travel in the southeastern U.S. in 2015, might not get suppliers off the hook, if they knew the bad weather was coming and didn’t take precautions.
“You end up in a situation of, ‘Who is to blame?’ ” says Santiago Gallino, an associate professor at Dartmouth College’s Tuck School of Business. “It’s a tough discussion.”