Wal-Mart Stores did not get to be the world's largest retailer by doing things badly. Among its strengths has been an ability to find ways to drive costs out of the supply chain. Now, the company has decided that there are more supply chain savings to be had and all it has to do to make them happen is keep suppliers from making deliveries to its distribution centers. That's right, Wal-Mart has concluded that it can save money by picking up products directly from its suppliers.
According to a Bloomberg News report last week, Wal-Mart has contacted all manufacturers that supply its more than 4,000 stores and warehouse clubs to let them know of its plans to take over the deliveries.
"It has allowed our suppliers to focus on what they do best, manufacturing products for us," said Kelly Abney, Wal-Mart's vice president of corporate transportation. "With lower costs usually comes increased sales."
In an interview in February with eTrucker, Mr. Abney said roughly 60 percent of Wal-Mart's non-grocery and 80 percent of grocery freight deliveries were controlled by manufacturers.
Leon Nicholas, a director at Kantar Retail, said Wal-Mart believes it will be able to carry more product on a per truck basis and do a better job of delivering product to distribution centers on time. He also said the increased activity would give the retailer greater ability on negotiating the price it pays for fuel.
"They are reaching further back into the supply chain," Mr. Nicholas told Bloomberg. "It is an effort to ultimately reduce costs of goods sold, which will ultimately increase their gross margins. They believe they can ship and transport product more efficiently than the suppliers can."
One area of concern for some suppliers is that Wal-Mart's calculation on what can be saved is greater than their own.
"There may be a disconnect when we walk into the room on what that cost might be," Mr. Abney told Bloomberg. "But we work collaboratively. As soon as a supplier shares the data, almost always those differences are quickly resolved."
According to Mr. Abney, he has already had conversations with over 100 suppliers and a number have already turned deliveries over to Wal-Mart.
A potential downside to the Wal-Mart plan (totally depending on your vantage point) is that manufacturers may lose some economy of scale, forcing them to pass along higher transportation costs to other retailers.
Randy Huffman, a former Wal-Mart executive who runs a supplier consulting firm, GBD 360, told Bloomberg, "That aligns with Wal-Mart's taking cost out of the supply chain for their benefit and not their competitors. 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."
Discussion Question: What do you think will be the effect of Wal-Mart taking over deliveries from manufacturers? How do you see this affecting Wal-Mart's vendor selection process?