The highlight of news in the retail industry this week focused on Wal-Mart’s announcement that the company had posted better than expected profits of 3.2%, even though same store sales declined slightly in the U.S..  In the October quarter, Wal-Mart earned $3.24 billion, up from $3.14 billion in the year ago quarter.  Overall sales came in at $99.4 billion from $98.3 billion a year ago.

According to a New York Times article, the company attributed the slight decline in U.S. same store sales solely to falling prices across categories of food as well as electronics. Company officials were quick to point out that consumers remain quite worried about the economy and the uncertain job market, and continue to cut-back on their discretionary purchases.

Continuing the theme expressed by other companies in this global economy, profit increases were facilitated by productivity and cost control improvements including fuel savings.  Wal-Mart reduced inventory in its U.S. stores by $1.8 billion, which is quite a significant amount.  The company’s internal green and sustainability initiatives have no doubt had some impact on reduced fuel savings in private and store facilities. It was also noted that the company would focus on continued expense control as it moved into the critical holiday season.

Readers may well recall Wal-Mart’s prior multi-year high profile initiatives focused on RFID enablement, the key benefits of which were to improve on-shelf availability and improve overall inventory levels.  It appears that Wal-Mart has obviously found a way to reduce inventory without RFID. The company’s “Project Impact” initiative that focuses on less cluttered store layouts and higher-volume merchandise, coupled with the firm’s typical hard nose relationships with suppliers have had some impact on reduction of overall inventory.

The statement of deflationary pricing pressure in consumer goods surprised me.  From what I’ve been observing, major CPG companies such as Kraft and Kellogg’s have been raising their prices during these past few months, in order to maintain their own levels of profitability.  The obvious conclusion then is that consumers are either opting toward buying lower cost generic or lesser-known brands, or have a keen focus on price and coupon promotion.

In consumer electronics, particularly televisions, the march of the technology curve has facilitated the ability to offer lower priced units with adequate features. That should be no surprise since that has been the product lifecycle characteristic of this industry for many months. A Wal-Mart executive noted that the average unit price for flat-panel TV’s is down more than 20 percent in just a year. Wal-Mart’s “Project Impact” initiative calls for merchandising and selling more higher volume consumer electronics, including flat-panel TV’s.

Wal-Mart is the obvious giant in the retail industry, and as Wal-Mart responds to the market, the effects on the entire industry are a consequence.  This latest summary of financial performance points to supply chain cost and productivity savings as the facilitator of continued profitability levels.  The open question is where does Wal-Mart go from here to continue its profitability performance?

It would be interesting for Supply Chain Matters readers to get the inside perspective of Wal-Mart’s ongoing initiatives toward sales and profitability growth.  If you reside in an organization that is a major supplier to Wal-Mart, what types of pressures have been initiated to reduce inventory but insure on-the-shelf availability? What forms of overall pricing pressures have Wal-Mart buyers exhibited of late?

Share your observations in the comments section below this posting.

 Bob Ferrari

It seems that I’m constantly penning a Supply Chain Matters posting regarding the enviable results that Apple provides from both financial performance and supply chain capability perspectives. My last posting was at the end of July, Yet Again, Apple Sets the Benchmark. 

Earlier this week, Apple reported its latest quarterly and full-year financial and performance results, which were even better, and proves once again why Apple maintains its number one ranking in just about everyone’s top supply chain capabilities listing. While many companies continue to struggle or maintain some form of profitability in this challenging economic environment, Apple defies the economy. The company posted both a 47% jump in profits along with its second-highest quarterly revenue growth on record.

Apple’s earnings press release notes the following unit volumes for the latest quarter:

• 7.4 million iPhones, a 7% unit growth from a year ago, and a 42% increase from the 5.2 million phones shipped in the June quarter.
• 10.2 million iPods, an 8% unit decline from a year ago quarter, but the same volume as the prior quarter.
• 3.05 million Macintosh computers, a 17% unit increase over a year ago quarter as well as last quarter.

The combined 20.65 million units sold represent an average of 229,000 units of daily sales output.  While still maintaining a pace of over a quarter million units sold per day, that figure is slightly down from the previous calendar quarter.  By my calculation, days inventory outstanding (DIO) came in a 4.48 days, which is 3 days less than last quarter. Apple actually increased its inventory investment by $55 million in the quarter, which most likely represents a need to replenish overall inventories prior to the upcoming holiday season.

In the earnings press release, Apple’s CFO notes that for the full year the company grew overall revenues by 12 percent and net income by 18 percent in extraordinarily challenging times. What an understatement! 

In this economic environment, most CFO’s, especially those residing in the consumer electronics sector, would be thrilled to be able to boast of such results.  Sadly, most consumer electronics companies, particularly those that reside in Japan, are continuing to struggle in this current global economy.

Apple once again proves that it sets the global benchmarks in value-chain capability.

Kudos to the entire Apple value-chain team for a job well done.

 The question still remains however, how long can this track record continue?

 Bob Ferrari

Financial news is abuzz today regarding the latest Institute for Supply Management (ISM) Report on Business indicating that the U.S. manufacturing sector actually grew in August for the first time in 19 months.  The ISM manufacturing index surpassed the magic 50 mark, rising to a level of 52.9 in August.  Eleven of eighteen manufacturing industries reported growth in August, which is an important sign of broad-based growth. 

Of more significant importance, new orders rose nearly ten percentage points to 64.9 in August, the highest level since December of 2004. The customer inventories index was the lowest it has been in over three months which reflects that a cycle of replenishment of finished goods is underway.  New export orders are up almost 7 points in the last three months further indicating increased cause for optimism.

On a negative note, the ISM prices index registered 65 percent in August, 10 percentage points higher than in July, and a cumulative 21.5 percentage points higher than May.  This is a rather concerning trend in that continued higher prices for supply will surely dampen any longer-term momentum in product demand.

 As noted in yesterday’s posting, Will Emerging Asia Economies Lead as well as Sustain in Business Recovery?, while the news that U.S. manufacturing and supply chains may have finally turned the corner toward positive trending, the U.S. is still lagging emerging Asia countries in leading the overall global recovery. 

Other countries that also reported very positive manufacturing growth activity for August were:

• Australia, up 7.2 points
• Hong Kong up 2.9 percentage points
• France up 2.7 percentage points
• China up 2.3 percentage points
• Sweden up 1.9 percentage points

Finally, global supply chains may be turning the corner toward more positive growth.  While there is new evidence that the U.S. may be on the upswing, the real test is whether momentum can be sustained through the coming months, since there is still a long way to go.

 Bob Ferrari

We have often commented many times about the enviable position that Apple provides in its supply chain capabilities, especially in a more challenged market with altered patterns of consumer-related needs.

Apple reported yet another blowout quarter of sales and profits and we all have to tip our hats.  The company’s latest quarterly results (June fiscal Q3) reported $8.34 billion in revenue and a net quarterly profit of $1.23 billion.  Apple remains in a somewhat enviable position for this economy, in that demand for most of its products continues to exceed available supply, which adds to consumer hype of needing to have that iPhone.

Beyond the quarterly financials is yet another incredible demonstration of supply chain fulfillment capability.  Apple’s press release notes the following unit volumes for the quarter:

• 2.6 million MacIntosh computers shipped, a 4 percent unit increase over last year’s quarter
• 10.2 million iPods, a 7 percent unit decline over last year’s quarter
• 5.2 million iPhones, a 626 percent growth over last year’s quarter, and obviously the soon to be new volume leader in the Apple collection of products.

These combined unit shipments equate to a total of 10.0 million total units sold, reflecting an average of 277,000 units of daily sales output. Every day, Apple has been selling over a quarter million end-item products, and the company’s value-chain processes continue to consistently rise to the challenge.

Whether by design or shortage, Apple reduced its overall inventory levels by $125 million over the nine months from September to June. The company had an average of 39 inventory turns, and by my calculation, just less than 7 days of inventory sales outstanding.  That is a true reflection of running a lean and continuous replenishment of supply. In other words, if you visit your local Apple store or retailer, and you don’t find what you want, chances are good that you might find it again in a week.

But the fact that new models of the 3GS iPhone were only released in early June, and sustained these levels of sales does trigger curiosity as to whether Apple can continue to stay ahead of demand. In a previous post, I commented on Apple’s supply chain efforts to be able to support the recent weekend launch that yielded over one million 3GS iPhone units sold.   And as noted in a recent Computerworld article, Apple has launched an inventory tracker tool to assist consumers in finding out which store has available inventory for sale.

It’s no wonder that Apple remains on the top of nearly everyone’s benchmark list of best in class for supply chain capability. Sadly, Apple refuses to boast or allow disclosure of the specifics related to their supply chain business processes,  Can we really blame them?

Bob Ferrari

Over the weekend, stories appeared in multiple global media sites indicating that Dell experienced a second online pricing snafu involving customers within Taiwan, and Dell is now facing a series of challenges on multiple fronts.  The company apparently set local pricing errors on June 25, and again over this weekend.  The pricing errors involved laptop PC’s and a 19-inch monitor.  According to an article on CIO.com, a 19-inch LCD was listed for local Taiwan based customers for NT$500, or the U.S. equivalent of $15.26.  A similar price error occurred this weekend listing the Dell E4300 laptop for NT$18,500, or the U.S. equivalent of $563.40.  Normal pricing for this specific laptop is NT $69,000 according to news reports.

What struck me the most about this evolving incident was the overall speed and amplification of these errors. The first pricing errors appeared between 9:17pm on June 25, and 6:56am on June 26, roughly ten hours of online exposure.  According to an article in the Taipei Times, more than 26,000 people placed orders for the 19 inch monitors. The second error occurring this weekend, which involved the E4300 laptop, garnered roughly 14,000 orders involving close to 50,000 laptops.  Obviously, with an average of 3.6 laptops per order, some buyer intelligence was involved as Internet-driven chat groups and buying forums quickly spread the news of a bargain.

While Dell has admitted to and apologized relative to these pricing errors, it also chose to cancel the inputted orders.  Instead, the company has offered impacted customers options for discount certificates good for a future purchase on dell.com.tw.

Reaction has been swift.  Taiwan’s Fair Trade Commission has indicated that it will determine whether Dell has violated the Fair Trade Law by failing to deliver orders as advertised, and could possibly face stiff fines.  Dell’s reluctance to deliver the wrongly priced orders has also drawn criticism from Taiwanese Internet users and the media. The Taiwan Consumer Foundation has indicated that Dell had previously made similar pricing errors in China, and subsequently agreed to sell the items as priced.  The agency also cited other global corporations such as IBM, Whirlpool, and Murubeni as all acknowledging similar mistakes and honoring orders.

In my view Dell faces two significant challenges, each fueled by the current impact of the Internet.  The first is the building customer relations problem, as local governmental agencies, consumers, and impacted customers increase the “negative tone” relative to Dell.  To avoid more embarrassment and financial harm, Dell will need to find more creative means to appease consumers.

The second, and what I believe should be of the most concern to Dell’s Internet fulfillment and support professionals is how these pricing errors occurred on multiple occasions. Beyond an obvious internal control problem, the fact that Dell discovered its problem in 10 hours is no longer an acceptable response time.  Today’s buying reality is information rich and well informed consumers equipped with all forms of social media and instant information messaging devices that can alert buyers to bargains too good to refuse. With Internet sites open 24 hours a day and seven days a week, the clock never stops on a pricing error, until and unless it is quickly discovered and corrected.  Whether it is a lack of controls, inadequate staffing, or a system error, it doesn’t matter.  The error did occur, and the implications are a reality.

The fact that this also occurred at Dell, which AMR Research this year rated as number two in its Supply Chain Top Twenty Five for 2009 should not go unnoticed.  Late last year, Supply Chain Matters commented on Dell’s new decentralized supply chain operations model which was initiated to enable product groups to have more worldwide autonomy and flexibility in overcoming geographic boundaries.  This latest crisis will surely provide additional learning around the need for stronger internal controls in a decentralized model.

What do you think?  Should Dell bite the bullet and honor the pricing error, or find a compromise?  Do you suspect that this was a problem caused by decentralized controls? Would technology have helped discover this problem in a more timely fashion?

Bob Ferrari