Walmart has long been famous for its sophisticated supply chain. Now Businessweek reports that it is looking to take on an even bigger slice of its supply chain’s logistics (Why Wal-Mart Wants to Take the Driver’s Seat, May 27). Walmart has apparently been contacting suppliers proposing that Walmart take greater responsibility for transporting goods in exchange for, of course, a lower price:
The goal: to handle suppliers’ deliveries in instances where Wal-Mart can do the same job for less, then use those savings to reduce prices in stores, Abney says. Wal-Mart believes it has the scale to allow it to ship everything from dog food to lawn chairs more efficiently than the companies that produce the goods. “It has allowed our suppliers to focus on what they do best, manufacturing products for us,” he says. “With lower costs usually comes increased sales.”
Manufacturers would compensate Wal-Mart by giving the retailer lower wholesale prices for the goods it transports. Wal-Mart isn’t saying how much it hopes to save. However, in a slim-margin business such as retailing, even small efficiencies can help the bottom line; in 2009, Wal-Mart trimmed expenses by almost $200 million by packing and scheduling its U.S. truck fleet more efficiently, according to spokesman Lorenzo Lopez.
Until now, suppliers made most deliveries to Wal-Mart’s distribution centers. The retailer then used its fleet of 6,500 trucks and 55,000 trailers to ferry goods between the regional centers and individual stores. Under the new program Wal-Mart will increase its use of contractors, as well as its own vehicles, to pick up products directly from manufacturers’ facilities.
So how should we expect this to play out? Walmart already has the trucks and the expertise in scheduling, route planning etc. The article mentions that they also believe they can get better fuel prices than some of its suppliers since they buy in greater quantity. On top of that, they are not unionized and thus may have labor savings (or at least higher labor productivity) relative to some suppliers or third-party trucking firms. All of that says Walmart may gain from taking on this work.
On the other side, it is not so clear that this move benefits suppliers. Walmart may take on this work but other customer probably won’t. A supplier thus has to maintain some logistics capability but will operate a lower scale.
“That aligns with Wal-Mart’s taking cost out of the supply chain for their benefit and not their competitors,” [Randy Huffman, a former Wal-Mart executive] said. “Suppliers are going to have to apply that increased freight cost somewhere, so it’s more than likely it will be passed onto other retailers.”
Ultimately, of course, the outcome will depend on how Walmart divides up gains from this program between itself, suppliers and customers. Even if suppliers have to give a significant price cut, increased volume may more than compensate.
As an aside, we had Joe DePinto, the CEO of 7- Eleven speak a Kellogg a few weeks ago. He explained that they were similarly trying to take on a greater share of the logistics needed to serve their stores. His point was that direct to store deliveries from the local Coke bottler and Bud distributor as well as the Pepsi bottler and Miller distributor resulted in a huge number of deliveries to each store. 7- Eleven hopes to reduce that in-store overhead by consolidating deliveries. If Coke, Pepsi, Miller and Bud all deliver to 7-Eleven DC, then 7-Eleven can send on truck with beverages to the store on a schedule optimized to the store. (You may recall that Home Depot is similarly attempting to limit the number of tucks coming into its stores.) One of the challenges Mr. DePinto mentioned was determining the right price. 7-Eleven knows what Coke charges for delivered sugar water To deal fairly with its suppliers, it needs to understand the cost of just the sugar water. Walmart faces a similar challenge in order to win suppliers over to its new set up.