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.
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, 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 Planning: The 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 Wal-Mart'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.