Inbound 3.0 at Walmart

During the almost three decades that this publication has been preaching the benefits of matching demand more closely to supply, we’ve published scores of articles on Walmart’s efforts to master inbound logistics. The first major milepost along that road was acknowledging the value of controlling inbound logistics, making it a company-wide mission, and developing the technology and team to put that mission into practice. It took some doing, but today Walmart has almost total inbound control of all DC-to-store shipments, an important second milestone.

Walmart recently announced an initiative that takes its inbound logistics management to the next level. The company will ask its tens of thousands of vendors, shipping to 4,227 Walmart stores in the United States, to take over – where possible and profitable – inbound shipments from those vendors to Walmart DCs.

According to Kelly Abney, Walmart’s transport vice president who is heading up the initiative, the retailer is using the approach that “the vendor can concentrate on what it does best” – manufacturing or importing – and not have to worry about transport costs. Doesn’t this sound a little like the same approach 3PLs use?

What was Walmart’s motivation to tackle an inbound initiative now? One driver might be its announced logistics sustainability goal of doubling fleet efficiency by 2015 (2005 benchmark). In 2008, for example, Walmart delivered three percent more product while driving seven percent less, a savings of almost 90 million miles that year.

But it is more likely that the economy’s impact on four quarters of sales has the retailer looking to extend inbound logistics excellence to find every efficiency that offsets costs.

Let’s look at some risks and benefits this inbound initiative affords Walmart and its vendors. On the plus side, Walmart is convinced it can manage logistics more efficiently by taking over the vendor-to-DC leg, and use those savings to reduce prices. Considering that, Walmart is asking for allowances in the form of product discounts for any vendor that buys in. Walmart gets better inbound product control, and fills empty backhauls in its 6,800-truck fleet, creating capacity for Walmart and for any shipper worried about capacity if/when the economy picks up.

One important benefit to the participating vendor is sidestepping rising transport costs tacked to increasing driver and/or fuel costs. If and when transport costs rise, it’s Walmart’s problem, right? Maybe. It’s also a significant sustainability play, which Walmart and participating vendors deserve credit for.

The initiative moves Walmart one step closer to using its transport expertise as a profit center, in this case acting as a carrier. And, if it uses more outside resources in peak times, which it says it will, can Walmart as an asset-based 3PL be far behind? The company already has the Three T’s: trucks, team, and technology.

On the down side, Walmart’s buying power and negotiating energy will be amped up even more if it takes over a significant portion of a vendor’s shipments. According to press reports, Chinese vendors say Walmart is a very tough negotiator, which is no faint praise coming from some excellent businessmen. The more reliant you are on one key vendor having those skill sets, the more influence you cede over your own bottom line. Also, having less work to do creates the potential for a reduction in the vendor’s logistics management staff, which could be a positive or a negative, depending on where you stand.

When asking for a transportation allowance in the form of a rebate on products, could Walmart overestimate what those costs might be, asking for a five-percent allowance, for example, when transport costs for that product might be only three percent? There has been some talk on the street along those lines, but once the vendor shares the transport costs those issues are resolved, according to Walmart.

Another factor for vendors to consider when calculating their true transport costs is the fact that their costs for shipping to other customers will increase once Walmart’s volume is backed out of the total transport spend.

Because Walmart is convinced it can manage the inbound leg more efficiently, is it likely it will share true costs with vendors and split the savings in a gain-sharing arrangement? Hmmm.

These and other questions need to be considered and worked out, but this initiative is an important event in American businesses’ quest to better match demand to supply.

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