An article featured in Bloomberg Businessweek, Why Wal-Mart Wants to Take the Drivers Seat, notes that the world’s largest retailer has come-up with yet a newer scheme to drive down its supply chain costs.  Wal-Mart wants to become its own freight forwarder, with plans to assume transportation services for a select group of U.S. based suppliers.  The goal is to handle supplier deliveries when Wal-Mart’s transportation teams feel that they can do the same job for less, most likely having its private fleet take maximum advantage of backhauling opportunities at supplier sites.

As with all initiatives related to Wal-Mart, there is a bit of catch.  Target suppliers will have to provide Wal-Mart a lower wholesale price to compensate for savings in paying their own transit freight costs to Wal-Mart distribution centers.  The article notes that in two instances Wal-Mart sought a 6 percent price reduction for the goods it orders, while these same suppliers estimated that the actual expense savings was closer to 3 percent.  The rest, of course, is subject to negotiation, but many of Wal-Mart’s suppliers are well aware of the one-way negotiating tactics that a Wal-Mart procurement official can muster.

While Wal-Mart can certainly run TV advertising noting how much more money it saves for consumers and how green and efficient its private fleet operates, The now TV famous Wal-Mart rig driver “Mike” is going to be a very busy man.  I however  remain a bit of a skeptic as to whether this strategy is a win-win for many in the existing supply chain, including Wal-Mart.

For suppliers who opt-in, they stand to lose volume, and potentially rate leverage with their existing transportation providers.  In scheduling production runs, an uneven or altered production output schedule can be buffered by the flexibility that suppliers may have with a transportation carrier in changing pick-up or consignment dates.  A Supply Chain Matters commentary in February noted that Wal-Mart had already tightened its delivery windows, threatening to impose a 3% penalty if a supplier shipment arrives at a regional DC outside of a prescribed four day window, either early or late. One wonders how much schedule flexibility these suppliers will now have when fleet managers back down the schedule and now proscribe when the Wal-Mart truck will show-up for pick-up. What about missed or partial shipments, or changes to Wal-Mart’s fleet schedules?  Will Wal-Mart alter its penalties for missed appointments at the supplier dock?  The bottom line for suppliers is once again re-iterated to the need for more sophisticated production planning and scheduling processes and systems.

Non Wal-Mart customers could see increased supplier costs as freight concessions passed to Wal-Mart are compensated by higher prices to other chains. Transportation carriers, who continue to struggle with the severe effects of this past recession, can ill afford to lose some key volume-related business in current transportation of goods from suppliers to Wal-Mart distribution centers. The U.S. can ill-afford to lose additional public carrier fleet capacity.

Finally, Wal-Mart itself may be overextending itself with this move to become a broader transportation provider.  If fuel costs were to rise dramatically, the company would suffer an almost immediate impact.  Higher volumes, with associated wear and tear will force tractors and trailers into accelerated replacement cycles, and thus higher capital replacement costs. Infringing on current carrier volumes could well make Wal-Mart a more convenient target for trade union activism.

These past several months have provided many large-scale Wal-Mart initiatives, all directed at bringing more consumers into its U.S. stores.  A massive store simplification and re-layout program, and direct regional purchasing among others, were all directed at increasing same-store sales, but the results to date have been disappointing.

One wonders when Wal-Mart will reach the wall of gaining efficiency in its overall supply chain and perhaps turn attention to other internal cost containment measures.  Perhaps the Walton family could afford a simpler overall lifestyle!

 Bob Ferrari