The Supply Side: Wal-Mart works to reduce higher inventory levels

Wal-Mart and many other retailers are wrestling with inventory levels growing faster than sales. In April, Wal-Mart acknowledged during its Year Beginning Meetings that the retailer lost about $3 billion in sales last year because some products were out of stock, while at the same time its overall merchandise inventory grew a faster clip than its sales.

Inventory has been rising for the past three years at Wal-Mart, but execs with the retailer say the retailer’s overall inventory levels are in good shape. However, analysts such as David Strasser at Janney Capital Markets have said the prolonged uptick in inventory is “likely getting marked down substantially, driving sales at lower margins.”

Strasser said weaker than expected holiday sales across the retail spectrum, were further pinched by a long, harsh winter that greatly condensed the prime selling window  the spring seasonal items.

Analysts believe the uptick in Wal-Mart’s inventory levels — up 5.5% between June 2012 and 2013 – continues to have a negative impact on margins and bottom line profits.

"There can be several reasons for high inventory levels such as slow sales due to product/store selection, seasonality issues, changes in consumer demand, and/or replenishment issues," said Jami Dennis, co-owner of Rapid Training Solutions. "It isn’t just a negative impact on suppliers, but also Walmart and the consumer. It clogs up the system and slows down the flow of new product scheduled to go into the store for the next season.”

Dennis said it's simple math.

"You cannot add, unless you subtract, therefore, they must price adjust to move through the goods to free up shelf space. Suppliers often help fund price adjustments to move through the inventory. Unfortunately, many suppliers are not proactively managing their store level inventories and watching order levels to ensure that their ship-to-sales ratios are appropriate to drive sales and profitability, without overstocking stores," Dennis explained.

She said Wal-Mart gives each supplier a handy tool in Retail Link access to help monitor the business and partner in the decisions to minimize the losses. The more collaborative the relationship, the less frequency of these issues.

PROMOTIONAL PRICING
Promotional pricing has become all too common, around the mall and off-mall areas, according to Ken Perkins, president of Retail Metrics.

Retailers from Wal-Mart to Old Navy are blasting customers with e-mail blasts featuring hourly sales for special items — in-store and online. Analysts say this promotional pricing with savings up to 30% or more is dangerous, because consumers quickly begin to expect it and will balk if the promotional discounts are taken away.

Wal-Mart began last fall to aggressively cut inventory in certain categories including health and wellness and home. The retailer had to take big markdowns late last summer to move through excess women’s apparel, and they were also left with an overhang of school supplies heading into the holiday season.

INSIDE THE BACK ROOM
A veteran Walmart employee who manages the back room of a Walmart Supercenter told the City Wire recently during Wal-Mart shareholder week that consumables rarely stack up, but apparel, home and seasonal merchandise are often carried over from year to year.

“My store is sitting on three years of school supplies. We donate some, but we will still have supplies in the back room this year when the new shipment arrives later this summer,” the employee said.

This inventory overhang creates a challenging climate for the retailer and its suppliers. The store employee said it is disconcerting to see a new shipment come in of something already setting in back room.

“I know that is going to affect my bonus,” the employee said, referring to the annual bonus pay that is tied directly to that facility’s operational performance and profitability.

REPLENISHMENT TRANSITION
There is some hope that Wal-Mart’s new Global Replenishment System (GRS), in use now by a few large suppliers will help with more accurate demand forecasting and in reducing empty shelf issues and curtain excess inventory stacking up.

GRS will eventually replace a system known as Inforem, which was created by IBM and last updated in 2007. Inforem uses an upward forecast modeling system, the complete opposite from the downward forecasting model used in GRS.

Duncan Mac Naughton, head of merchandising for Walmart U.S., told investors in April 2012 that the retailer was working on the GRS which is believed to be a better forecasting engine. He said minimizing inventory at the store level, improving out-of-stocks with better forecasting is an end-to-end commitment using technology to drive better performance in the store.

“It will allow us to be more real-time with our supplier on what our expectations and our needs are and we will deliver better real-time inventory to our stores,” Mac Naughton said at the investor conference.

Wal-Mart continues to slowly phase in the new GRS system and convert more departments and suppliers from the old Inforem system. The retailer is, according to sources, proceeding cautiously to work out any kinks in the system.

CONVERSION INSIGHT
Insiders said the early conversions have been frightful for some suppliers with lost shipments leading to high out-of-stocks at the distribution center and store. There are very few experts on GRS subject matter as the system still at this stage and Wal-Mart’s replenishment managers are also still learning the system.

Dennis said working through this transition with the replenishment manager and making sure all the different cut-over steps are uploaded and established correctly on the front end will be the deciding factor of a supplier’s transition success.

When a supplier is given little notice of the transition, Dennis said the best thing a supplier can do is review their “Item/DC” and “Item/Store” – items at the distribution center and items in the stores – forecast variances and offer their recommendation for a new forecast for each variance. She also recommends that suppliers complete a lead time audit, and make sure an accurate order increment and minimum order quantity is in place for each “Item/DC” combo, if the supplier stores product at the distribution center. The lead time audit is a validation of processing and transit time from supplier ship point to each Wal-Mart distribution center.

Dennis said suppliers who want to make an easy transition to GRS should make sure they have an open line of communication with their replenishment manager and a firm grasp of the new tighter forecast variance.