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Warehouses & DCs Will Cost Manufacturers Up to 3% Profit Margin Loss with an Inability to Give Walmart Product On-time, In Full

On-time, in-full scores for Wal-Mart’s top 75 suppliers -- including  Unilever -- had been as low as 10 percent. Not one had reached the 95 percent long-term target, hurting the retailer's ability to improve product availability to compete with Amazon, which provides consumers with the products they want, when they want it at the price they want it. The retailer is losing an estimated $1B due to product unavailability as products are not being shipped on time, in full or products are arriving too early cluttering back rooms slowing time-to-shelf.

This is why Walmart will now fine suppliers up to 3% of the cost of goods, if on-time, in full (OTIF) deliveries for full truckload shipments do not meet the threshold of 85% by April. Less-than-truckload shipments will have a 50% threshold for compliance, up from a 33% baseline set a year ago. The must-arrive-by-date (MABD) window for delivery has moved from to one or two days from four. The retailer is looking for efficiencies and squeezing their manufacturer suppliers.

This is creating anxiety as the new fines will cut profit margins by up to 3% at a time when freight costs are on the rise and capacity is decreasing. Carriers and transportation 3PLs are playing on this anxiety as you'll find a plethora of content from companies like BlueGrace Logistics and Zipline Logistics on the new guidelines and how they take on-time delivery and order compliance seriously. You'll find freight consolidators including CaseStack, RJW and Prime Logistics offering manufacturers a guaranteed service with costs anywhere from 14% to 19% more than the regular service.

But, I've found that transportation is not the main issue and that premium delivery services are not needed....

As an engineer with experience in both manufacturing and national supply chain management (Procter & Gamble, Schneider, others), I've learned how the warehouse and DC center can impact operations and the ability to provide on-time in full. It doesn't matter if the carrier can deliver on-time performance if the product is unable to leave the warehouse and DC. 

Here are the warehouse and distribution center gaps I’ve seen because most 3PLs have no responsibility to bring manufacturers closer to customers like Walmart:

1) Focusing solely on cutting costs while re-designing storage and warehouse workflows. I've seen one of the top 5 U.S. trucking and warehouse providers make storage and networking suggestions that would increase inventory levels and reduce inventory turns for a consumer products manufacturer by 50%, even though studies show that there is a 77% correlation between inventory turns and profitability. Also because they were looking backward at historic data vs. future, seasonal promotional data, this provider would have put up to 40% of direct shipments to customers like Walmart at risk of failed delivery. This would have resulted in lost sales and financial repercussions (up to 3% profit margin loss) for the manufacturer. The cost savings that would have been achieved with the suggested changes would be far less than the financial repercussions the manufacturer would have received with its inability to meet the on-time, in full threshold.

2) Failure to utilize cross-docking to increase inventory turns
. Studies show that more than 55% of manufacturers have zero cross-docking capability. I've learned that this can lead to:

  • Pallets and cases being put in inefficient locations
  • Out of stock conditions
  • Delays in both inbound and outbound
  • Weekly production line shutdowns

These are issues which have nothing to do with transportation that will impact on-time, in full performance. When you utilize cross-docking and synchronize the warehouse layout design with future business objectives and the minute-to-minute needs of your employees, you reduce steps and touches, accelerate time to market and enable greater cost savings by skipping the DC.

3) 50% under-utilization of dock doors. I recently met with a manufacturer's plant logistics manager to review opportunities for improved on-time, in full performance. I learned that how the 3PL manages the DC will impact the plants' ability to service customers like Walmart. For example, he showed me his dock doors on the computer screen. There were 24 dock doors and at that moment in time, 12, were plugged with loaded idle trailers that should be shipped to the DC and to customers like Walmart.

Because the 3PL did not have additional local shuttle capacity, the manufacturer found it a challenge to support shipment surges when trucks and equipment were out of service or when there were staff call offs. This is one of the most common reasons behind delays in unloading at the DC and the piling up of product at the plant that should be shipped to the DC and customers.

I've learned that adding little synchronization of the DC and warehouse on top of limited local capacity is like pouring gasoline on top of a burning fire. Because the ERP system is calling for the product to be shipped to the DC which is playing catch up, plants are unable to direct ship to customers. If the manufacturer can't get their goods in and out on time due to congestion and door limitations, then it's not delivering to their customers like Walmart on time either. This can negatively affect their relationship, pricing, profit margin loss due to fees and even the potential pulling of product from shelves.

4) Not using count-back methods to improve case pick accuracy - While there is a great focus on the "on-time" aspect of Walmart's OTIF initiative, we can't forget that they want their orders delivered in full. This means that pick inaccuracies will not be tolerated and that the warehouse and distribution center will need a natural, automated "check and balance" process with every order. For one manufacturer, we were able to use technology that ran on a common core platform with modular adaptability to put automatic stops on orders that were not accurate. As a result, the manufacturer's customers got exactly what was needed, making both of them more profitable. The error rates dropped from 4% to .02% thus created tighter relationships with customers who are driving new growth.

5) Limited visibility, fragmented communication and a lack of standardization - For one manufacturer, each P&L and plant was optimizing and executing separately and each had their own processes, systems, technologies and reporting. Although they impact each other, there was no visibility of the gaps between raw material, work-in-progress product and finished goods because existing technology did not integrate their four (4) warehouse and transportation systems. This means each plant was blindly forecasting both inbound & outbound, leading to partial deliveries and partial service to the plants on a weekly basis. This impacted production lines also on a weekly basis as they experienced emergency out of stock, line shut down time and production changeover situations. This prevented growth, as they could not fulfill customer orders consistently. Another non-transportation issue that would impact on-time, in full!

6) Lenient cycle counts - In addition to product damage, one manufacturer was continually shorting their customers (approximately 5 to 6 shipments every other day) because the product was not being put in the right place. If the product could not be found and if the truck was waiting, they would just cut the order and ship it short. There was no cycle counting and there was no inventory tracking to reduce errors and eliminate shorting the customer. In order to maintain good inventory and good accuracy of all of your shipments and to be timely with your shipments, it is important to engage in cycle counting on a regular or weekly basis. Because the manufacturer is engaging in daily cycle counts of specific locations (which many 3PLs do not do) and quarterly book-to-book inventory for validation and increased accuracy, there have been zero shortages. This manufacturer has also been able to identify damage and replace it ahead of time (even before the truck is scheduled to arrive).

Do you see how your ability to meet Walmart's OTIF thresholds stretches far beyond "transportation?"

It's time we go beyond costs and look for ways to bring our supply chain closer to the customer as they increase their demands on manufacturers. Walmart is not the only retailer placing greater requirements on manufacturers and suppliers. Target has a "single day arrival" initiative and Kroger's has an original request for arrival date initiative where the penalty is $500 if the arrival date is missed by 2 days. There is a growing trend for stricter requirements and those manufacturers who fail to synchronize their warehouse, DC and transportation and those who fail to optimize processes to get closer to their customer will experience continued deterioration of their profit margins.

Connect with me to learn about the changes we're making with manufacturers to ensure that their warehouse and DC can deliver to Walmart and others on time, in full.


Topics: 3PL warehouse DC