Results Count ... everything else is conversation.: Walmart’s Secret Sauce … How the largest survives & thrives

The secret sauce of Walmart is "enslaving" vendors to manage inventory

Amazon and omni-channel are sexy topics that grab a lot of retail press. But at the end of the day, Walmart is the largest retailer on the planet, and the second largest company in terms of revenue. To continue to grow and remain profitable is a remarkable feat given the size of their worldwide operation. And, Walmart is never one to rest on its laurels! We've posted previously about Walmart's Lab, ventures in social media, and its own initiatives in "long tail" ecommerce. Yet, if there is a secret sauce that makes Walmart successful, it is mastery of using data to hold suppliers accountable in managing its inventory and in stock rates for them!

Walmart dominates on breadth of assortment and inventory management

In this highly competitive omni-channel world, retailers truly must differentiate or die. In terms of a retailer's brand and value proposition, there are 8 key dimensions where retailers can differentiate their value to consumers:

Key Retail Brand Differentiators

To thrive with consumers, a retailer must standout on at least two of these dimensions. In the case of Walmart, they have made their brand and fortune synonymous with breadth of assortment and low price. Walmart's low prices come through mastery of supply chain and being able to drive out costs, while maintaining shelf stock on a massive assortment in store. The result is that while Walmart might not "always" have the absolute lowest prices, consumers trust that they will have one stop shopping with everything they need at very good prices.

Breadth of a massive assortment requires mastery of GMROII

What we as consumers don't realize or appreciate is that keeping large numbers of items in stock can be very expensive. Indeed, inventory is often the 2nd most expensive thing for retailers to operate. And, in the case of Walmart, their large stores stock as many as 200,000 items! It is this breadth of in-stock selection that serves as a key Walmart differentiator, particularly in grocery and consumable items. But, retailers have to make a profit turning their inventory. Retailer profitability is highly dependent upon one key metric: GMROII - Gross Margin Return on Inventory Investment.

Gross Margin $ generated from sell through

GMROII = ______________________________________

Average Inventory @ Cost

To optimize gross margin dollars requires having the right SKUs on the shelf that the consumer wants to purchase. This requires a lot of category management to ensure the right mix of SKUs with the right margin, as well as other items that consumers will purchase to increase the gross margin of the overall market basket. To maximize GMROII also requires aggressively managing inventory to reduce operating costs. Walmart typically achieves 8 or more inventory turns a year on hundreds of thousands of SKUs, spread across over 4,000 US stores. Their GMROII is typically at the best class level of 2.0+ ($2+ returned for each $ invested inventory). With all this size and complexity, how does Walmart achieve this return?

Walmart leverages data to get vendors to manage it all for them!

If you are a supplier who has done business with Walmart, you have certainly heard of Walmart's Retail Link. In fact, it is almost impossible to do business at scale without being on Walmart Retail Link. In short, Walmart essentially gives you all of your data for your SKUs and then holds you accountable for managing them!

The essence of Walmart's data genius & leverage = You manage if for our GMROII.

Through Retail Link, Walmart essentially gives suppliers all of their sell through data by SKU, by hour, by store. They also give vendors on-hand inventory by SKU, as well as gross margin achieved, inventory turns, in-stock %, and yes, the metric of GMROII! Essentially, Walmart has created a vendor managed inventory system where they let you the supplier decide where to put SKUs and how to ship through to stores. They can empower vendors to make these decisions because they also can hold them accountable for KPIs like GMROII! This makes Walmart profitable, because they can leverage data to literally hold every one of their "partner's" feet to the fire to maximize margin, with the lowest inventory possible, to produce the greatest GMROII.

The new retail balancing act – Low inventory with no out of stocks

To achieve maximum GMROII, the goal is to maximize inventory turns by keeping stock at the lowest levels possible. The danger is running so low on stock that the shelf is empty at the end of the day when the consumer reaches to purchase. To maintain their key differentiator of breadth of assortment and the place to buy it all, Walmart must also focus on being in-stock.

To you, the end consumer, the only thing that matters is that the Skippy crunchy peanut butter you came for is sitting on the shelf when you reach for it. In fact, you expect every product on your shopping list to be on shelf. You do not care if Walmart has stock in the backroom that you can't see. The only stock that counts for consumers is that they can see and purchase.

SPARC – Walmart's new way of leveraging data with suppliers

In attempts to run on leaner inventory, Walmart has received consumer criticism for being out of stock. In typical Walmart fashion, they have created a new system and tool which leverages real time information. According to Retailing Today, Walmart is now rolling out SPARC, which stands for Supplier Portal Allowing Retail Coverage.

You will notice that the first word in the SPARC acronym is "Supplier". SPARC is literally a smartphone app that enables approved suppliers and their third party detailing firms to check on all stock available in a given store. Translated, that gives Walmart the ability to "empower" suppliers with real time data to hold them and their service firms accountable for literally keeping their SKUs in stock real time on the shelf. From a consumer perspective this improves their shopping experience. But make no mistake, SPARC maximizes GMROII profitability, and has the potential to further reduce store labor costs for Walmart stores.

Results Count! Love or hate Walmart, at the end of the day they continue to improve best in class infrastructure to maximize profitability on a massive retail scale.

SPARC means nothing for Walmart if it doesn't create value for the end consumer who votes with their purchase power. At the moment, over 130 Million consumers are walking through Walmart's doors every week voting for assortment selection and the value of it all being in stock. Walmart now has a new smart phone app to make sure vendors will fulfill their brand promise and core differentiator.

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Sources:

Morning News Beat
Retailing Today
Walmart Store Front: Wikipedia.org
Retail Link: 8th and Walton
Differentiators Graphic: IMS Results Count

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Posted by: Leanne | September 19, 2013 at 03:14 PM