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Understanding WalMart’s Inbound Freight Strategy
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SUPPLY CHAIN TRIVIA
   

Q.

What grade did student, Fred Smith, receive on his 15-page Yale paper proposing a reliable overnight delivery service? Fred Smith went on to found FedEx.

   
A.
Click to find the answer below
   

Understanding WalMart’s Inbound Freight Strategy

SCDigest Editor Dan Gilmore is riding a bike across Ohio this week. For one of the few times ever, we have a guest First Thoughts columnist this week, David Schneider, former Pep Boys logistics executive and now president of David K. Schneider and Associates. This is a condensed version of a longer piece that will appear in Supply Chain Digest next week.


There is a difference between strategy and tactics and many confuse tactics with strategies. Strategy is the art and science of overall planning and conduct of a large-scale operation. Strategy involves defining goals, or even better, defining results and the purpose of the results. A tactic is an expedient for achieving a strategic goal; nothing more than a maneuver. Far too many people get confused and deploy tactics under the guise of strategy.


Reading in the general business and trade press about WalMart's new “strategic” initiative to expand their control over their inbound domestic freight humors me for two reasons: First, the conversion of freight terms from prepaid to collect isn’t a new concept. Second, it can't be called a strategy; it is really just a tactic. (See WalMart Takes Control of Inbound Transportation.)


A large aggregator of freight from a wide range of locations should always be endeavoring to “control” its inbound supply line. Sun Tzu teaches that “The line between disorder and order lies in logistics”. Big-box retailers and large manufacturers like to have order. Disorder adds costs, and WalMart is on a strategic mission – from the deepest of the corporate DNA – to eliminate costs.

Schneider Says:
 

"This level of inbound control is the holy grail of logistics and supply chain management to any large retailer and many large manufacturers in the US."

What do you say?

 
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your Feedback here
 

Tactics Support Strategies

I learned some time ago that every tactic deployed should support as many strategic goals as possible. A tactic that supports only one strategic outcome is not a very effective tactic. A tactic that supports 5 strategic goals is a fabulous tactic.

Since transportation can be as much as one-half to two-thirds of the total cost of distributing product, it only makes sense to drive is in as many efficiencies into your transportation network as you possibly can.

When vendors are pressured to give an allowance on pre-paid transportation terms, as WalMart is now said to be doing, they will often argue that the removal of that buyer’s freight volume will drive their transportation costs up, a cost that will have to passed along to the rest of the customers.  “It’s not fair to our other customers,” is an argument that I would hear when I was running a logistics organization and we converted terms.  My response at the negotiation table would be: “Where is it written that life is fair?”  I referred to this argument as the "socialized freight" argument, and it does not hold water in the end.

In the long run, the buyer really dictates the terms, so you could say "resistance is futile" on the part of the vendor. However, in some cases (far more than you would imagine) the main challenges come from within the retailer or other buyer’s own organization, with friction between the logistics and merchandising/procurement teams. In many retailers the merchandise managers don't understand the cost of transportation and sadly enough believe what the vendor's representation tells them over the analysis of their own company’s logistics team. 

If the goal of the effort to covert terms is focused on creating additional net profit dollars for the buyer’s company, the tactic is considering just a singular strategic goal being accomplished; not a high-efficiency tactic that supports several larger goals.

More Freight Doesn’t Always Equal Lower Rates


Bigger is not necessary better; more does not automatically mean less. 

With more of the inbound freight volume under its control WalMart could be in a position to command better rates from their carriers, but I really doubt that is the strategy they have in mind with the initiative. WalMart is already a huge shipper. The sheer number of shipments that come in and out of the WalMart distribution centers is staggering. Approximately 315,000 inbound loads are delivered to WalMart distribution centers every month - more than 3.7 million annual deliveries. Of those inbound deliveries approximately 115,000 per month (37%). are shipped with Collect freight terms. The new goal is to convert the other 200,000 inbound loads per month.

There clearly are even more savings and efficiencies brought to the entire supply chain when WalMart takes complete control of the transportation network. I believe that these efficiencies will provide WalMart with the ability to deliver on a host of other strategic results that they have promised the world.

In great summary(more detail next week in On-Target), those areas are as follows:

Improve Fleet Efficiency: By taking over responsibility for the control of the inbound WalMart can use those same inbound trucks for delivery of goods to their stores, creating continuous moves for the carriers. Continuous Move not only saves costs, it reduces the carbon footprint – a tactic that meets two WalMart strategic goals.

Support Mode Changes and Consolidate its Network: Every domestic vendor for WalMart is within the delivery territory of one of its 150 distribution centers. WalMart can backhaul the freight for the entire chain out of any vendor or back to its distribution center in a full truckload quantity. At the distribution center it can unload and re-consolidate product to be shipped to one of the other 149 distribution centers.

This is a huge game changer. From my own experience in a logistics operators seat we reduced our less than truckload spend by almost 40% by using a backhaul consolidation program. If WalMart can accomplish this it will remove an incredible amount of freight volume from a wide variety of less than truckload carriers, saving tens of millions of freight cost.

Once the freight is consolidated into an outbound trailer it can move either over the road to a distribution center less than 500 miles away, or it can move intermodal to a distribution center across the country. Intermodal not only drops cost, it reduces the carbon footprint, making another step towards the sustainability goals that WalMart has set.

Expand Drop and Hook Programs: With the mode shift to mostly truckload WalMart can create a Drop and the Hook program with its carriers.  Truckload carriers will price drop and hook moves at a lower cost than freight moves where there is a live unload because the driver is not being detained waiting for an appointment or waiting while the trailers unloaded.  In some cases I drop and hook rate can be as much as $100 per truckload less than a live unload. Drop and hook could be potentially a $10 million cost savings to WalMart.

Optimize Physical DC Activity PlanningThe ability to accurately control the delivery of goods into its distribution centers is another huge opportunity for efficiency gains.  Gaining visibility of the inbound freight before it is picked up allows inbound planners to schedule the freight to match what is needed in inventory replenishment and manage labor needs – adding predictability and performance.

Reduce Inventories Through Improved Reliability: What is the benefit of reliability?  Well, size does make it relative, and in the case of WalMart the benefit of added supply chain reliability could be – on the low side - $500 million in inventory reduction.  On the high side, as much as $2 billion in lower inventories is possible. The resulting impact on cash flow and operating income would be equally significant.

This is quite a list of total benefits to WalMart from its program to take greater control of inbound freight. However, this kind of program and the benefits are not unique to WalMart. This level of inbound control is the holy grail of logistics and supply chain management to any large retailer and many large manufacturers in the US.

What makes Wal-Mart different is the sheer magnitude of their universe of inbound freight. Every retailer sets out with the goal to convert all inbound to collect control. What is really special about WalMart's initiative is that it is a "big hairy audacious goal” to control over 7 million truckloads a year, a formidable challenge. It is a prize that is worth pursuing. 

What's your reaction to this take on WalMart's inbound freight program? What would you add? Let us know your thoughts at the feedback button below.

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YOUR FEEDBACK

It's been awhile, but we haven't had a chance to publish any of the good letters we received on Dan Gilmore's column on The Great Inventory Deleveraging, which predicted we will finally see a step level decrease in inventories after stagnation for many years.

That includes our Feedback of the Week from Bill Emerson, who brings up several issues, including how "over stored" the US has become in recent years.

You will find he good letter and several others below.


Feedback of the Week: On the Great Inventory Deleveraging:

There is one key macro challenge to effectively reducing inventory that has not been considered, which is the excess number of stores and selling space relative to aggregate demand. As discussed in a recent post on my blog site, the number of stores and retail selling square footage, driven by easy credit, has been growing at a multiple (in some cases 4-6X) of population growth for the last 40 years. This growing imbalance was masked by an equivalent rise in consumer debt and a precipitous drop in household savings, which in turn created an artificially high level of aggregate demand.

The credit bubble has collapsed, household savings are rising, and demand is moving towards a more rational level. The supply/demand imbalance created by 40 years of growing retail square footage faster than population growth has created a tremendous glut in stores and selling space. To put this in perspective, according to the International Council of Shopping Centers, there is now 46 square feet of retail selling space for every man, woman, and child in America (the equivalent number in Europe is around 2 feet). All these stores require inventory, whether it is justified by selling or not.

SKU rationalization is a good start, but it is essentially nibbling at the edges of the much larger issue of too many stores to fill relative to consumer demand. Until that is addressed, either by design or attrition -- or Americans go back to spending more than they earn -- there won't be significant progress in aggregate inventory productivity.

Bill Emerson
Emerson Advisors


More on Inventory Deleveraging:

 

Companies have desperately wanted to reduce inventory levels but haven’t for example had visibility of real-time sales data to compare against inaccurate sales forecasts. Therefore, companies take a best guess estimate and build “just in case” buffers in to manufacturing quantities and resultant stock levels.

In addition, the further you go down a supply chain the worse the visibility becomes so I’d be intrigued what your survey would uncover if you looked at end-to-end supply chains by vertical market.

There are solutions though to these problems though and on a number of recent projects our customers have experienced reductions in inventory by up to 60%.

Matthew Slinn

CEO

Perceptant.com


Appreciated your comments on Inventory deleveraging.

I think the reason this has taken longer than you might expect, is firstly for many there is quite a lag between inventory review and the new adjustments.

Secondly there had been a step change – but how big was the step?  People were reticent to set the new level as it might bounce back it might go further.

Thirdly even having identified what new inventory levels might be its another matter disposing of the surplus without decimating prices or future capacity.

Its my opinion that those who have a tighter connection between there demand signal and their inventory policy and process are in a better position now as they responded sooner to the downturn and made smaller and quicker responses earlier, so the decline was a longer slide rather than a big step.

These companies are turning inventory better through the slump and therefore more profitable than competitors which enables them to maximise on sales opportunities, finally they able to respond more effectively when signs of grow start to manifest!

Hope you find these comments useful.

David Food

Strategy Director

Prophetic Technology


 

I suspect that I may be repeating myself but until CEOs and CFOs understand how inventory really works in a supply network then we have little hope of seeing inventories fall in a sustainable way.

One classic I came across the other day from albeit a large and complex organisation was an indication that in year 2 of their inventory reduction programme they were going to take swingeing across the board action as the inventory had actually gone up in year 1. They seemed not to understand that in order to improve delivery capability to their customers they had started to buy more of what they needed and had also started to take out that which was not needed, but unfortunately it was faster to increase the former than to reduce the latter. No great surprise to those of us who understand which way is up as far as inventory is concerned, but the accountants and marketers that run businesses take a great deal of educating and we have simply not been good enough at getting the message across.

 

David MacLeod

 

SUPPLY CHAIN TRIVIA
Q.

What grade did student, Fred Smith, receive on his 15-page Yale paper proposing a reliable overnight delivery service? Fred Smith went on to found FedEx.

A.


Student grade of "C".  A Yale University management professor Challis A. Hall said, "The concept is interesting and well-formed, but in order to earn better than a 'C', the idea must be feasible."

6