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Walmart Offers Vendors a Slight Break on Delivery Thresholds
Walmart is slightly reducing its requirements for on-time and in-full (OTIF) shipments from suppliers after tightening them in 2020 due to the supply chain disruption caused by the pandemic.
According to the Wall Street Journal, Walmart’s requirements for on-time shipments are being reduced to 90% of the time and in-full shipments to 95% of the time, down from a 98% benchmark set for both during the pandemic. Prior to September 2020, Walmart’s OTIF target was 70%.
Vendors are fined 3% of the total shipment value for shortfalls.
The updated targets remain high hurdles. Consumer packaged goods vendors across retailers delivered an average of 84% of orders on time in 2023, according to supply-chain visibility firm FourKites.
The change for Walmart comes as ordering patterns have returned to normalized levels with inventories rebalanced.
“We feel good about our inventory position as we begin this year,” John Furner, chief executive of Walmart U.S., said last week on an analyst call. “Store managers and associates have back rooms that are quite under control.”
Walmart’s OTIF policy, a stricter take on its former Retail Reliability Program, was first rolled out in 2017 with a stated goal of adding $1 billion to revenue by improving product availability at stores. At the time, Walmart said some suppliers’ OTIF scores were as low as 10%, and improved in-stock levels were seen as necessary to help Walmart better compete with the speed of Amazon and the lean-cost structure of competitors like Dollar General and ALDI.
Target, Kroger, Walgreens, and others have similar OTIF policies.
A survey from McKinsey & Co. shared in November 2022 indicated that retailers were already returning to their pre-pandemic delivery expectations. Of CPG vendors surveyed, 85% had a core retail customer change their delivery dates from “requested” to “scheduled” or “committed.” What’s more, 63% reported retailers narrowing delivery windows and increasing fines for noncompliance.
To preserve margins amid “high and rising” delivery requirements, McKinsey said vendors “need to understand the true cost” of meeting their customers’ expectations and charge enough for extra services, such as expedited shipments or complex order requirements. McKinsey wrote, “Ensuring that pricing reflects the true cost-to-serve is important for multiple reasons: protecting CPG players from margin erosion, promoting equity among retailers, and preventing manufacturers from subsidizing one retailer’s unusual requirements on the backs of its competitors.”
Capstone Logistics’ advice includes investing in technologies to improve inventory visibility, developing internal processes to manage risks during surge seasons and poor weather events, and building out diversified routing guides to minimize the risk of having too few carriers.
Kevin Williamson, CEO at RJW Logistics Group, told Forbes that while compliance eliminates fines, having more accurate and timely shipments ultimately drives sell-through rates. He said, “When a supplier is on the shelf, available for purchase, their sales and market share grow, along with consumer loyalty and brand equity.”
Discussion Questions
Is Walmart’s on-time and in-full (OTIF) policy, and similar delivery requirements by other retailers, fair or too harsh?
What’s your advice for vendors to maintain compliance?
Poll
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David Biernbaum
Founder & President, David Biernbaum & Associates LLC
Peter Charness
Retail Strategy - UST Global
Walmart has always had high benchmarks for vendor delivery, but they were pushed even higher during the pandemic. This was understandable as demand went through the roof and Walmart needed to maximize availability. Demand is now more normalized and supply chain snafus have eased, so Walmart has made the targets less onerous. That said, many vendors still struggle to meet the targets which means they pay fines: but everyone knows what the targets are when they enter an agreement with Walmart. Vendors really need to build in a lot of redundancy to schedules as delays are almost inevitable and there are some functions, like docking at a retail DC, that they cannot completely control.
So who does WalMart think they are…more important than everyone else ?? Well, yes, and they’re right. I’ll spare us the usual bromide – if a vendor doesn’t like it they don’t have to sell to them – not so much because it’s true, but rather because it elevates fairness to some kind of idealized concept, rather than a day-to-day concern: “fair” really exists only in the context of industry norms, and by the article’s own reporting (“Target, Kroger, Walgreens, and others have similar OTIF policies”) WM abides. Vendors may well not like policies like this, but they’re necessary for efficient retailing, and as WM passes on those savings, consumers do ( or, at least they should).
These delivery requirements seem like a reasonable and fair stretch goal for suppliers, as the rates lie slightly above the current average. The new targets will push lagging vendors to tighten their processes to avoid penalty fees, support their supply chains and satisfy customers.
RFID adoption is growing because it helps vendors stay compliant by managing inventory with greater visibility and accuracy. Proactive risk mitigation plans also help suppliers manage spikes in demand, natural disasters and logistics challenges.
Having worked with numerous CPG clients, I can safely say that late shipments are not usually the fault of the vendor. Numerous other factors, and other variables, are often the drivers, and in the case of many retailers, late arrival has more to do with retailer operations’ than vendor performance. Db
David, good point. I remember times when it cost us more as a vendor because the truck had to sit in the warehouse lot overnight because the retailer had no open slots.
Suppliers already know that the larger the retail customer, the more demanding the expectations. If they want to receive that much expected demand, they have to be prepared to invest in capabilities to support it. Improvements in forecasting, demand planning, and overall inventory management for both retailers and suppliers have become table stakes especially since the start of the pandemic. From a customer/supplier relationship standpoint, its important for both parties to be clear and transparent on what metrics are used, how they are measured, and the two-way communication required to support the relationship.
WM is simply returning back to (somewhat) normal. They can pretty much do what they want, and vendors need to be very thoughtful about THEIR strategic priorities-is the relationship worth living up to the various processes imposed on them? For most the answer is yes.
When I had my company, I loved dealing with Walmart. Unlike many retailers, they ordered regularly, gave you a delivery window, and, most importantly, the money was in our bank account 30 days later. No retailer was better at this.
If you met their delivery instructions, there was always an open warehouse slot when your truck arrived. If there was a problem, you advised them before the fact, and they adjusted. We were never fined.
The OTIF expectations can often be a one-sided equation rather than taking all factors impacting logistics into consideration.
Suppliers if provided with inaccurate forecasting and extreme lead time expectations which can be controlled on the retailer side, creates a recipe for failure.
Penalties should be looked at as a guardrail but when positioned as a profit center within an organization, these policies can be detrimental and erode vendor relations. It is a fine line, and this reduction in expectations will likely go a long way to improve relationships.
When supply is constrained, Walmart is always first in line to get a full shipment – ahead of other Retailers. Their requirements are clear and evenly enforced. Vendors know where they stand. If you accept an order, you need to follow the terms….simple and effective.
Hard to argue with a policy that requires vendors to keep their promises. Applied evenly across the board, OTIF always seemed fair to me as an outsider. Should help ensure on-shelf availability for vendors too, and Walmart should provide that evidence in return.