Wal-Mart is using its $408 Billion in annual sales to gain even more control over its suppliers. Their latest initiatives have applied pressure to their suppliers to provide environmentally friendly products and packaging, as well as exclusive product sizes and joint advertising promotions. Now they are seeking to take control of inbound supplier shipments to reduce their inbound transportation costs.

According to Wal-Mart’s vice president of corporate transportation, Kelly Abney, Wal-Mart has contacted their suppliers in an effort to handle those supplier deliveries where Wal-Mart can perform the same function for less cost. Their overall goal is consumer oriented in that they are looking to use these savings to lower prices in their over 4000 retail outlets. And you can just imagine the buying power Wal-Mart will now have with their freight carriers. Their message to the suppliers is, lower costs mean more sales. They are also seeking lower costs from the suppliers for the products they ship because they will no longer be bearing the transportation expense.

Anyone who has been reading this newsletter for any period of time knows that we endorse this concept for all companies. The fact is if you are going to PAY for the inbound freight expenses, which by the way ALL companies do in one way or another, it is in your best interest to CONTROL those routings. Suppliers can ship products “freight collect” in which case the buyer would receive a freight bill from the transportation company; it can receive goods “freight Prepaid and added to the merchandise invoice”; or the freight costs can be factored into the price of the delivered goods. So in any of these scenarios the buyer is paying for the transportation cost. Corporate CEO’s should not believe their purchasing managers when they say we purchase goods “freight free”. Those terms just do not exist!

The price reductions Wal-Mart is seeking are significant. In some cases they are looking for reductions of 6% of the cost of goods sold, which by some supplier estimates is twice the price reduction the suppliers believe is equal to the cost of shipping. Wal-Mart has already met with over 100 of its top suppliers to negotiate new pricing terms. According to Abney, Wal-Mart ALWAYS works collaboratively with its suppliers so it expects the process to move along smoothly.

While all of this is good news for Wal-Mart and potentially for its retail customers, the news isn’t so rosy for the suppliers. The “buying power” now shifts from the supplier to Wal-Mart so the suppliers’ freight costs could be increased especially if they lose the efficiencies they had by utilizing their own fleets to deliver to the retail giant. So who will bear this increase in costs? Perhaps it will be the other retailers the supplier ships to.

A question that remains for suppliers is just how delivery shortages and overages will be handled with Wal-Mart. Under the current shipping method at Wal-Mart, the supplier’s carriers drop full trailers of products into Wal-Mart’s distribution center facilities to be unloaded at Wal-Mart’s convenience. Upon checking the goods into inventory there are often shortages, damages and yes, in some cases overages. If Wal-Mart controls the inbound routings with their own freight carriers how these issues will be resolved with the suppliers remains to be seen.

Wal-Mart has been announcing that sales at its US stores have been down for the past four quarters so Wal-Mart is sharpening its focus on transportation expenses to offset these reduced sales. The suppliers seem to be between a rock and a hard place as no one wants to lose a customer like Wal-Mart. The bottom line however MUST be the profit margin for the supplier. If there is none, they will never make it up on volume!

Tony Nuzio