Making sense of Walmart’s new supplier agreement

Walmart’s interpretation of EDLP and a desire to simplify operations with a uniform supplier agreement sparked confusion this week among those unfamiliar with the company’s business model.

The distortion began on June 23 with a Reuters story headlined, “Wal-Mart to impose charges on suppliers as its costs mount.” The piece was based on a confidential document Walmart shared with suppliers a week earlier regarding modifications to agreements with suppliers concerning payment terms and allowances related to suppliers use of Walmart’s supply chain to flow goods to new stores and distribution centers.

The inference from the Reuters’ headline, the tone of the piece and subsequent coverage from other media outlets fed the false narrative that Walmart bullies suppliers and when faced with challenging business conditions had resorted to tactics employed by competitors as a means to make money. The fee charging strategy, often referred to as, “making money on the buy-in rather than the sell-through,” runs counter to Walmart’s strategy of being an every day low cost (EDLC) operator which enables its every day low price (EDLP) strategy.

That’s not to say Walmart doesn’t charge suppliers fees, it does, but typically they are used as an inducement to encourage a type of behavior. For example, to encourage in stock levels several years ago Walmart established a window of time that goods needed to arrive at distribution centers and those who failed to hit the “must arrive by” window were charged a fee.

The reality is Walmart 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. All those variables which changed from deal to deal and promotion to promotion make for an accounting nightmare with hi-lo merchants. Conversely, as Walmart noted in its letter, “our business model is simple – operate at everyday low costs to provide customers with everyday low prices.”

Doug McMillon has been banging that drum for years in his current role as president and CEO and prior to that as president and CEO of Walmart International. The guy has been unwavering in his stance on EDLC/EDLP during presentations to analysts, on earnings calls, in presentations at industry events or in casual conversations with those attending such events.McMillon’s title should be chief EDLP officer.

“Operating under this model affects all we do at Walmart, including how we work with your company, how we advertise and how we go to market. With this in mind and as part of our focus on EDLC and EDLP, we have recently completed a full review of our current supplier agreements. Our aim is to drive consistency in business terms, with focus on simplification,” according to the letter Walmart shared with suppliers on June 17.

According to Walmart, the four key amendments outlined in the letter will:

• More closely align payment terms with the company’s average total days of on-hand inventory.Walmart’s new agreement could have some suppliers getting paid in as little as 10 days. So much for bullying suppliers.

• Simplify our payments terms, which will help reduce administrative costs for both parties.

• Simplify and bring consistency to the collection of allowances related to the growth of our business and suppliers’ use of the Walmart supply network (specifically the new store allowance, the warehouse allowance, and new warehouse allowance).

• Align defective allowance, soft goods defective allowance or swell allowance with the actual rate of returned or unsaleable merchandise from Walmart Fiscal Year 2015.

“These changes are about serving our shared customers and making sure they have the low prices they expect and deserve from Walmart. Through the changes we have outlined, together, we will keep our commitment to ensuring that we are operating at everyday low costs that yield everyday low prices for the millions who shop at Walmart,” according to the letter.

Suppliers were given until June 30 to agree to the new terms.