Partners are central to the supply chain strategy at Walmart®, and Walmart has clear expectations of them. Those expectations just went up. The Bentonville, Arkansas, based retailer now requires consumer packaged goods (CPG) companies that ship to its distribution centers (DCs) in full truckloads to deliver on-time, in-full (OTIF) 95 percent of the time within a one-day delivery window. The penalty for non-compliance is three percent of the order value assessed monthly, and early deliveries are penalized as much as late or short ones. Requirements for less-than-truckload shipments have been made more stringent as well.
CPG companies are having trouble keeping up, with compliance reported to have reached only 70% by August 2017. The accumulating fines show that the usual short-term measures and localized interventions have not been enough. Companies need a way to understand what’s going on at Walmart and a framework to relate the changes to their own long-term transformation projects.
What OTIF means for Walmart
When Walmart first started discussing OTIF in 2016, it may not have known what the future held for Whole Foods®, but there’s no doubt that these changes are driven by pressure from Amazon®. To compete successfully, Walmart needs to free up capacity all around and deploy it for innovation. We have to look beyond the backlots of Walmart DCs to what’s happening in Walmart stores to predict what’s on the horizon.
The physical storefront imitates the digital storefront
Paradoxically, to compete with online retailers, Walmart needs to become like them. Amazon offers consumers low prices and great convenience, but where it really dominates brick-and-mortar stores is in product selection. Always available, the website has an endless assortment of products, seldom runs out of stock and takes orders around the clock. In contrast, the store is limited by shelf space. What Walmart needs to do is get maximum revenue out of its finite shelf space.
Walmart’s world is more challenging because online retailers benefit by separating demand capture from demand fulfillment. The one hour to two-plus days available for delivery give Amazon time to react after order capture. In contrast, a delay in stocking shelves at Walmart with the right product in anticipation of demand means that demand is lost — or worse, that a customer is lost to another retailer.
For Walmart, continuously refreshing its assortment based on what’s selling and what’s not depends not just on having inventory in the back of the store or DC but also on the absence of wasted effort spent handling materials that are not needed. When this is done successfully, the primary purpose of the store becomes to capture demand for the largest selection of products possible, just like a website.
A true demand-supply match and nothing more
Walmart DCs and stores are largely getting out of the inventory-holding business. Alongside OTIF, Walmart’s “top stock” program, where backroom inventory is placed on top of shelves, is another attempt to free up space for job training and team building while keeping shelves full.
It’s a subtle shift from push to pull. Instead of reliably having in stock what Walmart thinks it can sell, it shall quickly make available what is selling. Just as stores serve to match demand and supply, DCs too are becoming pass-throughs for the supply of materials and information on demand.
As Walmart orders more frequently in smaller amounts, the rate of flow increases so the retailer has physical space in DCs, in the back of stores and on shelves, as well as more flexibility to switch the assortment without leaving large amounts of unused inventory to be backhauled or marked down. More efficient inventory management translates directly into lower prices as well.
Meeting customers wherever they are
While the physical store experience cannot follow consumers everywhere, the goal is definitely greater proximity – to be present at more locations, especially in urban centers with smaller format stores, so that the faster delivery offered by Amazon is counteracted with the convenience of a shorter drive to a neighborhood Walmart store. Replenishing smaller stores from Walmart DCs can only be done through smaller, faster and more frequent deliveries. Likewise, DCs too need to be replenished by a fast-moving and quick-changing flow of materials.
With more flexibility, urban stores and traditional larger-format stores can be geared up to provide more services to customers, such as more associates to help customers locate products and finish their shopping faster, local deliveries from stores, convenient drive-throughs for “buy online pickup in store” (BOPIS) merchandise, or convenient returns without long lines. This would only be possible when products can flow more rapidly through DCs and stores, freeing up space, labor, time and cash for innovation.
In summary, Walmart’s OTIF mandate is driven by the goal of serving customers better by having the greatest assortment on the shelves of conveniently located stores. By making the supply more reliable, OTIF lets Walmart do so with less inventory, which lowers costs and translates into lower prices for consumers. As CPG companies determine how to respond to Walmart, they must keep in mind not the drop-off point at the DC but the demand-driver at the store: the end consumer. Let’s pick up this thread later in Part 2 of this blog.