As Amazon continues to squeeze its competition, retailers such as Wal Mart are pulling out all the stops in an effort to maintain their position in the industry. The recent purchase of Whole Foods by Amazon will greatly strengthen its position in the grocery products market, an area to which Wal Mart has devoted considerable resources over the past few years.
As it has in the past, Wal Mart is looking to its suppliers to help reduce its costs and improve customer service. Next month the huge retailer will begin a program called “On-Time, In-Full” (OTIF) which will require truckload suppliers of fast moving items to deliver 100% of the product ordered on a specific delivery date 75% of the time. This delivery target will increase to 95% by February. Penalties for non-adherence will be 3% of the retail value of the goods arriving either early or late. (The Wal Mart theory on early arrivals is that they create expensive overstocks.) This will be a tough objective for many suppliers. According to Wal Mart, in a study of its top 75 suppliers, OTIF “scores” have been as low as 10%, and no one reached the 95% goal. Suppliers already are struggling with several issues. Developments such as omnichannel shipments and pressure for same or next-day deliveries, to name just two, already are making the logistics manager’s job very difficult. As is usually the case, smaller shippers will feel the pressure more than the larger ones that have the resources to invest in upgraded inventory management systems.
It appears that Wal Mart will be somewhat unforgiving in enforcement of the new rules. There are several things that can go wrong with arrangements such as this – weather, equipment, congestion, infrastructure. Sometimes Wal Mart itself will probably be at fault. The company has said that “disputes will not be tolerated.” Hopefully however, a more lenient policy will prevail. In another presentation, a Wal Mart executive said, “Variability is the Number 1 killer of the supply chain.” That of course, gives us a blinding glimpse of the obvious. Variability was not invented by the suppliers. If we operated in a perfect world, there would be no need for most of us. While we constantly strive to reduce variability in the supply chain, we will never be able to eliminate it.
Why is Wal Mart doing this? They indicated they could add $1 billion in annual revenue; but basically, they are doing it because they can. Wal Mart is such a major factor in the business of so many suppliers they cannot be ignored. Other competitors have adopted on-time programs, but are not large enough to have the same impact.
In fairness to Wal Mart, over the years, it has dragged suppliers kicking and screaming into changes that have turned out to be beneficial for all. Ideally, this will be another one of those, but it will not be without considerable initial pain.