The Supply Side: Wal-Mart contract changes still challenging suppliers

It’s been nearly three months since retail giant Wal-Mart Stores began sending out modified supplier contracts requesting warehousing fees or shared supply-chain costs and extended payment terms on items that don’t sell quickly. The change continues to keep busy consultants and others who work with suppliers on such matters.

Wal-Mart spokeswoman Deisha Barnett told The City Wire in June that the letters mailed to suppliers beginning June 17 were part of the retailer’s renewed focus on “everyday low cost” and “everyday low price” that best serves its 140 million U.S. customers each week. Suppliers were caught off guard by the letter and were surprised that the retailer asked them to comply by July 1.

Supplier service providers have told The City Wire they are still assisting suppliers with their strategies and responses nearly three months later. One local supplier consultant firm told The City Wire that its clients were asked to extend payment for 90 days with a 2% discount, or 120 days with a 1% discount for the distribution center. Concern upfront was high given the short deadline and what looked at first to be several big changes from previous contract terms.

“Some of the smaller suppliers at first wanted to ignore the letter, but that is not a possibility. Most also felt that Wal-Mart was trying to fund its worker wage increase on the backs of the suppliers,” the local consultant said. 

Jami Dennis, also a supplier consultant, said smaller suppliers didn’t feel secure enough to push back on the terms, even though the added costs have to be addressed in some way.

Supply chain experts said the strategy to prevent carrying inventory too long is also used by Amazon.com. One pet supplier said their new agreement with Wal-Mart asked for an additional 1% discount on what was a 20-day payment term, except now Wal-Mart wants to extend the payment window to 90 days. This scenario gives Wal-Mart 105 days between invoice submission and payment. The retailer is asking for the extension because more time is needed to sell the products.

The biggest change for the suppliers to accept is an added 1% handling charge Wal-Mart is requiring for products that enter a distribution center. This alone is likely to be a significant profit center for the retailer who handles more than one billion cases of product annually through its supply chain network.

Retail experts say it’s important to note that Wal-Mart charges far fewer fees than promotionally driven retailers who exact heavy tolls for participation in cooperative advertising programs, loyalty marketing programs and product placement in stores.  While that may be the case, with the new contract terms Wal-mart would charge a food supplier 10% of the value of inventory shipped to new stores and to new warehouses, both one-time charges, and 1% to hold inventory in existing warehouses. Prior to the change, the supplier faced none of those extra fees.

Nate Sklaroff, director of sales at Harvest Revenue Group, said there are five things suppliers should remember as they respond to the new agreement terms:
• While this "request" says it has nothing to do with cost of goods, their FAQ offers in-house financing for the new program — which leads one to believe it is, indeed, a factor;

• The request references a "share in the cost" of supply chain. If everyday low costs are sought, it's hard to see how a price increase to offset this wouldn't be needed;

• The agreement talks about help to pay for inventory which sits in the warehouses (days on hand, or "DOH") for extended periods long before it's sold. Suppliers should suggest asking ways to reduce that backlog and make things more efficient, as well as requesting how they arrived at their DOH numbers, which may seem high;

• Warehouse allowances, which are additionally sought, are typically already netted out of cost; and

• Changes to the agreement in place will negatively affect accruals used for funding and promotional events

Sklaroff suggests suppliers keep these points in mind as they address and respond to this issue.