By Todd Barker | Director, Integrated Demand and Supply Planning | Chainalytics |
Walmart’s current suppliers have now officially moved over to the retailer’s updated service metric of “On-Time-In-Full” (OTIF), which took effect in August of this year. Previously under the Must Arrive By Date (MABD) guidelines, suppliers of fast-turning products, as well as perishable food and beverage, were required to hit a 90 percent on-time delivery percentage within a four-day delivery window. With the new OTIF policy, the four-day window no longer applies and shipping early, late, and short is no longer an option for suppliers who want to meet the new requirements and avoid penalties or fines. Under OTIF, Walmart is looking to take greater control of their supply network to drive higher in-stocks, greater sales, and lower end-to-end network inventories and has even restructured their internal replenishment group to gain better insight into inventory and out-of-stock issues.
With the new score card, Walmart hopes to improve the overall visibility into what is driving some of the compliance issues including their own internal faults. However, the new scorecard will act as the “compliance bible,” as Walmart claims supplier disputes of fines and penalties “will not be tolerated”. Suppliers that haven’t started identifying and addressing its service issues should get ready to see penalties and deductions taken against their invoices.
Here are the latest OTIF guidelines for full truckload (FTL):
- Starting August 2017, FTL suppliers must deliver orders 100% in full, on the must arrive by date, at least 75% of the time.
- By February 2018, FTL suppliers must deliver orders 100% in full, on the must arrive by date, 95% of the time.
- Non-compliance will result in a fine of 3% of the “missing case” value; early deliveries will also be penalized, to eliminate overstock situations.
For less-than-full truckload (LTL):
- Starting August 2017, LTL suppliers must deliver orders 100% in full, on the must arrive by date 33% of the time.
- By February 2018, LTL suppliers must deliver orders 100% in full, on the must arrive by date, at least 36% of the time.
- If OTIF was 36% or better in August 2017, then the supplier must demonstrate a 20% improvement.
- Non-compliance penalties (3% of non-compliance COGS) will be invoiced monthly.
So what does this all means as it relates to integrated planning and what steps do suppliers need to take to ensure they meet and exceed the new service requirements?
Understanding Root Causes of Misses: Suppliers will now be required to have a much better understanding of the OTIF calculation and the key drivers currently impacting it. Too often companies have service issues, and their initial reaction is to stock more inventory when in fact they fail to address the root issues. The ability to pinpoint issues with supplier performance, forecast accuracy, inventory accuracy, picking delays, carrier delays, and other key drivers will be critical to ensure suppliers are focusing on improving the right areas.
Metrics and Reporting: Forecast Accuracy, Bias, In-Stocks %, Forecast Value Add, SKU Forecastibility, Supplier OTIF, Schedule Adherence, Turns, On-Hand Accuracy. If some of these metrics are not currently in a supplier’s vocabulary, they need to be. At the end of the day, if suppliers aren’t constantly monitoring SKU and operational performance, they won’t see issues until they become problems and by then they are in full blown fire fighting mode. You can’t fix it if you don’t measure it.
Forecast Accuracy and Collaboration: Suppliers must now possess significantly higher levels of collaboration and data/forecast sharing (both with Walmart and their own suppliers) to ensure they are properly accounting for changes in demand associated with new product launches, promotions, planogram changes, production schedules, store openings/closings, etc. While Walmart has never been the greatest at providing accurate forecasts, it is better to at least have some insight than none at all so that everyone can at least review and agree on a number.
Planning Tools: For many, the use of Excel spreadsheets and Access databases will no longer be sufficient to support their planning and inventory processes, and investments in new planning and inventory optimization technologies will become a necessity. These basic tools lack the ability to create optimized solutions, have greater chances of error, and require too much time to maintain and manage. Large companies like P&G can afford these costs, but many small to mid-size suppliers will need to find solutions which fit their scale. The costs of poor forecasting, overstocking and understocking, and improper buying will now come fully into play.
SKU Segmentation and Positioning: Not all SKUs are created equally, yet many companies don’t seem to recognize this when it comes to setting inventory policies or deployment strategies. The days of high-level ABC segmentation are over and SKU demand profiles, order size, order frequency, forecastibility, and impact to overall service are all key factors that require an in-depth understanding. Simply stocking items in all locations based on an overall weeks of supply (WOS) coverage is a recipe for disaster.
Now that this mandate has been set, Walmart’s suppliers need to implement the necessary actions to re-evaluate and redesign their supply chain in order to prevent repeated penalties. With recent reports indicating that OTIF scores for Walmart’s top 75 suppliers had been as low as 10 percent and not one had reached the 95 percent long-term target, it will be interesting to see how long it takes suppliers to meet the new requirements and at what cost. For many suppliers where Walmart is the majority of their sales volume, the costs to meet the new requirements may prove too much to overcome.
Todd Barker is director for the Integrated Demand and Supply Planning competency at Chainalytics. He has 20+ years of executive management experience developing integrated planning, materials, sourcing, logistics, manufacturing, distribution, merchandising, and overall end-to-end supply chain strategies for small to large scale manufacturing, consumer goods, and big-box retailing businesses.
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