Performance metrics are most effective when they are specific. Accordingly, Walmart is changing the way it assesses, rewards, and penalizes the suppliers designated to deliver products to its stores. Rather than using an overall metric of delivery success, the retailer will measure performance according to whether the delivery is on time and whether it is complete. By separating these metrics, it hopes to improve performance, the accuracy of its assessments, and its overall logistics.
Such efforts are a direct response to Amazon’s effectiveness in getting orders to customers quickly and completely. The online giant rarely suffers stockouts, whereas Walmart still struggles to ensure that desired products appear on its store shelves when customers want them. But it also is seeking to reduce inventory levels in its supply chain, to ensure greater efficiency. These contrasting demands suggest that it must improve the precision with which items move through the system. Furthermore, detailed analyses indicate that approximately 30 percent of out-of-stock events result from incomplete shipments.
In the past, a combined measure of supplier performance indicated the consistency with which suppliers delivered all the required products on time. If a delivery was late or if it was incomplete, it counted against the supplier. But it was not clear, to Walmart or its supply partners, where the exact problem lay. Was the delivery complete but a day late? Or was it on time but missing a case or two of the ordered products?
Such questions are critical for designing appropriate incentive and punishment systems. If a particular supplier is always on time but often missing half the order, Walmart would want to undertake efforts to ensure it has the capacity to produce the amount it needs. If instead another supplier always delivers the full amount but only after the deadline, Walmart might need to encourage it to expand its fleet or improve its supply lines.
The measures do more than show Walmart where it might need to assist its supply chain partners; they also establish clear standards and punishments for any supplier that misses them. For example, Walmart insists that suppliers that provide full trucks of goods must arrive within a two-day window at least 87 percent of the time. Even if they ship partial truckloads, Walmart expects them the meet that deadline for 70 percent of deliveries—a substantial jump from its previous requirement of 50 percent on-time deliveries of partial truckloads.
If they fail to meet both the on-time and complete order standards, suppliers are charged a fine, equivalent to 3 percent of the cost of the goods being shipped. But by separating the metrics, Walmart also makes the fines more precise. Thus for example, if the shipment arrives on time but is missing half of the order, the fine would apply to that half that has not arrived. In contrast, if a full shipment arrives three days late, the fine applies to the entire purchase
Discussion Questions:
- Why is Walmart asking its suppliers for the changes detailed in this abstract?
- Which financial ratios discussed in Chapter 6 would be affected by these changes, which direction will they go, and why?
Source: Jennifer Smith and Sarah Nassauer, The Wall Street Journal, March 6, 2019