Negotiating Payment Terms
As mentioned before, payment terms define the conditions under which payments for goods or services must be made. So for example, if the negotiated payment term is “2%/ 90 net 120,” it implies that Walmart will receive a 2% discount on the invoice amount if payment is made within 90 days. If Walmart does not take advantage of this discount, the full invoice amount is due within 120 days.
It is advisable to review and possibly renegotiate payment terms periodically, at least once a year. Often, payment terms were set several years ago and may no longer align with the current business situation. For example, if the business has grown significantly and product turnover in the warehouse has increased, it might be beneficial to negotiate terms like “2%/30 net 60.”
Regarding cash discounts, a costly issue that can occur is that Walmart may take the discount even if payment is not made within the negotiated period. This is known as unearned cash discounts. In this instance, it is important to keep records of all data to dispute any potential unearned cash discounts that may have occurred. When negotiating cash discounts, take into account all risks and determine if they work for your business.
Negotiating Return Terms
In the supplier agreement, the return policy must be confirmed to determine whether returned items should be donated, returned to the supplier, or destroyed in field. The decision largely depends on the nature of the products. For larger, more expensive items like TVs, the preferred option is usually to return them to the supplier for potential refurbishment or inspection. Larger return items typically have a higher handling charges. For lower-cost items, such as pens, suppliers often choose to either donate or destroy them in field.
A key consideration for the return policy is the handling charge, which is typically set at 10%. However, this rate is negotiable and it is not uncommon to negotiate this rate down to 1-5%.
Negotiating Allowances
New Product Allowance / Warehouse Allowance
It’s common to encounter allowances like “10/10/1/1,” which means offering Walmart a 10% discount to stock new stores and warehouses with product. This allowance supports Walmart’s investment in new stores and warehouses, helping suppliers grow their market share.
For example, if Walmart were to build a new store in Arkansas, the supplier would provide a 10% discount on all products sent to that store for the initial mod set. This discount is put in place to help Walmart set up the new store. This typically applies to Type 33 items flowing through DCs and Type 20 items that reside in the DC. If a new DC is opened or a product becomes a Type 20 item, a 10% discount may be required to help set up the DC. After the initial setup, subsequent orders will follow the normal pricing.
For more insight into the different types of Walmart DC’s, check out this article, “What is a Walmart Distribution Center?”
Walmart usually expects a 1% allowance, denoted as WA or QD, for using their network. Each supplier agreement will only require payment for either WA or QD, not both. The WA applies to Type 20 items that are warehoused in the DC before being shipped to stores. The QD applies to assembly-type items that flow through the DC and immediately to the store. Suppliers should not be charged 2% (1% WA and 1% QD) for each PO; only one of the two allowances should apply per specific supplier agreement.
Defective Merchandise Allowance
The defective goods allowance is a discount given to Walmart upfront to cover costs associated with handling defective goods. For example, with a defective allowance of 5%, a supplier provides a 5% discount on each invoice, anticipating that Walmart will experience around 5% worth of returns over the next quarter or year. This approach consolidates the handling of returns into a lump sum rather than addressing each return individually.
If, at the end of the evaluation period (quarter or year), the actual defective merchandise percentage is higher than the agreed allowance (e.g., 10% instead of 5%), Walmart will request reimbursement for the additional costs. For instance, if the true defective rate is 10%, Walmart will ask for a payment to cover the extra 5% of unsalable or returned merchandise.
Conversely, if the actual defective rate is lower than the agreed allowance (e.g., 2% instead of 5%), Walmart should compensate for the 3% difference. However, receiving such a return is uncommon. Suppliers often use this scenario as leverage to negotiate better terms, such as increased store placements or promotional opportunities, rather than expecting a direct financial return.
When conducting business evaluations it is important to consider the following:
- Setting Allowances: Most suppliers have a defective allowance from another channel/retailer they are currently in (i.e. if their defective allowance at Target/Amazon is 2%, a recommendation would be a 2% defective allowance to Walmart). If suppliers do not have a defective allowance from another channel they can ask Walmart for the category/fineline defective allowance average and use that.
- Monitor Defective Allowance: Keep a close eye on defective allowances, as excessive defectives can indicate potential post-audit issues.
- Leverage Lower Defective Rates: If the actual defective rate is lower than the defective allowance percentage, use this as leverage to negotiate better terms with Walmart.
- Negotiate Allowance Adjustments: It is possible to negotiate the defective allowance rate with Walmart. For instance, if the initial rate was 5% due to being new to Walmart, but the actual defectives are lower, request an adjustment to a more accurate rate, such as 3%.
Some suppliers choose not to offer a defective allowance at all and instead accept deductions on every PO they send to Walmart. This decision is entirely up to the supplier and can be compared to tax payments. Suppliers can either pay a little upfront, or owe money at the end of the year to balance the accounts. Alternatively, they can pay nothing upfront and owe the full amount later. Different suppliers have varying preferences regarding cash flow, so it’s important to consider what works best for their specific situation.