SCDigest editorial staff
The News: Execution of Wal-Mart’s plans to shrink its inventory base cause some financial headaches for many of its suppliers.
The Impact: Wal-Mart’s program indicates both the incredible importance of Wal-Mart sales to many companies, and how in reality trading “partners” may have very different objectives. While Wal-Mart has a great supply chain, it has its challenges like everyone else.
The Story: Last fall, Wal-Mart announced plans to shrink the rate of inventory growth, and began executing on those plans this year. As a result, a number of consumer goods companies have been estimating some reduction in sales volumes, causing their stocks to take a hit.
According to several sources, Wal-Mart told suppliers in January that it hoped to reduce inventory levels by $6 billion, and is taking aggressive actions to achieve that number. With an average inventory of about $32 billion, a $6 billion reduction would represent a decrease of about 19%.
Such a move, especially if executed in a short time window, can and appears is having a significant impact on the sales and bottom lines of many consumer goods companies, many of which have a substantial percentage of their total sales to Wal-Mart and its Sam’s Club chain.
Procter & Gamble, for example, saw its stock take a hit in March after it said inventory reduction moves by retailers would lower its rate of sales growth for 2006. Consumer goods companies offering similar sentiments include Elizabeth Arden, Playtex, Spectrum Brands, and Hershey Foods. Elizabeth Arden’s stock, for example, fell 5 percent after a brokerage company downgraded the stock, citing likely sales decreases for the cosmetic maker based on changing inventory strategies of its customers.
The changes are having a ripple effect, as even some trucking companies are feeling a pinch. This can happen directly, if the trucker’s own customers ship less to Wal-Mart, or indirectly, as lower Wal-Mart volumes lead to extra industry capacity that reduces overall freight rates.
Wal-Mart’s inventory performance of late has been decent, but nothing exceptional for the industry. Johnnie Dobbs, recently promoted to head of all supply chain and logistics for Wal-Mart, last year said that, “There are so many different ways inventory can enter our system it’s a constant challenge to keep it under control.” (See Target and Wal-Mart Logistics Execs Share Thoughts on Distribution).
There is no question Wal-Mart’s inventory efficiency has slowed in recent years, and that overall the level of the company’s cost increase versus its sales growth, which has recently been high versus its historical metrics, has been a factor in the company’s poor stock price performance. One analyst estimated Wal-Mart’s current inventory turns currently to be about 7.8 versus 8.1 in 2002, despite significant increases in the percentage of food in its revenue mix, which tends to have faster turns than hard lines and apparel categories.
Our aim is to grow inventory at half the rate of sales growth.” said Chief Financial Officer Tom Schoewe. “Over the last six quarters, we haven't met that objective."
In 2005, Wal-Mart’s inventory increased 8.2 percent, versus sales growth of 9.5 percent.
Wal-Mart’s strategy is two-fold, by most accounts:
- Pare back the number of stock keeping units (SKUs) it manages, focusing especially on eliminating less profitable products and reducing the variety of products in a given category.
- Streamline the flow of goods from manufacturer to the store shelf. This higher velocity results in more turns and therefore less inventory. This is typified by the “Remix” program Wal-Mart announced to speed the flow of high volume SKUs (see Wal-Mart to Roll Out “Remix” Program Nationwide ), as well as improved flows from overseas manufacturers through to the stores.
The first strategy can impact sales long term for some consumer goods suppliers if the products or varieties of a given supplier or targeted for elimination, though in theory some of that may be made up in greater sales of the company’s primary SKUs in a category.
The inventory reductions from higher velocity inbound processes will resort in a short-term hit to suppliers as inventory-to-sales levels adjust, but in the end will not impact total sales.
Ultimately, of course, RFID also plays a role, though lately Wal-Mart seems more focused on the revenue side impact of RFID through reduction of out-of-stocks.
Should CPG companies be happy or not about Wal-Mart’s inventory reduction plans? How do you best reconcile the short-term financial hit with developing a more efficient total supply chain? Do you expect Wal-Mart to succeed? Let us know your thoughts. If you are a consumer goods manufacturer and want to respond anonymously, just let us know.
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