Shortly before Christmas, we ran a piece titled "Wal-Mart Out-of-Stock Study - Proof or Not?" that reviewed of the University of Arkansas report on its test of RFID and its impact on out-of-stocks (OOS) at store shelf level at Wal-Mart stores.
Our piece generated a tremendous amount of reader feedback on all sides of the spectrum. Here was the gist of our review:
- This was a good bit of research that adds to the body of knowledge.
- In percentage terms, based on our back of the envelop calculation, the increased profits to Wal-Mart resulting from the 16% reductions in out-of-stocks is small.
- The study doesn't address whether the goal (reduced out-of-stocks) could be achieved by other programs or process improvements that were less expensive and/or less disruptive to Wal-Mart vendors. This was by study design, but therefore leaves unanswered questions.
First, let me get this out of the way - a couple of people on the vendor side of the equation basically told me to quit raining on the RFID parade, noting the uniformly positive coverage of the report in almost every media/analyst outlet. I understand these commentators were well-meaning, if biased - we'll just say they really are true believers and think we need continued positivism from all sides to really get the RFID train to take off.
Let me say yet again I am very positive on RFID virtually everywhere over the long-term - it's just mostly better - as the costs and performance vectors continue to improve, and very bullish on RFID in many applications right now. That said, we're going to give you our analysis on this and everything else straight up - there's lots of other avenues for the hype machine.
You'll find a number of the letters we received nearby - more next week. One theme throughout several of them was that while the economic return based on our calculations to Wal-Mart was small in percentage terms (increasing profits fine-hundredths of a percent), in absolute dollar terms it is still large.
Andrew Matorin from the research arm of investment banker Bear Stearns was one of those. He noted "that the returns would be very significant to Wal-Mart, which is perhaps why they are pursuing it with such gusto. $100 million+ in additional cash flow a year could be meaningful to any company, regardless of size." But, he added, "I do agree that the study was not exhaustive. Just a first step in a long road filled with analyses."
We even had a letter from Barnaby Feder, who often writes on RFID for the New York Times, commenting in part on the study's use of the figure of OOS's costing retailers 3.4% of potential sales - a number actually estimated in another study on the issues of OOS's generally. Noted Mr. Feder: "If Wal-Mart really wanted to make the case they'd share a little more data about how the 3.4% figure relates to their operations. If they are as good as they claim to be, that may be high."
Dr. Warren Martin of the University if Alabama at Birmingham noted that the impact of an OOS is likely greater for the manufacturer than the retailer: "If customers cannot find their favorite brand on the shelf, most people will select another brand. So for a manufacturer being out-of-stock is a much more significant immediate problem than for a retailer. For the manufacturer, the out-of-stock can cost a sale and decrease market share since your competitors get your lost sales."
Though this makes common sense, the original study providing the estimate of 3.4% lost sales to the retailers found manufacturers lost only 2.6% from OOS's. Procter & Gamble also has some data on this we'll track down soon.
Finally, are there other ways to get at the OOS problem than RFID? Notes David Sandoval from B.U.S. Systems: "There may be several alternative process improvement ideas to automate pick-list creation based on POS, shelf space plan-o-gram, and backroom book inventory data. It's a good case study justifying automated shelf pick-lists, but I don't think RFID is the only way to get there from here!"
We had many more letters. We publish all of the above comments in full and some others this week - more next week. We'd still like your opinion.
What is your take on the University of Arkansas EPC/Out-of-Stock research, or our reader feedback? Does it clearly show the benefits of EPC, or do you have questions? Do we need more analysis of alternatives and total economics?