Walmart’s new on-time delivery standards may create supply chain challenges for its suppliers

Earlier this year, retail behemoth Walmart announced multiple changes to its on time delivery standards for its suppliers that have the potential to significantly impact how these thousands of suppliers approach its supply chain and logistics processes with retailer.

Effective February 2017, Walmart is going to require its suppliers (shippers) to meet a two-day shipping window instead of its previous four-day window, as well as up its required compliance rate from 90 percent to 95 percent. 

In a corporate blog posting, Walmart said that for non-compliant deliveries, its suppliers pay a fee of 3 percent of the cost of goods of all non-compliant deliveries, which has been in effect since 2010. The 3 percent “tax” also applies to suppliers when less than 95 percent of merchandise cases are received within the must arrive by date (MABD) delivery window. But suppliers are not charged it they cancel purchase orders prior to the MABD.

The impetus for these types of changes over the years, according to Walmart, is part of an effort to “streamline its supply chain and cut costs,” adding that “stores are no longer acting as warehouses, with too much inventory in back stock rooms or in trailers behind stores. Walmart wants merchandise to arrive in stores just in time to restock shelves and serve customers.”

While Walmart’s reasons for these changes are clear, it does not mean they will not be challenging for its suppliers by any stretch on multiple fronts, according to Andrew Lynch, co-founder and president of Zipline Logistics, a Columbus, Ohio-based 3PL focusing on retail and consumer products.

“There is serious skin in the game with these mandates for shippers that serve Walmart,” he said. “Falling below 90 percent on-time delivery for 3 percent of the invoice fee is a monster and will be even more so when it goes up to 95 percent.”

Lynch explained that these pending changes in February are somewhat reactionary to evolving consumer trends in that Walmart needs to be leaner and more exact about when goods are coming into their distribution centers, as well as needing to have higher velocity on their inventory turns.

“It makes sense and is on trend, especially after they acquired Jet.com, a high-velocity online retailer, while tightening the bar for delivery compliance at the same time. While it is unknown is these two things are related, it makes sense if they are. But the funny thing is that not all of our customers are totally aware this is happening, and there is not a ton of communication on it from Walmart’s end. None of our clients came to us about it; we started going to them.”    

And this is where Lynch says things will get interesting between now and February in regards to customer challenges.

“Most folks in a heavy manufacturing situation or a branding and marketing situation don’t necessarily have the time to take a step back and look at their transportation into retailers, or customer facing logistics, and evaluate the way that things are set up to optimize costs and service,” he explained. “These people most of the time are treading water and trying to keep up with orders and trying to maintain. What we do for clients and what they do for themselves is take that 10,000-foot view and see-depending on where they are manufacturing-how they can get a good understanding of what the transit times are into these Walmart facilities and where our opportunities are to consolidate orders with other retailers and other Walmart facilities and then we can approach them with a strategy to reorganize their due dates which are typically set in contract talks with Walmart and when going through price and volume expectations you are also going through the opportunity to set when those MABDs are based on when those orders come in.”  

And with a negotiated lead time on orders, Lynch said the MABD is based on a day of the week following the order date, so if orders come in on a Thursday and a customer has a seven business day guaranteed lead time that may mean that the customer’s MABD is the following Thursday, leaving that next Wednesday and Thursday as the days on hand to deliver that shipment.

If it is a single-source supplier that only has one manufacturing location, that supplier needs to come up with the best MABD that allows it to continue to maintain control over its inbound supply and production in order to meet the 95 percent on time delivery standard soon to be required by Walmart while not excessively increasing costs.  

“That is where you dive into consolidating for customers onto one truck and deconsolidating, too,” said Lynch. “There is also a lot less handling and loading to ride and not worrying that an LTL carrier will get it back on truck and delivered by the MABD. It is all about control and from Walmart’s perspective of course they want control of when their inventory comes in and for us what we are advising our clients is to not necessarily allow that to mean that they have control of your entire production line and inbound supply chain. If you give up control of transport you give up control of all those other things. If Walmart gets a lower price they are picking it up when convenient for them and unless you are a huge supplier you don’t have production capacity, warehouse capacity and sourcing capacity to let someone else have that much control over your supply chain.”

Walmart is not alone in establishing these types of mandates. Target also announced its plan to tighten deadlines for warehouse deliveries last May, with fines for late deliveries increasing and penalties up to $10,000 for inaccuracies in product information, which took effect on May 30, according to a Reuters report.