| By Pieter Bauwens | Principal, Europe | Chainalytics |
How the new policy presents an opportunity for more fact-based decisions when interacting with retailers.
Walmart signaled their new On-Time-In-Full (OTIF) policy in 2016, communicated its details in July 2017, and now requires full truckload (FTL) suppliers to comply with the policy 95% of the time starting February 2018 (less-than-truckload suppliers are only held to a paltry 36%). As supply chain professionals, we all know how challenging achieving that level of performance proves to be, especially given that Walmart reported it had only reached 70% compliance as of August 2017.
In August of 2017, Walmart started measuring suppliers based on tighter standards for On-Time-In-Full (OTIF) delivery. The main categories such as groceries, consumables, health & wellness now must be delivered on the requested delivery date (Must-Arrive-By-Date – MABD) itself rather than the four day delivery window previously granted. Delivering one day early, one day late, or with an incomplete order will result in fines of up to 3% of product invoice value. Starting in August, 75% OTIF was the threshold, measured on a monthly basis and for full truck load deliveries. However, as of February, suppliers will be evaluated based upon a 95% OTIF target rate.
Over the past two quarters, suppliers are realizing there is no room for error as OTIF compliance continues to generate a great deal of conversation concerning a shipper’s continued business with Walmart. In an effort to maintain a collaborative partnership with the world’s largest retailer, suppliers are working hard to improve their maturity of the demand-supply planning, of inventory management, transport management, carrier selection and monitoring, and overall supply chain visibility.
More importantly, what’s been under the radar is the need to understand the true costs of these more rigorous service requirements, and ensure that allocation of these higher service costs apply only to those business segments requesting these higher service levels. For example, consider the additional cost of inventory – especially for items with high demand variability and low velocity. Think about the rise in transport costs caused by the tighter delivery window. Think about the additional change-over costs in case you respond by increasing you manufacturing responsiveness.
Now, without the correct facts and figures or the ability to run some basic what-if scenarios, it becomes increasingly difficult for sales to negotiate profitable deals, knowing the power balance lies with Walmart. Surprisingly, a lot of companies still fail to understand their Cost-to-Serve and therefore also the true profitability of their customers and products. About ten years ago, improving the Cost-to-Serve transparency was high on the agenda, but many companies failed to realize the expected benefits as some lost themselves in overly complex Activity Based Costing (ABC) projects while others lacked the right data at the time, and all companies struggled to find suitable software to analyze the Cost-to-Serve. Today, many people have learned how to model Cost-to-Serve without the need for complex and volatile ABC models. Now, there is more data available than ever before – partly due to increased system capabilities, partly due to the fact that more processes are now outsourced. And finally, business-user oriented analytics solutions fit for Cost-to-Serve have been developed.
Walmart’s service requirements can now be the trigger to improve the transparency on the Cost-to-Serve and to start including customer and product portfolio discussions in your executive S&OP process.
We believe, the right response to Walmart’s OTIF mandate is to develop further cost transparency as well as the skills to evaluate the different options in a fact based manner:
- Do you stick to your actual processes and simply eat the penalty if not reaching the required service?
- Do you invest in improving your business planning, and increase the reactivity of the Supply Chain to achieve the targets and eat the related costs yourselves?
- Do you start a fact-based discussion with Walmart on what efforts you already have undertaken and demonstrate how service could further increase with improved forecast accuracy. Also, demonstrating how different scenarios of lead time, changes in the order patterns and in the product mix can further contribute to improved service in a cost effective way?
- Do you consider discontinuing portions of your product offering for Walmart – for example those with more erratic demand, and/or smaller volumes which make it harder to achieve the service goals in a profitable way?
We believe the move of Walmart towards higher OTIF makes sense. The new guidelines will make the retail and consumer products supply chain more efficient and service oriented. Under this model, the new supply chain will become more performant, lower costs and save cash for all parties involved. To ensure the savings are reasonably spread across the value chain (and not all go to Walmart), suppliers need to be equipped to evaluate the different options in a fact-based manner.
Supply chain organizations should strive to empower their organization’s negotiation team with true cost and profit transparency so it can defend price levels, steer for the most profitable product mix, and possess the tools to discuss how to decrease total costs. This will help to not only manage the profitability of Walmart partnership but will benefit your entire product and customer portfolio. This is an opportunity for us as supply chain practitioners to determine how we can turn the challenge into an opportunity.
Pieter Bauwens is principal within the Chainalytics Europe practice. His focus is on the Cost-to-Serve, Portfolio Profitability and Complexity offerings to support the expanding growth of the European practice. Pieter’s 20+ years of experience span roles at Heineken, S&V Management Consultants, and Director of Strategy and Operations at PwC Belgium prior to joining Chainalytics.
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