Is Wal-Mart Sub-optimizing Its Extended Supply Chain?
In a recent letter to their suppliers (full letter here courtesy of ARC), Wal-Mart outlined a new policy about the enforcement of the MABD (must arrive by date). The gist of the policy is that all purchase orders (POs) must arrive within a four day window preceding the MABD. If a supplier is out of compliance over a period of time, they will be subject to a fine which equates to 3% of the cost of goods sold (COGS). How is that for a chargeback? While it is common place for retailers to have some chargebacks in place if certain conditions are not met (labels, timing, packaging, etc.), this new program raises the risk and cost exposure to shipping to Wal-Mart. Wal-Mart’s go to market strategy is largely competing on price, and to achieve their price superiority they lean heavily on suppliers to lower their COGS so they can pass some of that savings onto consumers. Many suppliers will have no choice but to accept these terms since Wal-Mart represents so much of their business, but this new policy will make it less profitable to sell their wares to Wal-Mart.
I wonder if Wal-Mart cannot see the proverbial forest for the trees when it comes to their extended supply chain costs? Anytime we chose to measure/manage/incent on a metric it is quite likely to improve. I have no doubt that the number of POs that arrive within the MABD window will increase, but at what cost? Just last Spring when Best Buy was reporting their Q1 financials they stated they lost potential sales because some vendors had simply not supplied the expected merchandise. I can see a similar situation unfold in the case of Wal-Mart. The more constraints that are introduced into a situation, the less the situation can be optimized. If the supplier has these strict delivery windows they might be less inclined or dis-incentivized to consolidate loads. This could result in out-of-stock conditions on the store shelf, something that clearly costs Wal-Mart money. To the degree this new policy raises the overall cost for the suppliers the less they will be able to work with Wal-Mart on additional price concessions or Wal-Mart could push them to the brink of bankruptcy, neither of which is a good outcome for Wal-Mart.
While I am all for management of key metrics, it is always important that the metrics enforced in one division/department support the overall corporate strategy otherwise a sub-optimal result is likely. This new policy is now in effect as of February 1, 2010. It will be interesting in the coming months to see the impact this has on Wal-Mart’s extended supply chain and if it goes the way of the RFID mandates…
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