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[21 comments]

Walmart sees $3B opportunity in fixing out-of-stocks

April 15, 2014

Early last year when Bloomberg first broke the news that Walmart faced severe challenges with inventory in its stores, a company spokesperson challenged the accuracy of the reporting. In essence, the retailer suggested that low stock levels in some locations were isolated cases and not reflective of the company as a whole. Now, the news service reports that Walmart executives at a company meeting acknowledged the chain has a problem with its inventory and that fixing it represents a $3 billion opportunity.

To address the inventory issue, Walmart plans to add labor hours. Before the last Christmas holiday season, the retailer made a public relations splash when it announced it was moving some 35,000 part-time associates to full-time and another 35,000 temporary workers to part-time. The company said those workers would maintain their hours after the holidays.

Walmart is looking to reduce the number of slow movers on its shelves to make it easier to manage its inventory. According to remarks attributed to Duncan Mac Naughton, chief merchandising officer at Walmart, the retailer's goal is to limit inventory increases to half its sales growth rate this year.

FINANCIALS:     [NYSE:WMT] [ ]

Discussion Questions:

Do you see Walmart's out-of-stocks problems as primarily a labor or SKU/space management issue? What would it mean to Walmart's competitors should it realize the $3 billion opportunity it has identified?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Generally speaking, how does Walmart's in-stock position compare to key competitors such as Target, Kroger, etc.?

Comments:

Whatever it is, if Walmart has not been able to solve it with their technology/analytics, then what does it say for other retailers? SKU management and space management are readily available and in use everywhere, but you can't automate the stocking of the shelves. Maybe Amazon can lend a hand to bricks and mortar retailers and develop drones that can keep the shelves stocked.

I happen to be in a Target over the weekend and was amazed at how many shelves were out of stock. This was on a Saturday no less. I then cringed when I used my debit card to pay at the register. Oops.

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Zel Bianco, President, founder and CEO, Interactive Edge

Out-of-stocks are the three most hated words in retail. This is a problem that every retailer has, whether they use an EDLP price model or not, and include the largest (Walmart) to the smallest of retailers. Having Walmart recognize this is not news, since Walmart has been fighting it since its inception. Everyone does. The news is that they are recognizing it at $3 billion, and it probably is even larger than this.

Go into any Walmart store and count the OOS's, then count the items with just one piece left. If you have access to Retail Link you can easily determine the historical amount of time needed before the last piece becomes an OOS. This probably drives Walmart's estimation of $3 billion to double the number, since each store stocks very little product and cannot replace product until it arrives.

OOS's are both a replenishment space issue and a labor issue. However, it is good to see Walmart recognizing it...let's see what the next year brings in their retail numbers.

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Kai Clarke, President, Kowa Optimed, Inc.

I doubt any Walmart competitor is shaking in their boots because Walmart has finally admitted they have a stocking problem. That has not been a secret to anyone (but Walmart) for several years. Now that they have admitted to it, lets see what, beside lip service, they will do to remedy it.

I do not think this is or has been a SKU issue. I think it relates more to the labor and supervisory hours allocated to each store.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Clearly it's a function of both labor hours and less-than-effective inventory management.

You can have perfect assortment and even adequate backroom stock but that doesn't do you much good if there is nobody there to move it to the shelf. On the other hand, all the labor in the world can't save a mismanaged category where, for example, facings of high demand SKUs are cut to make room for excessive variety.

The answer to the second question is obvious. If Walmart can fix the problem, its sales should go up at least $3 billion and most likely even more.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Indeed, out-of-stocks remain a persistent problem for retailers such as Walmart. Despite decades of effort, the needle has not really moved. However, neither the approach of increased labor, nor elimination of slow movers, is the correct way to address the problem.

Increased labor is exactly the wrong approach. Forward-looking retailers are realizing that manual inspection of shelves is neither cost-effective, nor is it reliable in identifying out-of-stock issues. Rather, automated solutions that identify out-of-stocks as they are happening, and more importantly, diagnose and allow correction of perennial root causes are the cutting-edge solutions that should be explored. More labor, performing the same old function of "looking for holes," is a step in the wrong directions.

And, of course, eliminating slow movers without performing assortment analyses is also a step in the wrong direction. Many overall slow movers are exactly those items that your key customers purchase. If item X sells 10 times as quickly as a perceived substitute item Y, but many of your top tier customers purchase only item Y (even if Y has a long purchase cycle), are you really going to eliminate item Y? Perhaps the only thing more disastrous for customer loyalty than being out-of-stock on the items that your top customers want to purchase is to discontinue the items that regularly bring your top customers into your store in the first place.

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Dr. Paul Helman, Chief Science Officer, KSS Retail

The challenge with being the biggest mass merchant is that one of your key differentiators is breadth of selection and the largest store assortment creating more choice. That tends to lead to SKU proliferation.

Walmart tried to implement "SKU rationalization" several years ago to reduce SKUs (and promote house brands). When shoppers could not longer find their favorite brand of cereal or peanut butter, they rebelled. And the rebellion can get very LOUD on social media these days.

What Walmart is proposing is category management 101. Walmart has the capacity to customize assortments at an individual store level, so they should in theory have all the data they need to be able to pull off this strategy. This is yet another case in retail where having "data" does not ensure execution.

I'm with Zel Bianco on this one ... If Walmart and Target can't execute 95+% in stocks, who can? And what does this say about their ability to truly execute omni-channel where consumers want to look online to see if a store has stock?

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Chris Petersen, PhD, President, Integrated Marketing Solutions

It's probably not either or, but both and more. Walmart's known for years that they have an OOS problem (I'm looking at a report from 2007 done by U. Colorado and IE Madrid showing the same thing). Fix the assortment and you need less labor. Increase the labor and you have to worry less about the assortment (although not as smart a solution). The question that is open is, what do shoppers do when their product is OOS? Do they buy something else, get it on the next trip (maybe), or go to another store?

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

Walmart has tried to be all things to most people. That has created a wide array of SKUs, many of which moved slower than wished for. That has created inventory issues and accompanying labor issues.

To wit, the bigger a company becomes, its foundation needs greater strength and skills. For whatever reason, I am reminded what happened to Kmart, which was larger than WM two decades ago.

If the $3 billion opportunity really exists for Walmart, life will still go on for its competitors - old and new.

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Gene Hoffman, President/CEO, Corporate Strategies International

Not so many years ago, Walmart boasted that it had the best replenishment system in the world. They provided suppliers with up-to-date information and they were responsible for keep product in stock. Then and now I observe many out-of-stocks in Walmart. Clearly this great system is not working. There is a big difference in food and non-food item movement and thus space allocations. Walmart has the volume to operate a true demand system.

From experience, the solution is a combination of factors. Start with the idea of shelf allocation. Replenish on an economical basis and last, have the labor to move product from back room to the flow. In this computer age, there really is no reason for out-of-stocks.

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W. Frank Dell II, CMC, President, Dellmart & Company

Walmart should be cautious about eliminating too many "slow movers," as they may trade one problem for another if they are deemed to be void of variety once they complete their SKU rationalization. Out-of-stocks (OOS) can certainly be tamed by understanding the space to sales ratios on the shelf and insure that there are either outside displays to supplement the shelf or a systematic checking process that prompts employees to do spot checks on those items that are susceptible to being OOS.

From an anecdotal position, it seems that Walmart does have the people on the floor sufficient to manage OOS, but if they are not provided the right tools to aide them in their efforts, such as data-driven electronic alerts and the like, the problem will likely not be effectively managed.

Unlike many of the problems retailers face such as competition, inflation, and manufacturer's price increases, OOS is largely manageable and under the control of the retailer. One would think that if $3 billion is the prize, they would be doing a full court press to chase it.

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Mark Heckman, Principal, Mark Heckman Consulting

It's a space management issue. Store traffic in supercenters is too high for the way they allocate space. European hypermarkets figured this out decades ago and the club channel does it right too. For some reason, Walmart wants their food ailses to look like supermaket aisles. They can add all the labor they want. Until space is allocated closer to demand and restocking cycles, holes will exist.

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Dan Raftery, President, Raftery Resource Network Inc.

Walmart's emphasis on adding labor hours suggest that the inventory is in the backrooms and just isn't getting to the shelves in time and/or that the shelves need more frequent attention after customers have shopped them. The flip side of course is to rationalize their SKUs without jeopardizing the shopping basket. The space allocation across their range will need to be considered as well. It may take some time to get it "right" but Walmart has the resources and now renewed focus to get it done.

Retailers of all stripes work to reduce out-of-stocks, so in the big scheme of things I don't see a negative impact on other retailers should Walmart achieve its $3B target. If anything, Walmart's announcement may boost efforts to reduce out-of-stocks at other retailers. Besides, how do shoppers behave when their destination store is out of stock? Order from that store's online commerce store (an opportunity!), or dial up Amazon for right there and then? Go to another store in the same chain? To a competitor?

OOS will never go away, but can always get better, much better!

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Mohamed Amer, Vice President, Global Consumer Industries, SAP

In-store stock conditions have been a problem for most retailers for at least three decades. The problem for Walmart and others is multi-faceted. Improving store execution requires a disciplined, coordinated and comprehensive approach...three enablers must be developed sequentially and in place to produce the desires results. If done correctly, out-of-stock conditions can be improved by at least 50%. This can be done through the design of effective merchandising standards and compliance processes, better alignment of operations with merchandising and realignment of in-store responsibilities. Process and tools alone will not produce the desired results.

It is about time retailers recognize the organization structure of the store is outdated. We have proven that restructuring of the store organization, if done right, can be an immediate fix at minimal investment. Also, retailers should continually investigate opportunities to implement tools designed to more efficiently manage merchandising execution and compliance.

Winston Weber, Chairman and CEO, Winston Weber & Associates, Inc

There is no doubt that labor is one of the key elements in Walmart's out-of-stock problems. I also think they have issues within their distribution process - and yes, they may be carrying too many slow-moving SKUs that continue to create out-of-stocks on the better moving items. Walmart competitors are clearly following this story, and for the ones that have little voids, they have been the winners in many cases.

It will make Walmart much more competitive if they could cut those out-of-stocks in half, and also concentrate on offering better, more consistent customer service (another labor issue). Walmart still has lots to win in the marketplace.

Donna Brockway, President, FutureRetail

As a former Walmart vendor, I find it hard to imagine that the problem is technology or SKU management. The technology is such that there is no reason for a vendor not to have product in the store. It really is in the vendor's hands.

If so, two issues rise to the top. The first is labor. If the inventory is getting to the store and not getting on the shelf, it is a labor (or store management) issue. The second conclusion is more serious...shrinkage. If shrinkage is heavy, inventory is reduced without going through the checkout. If it doesn't go through checkout, the reduction in inventory is not recorded and therefore inventory is not replenished, resulting in OOS!

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Gene Detroyer, Professor, Independent

My observation would be that Walmart, like many retail organisations, struggle with balancing the competing priorities of in-stock, inventory (less of), waste (less of), shrink (less of) and labor hours (less again) - foregoing lost sales via out-of-stocks may be the best way to optimise profits in the short term.

'TotalLoss'

I agree, OOS is a huge issue at Walmart, but not so sure about the cause. They have had the absolute best supply chain system with RFID, etc. for years, so how could they run out of anything? Or is the replenished stock sitting in a stock room because there are not enough employees to restock? I agree they don't have enough help, but I find it hard to believe merchandise is sitting in the stockroom.

'smitty1052'

I see it as an utter failure of the vaunted Walmart distribution system. Walmart touted its distribution system for years, but became much to complacent. Expectations replaced inspections and in-store execution along with supply chain problems lead to hundreds of OOS situations in every store. I visit my local Walmart for several pet items and after driving for 15 minutes and passing 7 other grocers I get a little peeved when I am confronted by an OOS. Walmart can do better but this has obviously not been a priority!

Ed Dennis, Sales, Dennis Enterprises

In order to financially perform to anticipated street forecast, a retailer must meet turns and landed costs of goods sold. With a shortening supply of floor and e-commerce traffic, mass merchandisers must seek to improve out-of-stock circumstances against climbing fuel costs. Big box distributors like Walmart are mandating full truck load deliveries for the stores and reducing freight team activity to 3-4 day/night requirements. The resulting out-of-stocks are left to burden sales efforts with windfall stock shortages and/or labor overages.

This is no small challenge and will be the cause of death for many stores and companies for some time to come. We will have to wait and see what the true costs of meeting out-of-stocks head on are. Bringing distribution to the store level by way of putting store space overages to work for store and e-commerce supply, and reducing the number of regional distribution centers might help the balance sheet, if overhead and general administration can carry the expanded work force without increasing payroll themselves. These are difficult times for retail and the near future will see great improvements on the supply side, or outrageous inflation for all.

'gjarnoldjr'

I have personally seen that a great deal of Walmart's OOS problems are due to management's refusal to accept on-hand corrections made by their department managers. That, coupled with a serious labor issue creates the severe out-of-stocks that Walmart has been experiencing. There is a good automatic ordering system in place but very little training to go with it. So instead of the system's being used properly, it is tampered with so that it can't work. Go through any department in any Walmart and scan one aisle of items. The result will be that only about 1 in 20 items will have the correct on-hand count in the system. That's my personal estimate, but I think it's pretty accurate.

What's the point of writing a book if nobody knows how to read it?

Sally Beckner, Owner, Sunflower Sally Used and Rare Books

How about mentioning the gorilla/elephant/dinosaur in the room? The lowest level, lowest paid, mostly part-time Walmart employees have a key role here. While spending millions on "say it ain't so" publicity, Walmart's position and strategy when it comes to labor problems and therefore labor solutions is denial. Or refusal. Walmart would spend billions to automate everything and jettison employees. Of course robots don't shop at Walmart. But that's another issue.

'GlobalPB'

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