By Mike Eaton | Principal, Transportation | Chainalytics
It’s become common knowledge that Walmart is in the process of implementing new, more stringent standards in regard to On-Time-In-Full (OTIF) delivery requirements. Reportedly, failure to adhere to these standards may result in punitive fines of up to 3% of product invoice value. For the transportation component, on-time is reportedly being redefined as a single must-arrive-by date (MABD) as compared to the historic standard of a four day window.
Obviously, the OTIF challenge is a multi-disciplinary endeavor in the supply chain. I would argue that product availability issues are far more complex than the transportation challenges. Generally speaking, for lanes of defined transit time, the contract carrier (TL and IM) and LTL industry do a very good job of picking up and delivering as requested with several underlying assumptions:
- The shippers underlying transit time spreads by mode (requested ship to requested delivery) are correctly maintained
- The shipper has product available and outbound facility loading capacity on, or before, the requested ship date
- The receiving facilities will give unload or yard drop appointments on the must –arrive-by-date – MABD. These are major underlying assumptions.
However our work with shippers over the years generally indicates that carrier performance to SCHEDULED APPOINTMENT dates/times is very routinely over 96% for shippers who track these KPIs. Generally speaking, carriers perform their obligation effectively when tendered freight on-time and appointments are available at the receiving facility.
So what are the major transportation specific challenges and what are best in class firms doing to address them?
- Receiving appointment availability – Many large suppliers have for years been “pre-securing” delivery appointments early in the order life cycle. This is often done by the shipper’s customer service or transportation functions scheduling the delivery appointments – sometimes directly, sometimes through their carrier partners. These appointments become visible through the entire order management process. Fulfillment knows what needs to ship and when. Carriers know what appointments they are expected to fulfill at tender, or sooner if involved in the pre-secure process.
- Surge volume – volume spikes are problematic for everybody; shipper, carrier, and receiver. All struggle to address seasonal, holiday, and promotionally driven volume spikes. On the transportation side, diversification of routing guides (splitting lane volumes among multiple carrier partners) is often a solution. It’s typically easier to get multiple active carriers in a lane to surge capacity with you than to ask otherwise inactive carriers on a lane to respond at the last minute. In any case, whether with expanded carriers or brokers, it’s usually easier to cover loads that have the pre-secured appointments reference above.
- Consolidation programs – there are many flavors of LTL consolidation moving into the Walmart network: Walmart’s managed network, commercially available consolidators, vendor pool consolidation networks, and those managed by regional and national LTL providers. Historically, consolidators could deliver purchase orders spanning multiple requested arrival dates within the four day window and meet the delivery requirement. Under the new standard, only product with one due date could be consolidated into a single delivery. This sub-set of activity will become more challenging. I suspect it may lead to further consolidation among providers of these services as each needs to generate sufficient volumes to create full truckloads of single arrive-by-date products into a receiving facility every day.
What are the financial ramifications to the CARRIERS in this new OTIF world? This remains less clear to me. As an industry we don’t have much history of actual punitive fines against carriers. While it exists to some degree in JIT Automotive, my anecdotal observation in that sector seems to indicate the instances of it actually being invoked are few and far between. Given the known margins in the carrier sector, I believe that any attempt to begin “fining” for late or early delivery service only has two possible outcomes: increased rates and/or carriers exiting from those routinely problematic lanes. Historically, the shippers’ leverage with carriers on performance issues plays itself out in future lane/volume awards during periodic procurement events rather than hard dollar fines. To date, shippers have mostly borne the direct financial impact of service shortfalls (OTIF). I suspect that will remain the case.
It will be interesting to watch these new standards play themselves out in the supply chain.
Mike Eaton is a Principal, in the Transportation Competency, at Chainalytics where he focuses on transportation management improvement initiatives and the application of transportation technology.
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