We are coming up on February 1st 2010, the day that Walmart starts enforcing the penalties associated with its Supply Chain Reliability Program. If you are not familiar with the program, below are excerpts from the letter that Walmart sent to suppliers on Oct. 15th, 2009.

Dear Valued Supplier,

Walmart and Sam’s Club are continually seeking to improve our supply chain efficiency…Therefore, in order to better serve our customers and members, Walmart and Sam’s Club recently partnered with U.S suppliers, across all business units, in a collective effort to develop the Supply Chain Reliability Program. We are excited about rolling out this initiative in collaboration with a broader assortment of valued suppliers. The new program will help us operate at the lowest possible cost and provide the best possible service. The key facets of this initiative are as follows:

  • Walmart and Sam’s Club incur additional costs for inventory carrying cost, warehousing, store/club labor and shrink for shipments arriving early, and lost sales on short shipments and shipments arriving late. In an effort to improve on-time delivery, a reimbursement charge of three percent of the cost of goods sold (COGS) will be applied to each case not delivered and recorded in our system within the MABD [Must Arrive By Date] delivery window.
  • Walmart and Sam’s Club require domestic replenishment, promotional and new modular purchase orders (PO) to be delivered, in full, within a four day window, comprised of the must arrive by date (MABD) on the PO and the three preceding days. To determine if there is a compliant delivery, replenishment orders will be measured against the original MABD on the PO, and promotional and new modular orders will be measured against the current (aka “adjusted”) MABD on the PO.

Supply Chain Reliability Program overview:

  • Program compliance is evaluated on each nine digit (department and sequence) supplier number. We measure compliance both by the number of cases delivered outside the MABD delivery window and comparing number of cases actually delivered to the cases ordered. If less than 90% of cases in any month for any supplier sequence number are not received within the MABD delivery window, including cases ordered but not delivered, then the supplier is assessed a reimbursement charge of 3% of the cost of goods. This 3% reimbursement charge is not assessed on those cases that were delivered within the MABD delivery window. Your compliance will be evaluated on the basis of each Walmart business month and you will be provided with an explanation of any reimbursement due which Walmart and Sam’s Club will deduct off invoice.
  • For most categories, the current delivery window is four days including the must arrive by date (MABD) minus three days. The MABD delivery windows for certain business segments are more stringent (e.g. perishable). Please work with the replenishment managers responsible for dealing with your company to ensure you have a clear understanding of the MABD delivery window that applies to your category.
  • Visibility will be provided to suppliers via a scorecard on Retail Link beginning on November 1, 2009. A weekly scorecard and monthly report will be available on Retail Link to report supplier performance, PO details, and the potential or assessment of reimbursement charges. The weekly scorecard, monthly report and additional information are located on Retail Link at Retail Link/ Decision Support/ Merchandising Applications/ Delivery Window.
  • This new program does not currently apply to direct imports orders or direct from supplier to store deliveries.

In total, this program will drive greater reliability in the delivery of products to the store shelves. These criteria are subject to change. We appreciate your partnership in this process.

Sincerely,

xxx

This program raises many questions for consumer goods manufacturers. For example, if an order to a DC fills 2.7 trucks, what are the costs of sending extra inventory along to cube out the truck and reduce transportation costs versus incurring the Walmart penalties versus sending the last load less-than-truckload?  Will the answer depend on whether the SKUs in question are part of Walmart’s ‘Win, Play, or Show’ assortment strategy? What sort of analytics can be developed that leverage Retail Link to show revenues at risk? Will supply chain software companies develop optimization solutions to help with this? 

If a supplier gets penalized because of poor carrier performance, will it pass the penalties along to the carrier?  How would this influence carrier procurement? 

Will other retailers copy this program?

One thing is for sure: many consumer goods supply chain executives will be challenged to hit their cost targets in the coming year.