Walmart’s $3B OOS Challenge: Why Execution Matters More Than Labor

Walmart has acknowledged in recent weeks that it is still struggling to control out-of-stocks in its stores, with its eye on a $3 billion prize in regained sales. Much of the analysis we have seen recently seems to focus on the trade-offs of lost sales versus added labor cost.

A key factor is the importance of in-store execution. Walmart executives referenced the term at its Year Beginning Meeting in the context of adding labor to keep shelves better stocked. At the same time it said it was working to control inventory growth.

The story received a large amount of press and analyst write-ups. Here’s a sampling of several we found most interesting:

• Wal-Mart to trim inventory to increase sales (Ft. Wayne Journal Gazette)
• The Trouble Lurking on Walmart’s Empty Shelves (Time.com)
• Walmart’s Out Of Stock Problem: Only Half The Story? (Forbes.com)
• The Walmart Out-of-Stock Problem: Lessons Learned (RSR Research)
• Walmart sees $3B opportunity in fixing out-of-stocks (RetailWire.com)

At Itasca Retail, we take a different view of execution, one that begins with gaining systematic control of the reordering process. More labor is not a useful fix if the process is not engineered for success.

Any ordering and replenishment system designed with what we would call central planning suffers from execution issues. This is most often true because, from their inception, operational use was never a part of the plan. Many retail headquarters just send down executive orders and imagine that they are carried out at store level.

Just adding labor is not a good answer because if you have an inefficient system, odds are that more labor will compound the inefficiency.

Take for example the known issues with solutions that generate automated alerts. The idea is that a central analytical solution will spot an item movement trend that signals a condition has developed at the shelf. An ‘alert’ is generated, directing action by an associate.

The reality is that most of these alerts are “false” alerts that require associates to initially run around the store verifying events that are not happening. The store soon learns to ignore or check off the alerts. If you had more labor in the store, they would be forced to react to more of these non-events.

Or consider inventory adjustments and cycle counts. One of the issues with directed cycle counts is that the process often induces more errors than it fixes. Here again, to those not present in the store these actions seem prudent and reasonable. The reality is that inaccurate inventories account for most system OOS and inaccurate cycle counts are the most likely cause.

If you throw more labor at the problem, will you compound this with even more cycle counts in an effort to obtain accuracy?

An Industry-Wide Challenge
This set of issues is certainly not unique to Walmart. We believe a lot of retailers are confusing the needs of replenishment at store with the analysis of what the product mix should be, etc. That’s why some view inventory levels as a space management issue, or an analytics issue. It’s not just better information that is needed; it is better execution which leads to better information.

Let’s pose some simple questions: How well are new product introductions executed? If these aren’t handled well, should you suppose that existing products are managed any better? What are your distribution OOS? If these are low why are your stores significantly higher?

A core reason that store execution is not well addressed is that retailers believe that the only way to do this is to throw labor at it. Retailers must not handicap store associates by giving them outdated solutions while reserving technology solely in the hands of central planners. One of the great changes in retail has been the empowerment of the shopper through their use of mobile computing power. It is very realistic to enable your own associates to become your in-store experts.

Both labor levels and shelf replenishment decisions would be made easier and more accurate in an environment where there is confidence that the reordering process is reliable and well measured.

Supermarket supply chains have been among the most efficient in the marketplace. This has been a positive result of the ”pull” based philosophy of replenishment and a trained work force.

Moving to a push philosophy backed by analytical systems has not proven to be better. The Walmart case reveals that it can be a step backwards. A pull-based operational solution that takes into account the realities of supermarket retailing has proven to be a better solution.

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