The Beast of Bentonville has sent a clear message to its U.S. inbound delivery network: Effective today, it’s shape up or pay out.
As of Tuesday, suppliers who pay the freight charges for shipping to Walmart Inc.’s (NYSE:WMT) U.S. distribution centers (DCs) must fulfill orders exactly as Walmart wants, hit the company’s “must arrive by” date at the designated DC, and accomplish both at least 98% of the time or face a fine equal to 3% of the cost of goods sold. The directive applies to purchase orders supporting brick-and-mortar and e-commerce transactions.
For food and consumables, an increasingly important part of Walmart’s traffic mix, the goods need to arrive at the specified DC on Walmart’s mandated “must arrive by” date. Orders of general merchandise can arrive within one of two delivery days that are designated by Walmart.
The full brunt of the new directive, which is part of Walmart’s long-term “precision retailing” strategy, applies to suppliers who ship under “prepaid” transactions, where the shipper pays the freight costs and manages the process. Goods shipped “collect,” where the Arkansas-based giant controls the freight in return for reduced payments to suppliers, need not comply with on-time delivery standards because Walmart controls the shipping. However, the “collect” supplier will be responsible for properly filling Walmart’s orders for Walmart pickup at least 98% of the time.
Until Tuesday, Walmart’s “on-time, in-full” (OTIF) program assigned different performance metrics to truckload and less-than-truckload (LTL) carriers, as well as to the type of commodities being delivered. For example, LTL carriers were required to meet the OTIF standards only 70% of the time. Truckload carriers had to meet an 87% on-time standard. In addition, 95% of all general merchandise orders had to be filled exactly as Walmart required. For food and consumables, that figure was 97.5%.
By requiring suppliers and carriers to hit uniform targets regardless of the goods being shipped, Walmart hopes to increase the consistency and reduce the variability of DC-bound deliveries. In the tightly synchronized world of Walmart’s supply chain, a shipment arriving at a DC a day early is just as problematic as a shipment arriving a day late.
Walmart, which didn’t respond to requests for comment, announced the changes in a Sept. 1 internal memo, giving its supply chain two weeks to adjust. Suppliers complained about the tight turnaround in the midst of a pandemic and just two months before the start of the critical peak holiday buying season. “There has definitely been some supplier freak-out,” said Jami Dennis, CEO of Vendor Masters, a consultancy that helps vendors navigate retailers’ supply chains. Dennis lives in Bentonville and at one time worked for Walmart in a merchandising role.
Walmart launched its OTIF initiative in mid-2017 with the goal of eliminating lost sales because store shelves were not restocked fast enough. It has ratcheted up the standards several times since then. The most recent came in 2019 when it raised the requirements on general merchandise and food and consumables orders.
Compliance has been successful for some, and not so much for others. In particular, food and consumables compliance has been well below Walmart’s standards, according to people familiar with the matter.
Like many retailers, Walmart has struggled with delivery consistency, and empty or poorly stocked shelves, during the COVID-19 pandemic. “All you have to do is walk through a store to see the gaps in the supply chain,” said Michele Brannon, manager, 3PL partner, customer and sales assurance, for LTL and truckload carrier Averitt Express Inc. Cookeville, Tennessee-based Averitt is a longtime Walmart carrier and a disciple of the retailer’s OTIF policies.
Walmart has been transparent about its heightened expectations of supplier and carrier performance, according to those who follow the company. It has waited long enough to implement inbound delivery standards it feels are necessary to consistently manage product flows at the DC and, by extension, ensure fully stocked store shelves, they said.
“They need to rip the bandage off, or else they can’t manage their DCs,” said Brannon, referring to Walmart migrating its inbound supply chain to the new standards.
While she understands some supplier concerns about Walmart’s timing, Dennis said that “anyone who didn’t see this coming wasn’t paying attention.” Walmart wants its suppliers to get their house in order and to “clean up their mess,” she said.
Hitting the targets isn’t rocket science, Dennis said. It requires watching every purchase order and every stock-keeping unit (on a weekly basis) to determine, over time, where the pain points are. Once bottlenecks are identified, it is often a matter of addressing the issue with Walmart representatives, who are generally accommodative. “You can work with Walmart,” she said.
Sometimes the resolution involves adjusting the performance profile that Walmart creates for every supplier before the retailer transmits its first purchase order. Walmart will modify the criteria if the supplier makes a good case for that being an impediment to hitting the delivery targets, Dennis said.
If nothing else, suppliers must stop using the pandemic — and the chaos wrought by it — as the root cause of their issues. “COVID-19 is a reason, not an excuse,” she said.
The pain may be most keenly felt by LTL carriers that have long worked under a very comfortable compliance buffer at 70%. Dennis said it’s unrealistic to expect LTL carriers that had been at the prior threshold to bump up to 98% on such short notice. “But it’s an attention-getter,” she said.
Brannon said that some LTL carriers route Walmart orders through their regular appointment schedules, a practice that can affect compliance with the “must arrive by” deadline. By contrast, Averitt has customized a program where Walmart orders are immediately flagged and effectively given special handling, according to Brannon. This drives up time to market performance and delivery reliability, she said.
Averitt’s LTL service hits the Walmart’s “must arrive by” date, on average, 98.7% of the time as long as the freight is tendered properly by the supplier, Brannon said.
Brannon makes no apologies for treating Walmart like near-royalty. Averitt does tens of millions of dollars a year with Walmart, about two-thirds of that in prepaid business, she said. The companies have an excellent long-term relationship, and Walmart is regarded at Averitt as a flexible and respectful partner, Brannon said.
Averitt does urge its suppliers to give it a one- to two-day pickup cushion when tendering the order for pickup, according to Brannon. Averitt also offers its supplier partners a free service to help improve their performance under the elevated standards. Small to midsize suppliers, in particular, face tougher compliance challenges with Walmart because they lack the resources to support a robust pick-and-pack program, or their production lines can’t keep up with demand.
Averitt offers the service gratis because small-tier suppliers have enough margin pressure as it is, and don’t need their carrier digging into their profits by charging for a service that ends up benefitting everyone, Brannon said.
Short-term pain, long-term gain
Over the long term, the Walmart directive will positively shape its ecosystem, especially as retail fulfillment becomes even more demanding, said Mark Petersen, vice president of transportation for the North American Surface Transportation unit of logistics giant C.H. Robinson Worldwide Inc. (NASDAQ:CHRW). Robinson works with prepaid Walmart vendors, performs vendor consolidations, and is a vendor of produce to Walmart and a transportation provider to boot.
The new measure will push everyone to dive into their own processes to better measure performance and make needed improvements, said Petersen. He acknowledged that there will be short-term challenges, saying that “people are going to get there at their own time and at their own speed.” However, the rapid pace of change in consumer demand leaves little time for stakeholders to assign blame for performance shortfalls, Petersen said. Those who do will “probably be the ones left behind,” he said.
The stakes may be higher for Walmart than for its suppliers, consolidators or carriers. Besides causing inventory gaps, the pandemic has impaired store demand. The virus turned the traditional back-to-school buying season to hash. Halloween and Thanksgiving may be similarly impacted. That leaves the holidays, which will be more of a make-or-break cycle for Walmart this season than in prior years. Holiday demand will be off the charts, but so will customer expectations. The competition is also more ferocious than ever.
The goal of the threatened 3% fines is not for Walmart to build a revenue stream, but to incentivize suppliers and carriers to get products where and when the customer wants them, experts said. In this most unforgiving environment, stock-outs won’t be tolerated. According to Dennis, if Walmart had an accompanying message to its supplier and carrier base today, it would be that “we’re serious this time.”
(Note: The story is updated to include Averitt’s on-time metrics. Also, Averitt handles tens of millions of dollars a year for Walmart, not $10 million. Sorry.)