Tuesday, January 28, 2014

Walmart: The chicken and egg problem of empty shelves and low sales

The last leg in an inventory management system is getting the goods on the store shelves. Wal-Mart seems to have ignored the importance of this part in an otherwise super-efficient and sophisticated supply chain management system. As we will see in the lectures this week, planning and managing inventory involves meeting anticipated demand, protecting against stock-outs, among others. The inability to replenish the shelves regularly is, therefore, an indicator of a flaw in this planning and management. The reason behind Wal-Mart’s inability is lack of manpower. They have been cutting down on employees to reduce labour costs in the light of the downturn in overall sales and thus reduce operating expenses, for better profitability. However, I believe this is like a chicken and egg problem; Wal-Mart’s low profits are due to high labour costs or due to empty shelves in the stores. Let us analyse this and find out the real reason.

A number of customers across the United States have been complaining of not being able to find stuff they need in Wal-Mart. Margaret Hancock, a retired accountant from Newark, Delaware, has long considered the local Wal-Mart store as her one-stop destination. But recently she has failed to find even the basic items such as face-cream, cold medicine, bandages, mouthwash, hangers, lamps, and fabrics. The cosmetics section looks like “someone just raided it” said Hancock. She, however, could easily find them in the rival stores such as Target and Costco. It’s not that, there is a flaw in the supply chain of Wal-Mart or there are inefficiencies in their inventory management systems, it’s just that they don’t have enough hands to restock the shelves.

Wal-Mart, the world’s largest retailer, added 455 stores, a 13% increase, but it’s total US workforce dropped by 20,000 or 1.4%. Wal-Mart, however, says there is no problem, barring the occasional problem of stock-out here and there, considering the difficulty to manage 4,500 stores. They say that they have a 90%-95% in-stock level. But there is no denying that Wal-Mart has been cutting costs since the past year. According to their annual report, they reduced their expenses by 27 basis points over the prior year. That means they took $740 million out of their cost structure. Some of it was labour which has affected their service to the customers.

Wal-Mart has the most sophisticated supply chain in the industry. It has been one of the pioneers to adopt the practice of automated replenishment. The softwares hosted in Bentonville, are programmed so effectively that as the goods get purchased nationwide, automatically resupply orders get placed. Right from pampers to potatoes are delivered to the stores with incredible efficiency. Even the trucks are programmed to take no the most efficient routes, so as to waste neither time or fuel. And all of this gets loaded in the back rooms at the rear of the stores where eh employees of the store transfer the goods to the shelves using hand trucks. However, these back rooms are marked by a bit of organized chaos and you need stockers to bring the goods from these store rooms to the shelves. Ultimately, no amount of supply chain computer wizardry can eliminate Walmart’s need for muscle power to get the goods on the shelves

When I visited a Wal-Mart store last time, I could find a huge section of men’s apparel but just couldn't find the three things I needed – Gym pants, skull-cap and hand gloves. They were clearly missing from the racks and had not been replenished. Also there was a clear dearth of sales people to guide me to find the items I wanted. Wal-Mart definitely needs more employees to meet the customer needs. It is entangled into what many call a “vicious cycle” Too few workers leads to operational problems. Those problems lead to poor store sales, which lead to lower labour budgets. So lack of employees is clearly the root cause of the low sales at Wal-Mart. There needs to be a rethinking at the higher management level. There are also a lot of lessons which can be learnt from more efficient competitors such as Target and Costco.

What can Wal-Mart learn from the inventory management principles and from its competitors who seem to have applied these principles effectively?


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