Supply Chain Matters has previously noted that in these challenging business times, even the best organizational supply chains can experience a snafu.

Procter and Gamble, on just about every influencer’s listing as one of the top rated supply chains, is experiencing an uncharacteristic supply snafu which is gaining wider visibility. The timing is not ideal since P&G recently disappointed Wall Street by reporting a 49 percent drop in quarterly profits (quarter ending Dec. 31), a hefty write-down of previous acquisition costs, and 1600 planned job cuts.  The Wall Street Journal reported that P&G lost market share in a greater portion of its business lines during the past quarter partly because competitors held back on product price increases while P&G raised prices. P&G is now reversing some of these previous price increases.

The supply snafu involves the market introduction of a new branded line of Tide Pods, a capsule blended laundry detergent that was originally planned for market introduction in August of last year.  P&G product management had to push the market entry date to this month, and it now appears that supply constraints may limit how much supply will be available at retail outlets to support a broad product launch.

An article published on the Cincinnati Business Courier web site cites a Deutsche Bank analyst as indicating a second supply delay involving Pods and that P&G is communicating to retailers that constraints will limit supply for shelf displays only, and that off-the-shelf volume promotions should be timed for no sooner than July of this year. Noted was that the “three-chamber unit dose” delivery system for Tide Pods required special manufacturing processes to be developed. A spokesperson for P&G noted: “Unfortunately, we recently experienced unexpected challenges as we ramped-up new manufacturing capacity and processes in mid-November and December. However, we continue to see improvements in the manufacturing processes and are confident we will achieve the manufacturing capacity we expect on Tide Pods.”

An article appearing on AdvertisingAge noted that P&G appeared to have a first-mover advantage in the biggest laundry innovation in 25 years, but these latest supply setbacks provide an opportunity for laundry detergent competitors to launch their own versions of blended product.  That article notes: “A slew of ultra-concentrated detergent “packs” that are slated to hit stores in February are expected to ratchet up marketing outlays in the category by nearly $300 million.” The article also cites an executive at a P&G competitor indicating that “retailers are furious” and that P&G’s sales force is “having to use up chips saying they’re sorry” for changing plans twice in six months.

While competitors will seize on market opportunity, P&G as a leader in global supply chain capability will eventually bounce back and manage this Tide related supply crisis. Articles have also noted that P&G has complete patent protection on this new formulated product. As is often the case, lessons will be learned, especially regarding the alignment of product management, sales, marketing, and global supply planning in new product introduction involving highly complex manufacturing processes. There well may be lessons related to the executive S&OP processes, and in handing competitors an unplanned opportunity to seize on supply constraints.

We suggest that the takeaway for readers is that even the best supply chain teams can stumble, and when it occurs in the public limelight, when disappointing financial news is being communicated the headlines well become magnified.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC, and Supply Chain Matters.  All rights reserved.

The following posting can also be viewed and commented on the Supply Chain Expert Community web site.

This posting continues highlights of the Kinexions 2011 conference being held this week in Scottsdale Arizona.  Readers can also reference our prior Dispatch One and Dispatch Two commentaries  which highlight day one activities.

Day two of Kinexions kicked off with an uncensored presentation from former Gartner Vice President and supply chain sage Kevin O’Marah, who now characterizes himself as an independent thinker.  Kevin reflected on the history of business automation and innovation, the important trends that productivity and talent have brought to businesses large and small and his belief that large ERP vendors are not delivering the innovation required to enable the next era of business and supply chain process capabilities. Kevin referenced multiple survey data that reinforces that demand volatility is driving executives and supply chains literally crazy, and that the community needs to get ahead of these new realities of business. Kevin described the new wave as being led by human intelligence but with technology leverage.  Kevin was also kind enough to acknowledge our working relationship in the earlier days of AMR Research and I sincerely thank Kevin for the mention.

Day two customer presentations featured Lalit Pandit, the CIO of D&M Holdings, and Joe McBeth, Vice President of Global Supply Chain at Jabil, and Erwin Hermans, Vice President of Supply Chain Solutions, Celestica.  One of the extraordinary aspects of attending a Kinexions conference is that the audience can get perspectives from the key players located throughout many tiers of today’s global supply chain. The D&M Holdings story is one of a mid-market company that needed to transform its supply chain utilizing a planning and response management application that users could quickly adopt and leverage.  It is also an example of how a cloud offering is an important option for mid-market companies.

While there were many nuggets of information shared by all of today’s presenters, my personal favorite was Jim McBeth, who vividly expressed what supply chain response management really means for companies, and especially contract manufacturers. Jim reflected on the recent March earthquake involving northern Japan, and more recently, the devastating floods impacting Thailand.  Each had supply chain disruption implications, and as Jim best described it, “the guy who was the best information, wins”. In 48 hours, Jabil was able to provide risk assessments and impact analysis for its OEM customers and key suppliers. Jim noted that most organizations, consultants and pundits speak to constantly keeping inventory down, when the reality may be keeping partners in balance and inventory right-sized to buffer identified areas of component risk. Jim also spoke to the reality of planning at the EMS level, the mid-tier of high tech value chains when the bigger fish OEM’s will get the prime priority for available inventory and capacity. The reality turns out to be the ability to plan with predictive data, to proactively collaborate with OEM’s along with the ability to predict what requirements will be before the bigger players do the same.

This afternoon’s closing event was an interactive influencer’s panel discussion moderated by Trevor Miles of Kinaxis, which I was honored to be invited to participate.  Fellow panelists were Andy Coldrick, one of the original thought leaders in S&OP, Russell Goodman, editor-in-chief, SupplyChainBrain, and Predrang (PJ) Jakovljevic of Technology Evaluation Center.  Our goal was to wrap-up the conference by summarizing what we heard from customers and influencers, how we viewed the current state of  supply chain business process and technology innovation, and the notion of what is the state of collaboration in supply chains. A eureka moment came from an interchange of what comes next for S&OP?  Andy provided the perspective that as the originators of S&OP discussed what would be the next iterations, they also could not agree to terminology.  Andy’s charge to the audience, it doesn’t matter how you term the next iteration, what matters more is the objective your organization is seeking. Wise words from an original thought leader.

Supply Chain Matters will feature two additional Kinexions commentaries, one reflecting on this year’s briefing of key market influencers, and our conference summary impressions.

Bob Ferrari

Added Note: Kinaxis is one of other named sponsors of the Supply Chain Matters blog and the author provides services to this vendor.

Readers of this blog are often aware that one of the features of Supply Chain Matters is to follow certain supply chain transformation efforts involving either manufacturers or retailers.  Our goal has always been to tie existing news and developments with some form of context, whether crisis, transformational or renewal related.  In essence, we enjoy connecting some of the dots for our readers when supply chain business process and technology initiatives make a discernable competitive advantage.

An ongoing story involves home improvement retailing, which began with Home Depot and its efforts to overcome supply chain fulfillment capabilities gaps with its prime rival, Lowes. Our initial commentary began in early 2010, Can Home Depot Close Its Supply Chain Gap?, and was followed by a subsequent commentary in September 2010, Home Depot Making Progress in Closing the Supply Chain Gap.  The essence of these ongoing initiatives from Home Depot were an avoidance of a previous ‘big IT’ approach in favor of concerted investments in specific supply chain related process enablement capabilities.

During the bulk of last year, the Depot embarked on a $250 million investment in improved supply chain capabilities on both supply chain operations and planning. There was a rather large effort to shift inventory replenishment strategies toward more centralized planning, which included the majority of inbound inventory activity moving through 19 regionalized flow-through deployment centers. Additional investments were made in inventory optimization, supply chain network design and inventory forecasting technology which were all part of a three year effort focused on supply chain transformation.

In late February, the Wall Street Journal featured an article reflecting on Lowe’s operating results while noting that while Lowe’s demonstrated respectable results, these results were not quite as good as those of Home Depot.  Noted specifically was that in the midst of severe winter conditions that occurred in the U.S. throughout Q4, Lowe’s had run out of key inventory while Home Depot was able to capitalize on strong sales of snow blowers, shovels and other storm-related needs  by more responsive inventory replenishment strategies. A quote from the WSJ notes: “The question is which retailer will win the latest round in their three –decade-long battle for customers, as consumers resume spending on projects once again.” Also included is a quote from Lowe’s CEO Robert Niblock: “The competition has certainly gotten better.”

To update our commentary, we recently reviewed the latest operating results from both retailers.

In its briefing of Q2-2011 operating results, Home Depot senior executives again made specific mention of the positive bottom-line contributions made from recent investments in supply chain capabilities. Specifically, benefits of the ongoing supply chain transformation in the U.S. contributed 26 basis points of margin expansion while improving delivery, service and transportation cost savings to U.S. stores.  Centralized supply chain inventory management and the now deployed 19 regional distribution centers presently  handle 63 percent of total goods, up from 50 percent in the previous quarter.  Also noted was an expansion of supply chain improvement initiatives within outlets serving Canada and Mexico. As severe weather and drought impacted many parts of the U.S., Home Depot was able to satisfy demand for essential items in storm recovery, reconstruction  and landscaping needs.

Meanwhile, Lowe’s continues to fall short of expectations.  The company’s Q2-2011 operating results featured flat sales for the first six months, an associated 2 percent decline in operating profitability, and a decision to close seven retail locations. Gross margin has decreased 37 basis points and the company is facing some additional tough decisions to improve profitability.  There is now 2 percent more inventory than a year ago and inventory turnover has declined 3 basis points.  Last week the retailer announced a major restructuring of U.S. store reporting structures along with a restructuring of merchandising operations. Three operational executives have left the retailer.

For supply chain related initiatives, Lowe’s executives have highlighted the implementation of an Integrated Planning and Execution (IP&E) initiative to enable a more market-driven approach for merchandising while supporting efforts for some local region uniqueness.  This seems to be a different approach than that taken by competitor Home Depot, that noted centralized inventory ordering and replenishment. While we were not initially able to investigate the details of IP&E, we trust that he has some tenets to a market-driven S&OP process. Lowe’s has also begun deploying 42,000 handheld terminals for U.S. and Canadian stores, while merchandising structure and alignment remains in transition. That seems at the surface to be implementing automation without first fixing inventory and assortment management.

In April of 2010, Lowe’s CEO noted that he was confident that Lowe’s supply chain capabilities would continue to provide a competitive edge [over Home Depot]. Obviously that statement is no longer apparent, and Home Depot’s supply chain initiatives are providing continued boost to the bottom line. The chairs have swapped, and now Home Depot is leading in meaningful supply chain responsiveness.

Supply chain renewal and innovation does matter in retail and in other industry supply chains and this ongoing case study of home improvement retail rivals reflects the ups and downs of each.

Supply Chain Matters will continue to monitor and highlight these industry case studies.

Bob Ferrari

©2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters

Since the inception of this blog, along with our research and consulting services, we strive to provide readers and clients with specific evidence where supply chain capabilities make an impact on business performance.  Our goal within the Supply Chain Matters blog is to provide commentaries to help our readers connect the dots as it were, to where business decisions interrelate with supply chain business process and IT applications strategy.

Yet another important example of these interrelationships was brought out last week in a series of Wall Street Journal and other financial media articles commenting on Wal-Mart’s recent reporting of fiscal Q4 and full year earnings.  While the world’s largest retailer demonstrated an overall 2.5 percent increase in sales and a 27 percent improvement in Q4 profits, the actual headlines reflected more on management’s finally coming clean with an admission of missteps in its US merchandising operations.

Wal-Mart’s U.S. operations incurred another decline in customer traffic and revenues, a consistent and troublesome pattern that has continued over multiple quarters, that has opened opportunities for Wal-Mart competitors.

In our previous Supply Chain Matters commentary related to Wal-Mart’s financial performance, posted in November 2010, we noted that this supply chain prowess icon had already incurred six straight quarters of declining growth in existing U.S. outlets. We also noted that in 2009, Wal-Mart embarked on an aggressive store merchandizing initiative to cut clutter and reduce inventory stocking.  In embarking on this store re-vamping effort, Wal-Mart’s strategy was to attract higher income shoppers who valued both price as well as selection. Tactics involved a pricing and inventory stocking strategy to promote and aggressively price certain high volume consumer staples under the “price rollbacks” program, but at the same time initiate a “high-low” pricing program that increased prices on many other stocked items that would attract higher income buyers.   What got in the way was the cumulative effects of severe and sustained levels of unemployment.

At mid-year, the company suddenly had to reverse course. It re-assigned certain U.S. management, and began adding more lower cost, higher volume merchandise to stores, including the former ‘pallet clutter’ sale aisles with weekly specials.  Apparently this change of course was not able to positively impact Q4 sales.  As was the case it Q3, Wall Street analysts again noted that Wal-Mart’s overall inventory levels were even higher in Q4, up near 11 percent from year ago levels.

Wal-Mart senior management now acknowledges that as a retailer, it has confused and alienated its traditional U.S. core customers. While publically stating that core shoppers, accounting for the bulk of U.S. sales volume are households with annual incomes of $70,000 or less, we strongly suspect that that income level is a lot lower.   Wal-Mart management has often communicated that its retail sales tend to often surge at the beginning of a month, when paychecks and government subsistence payments are issued. This implies that core customers are clearly motivated by cash flow, price sensitivity, and availability of lower cost alternatives.

In one of its articles, the WSJ noted that reduced staffing at many U.S. stores has frustrated some of Wal-Mart’s vendors who observe more occurrences of out-of-stock shelves on weekends.  In spite of all previous investments in RFID and other initiatives directed at eliminating out-of-stocks, some out-of-stocks at key times remain.

Each year, this author has had a tradition of visiting and observing a Wal-Mart store both at the peak of the frantic holiday buying season, and two to three days after the Christmas holiday when re-stocking efforts are most noticeable. This year’s visit reinforced a perception that Wal-Mart has slipped in overall inventory management, selection and replenishment.

Rival Target, on the other hand, continues to see improvement in same store sales which were up 2.4 percent in Q4. Target has been adding more core food items and selection to its retail stores. Overall 2010 sales for Target were up 3.7 percent, while inventories are up 5.8 percent. Emerging competitors targeting Wal-Mart core customers like Dollar Stores have also benefitted immensely from current Wal-Mart merchandizing and inventory stocking missteps.

For its part, Wal-Mart management is moderating expectations by forecasting flat to slightly negative revenue expectations for Q1 U.S. store sales, while also indicating that it make take months to fix U.S. sales growth.  A threefold focus on acceleration in the opening of smaller stores, termed Walmart Express,  improving inventory stocking across its U.S. network of Supercenters and larger stores, with across the board item price competitiveness has each been outlined as a major focus this year.

In our prior commentary we noted that inventory stocking strategy can evoke differing management responses. Too much inventory is a detriment to working capital and margin performance while too little of required inventory risks out-of-stocks and lost sales. In the retail industry, marketing and sales, who control the levers of merchandizing strategy always want more inventory of what consumers are buying.  Where the rubber hits the road is where senior executives, cross-functional management and supply chain response come together in consistent operational execution and key performance indicator goal fulfillment.

While management theory, technology and integrated operational performance have come a long way, it would seem that a litany of non-stop supply chain focused initiatives may have lost focus to the needs of Wal-Mart’s ultimate core customers.

Wal-Mart management is now tasked with the challenge for quickly finding the right combination of U.S. merchandising, inventory stocking and distribution strategy that can accommodate the dual needs of satisfying needs of highly economically stressed core customers, while finding alternative means to attract a different level of customer.  In the end, the grand strategy may have been spot on, but the tactical execution may have faltered.

We would be interested to read the observations of readers, particularly those that have a close observation of Wal-Mart.  Has this supply chain icon faltered in supply chain capability, or will the Wal-Mart U.S. merchandising model need to be dramatically changed?

Only time will tell.

Bob Ferrari

With the U.S. Thanksgiving holiday, Black Friday weekend and general holiday season fast approaching, it is rather timely for all of us as consumers and supply chain management professionals to ponder the implications of an ever more sophisticated and information advantaged consumer, and how the 2010 holiday buying season will place ever more emphasis on retailer based multi-channel operations, and consequent stronger needs for collaboration with key suppliers.

On the Infosys Supply Chain Management Blog, I had the opportunity to provide a guest commentary on how the upcoming holiday buying season will test multi-channel operations and supply chain synchronization.

You are welcomed to add your own observations to the commentary.

Bob Ferrari

The following posting can also be viewed and commented upon on the Kinaxis Expert Community web site.

The nature of inventory can evoke a lot of opinion and management response.  Most senior financial managers and some CEO’s believe that too much inventory is a detriment to working capital performance. It is just plain, evil. Marketing and sales executives view inventory as an ultimate enabler, and having inventory of a hot selling product is tantamount to ‘candy’ to a child, or exclaims, “Give me more!”

Our community knows all too well that having the right balance and composition of inventory is the real test in the ability to satisfy all stakeholders. A previous mentor of mine, Larry Lapide would often evoke the cholesterol analogy regarding inventory in his presentations to clients.  There is good and there is bad cholesterol in our bodies, and the challenge is to optimize good and minimize the bad as much as possible.

There is a rather interesting business situation being played out, which includes inventory, and it involves supply chain icon Wal-Mart.  The world’s largest retailer recently reported its fiscal Q3 quarterly earnings, and while announcing a 9 percent increase in profitability, this retailer experienced the sixth straight quarter of declining growth in existing U.S. outlets. Nearly a fourth of overall sales now originate from non-U.S. retail outlets. Wal-Mart is quick to note that the condition of U.S. consumers has a lot to do with fueling this declining U.S. sales trend. The retailer points to a “pronounced” pattern of store sales at the beginning of the month, as soon as paychecks and welfare payments are issued.  The implication is that U.S. retail consumers have little to spend, have a difficult time in managing cash flow, and have a very keen focus on value. Meanwhile, rival retailer Target Corp. recently reported a 1.6 percent increase in same store sales, with traffic counts up by 2.1 percent.

For those readers unfamiliar with the Wal-Mart situation, there is some history to reflect upon.  Wal-Mart suppliers are acutely aware of the relentless focus on supply chain cost, which includes inventory, payables and process efficiencies. The latest initiative is a program directed at purchasing more goods directly from select global suppliers, bypassing intermediaries. Wal-Mart believed that it could gain even more efficiency through direct purchases of standard items.

In late 2009, Wal-Mart embarked on an aggressive store re-vamp and inventory reduction program.  The intent was to stock only high volume, high demand intems while creating a more streamlined, uncluttered look and feel to a Wal-Mart U.S. store. The premise was value at traditional low prices. Gone were the days of stocked pallets placed in main shopping aisles giving the appearance of a cluttered warehouse atmosphere. The new merchandising plan was designed to help customers navigate easier and located expensive or impulse items in select high-traffic areas.

At mid-year, Wal-Mart reversed course, re-assigned certain U.S. management, and is now adding more merchandise variety to stores. The Wall Street Journal noted that inventory has grown 7.7 percent compared to a year earlier.  By my calculation, in the most recent quarter, days sales of inventory is up to its highest level ever, no doubt in anticipation of an aggressive holiday buying season.

Rival Target has also embarked on a revised U.S. store merchandising program, but the results thus far, seem to be different.  Target speaks to a strategy that allows customers to indulge in small, affordable ways. Target also emphasizes that it is striving to constantly listen to customers and fulfill customer shopping needs.  Both retailers currently stand at very similar days inventory outstanding profiles, yet U.S. sales performance is different. In food and grocery items, Target is boosting food item selection with strong indications that this has been a multiplier effect on same store sales.  Wal-Mart on the other hand, may be losing food and grocery sales to not only Target, but a Costco Wholesale as well.

Technology and business process methodologies have come a long way in the ability to optimize merchandising, plan shelf space, analyze and optimize inventory investments based on consumer needs and revenue targets.  Management behavior or intuition it seems, has not made the same rate of progress.

What’s your view?

Bob Ferrari