By Bryan Nickerson, Manager, Trade Practices & Commodity Services
Retailer supplier performance compliance policies have been in force for many years with varying degrees of success. However, the rigorous requirements of the Walmart policy have caused considerable concern among shippers regarding how to retain Walmart’s high volume produce business and avoid fines.
According to McKinsey & Co., the On-Time In-Full (OTIF) metric measures the extent to which shipments are delivered to their destination according to both the quantity and schedule specified on the order. Walmart introduced its OTIF policy in 2017, however, it is only recently that produce shippers have seen a substantial increase in fines. The current policy specifies that shipments must arrive at the distribution center during a specific date and time window, be properly packaged and labeled, and be delivered 98% in full. Shipments that arrive short, not as specified in the Purchase Order, early or late are subject to fines, with little room for error.
While the original performance target was 70%, Walmart has steadily raised its requirements and on September 15, 2020, the target was set at 98%. Suppliers not meeting performance standards will be fined 3% of the cost of goods and repeated failure to hit the 98% mark will place future business with Walmart in jeopardy.
Walmart does recognize that there can be uncontrollable disruptions in the supply chain that can disrupt shipments and will factor these events into OTIF performance measurements, including waiver of fines. For example, shippers were given COVID-19 exemptions during the early days of the pandemic, but that exemption ended last August.
In February, Walmart began giving vendors the opportunity to contest fines on purchase orders they believe should be excluded from OTIF. Reasons for exclusion include item code changes, no unloading appointments available, major crop failure or natural disasters. However, most delays, including bad weather, are not recognized as acceptable reasons for fine relief.
Given the draconian nature of the Walmart OTIF policy, Western Growers members should understand how it is calculated and adopt the following best practices to avoid fines.
How is OTIF calculated?
Take the number of cases received within the delivery window and divide by the number of cases ordered. For example: You sell 1,000 cases of product to Walmart at $10 per package. The $10 price is what you bill Walmart, whether FOB or delivered. You only deliver 800 cases on time. Your OTIF penalty calculation is as follows:
Using the same example, you deliver all 1,000 cases but the shipment arrives a day late. Your OTIF penalty would be as follows:
It’s easy to see how quickly fines can accumulate. It is important for shippers to be aware that they are not subject to both On Time and In Full fines on the same shipment.
OTIF Best Practices
It is suggested that you adopt the following best practices to ensure that your shipments are on time and in full:
• Educate your employees. Talk to your production and shipping personnel and make sure they are aware of the Walmart OTIF requirements and the need to adhere to shipping dates.
• Talk to your carriers. Make sure that your carriers understand the OTIF performance rules, the importance of being on schedule and the need to promptly advise you of any in-transit or delivery issues. Build strong carrier relationships and provide them consistent business—preferably to the same Walmart distribution centers.
• Have set shipping dates. Schedule pick up dates and times with your carriers to ensure as little variance in transportation performance as possible.
• Review your OTIF scorecard weekly. Identify and correct deficiencies in your internal processes.
• Proactively address anticipated problems. Any product or shipping issues should be immediately communicated with the Walmart buyer(s) and replenishment managers.
• Pay attention to rescheduled delivery dates. If you reschedule a delivery, make sure the new date and time still fall within your “Must Arrive By Date” (MABD).
• Be aware of consolidated freight. Be sure to communicate clear expectations to carriers if your Walmart orders are being consolidated with other freight.
• Don’t arbitrarily fine carriers. You don’t like to be fined by Walmart and your carriers won’t like to be fined by you without a good reason. The current and anticipated transportation market is a seller’s market and carriers will be able to choose who they will do business with. Undesirable customers will have loads declined or receive rate quotes that incorporate anticipated fines.
• Keep full and detailed records of your Walmart transactions. Good documentation is key to reducing or eliminating fines.
While it is probable that every Walmart vendor claims that their business has characteristics that should provide for relaxation or elimination of the OTIF policy, a strong case can be made that fresh produce should not be subject to the same standards as manufactured products.
The Walmart OTIF policy is the subject of extensive evaluation by Western Growers staff to determine the next action steps and ensure fair trade practices are enforced in the industry. Shippers of fresh produce doing business with Walmart are encouraged to confidentially share their OTIF experience by contacting Bryan Nickerson at 949.885.2392 or [email protected].