Since the inception of this blog, along with our research and consulting services, we strive to provide readers and clients with specific evidence where supply chain capabilities make an impact on business performance.  Our goal within the Supply Chain Matters blog is to provide commentaries to help our readers connect the dots as it were, to where business decisions interrelate with supply chain business process and IT applications strategy.

Yet another important example of these interrelationships was brought out last week in a series of Wall Street Journal and other financial media articles commenting on Wal-Mart’s recent reporting of fiscal Q4 and full year earnings.  While the world’s largest retailer demonstrated an overall 2.5 percent increase in sales and a 27 percent improvement in Q4 profits, the actual headlines reflected more on management’s finally coming clean with an admission of missteps in its US merchandising operations.

Wal-Mart’s U.S. operations incurred another decline in customer traffic and revenues, a consistent and troublesome pattern that has continued over multiple quarters, that has opened opportunities for Wal-Mart competitors.

In our previous Supply Chain Matters commentary related to Wal-Mart’s financial performance, posted in November 2010, we noted that this supply chain prowess icon had already incurred six straight quarters of declining growth in existing U.S. outlets. We also noted that in 2009, Wal-Mart embarked on an aggressive store merchandizing initiative to cut clutter and reduce inventory stocking.  In embarking on this store re-vamping effort, Wal-Mart’s strategy was to attract higher income shoppers who valued both price as well as selection. Tactics involved a pricing and inventory stocking strategy to promote and aggressively price certain high volume consumer staples under the “price rollbacks” program, but at the same time initiate a “high-low” pricing program that increased prices on many other stocked items that would attract higher income buyers.   What got in the way was the cumulative effects of severe and sustained levels of unemployment.

At mid-year, the company suddenly had to reverse course. It re-assigned certain U.S. management, and began adding more lower cost, higher volume merchandise to stores, including the former ‘pallet clutter’ sale aisles with weekly specials.  Apparently this change of course was not able to positively impact Q4 sales.  As was the case it Q3, Wall Street analysts again noted that Wal-Mart’s overall inventory levels were even higher in Q4, up near 11 percent from year ago levels.

Wal-Mart senior management now acknowledges that as a retailer, it has confused and alienated its traditional U.S. core customers. While publically stating that core shoppers, accounting for the bulk of U.S. sales volume are households with annual incomes of $70,000 or less, we strongly suspect that that income level is a lot lower.   Wal-Mart management has often communicated that its retail sales tend to often surge at the beginning of a month, when paychecks and government subsistence payments are issued. This implies that core customers are clearly motivated by cash flow, price sensitivity, and availability of lower cost alternatives.

In one of its articles, the WSJ noted that reduced staffing at many U.S. stores has frustrated some of Wal-Mart’s vendors who observe more occurrences of out-of-stock shelves on weekends.  In spite of all previous investments in RFID and other initiatives directed at eliminating out-of-stocks, some out-of-stocks at key times remain.

Each year, this author has had a tradition of visiting and observing a Wal-Mart store both at the peak of the frantic holiday buying season, and two to three days after the Christmas holiday when re-stocking efforts are most noticeable. This year’s visit reinforced a perception that Wal-Mart has slipped in overall inventory management, selection and replenishment.

Rival Target, on the other hand, continues to see improvement in same store sales which were up 2.4 percent in Q4. Target has been adding more core food items and selection to its retail stores. Overall 2010 sales for Target were up 3.7 percent, while inventories are up 5.8 percent. Emerging competitors targeting Wal-Mart core customers like Dollar Stores have also benefitted immensely from current Wal-Mart merchandizing and inventory stocking missteps.

For its part, Wal-Mart management is moderating expectations by forecasting flat to slightly negative revenue expectations for Q1 U.S. store sales, while also indicating that it make take months to fix U.S. sales growth.  A threefold focus on acceleration in the opening of smaller stores, termed Walmart Express,  improving inventory stocking across its U.S. network of Supercenters and larger stores, with across the board item price competitiveness has each been outlined as a major focus this year.

In our prior commentary we noted that inventory stocking strategy can evoke differing management responses. Too much inventory is a detriment to working capital and margin performance while too little of required inventory risks out-of-stocks and lost sales. In the retail industry, marketing and sales, who control the levers of merchandizing strategy always want more inventory of what consumers are buying.  Where the rubber hits the road is where senior executives, cross-functional management and supply chain response come together in consistent operational execution and key performance indicator goal fulfillment.

While management theory, technology and integrated operational performance have come a long way, it would seem that a litany of non-stop supply chain focused initiatives may have lost focus to the needs of Wal-Mart’s ultimate core customers.

Wal-Mart management is now tasked with the challenge for quickly finding the right combination of U.S. merchandising, inventory stocking and distribution strategy that can accommodate the dual needs of satisfying needs of highly economically stressed core customers, while finding alternative means to attract a different level of customer.  In the end, the grand strategy may have been spot on, but the tactical execution may have faltered.

We would be interested to read the observations of readers, particularly those that have a close observation of Wal-Mart.  Has this supply chain icon faltered in supply chain capability, or will the Wal-Mart U.S. merchandising model need to be dramatically changed?

Only time will tell.

Bob Ferrari