Wal-Mart Remix
Editorial by Bill Bittner, President, BWH Consulting
I had a recent phone call from a regional manufacturer who has seen his transportation costs skyrocket with the Wal-Mart Remix program. Wal-Mart’s stated goal for the remix program is to improve the in-stock position at the stores by increasing the delivery frequency and better aligning the loads with the store selling area. This will reduce the amount of labor units required at store level and improve revenues by reducing out-of-stocks.
The twist here is that, in order to carry products at more DC’s without increasing on-hand inventories, Wal-Mart had to reduce the cycle inventory (often to zero) by reducing the supplier order size and increasing the order frequency. This has driven the cost of implementing the Remix program upstream to the suppliers. Suppliers have to either ship LTL to each Wal-Mart DC or use a consolidator to merge their truckload deliveries with other supplier’s products destined for Wal-Mart.
This reminds me of a great quote: “There is nothing less efficient than doing that which is completely unnecessary as efficiently as possible.” By offloading their cycle inventory to the consolidators and moving the inventory carrying costs from their expense sheet to the manufacturer’s, Wal-Mart has reduced their stocking costs in the store while also transferring the inventory carrying expense to suppliers.
Moderator’s Comment: Is it wise for Wal-Mart and other major chains to force expenses back up the supply chain? Are they forcing efficiencies or just
shifting costs?
I am an IT guy, but having been around logistics users for many years, I know the second most important factor, far behind travel distance, is handling
time. It doesn’t make sense to me that putting an additional handling step in a process can reduce the total cost. But an additional step can be used to transfer the “ownership”
of costs. That seems to be what Wal-Mart has done.
In Wal-Mart’s defense, there is one “holistic perspective” of this initiative. If product sales are increased because of fewer out-of-stocks then the additional
revenue for the supplier may justify the cost. This goes back to the old “how much does an out-of-stock cost” question and the impact of substitute purchases on the supplier’s
consumer franchise. –
Bill Bittner – Moderator
Over time, as the true cost is realized, it may come back in the form of higher prices on those items. This may force marginal volume products out of Wal-Mart, as it should.
Manufacturers can look at this trend as a glass half-empty or half-full. Yes, this is pushing costs upstream to them, and they will have to price accordingly. But it may also present opportunities to work more closely with the retailer to respond more quickly to and more specifically to consumer demands. If the retailer provides increased shopper data and works with the manufacturer to tailor the product mix at a more granular, even store-by-store level, with more frequent deliveries allowing faster adjustments, the result could be increased sales and maximized profits.
Reducing out of stocks at a retailer should be one of the top priorities for any supplier. Not having product available on shelf may mean losing the sale to another brand and potentially losing the consumer forever. The EDLP principle is based on squeezing out efficiencies from the entire value chain and the remix program is directionally strategic. Of course, for the program to succeed, the efficiencies need to be enabled through technology and process improvements and not at the expense of value chain partners.
Good points, all. Ben Ball mirrors my thoughts exactly. This will keep the bean counters busier than ever, trying to find out if they’re making a profit, or a loss, selling to Wal-Mart. It reminds me of the days when I worked for a company that lost vast sums of money selling to Macy’s, full details of which were only uncovered in due diligence, when we were being acquired. (Our stubborn CFO had listed most of Macy’s invoice deductions as “receivables” for quite some time.) I totally see where Wal-Mart is coming from, and can’t seriously find fault with them. It’ll be up to suppliers to do the math, and come to their own (hopefully enlightened) decisions.
…and our surprise is?
Aside from the fact that this is a time-honored tradition between distributor and vendor, this was also predictable. Suppliers have spent hundreds of thousands, if not millions, to convince retailers that out of stocks were a huge problem. True to form, the smart ones listened and figured out how to do something about it — in a way that didn’t increase the retailer’s costs. Seems pretty logical to me.
I don’t doubt that the regional manufacturer’s costs have gone up as he claims. I do question that they actually had (or have to continue) to go up.
World class (and would-be world class) manufacturers (big and small) have clearly proven that it is possible (indeed essential) to reduce total costs through the system and total costs to them by reducing cycle time and on-hand inventories using Lean or a more rigorous Toyota Production System (TPS) approach. In addition to reducing costs, quality and service levels invariably improve as well.
Toyota has shown over decades that its production and logistics systems take substantial costs out of the system for everyone. Failure to do so is an unsustainable business model.
I’d recommend the manufacturer take a critical look at the root causes of why costs have gone up, rather than suggest that it is simply a large retailer bumping costs back up the line.
The only thing which Wal-Mart is transferring is a temporary cost. The suppliers will have to bear the cost for a short period of time until they have determined what their additional costs of managing Wal-Mart’s inventory are. Then, like all other costs, these will be reflected back to Wal-Mart, and eventually back to the consumer. The key point here is that Wal-Mart will no longer be able to control these costs, since they will be inherent in the cost of the product. Most suppliers are not as efficient as Wal-Mart, so these costs will be the result of decreased efficiencies. This is not the Wal-Mart way, nor anyone’s intended goal, because Wal-Mart will now have higher prices vs. their competition.
Wal-Mart’s very efficient RFID program is not operational at all stores yet, so there is bound to be an uneven level of efficiency throughout their system, as is true for any company working to implement a change.
In any event, this decision is not inconsistent with an overall program focusing on replenishment, with the assumption of having as little inventory as possible sitting idle. If the new program really creates orders based upon replenishing what consumers buy without holding products idly stacked in inventory, the more frequent shipments of product will coincide with increased payments of goods sold. If the companies involved use activity based costing, they can price their services appropriately and the whole system moves toward a focus on what consumers buy, not what companies store.
With trade restraints looming on Chinese imports, WM proactively seeks every overt and nuanced cost advantage they can. You’d think, with all of their highly-touted advances in supply-chain management, WM would have just-in-time delivery down to a fine science by now. After all, the concept is several decades old. But, like mortal retailers, WM suffers from out-of-stocks – and to a greater degree than many.
I’m reminded of when CPG manufacturers began consolidating their local broker representation some years ago. Brokerage firms also consolidated in response, and major, nation-wide representation firms were formed. Trouble was, so few major influential brokerages remained that each one seemed to represent a major manufacturer – unable to represent additional brands for fear of conflict. This not only made each major brokerage manufacturer-dependent, but it made it impossible for manufacturers to fire their brokers. All of the other major brokers were involved with competing brands!
WM is in the process of creating mega-suppliers, according to some observers, the downside of which is alternate suppliers going out of business. When that happens, how will WM fire or even coerce their remaining suppliers, when there is no alternative supplier large enough to meet their needs?
What’s the cost of a lost sale because of out-of-stocks? What’s the cost of losing a customer? Are the answers to these questions much different for Wal-Mart than they are for the manufacturer? Cost shifting is a timeless art because the only alternative is a price increase.
Shifting costs to other points in the supply chain produces short term improvement in operating metrics. Economic theory says that over time, those costs gradually move back to the original source in the form of higher prices. The basis of the theory is that costs for all suppliers increase, which creates upward pressure on all commodity pricing.
In fact, technology has become the “bail out” for economic theory. If the new trend toward integrated customer service management (and Remix is simply that) is facilitated and driven by technology efficiencies…WM will absolutely reap the benefits of the cost transfer. If, on the other hand, there is no way to meet WM’s needs without additional NET costs (and I think there is) then the costs will inevitably transfer inio higher prices.
The very cool thing about this for WM or anyone is that because the re-transfer takes place gradually and over time, it is impossible to link the cost increases to the cost-shift which took place in the past — which will allow WM and anyone else to avoid understanding that what goes around comes around. Period. Even when you have the market power and leverage WM has. If NET costs increase for all suppliers, then prices WILL go up, assuming that excess profits were not being made initially. And having worked with many suppliers to WM, I am very confident that workable profits are being made, but very few instances of excess profit exist.
So it’s probably a short term cost transfer. The service requirements may generate vendor turnover for WM as some will not be able to accommodate. The cost increases will lead some suppliers into greater efficiency of operation, which will be leveraged across all customers, not just WM.
Wal-Mart has done an excellent job of moving cost to others. Requiring CPG companies to put RFID tags on product, for which the majority of suppliers receive no benefit, only added costs. Wal-Mart’s ocean freight rates are very low due to their volume. The result is, every other company paying ocean freight from China is paying a higher cost; here they transferred the cost to everyone else. Pushing cost back up the line is not new, but there is a stopping point. When suppliers are more afraid of losing the sales than making a profit is when the company goes out of business; just ask Vlassic.
The most telling story is Wal-Mart has an Out-Of-Stock problem. I have observed this at retail, but all we hear in the trade press is what an advanced replenishment system Wal-Mart operates. Vendor managed inventory (P&G’s 60 people, etc.) coupled with case flow-through is the answer. RFID is also being pushed to help reduce Out-Of-Stock. Simply stated, Wal-Mart’s replenishment process can not be all that it is cracked up to be.
The ideal supplier will be next door, deliver every 5 minutes, keep everything in stock at all times, and have labor costs at the Chinese level. Years ago, logistics consultants told department stores to transfer the tagging and pick/pack costs to their suppliers, so that “distribution centers” could simply become freight consolidation points. Cost shifting saves nothing. The money has to come from somewhere. When will more suppliers make a deal with Wal-Mart to simply get paid based on POS sales each week? Perhaps that will allow the suppliers to ship using reasonable economic order quantities at reasonable frequencies with reasonable case pack sizes.