This Week in SCDigest

The cumulative average growth rate (CAGR) for each unit and total sales is shown beneath the chart. As you can see, Walmart has had an average CAGR of a pretty decent 4.8% for total sales from 2004 through 2015, but that comes much more from the first half of that period than the last few years for sure.

Switching gears, Amazon get much criticism for its consistent failure to really make any money, though it eked out a small profit in 2015. But basically for now it is a breakeven business, making a little or losing a little each year and quarter, as shown in the chart below, where the 2015 $596 million profit was just 0.5% of sales.

Interestingly, I believe the significant increase in Amazon's cash flow number last year came from two areas: a big slow down capital expenditure and a $2.5 billion increase in accounts payables, the latter of which which accounted for about 21% of operating cash flow and about 50% of increase in cash flow. Was that just due to the impact of fast growth, or was Amazon really stretching out payments to suppliers? Don't know.

But there is operating cash flow and then what is called "free cash flow," or operating cash flow minus capital expenditures, and here the story changes quite a bit in 2015.

While Amazon had operating cash flow of $11.9 billion in 2015, and had CapEx of about $4.6 billion, actually down a bit from 2014, So that means CapEX was just 38% of operating cash flow, way down from a whopping 72% in 2014.

Walmart, on the other hand, had CapEx of about $11.4 billion (also down a bit from 2014) against $27.3 billion in operating cash flow, or 41% - a higher ratio than Amazon! (Note: as a proxy for official CapEx, I am using spending on real estate, equipment and technology). Importantly, Walmart, however, also has to pay a dividend from its cash flow- $6.3 billion worth last year - while Amazon does not. So Amazon's operating cash flow minus CapEx spend = $7.3 billion. Doing the same calculation with Walmart but also subtracting the dividend leaves it with just $9.6 billion in free cash - just $2.3 billion more than Amazon on $370 billion more in revenue.

In the first column I calculated Amazon's net shipping costs as a percent of merchandise revenue, which is more relevant than looking at that ratio against total sales, which include electronic media and services for which no shipping is required. It was a hefty number - 7.3% in Q4.

Now I am back this week doing the same thing for fulfillment costs - basically DC operations plus the depreciation expense for all those buildings and robots and reported as a line item by Amazon. We calculated the ratio of that expense - which doesn't include shipping, by the way - again against merchandise sales, as shown below.

Wow, fulfillment cost again of 17.7% of merchandise revenues last year, the same as in 2014. No wonder Amazon can't make any money - when do the savings from all those Kiva robots start kicking in?

I could do more, but think that's enough for awhile - unless convinced otherwise.

Any reaction to these numbers from Amazon and Walmart? Any other data you would like to see? Let us know your thoughts at the Feedback button below.

Nice report.

Testing, Timing, Training and Expectations.

Testing is not an event, it is a continuous part of the process. Test often. You can't test too often. Test every day, perhaps every hour. You didn’t do a test in the past day? Shame on you.

When do you pull the trigger for a WMS upgrade? In January, after you have pressed all of the inventory out into the stores for the holidays. I would rather put a gun to my head than launch after July.

Training is not an event, it is a way of life. Train every day. Train so they can do it in their sleep. Train to where they can do it in their sleep and with their eyes closed. Don’t. Stop. Training.

Expect everything to go wrong, and have a plan to deal with it. Consider Murphy to be an optimist, and that everything will go wrong. If you assume that everything will FUBAR, then you can come up with the plans to deal with it when only 10% of what you expected to go wrong appears. Even when you get caught with the 100% that you did not expect going wrong, one of your plans for what you expected may just be the right answer.

David Schneider
President

David K. Schneider & Co

I personally have been involved in many WMS implementations and the key factors have been:

1. Always #1 is the business engagement. They must be fully committed (ham and eggs analogy) and not "wake me up when its over."

2. Having internal COE expertise who can translate the business requirements into "consultant speak."

3. Having internal COE expertise who understand the capabilities of the new system and can translate that back to the impacted business to drive point #1.

Not having #1 means easily tripling the costs and doubling the time - heads will roll.

Not having #2 means wasting resources (time and money) and not getting full value out of the transformation.

Not having #3 means you are in real danger of not capitalizing on the full capabilities and efficiencies of the new system jeopardizing ROI.

Brent Ruth
Plan to Produce, IM/WM Team Lead

Caterpillar

Great piece - a scary cautionary tale. The lessons that are described apply equally to the implementation of a Transportation Management System (TMS).

One aspect of the disaster that isn't mentioned is the apparent lack of a contingency plan for quickly and safely returning to 'prior state' when it became evident that the new WMS was failing. Not always an easy thing to do, but when the go-live plan hinges on "failure is not an option" it can force the project team to continue pressing a bad position. Better to have a plan for bailing out (even if doing so still creates a bit of a disruption) and then getting reset.

I especially like the observation that testing is more than just a final checkpoint at the end of the project. Continuous and careful validation of the project on an ongoing basis throughout its life cycle, is the right strategy. And the three highlighted lessons at the end of the article are exactly on point, particularly the importance of stress testing.

Thanks for the thought-provoking (if also nightmare-inducing) article.

Mike Challman
VP, North American Operations
CLX Logistics, LLC