The Trouble Lurking on Walmart’s Empty Shelves

And according to recent reports, Walmart has cut employee hours so deeply that it doesn't have enough associates on hand to get stuff from back-of-the-store staging areas to the shelves.

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Stephen Wilkes / Gallery Stock

Correction Appended: April 9, 2013

In Walmart’s culture, one of the company’s central missions is to be an agent for its customers. That is, discover what the customers want or need and provide same. The last part of that mission is getting the goods onto store shelves. And according to reports in Bloomberg News, the New York Times and elsewhere, Walmart has cut employee hours so deeply that it doesn’t have enough associates on hand to get stuff from back-of-the-store staging areas to the shelves.

It is creating what in retailing is known as out of stocks—gaps in the shelves where products should be but aren’t. Obviously, stuff that isn’t there can’t be sold. A number of accounts quote shoppers as leaving Walmarts empty handed and heading for competitors. Walmart says there is no problem, bar the occasional stockout here and there—hard to avoid when you are running 4,500 stores. The company says it has a 90% to 95% in-stock level. But there is no debating that Walmart cut its operating costs in the past year. According to its most recent annual report, Walmart’s U.S. stores grew operating income faster than sales during fiscal 2013, reducing operating expenses by 27 basis points over the prior year. That means Walmart took $740 million out of its cost structure.  Some of that is labor; the question is whether service has suffered as a result.

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Walmart is supposed to have the most sophisticated supply chain management system in the industry. Along with its biggest vendors, such as Procter & Gamble, it has been an early and powerful practitioner of automated replenishment. As goods are purchased nationwide, the computers in Bentonville automatically spew resupply orders. Tons of programming muscle has gone into making sure everything from Pampers to potatoes are delivered to stores with incredible efficiency. Even the trucks are programmed  to take the most efficient routes, so as to waste neither time nor fuel.

And then all of it is unloaded into those back rooms at the rear of the stores where employees using pallet jacks and hand trucks transfer the goods to the shelves. (Except for products that are “direct store delivered” —DSD— such as bread, chips and soda, which are replenished by route drivers, for Pepsi, say.) And this is where the system may be breaking down. In the course of covering the company, I’ve been in the back rooms of hundreds of Walmart stores. They are marked by a bit of organized chaos (and the smell of bulky bags of dog food), which is why the stockers are really important. Ultimately, no amount of supply chain computer wizardry can eliminate Walmart’s need for muscle power to get the goods on the shelves.

This isn’t just about a few customers leaving stores empty handed, either, because inventory management goes to the heart of what Walmart does. The economics of retailing are a circular: You order stuff, it’s delivered, and you have 30 days to pay for it. The faster you can sell the merchandise, the less it costs you to finance, which is why inventory turns are a critical measure of retail efficiency. Globally, Walmart turns its entire inventory eight times a year (compared to 6.4 times a year for Target, for example). Ideally, you want to turn your inventory in less than 30 days — that way, your vendors are financing your inventory, not you. Faster velocity lowers costs, meaning you can then charge less, which increases velocity and lowers costs more — it’s this kind of virtuous circle that made Walmart king. So any speed bump, anywhere in the system, screws everything up.

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In retailing, there’s a constant push and pull among the merchants, supply chain managers, and store operators. It’s something Walmart hashes out every week at its Saturday morning meetings. Trouble is, in a low sales growth environment — and Walmart has struggled lately to increase same-store sales — there’s enormous pressure to hold down labor hours and other variable selling costs to boost profits. Yet in areas such as produce, where Walmart has never been particularly good, attention to display, color, and freshness of fruits and vegetables is critical — and labor intensive.

So the order to cut hours has likely been obeyed, if reluctantly, by store managers. But how do you maintain service levels with fewer man-hours? Walmart’s front-end managers are supposed to open another register any time there are more than three customers in line. The cashiers have to come from some other part of the store—the back room, which is invisible to the customer, is one such place to grab bodies. Maybe the hope is that the night stocking crew can catch up. If that doesn’t happen, the goods may be piling up. And even if Walmart’s claim of an 90%-to-95% in-stock position is true, that’s not so great. Given the inventory level in domestic Walmart stores—$25.8  billion, based on its last annual report—that means the company could be foregoing $1.29 billion to $2.58 billion in potential sales. One analyst figured that Walmart would have to spend $448 million to increase the number of sales associates by 5 per store. But if they are selling that much more, and the goods move faster, it would seem like a good deal all around. Especially if the customers are happy.

The original version of this article said that Walmart saved $7.4 billion by lowering operating expenses; the correct figure is $740 million.