Eric Peters, the CEO of TrueDemand Software, was in to brief us recently. During our conversation, Eric commented that many folks believe Walmart is performing well financially because low-cost retailers tend to have a competitive advantage during a recession. However, he believes Walmart’s recent gains in logistics efficiencies are also contributing to the company’s financial success. As an example, Eric highlighted Walmart’s “Win-Play-Show” assortment strategy, and he pointed me to a presentation given by Bill Simon, COO, Walmart U.S., at Morgan Stanley’s Retail Conference in April (you can read the transcript here).
Win-Play-Show is really a merchandising strategy that has beneficial synergies with logistics. In a “show” category, the company carries fewer SKUs than it has in the past. A “show” strategy is a defensive approach that limits product selection but does not cause a buyer to go somewhere else for a product. In “win” categories, price leadership is deemed absolutely critical, along with having more pronounced and well-positioned displays in the stores. This program has led to a reduction in the number of SKUs available in stores, something the folks in logistics always appreciate. Walmart supplements and expands the product assortment in its “show” categories through Walmart.com, where customers can order products online which are delivered to a nearby store for the customer to pick up.
Another Walmart initiative is to clean up the “look and feel” of its stores-i.e., make them less cluttered and look more like (to my eyes) Target stores. These revamped stores will carry even fewer SKUs than traditional stores that have not yet received a makeover. It will take Walmart about five years to makeover all of its U.S. stores.
Not surprisingly, having fewer SKUs, and selling higher volumes of them, results in more accurate forecasting and lower inventory levels. In its U.S. business, Walmart had a 6.8 percent increase in annual sales in FY 2008, yet it was able to reduce inventory by 1.2 percent. But the company believes these programs-fewer SKUs leading to less cluttered departments, combined with bigger, bolder price signage-also resulted in other business benefits, such as increased sales, fewer markdowns, and higher margin. For example, Walmart’s pet category (a “show” category) grew by double digits.
In Walmart’s financial presentations, the company talks about supply chain almost as much as it does about store operations and merchandising. For example, in his presentation, Simon commented, “Last year in a very, very difficult, up-and-down year…diesel went as high as $4.90…in some parts of the country and then dropped back down by the end of the year. Our logistics operation delivered about $200 million in savings to the group, and they did that through routing, reloading trucks, fuel efficiencies in how we drove, adding auxiliary propulsion units…no magic bullet[s]…except a lot of hard work and a very, very efficient organization.”
(I’ve heard through the grapevine that routing efficiencies have been aided by Walmart’s implementation of Manhattan Associates‘ TMS on the inbound side, while the company continues to use JDA‘s TMS on the outbound side. I’d love to know which GPS/telematics solution Walmart uses, but none of my sources knows. GPS/telematics enables increased fuel efficiencies based on better monitoring and coaching of drivers.)
Meanwhile, Walmart is eliminating empty miles in its produce category. In combination with a more structured replenishment process (in line with the way the company manages most of its other product categories), Walmart launched a program last October to increase the amount of produce it buys from local sources. This action has eliminated several days from its produce supply chain and has reduced the number of miles traveled, which also benefits Walmart’s sustainability objectives.
These inventory reductions has enabled to Walmart grow its sales without having to invest capital in building new distribution centers. As Simon commented, “Because we’ve rationalized SKUs and focused our energy on ‘win, play, show’ categories, because we have less inventory in the stores, it’s easier for us to find and stock the shelves [and] order the products that we need from the distribution center. And so reduction in inventory has resulted in higher in-stocks, not lower in-stocks.” This also means better labor productivity. Overall, labor productivity was up by about 3 percent and backroom productivity, which is measured as cases received per backroom labor hour, was up over 8 percent.
Walmart has always been one of the exemplars of supply chain excellence. What is interesting to me is how the company is blending merchandising and supply chain improvements to achieve benefits in both areas.