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

The following is one of two different perspectives regarding today’s Wall Street Journal article indicating that Wal-Mart expects to track certain clothing through the use of RFID enabled smart tags. This commentary is in the context of the consumer perspective.

As I read the Wall Street Journal article Wal-Mart Radio Tags To Track Clothing, I began feeling that there will be nothing left private in my life.  I happen to agree with Katherine Albrecht, author of Spychips, when she says, “There are two things you really don’t want to [RFID] tag, clothing and identity documents…” I am not so quick to dismiss these concerns as “breathless conjecture”. Let’s check out what we already have in place.

Most of us carry at least one store card which tracks what and how much we purchase at our local supermarket, shoe store, drug store, clothing store or gas station.  We all want a bargain, so we easily give away our information to get the discount, special offerings, or members-only sales.  We tell ourselves that we control to whom and what we tell our chosen companies about ourselves, but truly, that is not the case.  They can discern a great deal about our personal and collective purchasing and lifestyle habits from tracking those seemingly harmless little cards or key chain dangles.  We are a supply chain executive’s and marketer’s dream customer.  For very little investment and work, they know oodles about what and how much they should order and stock and what does and doesn’t sell.

Now let’s introduce an RFID chip.  Let’s see…who doesn’t use underwear or wear jeans?  If this works and really does lower costs and reduce theft for Wal-Mart, and by the way, reduce the need for employees and all associated benefits costs, since there will be less need for sales associates, inventory checkers, and warehouse workers, then it will be used for all products and companies.  Think of it this way, if Wrangler and other suppliers have to invest in the new equipment for Wal-Mart, it’s a short leap for other retailers to initiate the sensors.

I don’t necessarily worry about “some unscrupulous marketer or criminal being able to drive by [our] homes and scan our garbage”, as I do about the web of potential and ultimately most probable linkages among all our consumer and identity cards.  It matters not whether the sensor tag is removable.   What matters is that individual items will be tagged with individual sensors.

We already have the cards and they will, sooner or later, be replaced with new ones that have RFID sensors.  I envision that, in time, the sensors will be added to the cards, probably without too much of a fuss, as we don’t pay much attention to replacement cards or their informational inserts. New types of IDs are already beginning to be used for special identity documents and drivers’ licenses.  We’re sold on this idea of personal convenience and extra safety.

We are also a society that wants safety and cost containment measures to assist our quality of life and purchasing power.  We think it’s a wonderful idea to fingerprint our children, give them picture IDs with bar codes and have them carry these identifiers with them all day.  They use them for bus boarding, in lunch lines, and corridor passes. Safety first, anyone who doesn’t belong doesn’t get a nifty badge; they get a visitor’s pass! Our special work and school badges keep us safe.  They also help insure that public and private funds are being used appropriately.  After all, we can’t afford to waste money on cheaters who shouldn’t be getting what it is they shouldn’t be getting nor doing what they shouldn’t be doing at the expense of the taxpayer or the company shareholders.

In the end, our RFID chipped cards and IDs will be linked to our RFID purchased goods chips which will be linked to RFID surveillance cameras.  Imagine what information we will share with anyone who wants to know.   Supply chain executives will be able to track inventory and replenish stores on a timely basis and marketers will be hailed as being ‘best of breed’ for being able to read the market so well that companies can control costs, improve working capital, and raise shareholder profits.

From birth to death, and possibly beyond, every aspect of our lives will be an open book.  Can you say “Big Brother is watching”?  I don’t think it can or will be short circuited (pardon the pun), but…I do shudder at the future of an open world from which we cannot hide.

Marie Ferrari

The following is one of two different perspectives regarding today’s Wall Street Journal article indicating that Wal-Mart expects to track certain clothing through the use of RFID enabled smart tags. This commentary is in the context of the supply chain perspective.

Well here we are yet again, another business headline involving Wal-Mart and a new RFID initiative that promises great value.  The real question is have we as a supply chain and broader business community learned from all the previous RFID endeavors? According to the Journal article, removable RFID smart tags are to be initially placed on underwear and Wrangler jeans at the point of manufacturing, and if successful, expanded to other products.  Wal-Mart is indicating that it will subsidize the costs of the tag sensors, but suppliers will have to invest in the tracking infrastructure.  To alleviate consumer privacy concerns, the retailer is further demanding that suppliers affix the tags to removable labels or packaging, instead of embedding them in the apparel.  But alas, that does not calm the fears of consumer privacy advocates. The article rightfully points out that RFID tracking is not new to retailing, and is successfully done in other regions, most notably certain retailers in Europe.

Having observed supply chain related RFID initiatives since the very beginning, I offer the following perspective.  First, I have always been of the belief that auto-ID tracking technology can pay tremendous dividends to supply chain business and customer fulfillment processes.  The opportunity is the ability to literally connect the physical supply chain by electronic means, providing all kinds of benefits in inventory management, tracking, replenishment and fulfillment programs.

There were many obstacles in previous initiatives. These included the high cost of the tags themselves, the expensive cost of the scanners, the ability of software applications to process real-time data, the lack of consistent identity standards, and fears from consumer privacy advocates.  Some years later, much is changed.  Individual tag prices have come down, certain software applications are RFID enabled, and the standards have improved.  Technology vendors have also ratcheted-down the hype that RFID cures all ills. The consumer issues still remain.

At this juncture, all of us should be a lot smarter and more pragmatic on the proper rollout, deployment and adoption of smart tag enabled inventory tracking across the various tiers of the supply chain.  We have learned that suppliers cannot be the sole subsidizer for the benefit of a single customer.  We have hopefully learned that consistent standards benefit all.  Auto-tracking is first and foremost a supply chain efficiency initiative, not a sales and marketing initiative to gain insights on consumer buying habits.  Finally, we should have learned that consumer concerns about privacy are genuine and real, and had better be addressed in any rollout initiative, especially involving Wal-Mart.

I applaud initiatives that improve inventory item tracking and more responsive customer fulfillment tracking processes.  Technology such as RFID smart tags can be effective enablers to such processes, if deployed correctly.  Unfortunately, the name Wal-Mart associated with such initiatives still evokes multiple concerns.

Bob Ferrari

An article featured in Bloomberg Businessweek, Why Wal-Mart Wants to Take the Drivers Seat, notes that the world’s largest retailer has come-up with yet a newer scheme to drive down its supply chain costs.  Wal-Mart wants to become its own freight forwarder, with plans to assume transportation services for a select group of U.S. based suppliers.  The goal is to handle supplier deliveries when Wal-Mart’s transportation teams feel that they can do the same job for less, most likely having its private fleet take maximum advantage of backhauling opportunities at supplier sites.

As with all initiatives related to Wal-Mart, there is a bit of catch.  Target suppliers will have to provide Wal-Mart a lower wholesale price to compensate for savings in paying their own transit freight costs to Wal-Mart distribution centers.  The article notes that in two instances Wal-Mart sought a 6 percent price reduction for the goods it orders, while these same suppliers estimated that the actual expense savings was closer to 3 percent.  The rest, of course, is subject to negotiation, but many of Wal-Mart’s suppliers are well aware of the one-way negotiating tactics that a Wal-Mart procurement official can muster.

While Wal-Mart can certainly run TV advertising noting how much more money it saves for consumers and how green and efficient its private fleet operates, The now TV famous Wal-Mart rig driver “Mike” is going to be a very busy man.  I however  remain a bit of a skeptic as to whether this strategy is a win-win for many in the existing supply chain, including Wal-Mart.

For suppliers who opt-in, they stand to lose volume, and potentially rate leverage with their existing transportation providers.  In scheduling production runs, an uneven or altered production output schedule can be buffered by the flexibility that suppliers may have with a transportation carrier in changing pick-up or consignment dates.  A Supply Chain Matters commentary in February noted that Wal-Mart had already tightened its delivery windows, threatening to impose a 3% penalty if a supplier shipment arrives at a regional DC outside of a prescribed four day window, either early or late. One wonders how much schedule flexibility these suppliers will now have when fleet managers back down the schedule and now proscribe when the Wal-Mart truck will show-up for pick-up. What about missed or partial shipments, or changes to Wal-Mart’s fleet schedules?  Will Wal-Mart alter its penalties for missed appointments at the supplier dock?  The bottom line for suppliers is once again re-iterated to the need for more sophisticated production planning and scheduling processes and systems.

Non Wal-Mart customers could see increased supplier costs as freight concessions passed to Wal-Mart are compensated by higher prices to other chains. Transportation carriers, who continue to struggle with the severe effects of this past recession, can ill afford to lose some key volume-related business in current transportation of goods from suppliers to Wal-Mart distribution centers. The U.S. can ill-afford to lose additional public carrier fleet capacity.

Finally, Wal-Mart itself may be overextending itself with this move to become a broader transportation provider.  If fuel costs were to rise dramatically, the company would suffer an almost immediate impact.  Higher volumes, with associated wear and tear will force tractors and trailers into accelerated replacement cycles, and thus higher capital replacement costs. Infringing on current carrier volumes could well make Wal-Mart a more convenient target for trade union activism.

These past several months have provided many large-scale Wal-Mart initiatives, all directed at bringing more consumers into its U.S. stores.  A massive store simplification and re-layout program, and direct regional purchasing among others, were all directed at increasing same-store sales, but the results to date have been disappointing.

One wonders when Wal-Mart will reach the wall of gaining efficiency in its overall supply chain and perhaps turn attention to other internal cost containment measures.  Perhaps the Walton family could afford a simpler overall lifestyle!

 Bob Ferrari

No sooner has 2010 begun and we find evidence of large industry influencers embarking on the first steps toward what could ultimately become significant disintermediation and power change within industry supply chains.

This week’s two significant evidence points were a Wal-Mart announcement related to how it intends to cut additional billions of dollars of costs from its supply chain, and Google‘s announcement concerning its newly launched Nexus One smartphone.

Significant supply chain implications tend to always start with Wal-Mart, since its initiatives often cascade to other industries related to consumer goods.  According to a Financial Times article, (promotional free sign-up account may be required) the retail giant intends to combine its store purchasing efforts across major geographic boundaries.  The effort is described as a plan to consolidate global sourcing of supplier purchases by going supplier direct rather than utilizing third-party procurement companies or suppliers.  Wal-Mart plans to leverage purchase volumes for global distribution to its stores, rather than a current country-by-country approach.  The report notes that Wal-Mart has already established four global merchandising procurement centers for clothing and general goods, and is in the early process of shifting to global-wide direct purchasing of fresh fruit and vegetables, starting with North America.

Google, well known for its disruptive tendencies, who has of late muscled its way into branded smartphones, announced this week that it plans to sell phones directly to consumers, bypassing major wireless carriers and electronics retailers.  By establishing its own online store, Google will offer an “unlocked version” of its new Nexus One phone for $529, which consumers can directly purchase and later enable with a wireless carrier of choice that supports Google’s wireless technology.  Of course, there will be options to purchase “subsidized” Nexus phones, starting with a $199 plan offered by T-Mobile, but the initial blogsphere consensus is that Google’s intent is to ultimately challenge the traditional mobile phone distribution model through wireless carriers. One of the better initial analyses comes from Renay San Miguel in an Ecommerce Times article, What’s Behind Google’s Strange Nexus One Sales Strategy?

I’m sure that Supply Chain Matters readers can provide more than enough commentary regarding the pros and cons related to either of these noted initiatives. 

In the Wal-Mart case, there can be comments related to the overall risk of global-level procurement, risk related to consistency of quality, adherence to governmental inspection standards for fruits and vegetables, or responsive processes in the event of a product recall.  What happens for instance if a salmonella infected fruit or vegetable needs to be backward traced through the supply chain? Will Wal-Mart assume primary risk as the primary purchaser and distributor of goods?

In the case of Google, we can certainly debate the success or reward factors of any upstart who attempts to alienate the existing distribution thinking or network realities.  How will consumers be able to test-drive a phone, where does one go to repair or return a phone after you literally own that phone, and will global consumers be willing to shell out a large initial sum of money in order to avoid being locked into a specific carrier’s plan? Most important of all, how or who will Google partner with to deploy a worldwide order fulfillment network that can rival the likes of Amazon or Apple?

And let us certainly not forget a mention of what happens to all of the people employed by current intermediaries, since they represent the consumers of each of these vendors’ products in the long term. 

Many industry observers can point to the fact that major economic downturns, such as the recent global-wide recession, can often lead to new industry disrupters, companies who ride the recovery in an entirely different business model.   The first week of January 2010 should be referenced as the initial thrusts from two global giants to again be industry disrupters.  There will likely be others who follow, and time will tell how successful these efforts will become, or how disruptive they actually turn out to be.

We will no doubt have frequent updates during the year.  In the meantime, chime in with your own comments on how do you view these announcements?

 Bob Ferrari