Walmart to charter ships to ensure capacity for the holiday season

An article in SupplyChainDive titled “Walmart charters ships to ensure freight capacity, inventory for peak season (August 18, 2021) describes the challenge of higher out of stock levels and delivery capacity constraints faced by the retailer. By chartering the vessels, maritime container capacity is ensured, thus potentially decreasing lead time and ensuring on time delivery. With potentially 20% higher inventory levels planned, and additional transport capacity, out of stock levels should decrease. Will having its own capacity increase total logistics costs for Walmart, or decrease it ? Is this a way to solve a coordination problem between transportation and logistics ? Is this a competitive need or an efficiency driven decision ?

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55 Responses to Walmart to charter ships to ensure capacity for the holiday season

  1. Amanda Tronchin says:

    Yes, securing more capacity will increase logistics costs for Walmart. From a market perspective, the increased demand and volume will increase the price with a limited supply. From a Walmart perspective, to obtain the best pricing and highest likelihood that its suppliers’ goods are shipped to Walmart distribution centers, their stores would be to manage the logistics. Walmart could use economies of scale and assure capacity and at more reasonable pricing.

    This is a potential solution to the coordination problem between transportation and logistics. It allows Walmart to have control and to manage the relationship amongst its transportation and logistics partners. Finally, this is an efficiency-driven decision, which may become a short-term competitive advantage once other large retailers begin to set up and negotiate similar terms with logistics and transportation providers.

  2. Darsh Shah says:

    Yes, the total logistics costs for Walmart will definitely increase but chartering will also give them a significant competitive advantage as they are driven by the moto to have “Everyday low prices” for customers. Even if they increase the price by a few cents to offset the additional logistics cost, their competitive advantage will prevail.
    I do feel that this is the right method to solve the coordination problem between transportation and logistics as the end goal is to not go out of stock and this approach helps Walmart to achieve that target. Finally, I would say that this is an efficiency driven decision to proactively stay ahead of the competition. That is what makes Walmart’s Supply Chain one of the best in the world.

  3. JASON B HARRIS says:

    The priority for Walmart and other retailers navigating the current constraints in the market includes identifying new ways to ensure inventory levels for consumers to maximize the earning potential of the forecasted demand. Walmarts recent decision to charter private vessels to increase the likelihood that its capacity meets its demand will raise its total logistics costs while decreasing its marginal costs of goods sold. Based on the heightened demand throughout the pandemic and the emerging constraints to prepare for the holiday season, the opportunity costs associated with maintaining inventory levels require the sacrifice to swell logistical costs when chartering vessels temporarily. As Walmart exceeds sales goals, this transportation strategy will absorb the associated rise in logistics costs over time. Flexibility and innovative strategies to meet the needs of the business have to be weighed against the potential cost associated with the decisions at hand. With this in mind, Walmarts strategy may solve the coordination problem between transportation and logistics, and it can be considered as a viable approach upon evaluating the cost-benefit analysis. Every decision a business makes ultimately boils down to how it will impact its bottomline, which is to make money. While this strategy makes Walmart’s supply chain more efficient in the current market, it is a competitive need.

  4. Anantharaman Gomathyshankar says:

    Logistics Costs and implications:
    Yes, the logistics cost for Walmart will increase as a result of potential vertical integration between transportation and logistics enabling greater control across the entire supply chain for Walmart. The YoY inventory levels(Q2 2021) and projected YoY levels for Q3 and Q4 2021 being up 20%, it is imperative for Walmart to increase the efficiency of its supply chain to appease the unrelenting customer demand. Volume of Sale is the pivotal measure of revenue and profits for Walmart and this ensures the arrival of goods with relatively lower uncertainty regarding lead times. Having control on lead time in terms of average and variance enables application of standard optimization for all transportation and logistics initiatives undertaken by Walmart.

    Backorder Cost and Customer Goodwill:
    We can think of lack of inventory in terms of backorder costs and loss of customer goodwill. Assuming the lack of sufficient inventory(50%) for 5% of Sales($), and backorder cost factor of 1.25, it directly affects the effective sales by 4%. Moreover, lack of inventory in a store can cause customer attrition even among supposedly “loyal” customers. The associated cost of attrition for a store dependent on volume is huge.

    Conclusion:
    For Walmart it is both an efficiency and competitive need as the function of efficiency is what makes Walmart a heavyweight competitor in the consumer retail business. To stay on top of the market and to maintain and enhance its position Walmart has to stomach a temporary blow to their total costs arising from logistics to satisfy customer demand.

  5. Chia-Yen Lu says:

    Chartering the vessels would increase the total logistics cost for Walmart. The reason is that the demand is larger than supply in the marine shipping business at this point, also the demand will grow 20% in the year-end season. That is, the marine shipping company is not worried about their order, because the demand is going to be much higher than the supply. Therefore, Walmart needs to pay extra costs for the charter contract so that Walmart can ensure the maritime container capacity. This is a way to resolve a coordination problem, between transportation and logistics. The reason is that the charter contract ensures the shipping containers so that when time is approaching the end of the year, Walmart would have a lower out-of-stock level. This decision is efficiency-driven. With the charter contract, the containers would have a shorter waiting time in the port and could be shipped more efficiently. Plus, the containers that arrive at the warehouse without delay would be put on the shelve and provide to the customer.

  6. Mu Hua Hsu says:

    Compared to ship the freight by the shipping company, chartering ships will increase their logistics costs. First, the transportation cost increases due to the high demand for vessels, which will lead to the high price of the contract for chartering ships. Besides, in order to lower the probability of stock out, Walmart set a higher inventory position, which increase 20% YOY. In this case, the holding cost also increases. In total, the cost rise.

    However, we couldn’t limit our perspective only on the cost. The benefits of coordination between transportation and logistics should also be considered. First is that Walmart can more easily control its lead time. It will satisfy the customer demand and lower the cost of backorder. Customers’ attrition rate will then be in control. Besides, with their own rented ship, they can have much information about shipping, and decide a better logistics policy.

    Therefore, I think the new method is both the competitive need and efficiency-driven decision. For the former one, if Walmart satisfies more demand in the market, customers will then prefer choosing Walmart, and maintain being the market leader. Newcomers or smaller competitors could hardly beat them since the difficulty to endure the lower margin. The decision is as well efficiency-driven. Although the cost climbs, the time of delivery is more stable.

  7. Yi-Hsuan Hsu says:

    Walmart had signed 40 new charter agreements and experienced increased freighted costs, with aim of faster delivery to ensure product availability during the holiday season. Even though the total logistics cost becomes higher, the transportation costs per product unit could actually be decreased, with more product units being shipped. Therefore, Walmart could not only ensure that they have enough stocks to fulfill customer demand, but also acquire higher product margins. Walmart could better address the coordination problem between transportation and logistics. For example, they might be able to sign the new charter agreements with fewer larger charter companies, instead of 40 separate ones. By chartering more ships from each of them, Walmart could negotiate a better shipping price with the charter companies but still maintain the same level of overall transportation capacity. Lastly, I believe it is an efficiency-driven decision, as in the retail industry, both the in-stock rate and the product margin ratio are influential to a retailer’s competitiveness. If Walmart could better solve the coordination problem between transportation and logistics, it would become even more competitive, as product margin would also become even higher.

  8. Coumba Niang says:

    Total logistics costs will definitely increase for Walmart as vessels ships are at an all time high cost. In addition, stocking up will increase holding costs. However, this would be a good efficiency driven decision for them as they will be able to recover costs during the holiday season for peak demand. Being an industry giant, Walmart needs to make sure that there have a small to none amount of out-of-stock items and backorders. Chartering ships to ensure freight capacity is definitely a way to solve coordination issue as both suppliers and Walmart need each other for business. This would also strenghten the relationship between Walmart and any other partner, which is a good opportunity for Walmart’s competitive strategy. This is also an efficiency strategy as it solves their logistical issues at the moment.

  9. Zihan Zhang says:

    I am concerned about this strategy because charting ships may generate a higher transportation cost, which does not necessarily lead to a decrease in the systematical supply chain cost. In other words, profits earned by decreasing the loss of sales may be covered by a higher transportation cost. I would say coordination between logistics and transportation is important but whether this change will help Walmart financially or not needs to be calculated carefully and then make decisions.

    However, charting ships is beneficial to the company in a long run. Business nowadays is more about customers. Providing goods that are needed by customers when customers need them can make the company earn more customers and leave customers with a great impression of its availabilities. It will make Walmart competitive, but efficient? I doubt it.

  10. Zihan Zhang says:

    I am concerned about this strategy because charting ships may generate a higher transportation cost, which does not necessarily lead to a decrease in the systematical supply chain cost. In other words, profits earned by decreasing the loss of sales may be covered by a higher transportation cost. I would say coordination between logistics and transportation is important but whether this change will help Walmart financially or not needs to be calculated carefully and then make decisions.

    However, charting ships is beneficial to the company in a long run. Business nowadays is more about customers. Providing goods that are needed by customers when customers need them can make the company earn more customers and leave customers with a great impression for its availabilities. It will make Walmart competitive, but efficient? I doubt it.

  11. Yijia Chen says:

    Increasing the leased shipping vessels will of course increase Wal-Mart’s overall supply chain costs. However, Wal-Mart can continue to operate its own competitive strategy which is ‘everyday low price’. Another advantage of this is that Wal-Mart can receive the planned inventory on time so as to reach the established inventory level, so it will not affect the customer’s buying experience and subsequent inventory supply schedule due to being out of stock.
    I think that the period of Wal-Mart’s cargo ship chartering in the inventory peak season is a way to maintain competitiveness and efficiency-driven decision. Wal-Mart not only needs to maintain its own competitiveness, but Wal-Mart can better coordinate with upstream and downstream to improve the continuity of its supply chain.

  12. Sara Fortman says:

    Yes, Walmart having its own capacity will increase their total logistics. You have to consider supply and demand – Walmart will have an abundance of supply for a while at a great price, and then when it comes to putting inventory on the shelves, they can adjust their low prices to accommodate the demand. This gives them a big competitive advantage. I do think this would be a good way to solve a coordination problem between transportation and logistics, since they will not run out of stock very quickly compared to other retailers, and this will help them reach their target. I believe this is an efficiency driven decision, because it seems like a proactive approach to have a large inventory and stay on top of their competitors. Walmart is known for having inventory readily available, pretty much overnight, which is how they are constantly ahead of other retailers because they always supply what the customers need/will need.

  13. Sruthi Madadi says:

    Having its own charter ships increases the logistics cost (fixed cost) in the short-run but as we use these ships to transport a greater number of high margin consumer products the overall logistics cost will not only decrease in the long run but also will cut down the lead time. But comparing with the logistics cost under normal circumstances owning charter ships is an expensive decision.

    For a retailer, the holiday season is when the demand is at the peak, and staying in-stock (providing a high service level) is the key to use this time to increase their revenues and stay competitive in the market. As we know post-covid the consumer spending is now back to normal, at this stage, every retailer wants to own as much inventory as possible. Knowing the current demand for the containers it’s a good move by Walmart to take the logistics into its own hands, this helps them to have strong control on the inventory and better track the lead time.

    This might not be the only way to solve the problem, but considering the time crunch and as Walmart sits on huge cash it was possible for them to own charter ships. But this expensive decision is worth it for Walmart to protect the customer’s goodwill and avoid expensive backorders/missed sales. And I think it is not the efficient driven but a competitive need.

  14. Calei Kelly says:

    Having its own capacity will increase transportation costs for Walmart, as beginning to charter ships likely has some starting costs and reduces their ability to partially load ships with other companies, to match the optimal batch size and inventory levels. However, since Walmart has such a high sales volume, this batch size problem is unlikely to be a major issue for them. Additionally, the costs of stock-outs are significantly higher with the current system, so Walmart’s use of personally chartered ships can in turn save them money by reducing stock-outs. If ship capacity is the only issue in this supply chain, I think this could reduce their overall logistics costs, if they have the sales volume for full ship batches. However, as we have been talking about in class, supply chain issues currently reach further than just shipping capacity. Port and docking capacity has also been significantly reduced, and while Walmart might be able to get its goods to the ports faster, it still is facing the delays like all other shipping companies are at the ports. I think there is good potential for this to work for Walmart as a solution to the coordination problem between transportation and logistics, but I don’t think it would work for smaller companies. Most companies don’t need the inventory that an entire ship provides, and thus chartering their own doesn’t make sense. I don’t think in the long-term once supply chain issues are resolved that this will be an efficiency driven decision. Right now, with the high Christmas/holiday issue coming up, this is likely a competitive need for Walmart to keep on pace with Amazon who has a lot of their own shipping systems.

  15. Emma Wellington says:

    The impact on total logistics costs for Walmart as a result of the company chartering capacity depends upon how the spot market performs in the coming months. It is likely that the decision will decrease total logistics costs for Walmart given the current transportation environment and predictions for continued increased demand. Since Walmart has entered into a charter agreement, they have locked in prices with the transportation company, which will likely be lower than spot prices for transportation in the coming months. Not only is it likely Walmart will see cost savings, but they also are able to better guarantee they will have capacity to transport inventory to stores in time for the holidays. Contracts like chartering are a way to solve the coordination problem between transportation and logistics. However, it is critical that the contracts include incentives that entice the transportation company to provide the capacity that is optimal for the whole supply chain. Therefore, the effectiveness of the contract depends on the specifications and incentives. Walmart’s decision to charter capacity for the holidays is both done from a competitive standpoint and to improve efficiency. In order to remain competitive, it is critical the retailer has inventory in stock and on the shelves. Additionally, by having the contract and established prices and capacity, time searching for transportation and negotiating terms can be reduced thereby increasing efficiency.

  16. bmyczkow says:

    Due to the cost of chartering their own ship, assuming they do not lease some space to competitors, Walmart total logistics cost should increase. While they previously had to only pay for the capacity they were using on ships, they will now have to pay for the entire cost of the ship. As previously mentioned, if Walmart is not able to completely fill their ships, they could look to leasing their surplus space to other companies, thus creating revenue and in turn paying some of their logistics cost incurred from chartering the ship. In theory being able to control your entire supply chain should lead to more transparency and allow for increased efficiency. However, most of Walmart’ inventory in stores is actually handled by the supplier, this may cause problems for Walmart if they are suddenly unable to maintain the same logistical efficiency and expected. I think it is a competitive decision, not necessarily a need. What Walmart is doing is ensuring that their products will make it to their destination on time, therefore ensuring they can have items the customer wants in stock. If Walmart is able to maintain inventory of certain popular items while other retailers run out of inventory it could become a domino effect in favor of Walmart. As people do their shopping, they will find what they want in stock at Walmart, and then for convenience sake do the rest of their holiday shopping at Walmart too. Essentially this could help a “one-stop-shop” approach.

  17. Aadav Srimushnam Sundaranathan says:

    It is a wise decision by Walmart to charter ships. Despite the spot prices for containers and shipping increasing, the cost of having dedicated freight capacity for movement can be weighed against the cost of missed opportunities to evaluate the returns. Vendor managed inventory at Walmart would have brought challenges for suppliers in catering to the demand surge in the upcoming months. This would be a win-win scenario for Walmart to have its supply lines secured and for vendors who would be scrambling for freight space to ship their products and meet delivery metrics. Having a higher shelf fill rate is definitely going to satisfy the shoppers in need. Walmart taking the lead to coordinate movement of goods will also help it consolidate shipments to move items to its warehouses and other locations. At times of disruptions, eliminating manageable risks by wresting more control and visibility in the supply chain helps organizations gain efficiency and perform better than its competitors.

  18. YING-HSUEN TSAI says:

    Theoretically, owning capacity will increase the logistics costs for Walmart for sure, unless Walmart can ensure the ships be loaded with optimal batch size. However, given the sales volume of Walmart, it is not impossible that it can achieve it. Even without meeting the optimal batch size, it is still possible that the total company costs to be lower. The current shipping environment is with inadequate capacity and high uncertainty. If Walmart really runs out of inventory in peak season, it might be ended up with nothing to sell, or even higher logistic costs to make things up. Therefore, the cost of stock-outs is much higher than the increased logistics costs by chartering the ships. Furthermore, it will be a huge plus if Walmart can keep enough inventory if other retailers’ shelves are empty. Therefore, it is more a competitive need than an efficiency-driven decision. In fact, Walmart is not the only retailer which chartered the ships, retailers like Home Depot and Ikea did the same thing. Maybe to further enhance logistics efficiency, instead of chartering the ships, Walmart can sign the take-or-pay contracts with the shipping company. Although in the given transportation environment, the bargaining power of shipping company will surely be higher, Walmart might still be able to gain some advantage comparing with owning the capacity directly.

  19. Vinay Krishna Devulapalli says:

    In the short run, the logistics costs for Walmart are going to increase due to the initial setup cost, figuring out various things on what works best for the supply chain. However, eventually, Walmart will reap benefits in the long run due to the tightened control on the chain. In addition, the transportation holding costs will increase due to the additional inventory. However, satisfying the demand will help recover the cost and not lead to customer attrition and maintain a reliable brand image. By chartering the vessels, Walmart will be able to get a more detailed understanding of the lead time and will be able to coordinate better. The decision is efficiency-driven as the customers expect companies like Walmart to have the required items for the holiday season, directly affecting the stock price.

  20. Sara Yung says:

    Walmart is one of the world’s most successful retailers and well-known name in the industry. Known for its low prices and variety of products, it can be difficult to keep up with consumers during peak seasons. I think Walmart’s decision to charter ships to ensure freight capacity and inventory are met during peaks is a smart one. Although Walmart will satisfy its demand, it will increase total logistics costs. Some logistical cost factors include: transportation (premium and economic services), manpower, and potential overtime. Having its own capacity increases the total logistics costs for Walmart because it increases the overall general movement and required people to move the product. Although it increases logistics, it also assumes that overall profit increases. One way to solve coordination problems between transportation and logistics is to consider using automatic power to scan, organize, and pack products, decrease use of premium transportation services, and discover consolidation practices to make most of the increased freight capacity. I believe this is a competitive need and efficiency driven decision because Walmart needs to keep up with big-box retailers (Target), online organizations (Amazon), and small retailers. It also needs to keep up with the peak season and to ease capacity.

  21. Zachary McClurg says:

    Total Logistics costs will increase with the higher cost to charter a ship, rising lead times, quantity ordered, and inventory levels. I believe this is a short-term coordination solution between transportation and logistics for the current high rate of consumer consumption and the shortages in production and goods being experienced. As production and availability of goods returns to normal levels, this may not be the best solution. The rising cost of shipping also plays a factor. If shipping companies are charting increasing rates and driving transportation cost through the roof and retailers are having to increase stock to ensure availability, the charter will likely be beneficial to total cost. This decision can easily be argued to be both, a competitive and an efficiency driven one. On the competitive side, with the holidays coming, Wal-Mart wants to ensure they have the appropriate forecasted stock to satisfy demand. On the other side, this may be the current most efficient financially way to transport the goods in a timely manner.

  22. Oladapo Olatunde says:

    This is a smart move by Walmart, coming at a time where competition heats up against e-commerce companies, the largest retailers are willing to pay to meet consumer expectations for full shelves. U.S. consumer demand has exceeded the availability of inventory posing a challenge to brick-and-mortar retailers, if they don’t fill the shelves they will lose business. Having its own capacity might turn out to be a profitable venture for Walmart as the rate of shipping vessels in the market are soaring high with limited capacity and we are fast approaching the holiday season. With a full capacity shipment getting to the port on time and they can convey the load to their stores, it could in the real sense not increase the total cost as they could secure a better bargain with the charter contract and how they coordinate the process increasing savings due to economies of scale. As Walmart would take full control of the process they will be able to better coordinate the problem between transportation and logistics as we know there are shortage of drivers as well. Walmart could use their own fleet and drivers to deliver on time their facilities. On one end it is a competitive need as other big retailers like home depot have also embraced such move. On the other this is an efficiency driven decision as to help reduce stock out.

  23. Rubin Mao says:

    Having its own capacity will definitely increase total logistics costs for Walmart. Since more self-owned ships will be used and more third-party-ships will be chartered, more costs will be charged. As well, more trucks will be needed to transport the increasing capacity. For the second question, in my opinion, the coordination problem is not only about the maritime container capacity, but also about the demand analysis and the allocation of the resources. An accurate analysis is needed to determine customers’ demands during the peak season and also the period lasting of peak season. The decision of chartering vessels to ensuring capacities is a competitive need in my own perspective. Peak season is not only existing for Walmart, but also for other grocery companies. To improving efficiencies during the peak season will make Walmart more competitive during this period, which helps to attract more customers and occupy more market shares.

  24. Dakota Ropp says:

    I think securing its own charters is a great idea by Wal-Mart. It allows them to have the capacity that they either need or desire to have for the holiday season, or any other season for that matter. That will allow them also to have a more coordinated system, because they will be able to do all of the coordinating in their own company rather than having to do coordination with the shipping companies. This will allow them to ship whatever they need when they need it. It will also be more cost efficient for them as they will not have to pay the shipping costs that the shipping companies will force them to pay. It will also give them a competitive advantage as not a lot of other companies have their own charter system. In the end it is a great idea for Wal-Mart for a lot of different reasons.

  25. Yilun Xie says:

    Having more capacity will definitely increase the logistics cost as that more safety stock in your warehouse will incur more costs. But it is also a good way to cope with uncertain demand. I would say that this is a way to solve coordination problem, but a better way would be to have a better forecast method, as that can solve the problem in a long-term without constantly having more logistics costs.
    I would say that this is both an efficiency driven decision and a competitive need. Walmart can have higher profit if they can satisfy more demand, which also expand its market share as more customers will come to Walmart instead of going to Wegmans or Target.

  26. Nicholas Reverman says:

    Total logistics costs for Walmart will increase, but it will help ensure that their stock out situations decrease. Having to pay more for logistics will eat into Walmart’s already incredibly low margin. However, it will allow them a competitive advantage, at least currently, as they will have access to more inventory than other retailers will (assuming other retailers do not charter their own vessels). If Walmart can satisfy demand more often than other retailers, that could lead to an increase in sales at Walmart, as people will be more likely to visit them instead of other retailers as they know it has a better chance of being in stock (especially with the current situation). This is a possible way to solve the coordination problem between logistics and transportation. However, this solution is only realistic for a retail giant like Walmart. Many other retailers would not be able to afford or have the power to charter the number of vessels that they can, all due to their size. This could be classified as an efficiency driven decision, only if they can find a way to negotiate better rates at which they charter these vessels. But with retailers’ margins already so marginally low, this could prove to be a struggle for Walmart in the short term. Long term, I do believe that Walmart could negotiate better rates, or even purchase their own vessels. This is an opportunity for Walmart to integrate into transportation and logistics more so than they already are. This would allow them to control their supply chain much more efficiently.

  27. Brian Mbui says:

    I’d say this is definitely one sure way of solving a coordination problem by chartering the ships. They will incur increased transport costs but I believe those would be offset by how much more demand they can accommodate with their increased stock. Higher stock levels mean almost meeting demand 100% of the time and that may equate to increased profits under the right circumstances. So, this is a great move by Walmart and definitely a smart move since they could offer even better deals and discounts to their customers therefore gaining an upper hand over the competition. The competitive aspect of this decision stands out more than the efficiency part of it since the chartered ships may not always be shipping at full capacity therefore wasting freight capacity for competition gain.

  28. Shivang Batra says:

    Chartering the ship will result in increasing the total logistics cost as earlier they were paying only for the container but chartering the ships comes with the additional cost. But on the other hand, making an agreement with the shipping company at a time when ocean freight is at its peak will definitely result in better costing in long run. Chartering has already resulted in 20% higher inventory level which will result in less stock-out and better customer satisfaction during the holiday season. In my view, chartering will surely result in more cost but this cost will offset the cost of losing a customer that will result in a win-win situation for Walmart. Chartering is a way to solve the coordination between transportation and logistics.

    Walmart’s decision for chartering is done both for competitive need and efficiency. Having higher stock results in better demand satisfaction which serves as a competitive approach for increasing customer trust and having the agreement and prices beforehand can save a lot of administrative cost and time thereby increasing efficiency.

  29. Li Ci Chuang says:

    In my thinking, chartering ships will definitely increase the total logistics costs for several reasons. First, higher container capacity results in higher transportation cost because Walmart faces higher demand for vessels now. Also, they try to prevent the probability of stock out, meaning that they hold a higher inventory level, and the inventory holding cost will increase accordingly.

    However, in the long term, the situation may change. For example, because the demand for chartering ships goes up, the bargaining power on price also increase. And the profit will get better in this way. Besides, as Walmart holds higher inventory level, they can stand out and compete when the whole situation is terrible: other retailers have zero inventory. I would say this strategy is competitive as well as efficiency-driven.

  30. Anupam Choudhury says:

    I am assuming Walmart has already done a cost analysis before going this route. With spot rates so high in maritime shipping without a guarantee for on-time delivery, it is prudent to take matters into your hand. It may not be a permanent solution, but it would let Walmart taste the waters themselves and prepare them for any future disruptions. With economies of scale, Walmart is well placed to take on the challenge.
    With uncertain supplies, lead time increases so is safety stock which is always a big chunk of inventory cost. By chartering vessels, Walmart is hedging risks due to uncertain lead times and saving total logistics costs.

  31. Yen Hung Chou(Misha) says:

    In my opinion, Walmart would definitely increase logistics costs by charting vessels. First, due to congestion in the worldwide mainly ports, the vessels providers raised contract prices according to the high demand market. Second, Walmart’s holding cost would definitely be higher because Walmart needs to set up 20% higher inventory than last year.

    Although Walmart’s total logistics cost would increase by charting the vessels, we couldn’t ignore the power of coordination. By charting the vessels, Walmart can control lead time easily. Walmart can fulfill more customer demand and lower the backorder cost. Second, Walmart can control the whole marine logistics system and gather more data for better logistics options rather than controlling by couriers.

    In conclusion, I think this is a great decision for Walmart because Walmart can satisfy customers just in time with a bigger volume to reach economy of scale. Furthermore, the more parts of logistics Walmart involves, the more logistics information Walmart could gain. The efficiency and service level for Walmart would get higher and higher.

  32. Jiandong Hu says:

    Walmart is a successful company, so it probably has some tradeoffs. Generally, if Walmart has enough goods that need a vessel space to load, chartering ships will decrease the logistic costs; however, most cargo vessels could hold 10,000TEU to 21,000TEU, which could last for months, so it will increase the inventory cost and cost of capital. Admittedly, chartering ships could ensure transportation capacity for Walmart, especially for the holiday season, when the demand surges. Also, the shipping crisis is getting worse these days, and many companies have postponed their shipping plan due to the crazy shipping cost, so it may be worth spending more on transportation to secure its inventory.
    However, I don’t think this is the right way to solve the problem. Coordination between logistics and transportation promotes a healthy and efficient supply chain. In my opinion, chartering ships is a way to build up inventory without concerning cost-efficiency, such as inventory policy. As competition heats up, companies are willing to pay extra to meet customer expectations, so I will not say this is an efficiency-driven decision.

  33. Lindsey Prommer says:

    Having its own capacity will increase total logistics costs for Walmart since they’re chartering their own ships, which is very expensive but obviously has sufficient upsides, which tipped the scales. The reason Walmart has chosen this path is because it is a way to solve a coordination problem between transportation and logistics wherein Walmart wants to decrease lead time, ensure on time delivery, and decrease out of stock levels, which they deemed couldn’t effectively be done using their previous transportation strategy. I believe this solution is a competitive need, as Walmart remains competitive through the peak season due to this solution, unlike competitors if they don’t make the same decision.

  34. Ting Lin says:

    The total logistics cost for Walmart will increase if it increases its own capacity, since it is not the most optimal level. Walmart pays more cycle stock costs and in-transit costs for having more inventory on hand. While Walmart has more control over the inventory level and service level, it also ensures that Walmart does not have too much backorder costs. Also, Walmart needs to keep its reputation of having stocks on hand and meeting customers’ demands. If Walmart is only stocking up for future surges during the holiday season, this strategy can be implemented temporarily. In the long run, Walmart should coordinate with its upper supply chain to determine the demand. The decision taken by Walmart is to help it stay competitive, but it is not the most efficiency-driven decision after the holiday season.

  35. Vasif Yusifzada says:

    Having its own capacity will definitely increase the total logistics costs for Walmart but it will also make them more competitive in the market. Retailers need to be proactive in getting inventory from suppliers as quickly as possible especially when there are higher out of stock levels during the peak season because customers want to see the inventory when they walk into the store or do online shopping. Higher logistics costs should not be a big problem for Walmart because when there is a higher demand for the items, they will be able to increase prices slightly and cover some of these costs. From the perspective of Walmart, it is better to sell an item for a slightly higher price rather than having stockout in the stores and incurring extra backorder costs. As a result, Walmart can definitely maintain higher customer convenience levels by satisfying the increased demand.
    This is one of the effective ways to solve a coordination problem between transportation and logistics because it would help Walmart to gain more control over the supply chain and ensure that the on-time delivery performance of suppliers is high. This is an effective way to prevent potential stockout in the stores during the peak season.
    Finally, I think this is an efficiency-driven decision that would help Walmart to increase on-time delivery performance and decrease the chance of stockout in the stores. Also, it will help Walmart to be more competitive in the market because they can satisfy the increased customer demand even during a peak season. It is not guaranteed that the success of Walmart’s strategy will be maintained in the long-term because it is possible that the other competitors will start implementing similar strategies in order to be more competitive in the market.

  36. Su Tien Lee says:

    Ships can provide a higher level of inventory with a lower price compared to aviation freights. Owning its capacity in ships may require a higher spend of facilities and infrastructure in the short run, but the long-run costs may be much lower, thus outputting a lower logistics cost. With their ships, Walmart can not only ship its items but also supplies from other companies that do not have their own capacity. Since ships have a larger storage, Walmart can sign a contract with them and provide a coordination space. This may be a way to solve the problem between transportation and logistics.
    I think the charters ships are not the best way to increase efficiency, but the large capacity and its low price are the most competitive out of other transportation. Commodities that are not limited to the expired dates can be delivered through this channel, providing a diversion in product allocation. This may form the competitiveness of Walmart and reach a good logistics efficiency in the long run.

  37. Zeyu Hu says:

    Total logistics costs for Walmart will increase if they charters ship to ensure freight capacity, inventory for peak season. However, since backorder is reduced, Wal-Mart will have higher revenue, so the total profits may increase even if they pay more logistics costs.
    Vertical integration definitely works on solving supply chain coordination problems. In this case, Walmart will reduce lead time and ensure on time delivery only by controlling maritime transport.
    I think this is a good way in the long run. Taking control of shipping will make Wal-Mart’s supply chain more competitive in the face of demand fluctuation.

  38. Hasit Yarlagadda says:

    With so many competitors in retail industry like Target, Costco, Amazon, etc. Walmart needs to prepare itself to satisfy the peak season demand. Rather than focusing on the margins, Walmart focusses on the volume of sales and hence capitalizing on the extra demand is essential for their revenue. Chartering ships might incur high initial costs but once they start making more trips it might prove cheaper. This is like a vertical integration where Walmart is taking over the transportation unit into its system and managing it. So, the transportation costs will finally decrease, and Walmart will have better control and flexibility over this. They can adjust the time and size of their trips as per their requirement.
    Being able to meet the peak season demand, will give Walmart customers’ a better experience. If customers are seeing no stock for a few items, they might start buying elsewhere and Walmart might lose them. From the perspective of Walmart this is primarily a competitive need since they will not be able to sustain in the market if they are not stocking up for the peak season and they might fall back in competition. But solution will also help in improving the efficiency of their logistics. This is a way to solve the coordination problem since we Walmart will have better control over the transportation unit and the transportation or ship chartering companies are getting a lease signed for a defined period.

  39. Esha Kaushal says:

    Chartering ships to ensure capacity will surely result in an increase in total logistics cost for Walmart but Walmart with increased inventory will also be able to reduce the probability of stock-out, thus ensuring that its customers are satisfied. This would also lead to a reduction in backorder costs for Walmart.
    Another benefit that Walmart can derive through having charter ships is the control on lead time and this would translate to better operational efficiencies in the logistics system.

    Keeping in mind the above benefits the decision seems to be motivated by efficiency gains and it may bring across competitive gains in long term as an increased number of customers will be satisfied by the availability of items at Walmart especially during peak seasons.

  40. Hao-Wen Weng says:

    The overall total logistics costs for Walmart definitely increases, but during this period of Pandemic, the matter is not the cost but if Walmart can get their inventory on time. Recently, the harbors all over the world are experiencing extreme ship traffic jam, and who’s products can be shipped at the first? The one who pays the most. Sometimes, even you would love to pay, the capacity and the containers are not enough either. Walmart might suffer this for a period, and even having its own freight might increase the logistics costs, it cannot compare with the lost of backorders. I think it is also a way to solve the problem of coordination because the agent of freight might serve several customers at the same time, and Walmart’s needs might not be the top priority, and even it is, Walmart still needs to pay the costs on negotiation and communication as well. In my opinion, having its own freight capacity will be their efficiency driven decision. Walmart can guarantee its inventory delivered on-time during the peak season, and while in the off season, they can rent the capacity to other retailers without waste.

  41. Wenbo You says:

    Having its own capacity will definitely increase the logistics costs for Walmart from chartering their own vessels and other additional inventory costs, but the costs can be offset by Walmart’s pricing strategies by slightly increasing the prices of goods.
    This can be part of the solution for coordination problems between transportation and logistics, but to achieve better coordination, Walmart needs to have elaborate analysis on customer demand to deal with demand fluctuations through the years.
    Though having corporate-owned vessels will bring additional costs, it will bring Walmart advantages for now and in the long run. At the moment, Walmart will enjoy the competitive advantages from more capacity. While in the long run, Walmart will be able to have more stable stock from this efficient driven decision.

  42. Wei-Ling Huang says:

    The vertical integration of chartering ships to ensure freight capacity will definitely increase total logistics costs for Walmart in a short run at least. However, with the peak season coming, the top priority for Walmart as a retailer is to ensure sufficient stock levels at its stores for operations. I believe chartering ships could solve a coordination problem for Walmart between transportation and logistics because Walmart will be able to take more control on arrivals of its in-transit inventory and to reduce more risks from uncertainties in the ocean freight market. Given that all retailers are facing with the similar issues of capacity constraints, unrelenting customer demand and out of stock levels, this is a competitive need for Walmart to have stable stock levels when the others don’t, and perhaps this is also an efficiency driven decision if freight costs in the ocean market keep increasing.

  43. Alexander Rabold says:

    Chartering their own ships will increase the direct costs of logistics for Walmart, but given the current issues plaguing global logistics systems, the decision is still a reasonable one. With demand bound to increase during the holiday season, and the potential consequences of not being able to fulfill demand, it would give Walmart a bit more breathing room when it comes to transporting goods and determining lead time. It’s also a way to ensure greater coordination between their logistics and transportation, since these ships won’t have to deal with the demands of other customers. Such a move is both competitive and efficient, since it allows for greater certainty in shipment costs/times and provides an advantage over their competitors through greater access to shipping.

  44. Haoning Wang says:

    According to Walmart’s choice to charter ships, it is necessary for the company to ensure freight capacity and guarantee the inventory for the coming peak season. There is no doubt that the transportation cost will increase since more ships carry goods for Walmart. The transportation cost will increase the whole supply chain cost for sure. But in the long run, Walmart can adjust to the market better. They can deal with the backorder cost so that they can make more profit in the peak season. This is a good way to solve the coordination problem between transportation and logistics.
    As we all know, the holiday season is coming. Every retailer like Walmart will prepare the inventory for the season. Walmart is trying to obtain resources and develop a product strategy and promotion plan according to the sales targets. The financing department should run the demand forecast to ensure the demand for the products. This is an efficiency-driven decision.

  45. Increasing logistics capacity, by chartering more ships to ensure freight services availability during high demand season would most likely produce higher prices initially. However, such logistics planning/arrangement would eventually result in total logistics costs saving. Considering the alternative here would be, facing freight capacity shortage when it is most needed (holiday season shipping period), it is safe to predict that such situation would result in much higher costs for many reasons. In case of shortage, market would react with higher prices for products/services; lack of logistics capacity could possibly mean Walmart does not receive its’ merchandises, at least on time, hence loss of sales/revenue. So, without such logistical arrangement, Walmart could be facing higher freight prices or revenue losses due to potential merchandise shortages; this would eventually result in much higher total logistics costs than it is being paid in this case.
    Managers have been using coordination to plan and guard for potential operations disruptions, however, coordination is not a cure in itself, it is critical to involve the relevant partners, as well as to include the necessary area of business or operations to ensure eventual incidents or crises are covered. By chartering ships, Walmart is not just making a deal with freight services suppliers to purchase their services when needed, this arrangement ensures ownership of transportation capacity, in this case when it would probably matter the most. This move provides the guaranty for Walmart in the coordination agreement. Such guaranty provides the confidence that when needed, Walmart would get the service in priority. Ultimately, in case capacity is not required at the time, Walmart could resell or cash-out the contract (if provided in the initial contract). It is important to note that this move by Walmart can easily provide them with competitive advantage, especially if direct competitors do not make similar arrangements/coordination deal. In sum, this move not only would result in more efficiency for Walmart’s operations, but it could also be the critical differential for competitive advantage in the market.

  46. Colton Kaplan says:

    Increasing the capacity by ensuring on-time delivery and decreasing out-of-stock inventory is a great strategy to ensure customer satisfaction. The cost of logistics will be increased due to chartering more ships. However, the cost will be offset due to the competitive advantage they will have during their peak season while others run out of stock. It is a short-term solution to solve coordination issues between transportation and logistics. I believe it is based on competitive need and the peak season is when a large portion of their sales occur. Although, they should come up with a different solution for the long term based on decisions driven by data and previous forecasts.

  47. Daniella Cobos says:

    I think that having their own capacity will increase total logistics cost for Walmart. However, they will still gain competitive advantage and can take advantage of economies of scale in order to reduce costs. This decision allows Walmart to be involved in the decision process from their transportation and logistics partners. ThIs is a competitive need decision because they are ensuring that they will be able to fulfill the demand . This allows them to be on the top of the game wile other retailers will not be able to meet the demand.

  48. Chi Wen Chen says:

    This practice which involves chartering vessels will in general reduce the total supply chain cost for Walmart because the stability of global supply can be more predictable, thus the overall inventory level can be lower, leading to less holding cost. One of the ways to coordinate this supply chain structure is to sign the risk-sharing contract between retailer (Walmart) and Vessel Fleet companies. By doing that, they have incentives to share demand information.

  49. harishgavva says:

    The logistics costs for Walmart will increase in the short terms because of the setup cost, cost due to adjustment and the labor cost involved. However, in the long run, Walmart will reap benefits due to the control on the chain and hence the capacity planning. In addition to these costs the holding costs will also increase due to the extra inventory that is needed to be carried to prevent stockouts. But this in term is balanced by the customer retention and maintaining the market cap. By chartering the vessels, Walmart will be able to get a more detailed understanding of the lead time and will be able to plan better in terms of inventory. The decision is efficiency-driven as the customers expect companies like Walmart to have the required items for the holiday season.

  50. szargham says:

    I believe the cost of stock out is what made Walmart to take this decision. Transportation cost will increase while stock out decrease. I believe the trade off is beneficial for the Walmart specially for this holiday season. I think Walmart will have more control on its coordination will create a better forecast accuracy along with having more accurate lead time. By reducing few uncertain factors, such as lead time for vessels, they can plan better and find a way to make the channel more efficient. Uncertantiy is always costly and if by chartering vessels they can reduce that, it could become part of their advantage.

  51. Akshit Jain says:

    As mentioned in article, Walmart’s decision to charter ships will help Walmart team to ensure freight capacity and inventory for peak season, but this decision will also result in increase in logistics cost, but if expected profit from potential sales is greater than increase in overall logistics cost, then Walmart decision of chartering ships makes sense. From short term perspective, this approach seems better to tackle demand variation during peak time or seasonal demand, but from long term perspective it will be difficult for Walmart team to coverup increased logistics cost.

    With potentially 20% higher inventory levels, decreased lead time and ensuring on time delivery, probability of Walmart stock out should decrease, resulting in better customer fill rate. From my perspective, this step by Walmart is in response of competitive need of retail market, as inventory level during peak time or holiday season turns out to be a critical factor.

  52. Kristian Komlenic says:

    This approach is very interesting, due to two reasons. First is being competitive and securing capacity before competition and second is irrational decision making. I want to focus on second one, I think irrational decision was taken because Walmart is looking at their own chain and how can they improve it (decrease costs). In this case they are able to understand peak season demand. However, irrationality comes from cost perspective rather than coordination. Coordination will be the key driver, should be, for Walmart and retailers. I think this will drastically increase cost because they are buying capacity and will require cash reserves to play its role.

    I am very interested to see how it will play during the seasonal peak, with other retailers competing for capacity this will cause issue for competition (4c). I think bid process should take place to maximize profits for transportation companies that are sharing their capacity for Walmart. In order to address this need, we will require a coordination agreements to share capacity with other retailers because if Walmart does not have the goods, Target could still supply them. If they are able to reach an agreement. This is above and beyond but I still think it is possible.

  53. Rajinder Budhiraja says:

    Walmart aims to better its supply chain performance through improved coordination that will result from its forward integration plans to charter its ships to ensure freight capacity, higher inventory, and service levels.

    Reaping the benefits associated with such a move, Walmart will gain through the following:
    1. Improved decision-making along the supply chain as the number of decision-making entities along the chain will reduce. It will result in better coordination of the chain structure, the third ‘C of the 4C framework’ of the supply chain.
    2. Increased logistics capacity (second C of the 4C framework) will result in lower variation in lead time that will reduce the safety stock level.
    3. They are building a more resilient supply chain through reduced dependencies on freight providers.
    4. In the long run, Walmart can explore the opportunity to sell its excess freight capacity in the available logistics market, which will open new avenues of revenue for Walmart.

    The total logistics cost for Walmart will be affected by such a decision. I will break the logistics costs into three components – Transportation Cost, In-Transit inventory holding cost, and Cycle Inventory holding cost. Out of these, the transportation costs are expected to lower as Walmart will no longer have to shed extra for the profit margins earned by the fright provider. However, it will be shedding upfront money to charter its ship. The in-transit inventory costs and the total inventory holding costs are also expected to drop due to reduce variations in the lead time.

    Chartering freight ships by Walmart is one of the many ways to address and solve the coordination problem between transportation and logistics suppliers. It leads to greater transparency in data sharing. Moreover, it will lead to a competitive advantage for Walmart in the long run.

  54. Ahmed Hegazy Ali says:

    I believe that total logistics costs will increase, but more control and visibility within the supply chain will be present. Furthermore, lead time will be relatively more controllable, which is always desirable in periods of high demand and lower supply. Moreover, supply chain visibility promotes risk management, which leads to a conclusion that lower uncertainty leads to higher fulfillment levels (lower stockouts).

    This is an expensive solution for solving a problem between transportation and logistics, and personally I wouldn’t promote this ideology. I would pitch that Walmart develop more strategic shipping partners in which it can ensure more visibility on the supply chain.

    I believe that this is an efficiency driven decision, and believe that it is extreme. However, I would require more information to provide a more data-driven opinion.

  55. Vikram Narendra says:

    Securing capacity through charter ships will protect Walmart from container shortages and possible price increase in the future for containers. With higher sales already planned for the holiday season, assured capacity provides Walmart a competitive advantage in ensuring that customers have their products when they walk into the stores. Although this will increase the total logistics costs, Walmart can recover this through a price increase.

    I believe the short-term decision in securing capacity is a competitive need because once you lose your customer to competition, it costs more resources to win back your customers.

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