For a decade and a half now, we seen a parade of consumer goods-to-retail initiates all designed to reduce inventory, speed the flow of goods, and reduce out-of-stocks. Efficient Consumer Response, Quick Response, CPFR, and most RFID/EPC have all emphasized a related value prop, which never quite seems to be realized.
We’re actually busy on some retrospectives on a couple of those industry initiatives now, but some recent news has me thinking about it right now.
It appears that a few leading retailers, notable Wal-Mart but also others such as CVS, are reaching the goals by just doing it, with new strategies around inventory and goods flow that has far reaching implications for both the supply chain and maybe the top and bottom lines of many consumer goods companies.
Last fall, as we reported, Wal-Mart announced its ReMix logistics strategy. In summary, it involves utilizing separate “high velocity” distribution centers, or large areas of existing DCs, for extremely fast moving goods such paper products, toothpaste, some food items, and seasonal products. Outbound pallets will be built with store layout in mind, enabling them to be rolled directly onto the floor for rapid shelf replenishment. With all Wal-Mart’s logistics prowess, the traditional model meant fast moving goods were delivered on the same trucks as slower moving items, often forcing store personnel to sort through a lot of other goods to find the items most in need of replenishment.
Wal-Mart is attacking inventory from several angles, including RFID, but it isn’t RFID that is likely to have the real short or even medium term impact. As we reported two weeks ago, with inventory growing much faster in relation to sales over the past few years than its historical average, Wal-Mart has decided to look hard at pruning SKUs and driving more frequent vendor shipments to get its sales to inventory growth ratio back in line.
Interestingly, a number of consumer goods and even some transportation and packaging companies have cited Wal-Mart and some other retailer moves as behind soft Q1 volumes and/or subdued projections for coming quarters.
My quick summary (leaving it short and sweet for a Memorial Day 2006 weekend):
- As we’ll write more about soon, there is an increased understanding of the role of inventory reduction in driving corporate cash flow and profits.
- One wonders sometimes whether for all the talk about taking inventory out of the chain, whether consumer goods companies in reality are quite happy with well-stuffed retail channels, and the ability to push lots of truckloads out at quarter’s end.
- The impact will certainly involve (as is happening right now) a “one-time reset” of channel inventories, dampening consumer goods company sales in the short term, but as an excellent Bank of America research note recently noted, there are longer term implications as well. We summarize this research note, including some charts, in News and Views nearby. It’s worth a read.
- It seems to me that for all the fancy initiatives, plain old blocking and tackling maybe be the best way to take out inventory. Analyze SKU counts. See what really contributes to profit. Streamline flows.
- Wal-Mart’s ReMix program makes great common sense to me, as massive a program as I am sure it is to revamp a network of that size, especially one that had been finely tuned to a different model for so many years.
All these changes appear to be working. As noted, we’ve seen a variety of suppliers commenting on reduce sales volumes.
Noted Wal-Mart Chief Financial Officer Tom Schoewe, speaking at a recent Lehman Brothers conference in New York: "Go into our stores today and compare it to six months ago and you're going to see a lot less inventory" on overhead shelves, in backrooms and in trailers behind the stores. He added: "I'm feeling pretty good about inventory."
Seems like it’s clearly good for Wal-Mart. Will it really be good for consumer goods companies as well?
What are your thoughts on Wal-Mart’s inventory policy changes? Did we maybe need less collaboration and more direct action to reduce inventories? And what’s the impact of manufacturers on all this?