Don't Be Confused!

Strategy & Tactics…
Using Walmart's Inbound Freight Control Initiative to Illustrate the Difference

There is a difference between strategy and tactics. Many people confuse tactics with strategies. Managers do it all the time. Leaders attempt to stay focused on strategy, but often go tactical because that is what they are used to.

And that is normal. Most people spend 97 percent of their time thinking in the tactical world — the world of the now.

Strategy is the art and science of overall planning and conducting a large-scale operation. Strategy involves defining goals, or even better, defining results and the purpose of those results. A tactic is an expedient for achieving a strategic goal; it is nothing more than a maneuver. Far too many people get confused and deploy tactics under the guise of strategy.

In the summer of 2010, the general business and trade press was all hot and bothered about Walmart's new strategic initiative to expand their control over their inbound domestic freight. The substance of the stories ranged from how this strategy was a bold new strategic concept to how this was going to hurt the suppliers. I laughed at some of the stories and shook my head at others. The articles amused me for two reasons: first, the conversion of freight terms from prepaid to collect isn’t a new concept. Second, it can't be called a strategy; it is really just a tactic.

Walmart is on a strategic mission – driven by the deep corporate doctrine DNA to provide customers with EVERY DAY LOW PRICES. Big-box retailers — and Walmart is the biggest of the big-box retailers — like to have order. Sun Tzu teaches that “The line between disorder and order lies in logistics.” Disorder adds costs, and Walmart must control disorder to control costs to deliver on its strategy.

A large aggregator of freight from a wide range of locations should always be endeavoring to control its inbound supply line. There are several tactics that a retailer can use to control inbound logistics. Some tactics involve changing the freight terms. Others don’t change the terms but negotiate the process. One option is not intrinsically better than the other; they are just different. The choice of the tactic should be determined by what best fits the doctrine and supports the strategic goals of the organizations served by the supply chain.

Tactics Support Strategies

So, why do I insist that controlling inbound freight is a tactic and not a strategy? Simply put, scale is one answer. Controlling inbound freight is but one way to control costs. This is an enabling tactic that supports even grander strategies than simple control, so control becomes nothing but a mere tactic.

I learned some time ago from reading Peter Drucker that every tactic deployed should support as many strategic goals as possible. A tactic that supports only one strategic outcome is not a very effective tactic. A tactic that supports five strategic goals is a fabulous tactic.

In the case of Walmart's initiative to convert a majority of its inbound freight volume from prepaid to collect freight terms, the lines between strategy and tactics have become a little blurred in many people’s minds. So let us work on unblurring those lines.

Basic Cost Reduction Strategy

Using Walmart's Inbound Freight Control Initiative to Illustrate Strategy

Sam Walton’s core epiphany when he operated his original Ben Franklin 5 and 10 stores was this: as long as the wholesalers controlled the distribution, the wholesalers would control the profit Walton made. Caught between the competitive pricing of the rest of the retail stores who were buying from effectively the same wholesalers, Walton’s stores would always have to fight for customer’s attention. He needed a preemption strategy.

Now, Sam didn't like the idea of limited profits in a “fair” competition — he wanted to win. When he conceived his new kind of store, he developed ways to buy the merchandise direct from the manufacturer and provide his own distribution network. That distribution network became the competitive edge that Walmart now possesses. Other retailers did the same thing, but Sam Walton set out to make sure that his distribution network was as efficient as it could be. He instilled throughout the supply chain organization the drive to minimize costs at every point, in every link of the supply chain. One of the reasons Walmart has such a strong supply chain organization is that Sam understood in his core that controlling your supply chain is key to controlling costs.

The joke has been made that Walmart is nothing more than a fabulous supply chain that happens to have some retail outlets. But it's really not a joke. It is the truth.

Since transportation can comprise as much as one half to two thirds of the total cost of distributing product, it only makes sense to drive as many efficiencies into your transportation network as you can. Walmart's approach — using private fleets to deliver to their stores — is a tactic that helped the company achieve two different strategies.

Eliminate the margin that would have to be paid to a third party to provide that service.
Control the fleet. By controlling the fleet, Walmart can control the quality and timing of the service to move the freight from the distribution centers to the stores.

That second strategy goes a long way toward reducing labor costs and maximizing the utilization of assets and resources. Take it one step further; using that same fleet to backhaul freight from suppliers back into the distribution centers helps offset the cost of running the empty miles from the retail stores back to the distribution centers. Some would call it a “no-brainer,” but many companies have failed to do this as well as they might. In fact I know of companies that have waged internal wars over the idea.

Walmart followed Drucker's guidance about using a single tactic to support multiple strategies. They did this by using the tactic of operating a private fleet to achieve three different strategic goals in support of the main goal — lower prices for the customer.

Basic Logic of Freight Terms

Understanding the terms and the emotion behind resistance to terms change

This may be remedial for part of our audience, so please allow me to apologize up front for the following simplified treatise on freight terms. I carry the scars of many a skirmish in the logistics trenches, where people who should have understood the nuances of freight terms did not, and epic fights ensued.

There are three sets of freight terms typically used in the United States, controlling two conditions. Those conditions are:

WHERE ownership title and risk transfers
WHO pays for the cost of transportation.

The three sets of freight terms are:

FOB Origin — Freight Collect: Title of ownership of the freight transfers at the seller’s dock, and the buyer arranges and pays the freight cost.
FOB Destination — Freight Prepaid and Add (PPD & ADD or PPA): Title of ownership transfers at the buyer's dock and the seller pays the freight, charging the buyer the freight on the invoice.
FOB Destination — Freight Prepaid (PPD): Title of ownership transfers at the buyer’s dock; the seller pays for the freight and rolls it into the price of the merchandise.

Converting PPA terms is easy; just change the terms. This should be automatic. Why? The vendor could care less what your freight cost is, and many do not. But the buyer should care. Why should you switch? I can think of four primary reasons.

Reducing the number of carriers delivering to your location helps you make your operation more efficient.
You may get a better deal on your outbound freight if you have more inbound on the same carrier.
The unloading allowance is the money reason — the carrier pays the receiver to unload the freight, which can be serious money.
You can see what your cost for freight really is from the supplier. This can be a powerful bargaining tool when thinking about whom you buy from and where they are.

Converting a supplier from PPD to Collect freight terms entails a challenge: you must negotiate with the supplier and get an allowance for that freight cost. Vendors shipping prepaid provide transportation service to a large number of small customers who may not have their own transportation departments. In the early days of retail, small shops never attempted to manage the freight process, so the sellers would “deliver the goods,” with the freight cost included in the price. As the retail environment changed and large chain stores grew, they created their own distribution networks. These retailers are always searching for ways to reduce costs, which puts pressure on vendors to change terms.

When pressured to give an allowance on PPD terms, vendors often argue that they will lose pricing power with the carriers, which will drive their transportation costs up — a cost that they have to pass along to the rest of their customers. “It’s not fair to our other customers,” is one argument I often heard when I converted terms. I refer to this argument as the "socialized freight" argument, and I believe that "socialized freight" is almost as bad as "socialized medicine." As a capitalist, I don’t understand why my company should have to support the profit line of our competition. Every time I challenged the vendor to prove that their rates would go up, they never did; they would have to show the markup.

In the long run the buyer really dictates the terms, so "resistance is futile" on the part of the vendor. In so many cases the challenges come from within the internal merchandising teams. So many merchandise managers don't understand the cost of transportation and believe what the vendor's representation tells them. Many times I have heard from an ignorant buyer that “freight is free.” Freight is never free.

If converting terms is focused on just creating additional net profit dollars, the tactic is addressing just a singular strategic goal; so it is not following the Drucker rule that tactics should address multiple strategic goals. For this reason, the shipper should look for more strategies to address with the terms conversion. Adding more strategy helps overcome cultural resistance.

Size Does and Doesn’t Matter…

More Freight or larger company does not translate to lower rates or lower costs

Traditional strategic thinking is to create volume-buying strength in such a way that the retail company with their superior buying power is able ship at a lower cost than the vendor. This is the idea that more freight must mean lower costs. This is a bogus assumption that illustrates logic that is tactical, not strategic.

Remember, Strategy Eats Tactics for Lunch.

Size does not always equal pleasure. In many cases BIG creates challenges. Rate structures ARE influenced by many factors, factors that are MAGNIFIED in a negative way by too much volume. Lets examine those factors.

Lane Efficiency — Empty Miles: In a truckload environment, the carrier has to be able to get the equipment into position for the load. If things are perfect for the carrier, there are loads available at the destination that need to return to the trip’s point of origin, so the carrier has a high efficiency lane and can offer a great rate. But there is seldom perfection in the fickle freight market. So the carriers almost always have some empty-mile distance to travel to the next load. Sometimes those loads will deliver close to the original shipper, but most times they will not. The carriers have to add the empty miles into the equation. Shippers that can help a carrier reposition the equipment with fewer empty miles can enjoy a rate advantage.

Lane Imbalance — Not Enough Return Loads: Remember, the carrier has to be able to get the equipment back for the next load. If the shipper cannot help with the backhaul to the head haul, the carrier is sure to charge more for the empty miles. When a shipper sends a lot of trucks into a freight-sink market where there is more inbound and less outbound without a return load, they are sure to get charged much more. Rates into Miami and Phoenix are an example of this — if you can book a continuous move out you will see a much lower rate. Rural shippers see this issue all the time — and they pay a steep penalty for being off the beaten path.

These are just two of many examples. There are hundreds of factors that will affect freight costs. Small shippers can be in a position to have superior rates because of where they can fit into a carrier’s network. It takes a sophisticated shipper with solid carrier relationships to create an advantage. A great relationship with a 3PL transportation company can help; a smart 3PL that handles many accounts can outperform most vendor-managed freight programs.

As I mentioned above, bigger is not necessary better; that is, more does not automatically mean less. With more of the inbound freight volume under their control Walmart may be in a position to command better rates from their carriers, but I really doubt there is strength in that approach. Walmart is already a huge shipper, with a staggering volume of approximately 315,000 inbound loads to Walmart distribution centers every month — more than 3.7 MILLION ANNUAL inbound deliveries. Of those inbound deliveries approximately 115,000 per month are freight terms Collect, about 37 percent.

Walmart already controls 1.4 million inbound loads a year. They already have effectively levered buying power. Would more than doubling the freight volume create more significant rate reductions just because of size? The idea of muscling up even more volume to hammer rates may be a little presumptuous. There must be other strategies being addressed with their effort.

Sustainability is a Strategy

Taking greater control helps support Walmart’s pledge to reduce fuel consumption

There must be additional net profit for Walmart to make by converting the rest of its inbound over to collect freight terms. Walmart has invested in multiple supply-chain management software platforms, including Transportation Management Systems (TMS), EDI, and Dock & Yard Management (YMS), and with help for MIT is busy knitting these platforms into an enterprise system. Converting terms requires a substantial long-term analysis and negotiation effort. Managing the movement of over 450,000 truckloads a month requires a substantial trained and experienced staff. This will not happen overnight, and none of it will be easy.

You could make the argument that with proper systems and processes Walmart will build a large enough critical mass to drive higher levels of efficiency into the freight management task. But just making something bigger does not necessarily drive more efficiency into the operation. We industrial engineers understand this very well — it is governed by the law of diminishing returns. At some point the additional effort needed to manage all that freight movement effectively may require more input per unit. The return on the freight “margin” and the rate negotiation strength is not enough to offset all of these investments, so there have to be more returns.

I suspect that even more savings and efficiencies will be brought to the entire supply chain when Walmart takes complete control of its transportation network. And I believe that these efficiencies will enable Walmart to deliver on a host of other strategic results that they have promised.

In February 2010 Walmart announced that it would dramatically cut the fuel consumption and greenhouse gas emission of its operations. The goal is daunting: Walmart is striving to deliver on three simple but massive sustainability goals:

To be supplied 100 percent by renewable energy
To create ZERO waste
To sell products that sustain people and the environment

Simple and straightforward? Yes. Easy to achieve? No. It will be very difficult. This is the kind of corporate goal that could damage a bottom line. But I am sure that Walmart is looking at ways for sustainability goals to be in alignment with their fiscal goals.

Fleet Efficiency is a Tactic…

This is a “double bag” tactic — it addresses lower cost AND sustainability strategies

When you consider the size of Walmart's private fleet it looks as though there is only so much they can do to drive greater efficiency and lower their carbon footprint. From 2005 to 2008 Walmart increased the fuel efficiency of their private fleet by 38 percent, mostly by upgrading technology and buying more aerodynamic trucks. They looked at alternative fuels, auxiliary power units, and aerodynamic fairings on both tractors and trailers. Walmart relentlessly looks at the little costs that add up.

Walmart understands that every truck is equipped with a resource that can be upgraded and retrained — the driver. An early adopter of Electronic On-Board Recorder (EOBR) units, Walmart uses the technology to track the location of the rigs, track the fuel burn, and monitor the driver’s right foot, gear selection, and other decisions. Altering driver behavior is the next frontier in improving fuel efficiency.

Walmart’s published goal is to double the efficiency of its truck fleet by October of 2015, so in five years they expect to almost double what they achieved between 2005 and 2008. The savings impact is like compound interest — it builds on past savings. More efficient equipment and driver performance is a partial solution.

There are many ways to skin the fuel efficiency cat. One is to run fewer empty miles. Walmart is gaining on efforts to optimize how merchandise is stacked in the trailers. More freight on the truck = fewer trucks and miles. The private fleet logged 87 million fewer miles in 2008 while transporting 161,000 more cases, allowing the company to save 15,000,000 gallons of diesel fuel. This is real progress — with relentless focus on driving more value of goods per load — which is a metric every business should use. Walmart is working hard to reduce packaging by 5 percent by 2013, which helps the effort.

While packaging changes affect value density, more is needed. As product mix changes and the cost of products continues to decline, Walmart is challenged to get even more product into less space. This effort not only impacts transport, it helps warehousing and store space. Some examples are detergent formulations that reduce the water content, package redesigns that change the shape of the cartons to increase the count loaded onto the truck, carton designs that reduce the “dead space” around the product but still provide the protection needed. All these efforts will directly reduce cost and carbon footprint.

Walmart is making a cross-functional effort to reduce packaging, improve load capacity, and reduce the total trucks used to drive down costs and fuel consumption. These are tactical efforts that support multiple strategic goals.