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Walmart’s new OTIF policy raises concerns

Early next year, Walmart is planning to enact a new “on-time, in-full” (OTIF) program that could be very difficult — and very costly — for some fresh produce suppliers to meet.walm

According to sources, initially the new policy was articulated in a company blog and has since been shared with suppliers privately. It has also been written about in several supply-side trade publications as it pertains to all types of suppliers from hard goods to produce. There does not appear to be a written policy available, as no shippers could be found who have seen it and the Walmart communications department also said it did not have a copy.

The main provisions of the across-the-board policy are that it cuts the acceptable shipping window in half from four days to two days and it requires a compliance rate of 95 percent of shipments.

A shipper whose scorecard comes in at below 95 percent compliance with regard to both on-time and in-full will be penalized a fee of 3 percent of the cost of goods on all non-compliant deliveries, according to reports.

Since February of this year, Walmart has been working with its suppliers to help them get in compliance. In February 2018, the new policy kicks in and presumably fees will begin to be assessed.

“We hope we don’t have to collect any fees from suppliers,” Walmart spokesman Ryan Currell wrote in an email exchange with The Produce News earlier this month. “We would much rather have all the product we ordered delivered on time, so we can get it to our customers, when they are shopping for it.”

Currell added that this program has been in the works since 2016.  

“A year ago we shared these same on-time and in-full delivery goals with suppliers and asked them to begin preparing,” he said. “We will phase these changes in over the course of this year (2017), working closely with our vendors to help reach these targets. We know that when products we’ve ordered arrive on time, it results in happier customers.”

Currell said that this new program is consumer-centric. “One of the best ways Walmart can help customers save time and money is to have the merchandise they want on our shelves when they are shopping for it. To better meet those customer expectations, we are working with suppliers to improve their on-time and in-full delivery.”

While produce industry members appeared to understand the motivation behind the new delivery mandates, there was also concern that they don’t adequately take into account the realities of fresh produce industry production.

Also, it was unclear as to how financial blame would be assessed in a supply sector where buyer-controlled transportation (f.o.b. sales) and third-party logistics providers are commonplace.

One Walmart supplier of California fruits, who spoke under the condition of anonymity, said he was unclear as to how the policy would work. He noted that the majority of his firm’s shipments to Walmart distribution centers around the country are arranged by Walmart.

“Our only control is when we can’t load on time or must prorate supplies,” said the supplier.

He added that shorting a load is not unusual, especially early in a season. “We predict in advance when the crop is going to come off but weather can change that. Are we going to be held accountable for that? That’s going to cause a problem.”

Longtime Walmart produce executive Bruce Peterson of Peterson Insights Inc. opined that the expectation for on-time, in-full deliveries is reasonable. He said retail operations are in the business of fulfilling the needs of consumers and you can’t do that when you have a lot of out-of-stocks, which often occur because of unmet delivery times.

Peterson also noted that the advent of Amazon has changed consumer expectations and the retail environment. Consumers can now order something today and get it tomorrow. Consequently, he indicated they are not tolerant of an in-store shopping experience that doesn’t immediately gratify.

But Peterson also said the fresh produce industry is different and there should be “at least some degree of tolerance.” From his more than 20 years of experience as the top produce executive at Walmart, he noted that almost all of the violations of the OTIF policy are in the beginning or the end of a season when weather and timing do play an out-sized role. His experience seems to have caused him to believe that while the policy is rigid, there will be more flexibility in its execution.

“I’d like to believe that behind closed doors there is an understanding about how this policy will affect produce suppliers,” Peterson said.

Walmart’s Currell said that there is a realization that “fresh produce has a supply chain with some unique challenges specific to the industry,” adding that Walmart is “focused on improvements to the program based on supplier feedback.” But he did not say that there would be any carve-outs for the industry.

Dick Spezzano of Spezzano Consulting Service, another retailer with decades of experience in filling stores with the right product at the right time, took issue with the 3 percent penalty. He said it is not uncommon for a retailer to slap a flat rate — maybe $50 — on a short load. But he said a 3 percent fine could be a big hit.

“What if it’s a load of grapes at $30 a box? That’s going to hurt,” Spezzano said.

Simple mathematics shows that a load of high-priced produce — think grapes or strawberries or avocados — could easily create a fee of more than $1,000 per load.

Spezzano questioned why any retailer would continue to do business with a shipper who did not consistently deliver on-time and in-full. He indicated the solution isn’t to charge a fee to good shippers when they occasionally underperform because of weather and other outside influences. If there is a problem, the solution is to find a better shipper.

Mark Petersen, vice president of transportation for Robinson Fresh, noted that Walmart is a customer and his firm does not comment specifically on the programs of its customers. However, he did discuss, in general terms, the transportation of fresh produce and the ability of the industry to execute on-time, in-full deliveries on a consistent basis. He noted that those two variables are often at odds with each other.  

“Fresh produce,” he said, “is not typically an inventory item.” Usually, it is a pick, pack, cool and ship product with freshness being the No. 1 attribute. For a shipper to deliver on the freshness promise, he must, by definition, estimate his production and sell that production in advance of its being picked and packed. That can mean prorating the volume. Or waiting while the inventory is assembled and the order can be completed.

He said if a customer is willing to sacrifice on the freshness attribute, it is easier to deliver “on-time, in-full” as the order can then be filled from inventory.

Petersen also took a look at the industrywide issue of assessing a fee or a fine on someone involved in the logistics of the supply chain. He indicated that holding the supplier of the transportation financially responsible is problematic when factoring in the risk-reward nature of the total transaction.

A supplier could have a load of product with a value of tens of thousands of dollars. A trucker may only be getting $3,000 for the delivery of that load. Assessing the trucker a fee, which could easily be 30 percent of his take, for a delivery out of compliance seems unreasonable.

Matt McInerney, senior vice president of Western Growers Association, said his organization has been contacted by a handful of shippers concerned about Walmart’s new OTIF policy.

“We have advised them to make sure they understand it fully and know what they have to do to be in compliance,” said McInerney.

He noted that the sale of product on an f.o.b. basis, in which the transportation is arranged and controlled by the buyer, does create an additional factor to the concept of a load not being on time.

McInerney also pointed out that the new electronic logbook regulations of the U.S. Department of Transportation that are going into effect in December of this year may very well affect standard delivery times. He warned shippers that they should take into account what type of disruptive influence this will have on delivery times as they assess their business opportunities with any buyer.

Mark Petersen of Robinson Fresh agreed that the impact of the new regulations are not known, but he reminded that the new regulations have to do with accurately recording hours of service. They don’t change how long a driver can legally drive each day.

Nonetheless, it seems to be somewhat of an open secret that hand-written logbooks do allow for some manipulation, which should not be the case after Dec. 18, 2017.

Bruce Peterson urged shippers to consider all factors when determining with whom to do business. He said no supplier can do business with all buyers and, in light of this new Walmart OTIF policy, it might not make sense for a particular shipper to have Walmart as a customer.

But he also said that it was his experience in his years with Walmart that these types of initiatives do ultimately improve the supply chain.