Walmart shifts inventory to warehouses
In reporting second-quarter results, Walmart officials said the chain is holding more inventory "for certain items" at its distribution centers rather than in store backrooms in a bid to improve flexibility across its supply chain.
The retailer continues to focus on clearing its backrooms of inventory in a bid to improve operational efficiencies in its stores.
The changes have resulted in total inventory growing at the rate of 2.2 percent, signficantly slower than the 4.8 percent gain in revenues in the quarter. Comp store inventory declined 2.4 percent versus last year.
"These actions, along with better management of seasonal inventory and reducing modular changes and future shipments to the stores, allowed us to reduce comp store inventory while improving both in stock levels and sales," said Greg Foran, president and CEO of Walmart U.S., on a conference call with analysts. "Inventory management will continue to be an ongoing focus for us."
Relatedly, Mr. Foran said a Customer Availability Program being rolled out will replace obsolete processes with "modern technology and new routines that keep associates on the sales floor rather than in the stockroom. Processes for truck deliveries at peak times and for stocking shelves have been significantly simplified, freeing more associates to be on the floor during peak customer traffic."
The improving stock levels come after Walmart faced numerous media reports beginning in 2013 of "out-of-stock" situations across stores. The shortages were blamed on employee cuts that hampered restocking.
Photo: Walmart
The Wall Street Journal said the move to shift inventories to distribution centers particularly supports e-commerce sales. Shipping from warehouses to an online shopper is quicker than having an associate pull an item as part of a ship-from-store model.
At the store level, one tradeoff may be that store associates will be less likely to fill a particular understock from the backroom. On the other hand, having an associate locate stock "can be expensive and inefficient" and deeper inventories at warehouses more efficiently refills stock levels across multiple stores.
"It’s smart, it’s naturally an outgrowth of e-commerce," Kevin O’Marah, head of research for supply chain talent development firm SCM World, told the Journal. "They can have less inventory systemwide, and still offer more variety."
Underscoring in-store inventory challenges, the Consumerist has been running a series of articles this year detailing the discovery of many consumer electronics devices and accessories nearly ten years old and obsolete on Walmart’s clearance racks.
- Wal-Mart Stores’ (WMT) CEO Doug McMillon on Q2 2016 Results – Earnings Call Transcript – Seeking Alpha
- Reins Back Inventory in a Revamped Supply Chain – Wall Street Journal
- Raiders Of The Lost Walmart Discover That PS2 Memory Cards Are Finally On Clearance – Consumerist
- Walmart To Keep More Merchandise In Warehouses, Less In Stores – Consumerist
- Walmart Strains to Keep Aisles Stocked Fresh – New York Times
- Customers Flee Wal-Mart Empty Shelves for Target, Costco – Bloomberg
- Is ship-from-store a proven omnichannel benefit? – RetailWire
Discussion Questions
Do you see broader benefits from stores carrying greater inventory stocks in distribution centers versus store backrooms? How does the strategy better support omnichannel goals?
Poll
BrainTrust
Ron Margulis
Managing Director, RAM Communications
The key here is having the right SC Decision tools and the SC Platform to determine and thus manage the inventory at the best location.
We will see many SCM changes over the next 12 months. It is the retail area that has been somewhat neglected as many retailers have been wrapped up in how to spell “omni.” The SCM charge is coming — be ready!
Have you seen the backroom at a Supercenter recently? It’s more chaotic than Penn Station at rush hour (especially during the past month). I was in a store near Denver last month and witnessed a backroom in total disarray. Product everywhere, the receiving clerks working several loads at a time and employees looking for items visually.
The move isn’t surprising as much of the effort to boost in-stock rates by flooding backrooms with merchandise have had little success. I guess the theory is if Walmart is going to be out-of-stock on 8 percent to 10 percent of its product anyway, it may as well hold inventory centrally and clean out the backroom.
Again, Walmart steps out to test and learn to manage this issue. Already the shoppers’ expectations for better inventory management and transparency are WAY ahead of retailers’ attention and ability to manage. I give Walmart a thumbs up for starting to move on this. The train is out of the station and many retailers have a long way to go to catch it if they want to meet or exceed customer expectations. To most shoppers, omnichannel means “be able to give me the goods when and where and how I want them on any given day.” Easy to say and much harder to do!
I have always been a proponent of moving inventory to the stores whenever possible. Even though commerce is growing, the stores are where the product can be sold, not the warehouse. This sounds more like a move of desperation than a savvy, strategic decision.
I remain surprised that the world’s largest retailer, with the resources they have, has not figured out inventory management to a more advanced level then this latest move indicates. It would seem that smarter forward buying and having better handle on space allocation at the store, would go along way to solving many of Walmart’s inventory issues as well as improve chronic problems with their in-stock position.
Consolidating more inventory in the DCs means the retailer needs less inventory to service the same amount of business nationwide (that’s a huge reduction in working capital). It means that the retailer is more flexible in getting the right products to the right stores, based on demand and not on forecasts from a headquarters. It means a reduction of obsolescence of inventory (and 80 percent price reductions) on products caught in stores with limited demand for them. As an aside, I often wonder how many of those shelf out-of-stocks are a result of the items being lost in the back room.
Of course, the retailer must have a system to assure that demand is serviced promptly — and who better than Walmart to do that?
Add to that the ability to meet a customer’s need via online infrastructure within 24 hours to solve an OOS and it is all win for the retailer.
At first blush this sounds like Walmart taking a page from Amazon’s playbook. It also reminds me of a few things:
When all you’ve ever played is the volume card, at some point it’s no longer self-sustaining. Clearly, this is where Walmart appears to be. Good news for better merchants across all channels.
It benefits the retailer to reduce in-store stock. Key to success is consumer satisfaction. I recently purchased a router and dehumidifier from Walmart, neither product was stocked in any local store. But I was offered very reasonable or “free” shipping and both products arrived inside the projected shipping window. Happy customer, reasonably priced and rapid delivery. So all retailers wishing to reduce store inventory need to ensure they can provide the same and continue to stock in stores products that consumer want NOW.
Out-of-stocks were previously measured at the store level. What is changing now is the numbers and types of stores companies now own. As consumer buying methods place demand for omnichannel business platforms the significant bottlenecks in retail are logistics, distribution and point-of-sale systems. The patchwork software modules designed and implanted into company enterprise systems are not performing to consumer expectation levels. This can be witnessed first hand at store customer service stations where difficulties in billing, returns, partial shipments and order errors are growing even as market demands shrink. Here lies the true disconnect in retail today.
The company systems that are in place today have been purchased to comply with anticipated system demands. This method is fine for a single sales method to the market. When an omnichannel selling platform is put into practice the company would be better to focus on sales results and consumer response. In the land of information technology hardware is the sizzle and software is always the key to success.
It is a win on almost all fronts! Much less merchandise double/triple handling at the stores, more flexibility to move excess inventory to high selling stores, supports online inventory, creates the ability to push inventory even further upstream (to suppliers). The only downside, in theory, is missing in-stocks if an unexpected sales spike occurs. Much more upside than downside.
According to an article I read recently from Greg Buzek, the out-of-stock, over-stock and returns problems sing to the tune of $1.1T. That is no small chunk of change.
If Walmart can reduce their in-store inventory and still be better than 90% in-stock, then more power to them. Methinks the issues are in the systems and processes, not where the inventory is stored.
But that’s just my 2 cents….
Recently after a futile multi-week search for a particular product in the health/pharmacy section at my local Walmart, I unexpectedly found a dozen packages of it sitting in their jumbled “clearance” department. I bought all they had. I kind of chuckled and strongly suspect that the reason it was on “clearance” was because it had not been available for customers to find on the regular shelf and purchase—so Walmart’s computer thought there were no sales and little interest in the item.
If keeping better overall control of their stock and clearing out the back room is the result of warehousing in distribution centers, then I absolutely think they are doing the right thing.
Will moving inventory from the backroom to a DC—which has to be at least some distance away—improve out-of-stocks (in stores)? That seems like a silly question, and it is if you hold some kind of normal expectation that moving inventory a few feet isn’t a challenge. But apparently Walmart doesn’t hold that view. “Expensive and inefficient.” It likely says a lot about the quantity (or quality) of in-store staffing.
As for online sales, yes this move will make that easier, but online accounts for less than 5% of WM’s sales—likely skewed toward big-ticket items like electronics—and something that improves 5% of your business while harming the other 95% seems like a dubious tradeoff.
It is interesting, given Walmart’s reputation on excellent supply chain practice. Either Walmart feels that the flexibility of shipping is such that they can quickly replenish the back room to prevent out-of-stocks, or they are so thin in store personnel that putting products in the backroom actually makes things worse in terms of moving products to the front of the store. Certainly it gives them some added flexibility to reallocate products to e-commerce when it is in central warehouse, But I do wonder about the tradeoff risking of out-of-stocks in the store. Guess we will find out how good Walmart’s delivery system is, and whether we start seeing more out-of-stocks in the store as a result.
What is somewhat amusing is that this is “new” and changing. Distributing the balance of stock in the supply chain, whether located in store, or DC, or Regional DC, or supplier finished goods VMI is not new or exciting frankly.
That a new “strategy” emerges to change the balance should have been a parameter change in a sophisticated supply chain solution, where the store demand forecast is accurate enough to drive the whole cycle.
There may be justification for differentiating between the supply chain (bringing finished goods to the retail company from the vendor) and the fulfillment chain (deploying goods in the sales and distribution channel to most efficiently deliver to the shopper, whether through a store, or a fulfillment center) but in reality, this is nothing particularly new.
The goal is keeping just the right amount of inventory in a location to make a crisp presentation, offer selection and avoid out-of-stocks or over investment. Then leave any balances in as “raw” a state as possible.
How many years ago did someone (who never got the credit) say the right product, in the right place at the right time?…