Walmart (formerly Wal-Mart) has once again put suppliers on notice they will be conduct SKU rationalization once again this year. In a statement included in this year’s 10-K filing with the Securities and Exchange Commission says the world’s largest retail chain has identified suppliers that may be a risk factor for the chain. Trimming product lines and/or eliminating suppliers obviously alarms current suppliers – but it is comforting news for local competitors.
The Walmart philosophy is to drive down the shelf-landed cost of products so they can maintain lower prices than their competitors on easily identifiable “like” items. The philosophy drives traffic into their stores that are then lured with high-margin impulse items.
Walmart has been very successful at past SKU rationalization due to the lingering culture established by Sam Walton. Although some say the 2009 SKU rationalization went too far by eliminating popular draw items, in general the Walmart practice has been able to cut administration costs while creating larger purchases or individual SKUs.
Rationalization of rationalization
Every vendor and SKU adds costs to doing business. In addition to data tracking expenses for an individual SKU, vendor monitoring expenses are a major consideration. In Walmart’s case they must inspect plants to ensure local laws are being followed. Safety and labor issues are important to large chains fearful of becoming a headline on a tabloid or a feature on the 60 Minutes television program.
Kmart Corporation conducted several SKU rationalization projects. As the company moved departments onto its automated replenishment system in the early 1990s entire product lines and vendors were eliminated. Merchants at the headquarters on Big Beaver at Coolidge in Troy based on their ability to use the technology required by automated replenishment. The move helped the retailer transform the way it monitored and allocated inventory more successfully as weaker or fringe suppliers were dropped.
Another SKU rationalization project late in the same decade was developed to eliminate unprofitable suppliers. The retailer was losing money when shipping, handling, and bookkeeping costs were considered. Some products, such as large area rugs, had not been charged for the special handling required in the distribution system. Once those charges were calculated it was found they were losing money for the chain.
Walmart emphasis
Walmart says they are looking at “political and economic instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers' failure to meet our supplier standards, labor problems experienced by our suppliers, the availability of raw materials to suppliers, merchandise quality issues, currency exchange rates, transport availability and cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our control.”
Customers are the ultimate concern, according to the chain’s 10-K. Walmart cites the possibility of under quality merchandise.
“Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue regarding the safety of any food and non-food items we sell, regardless of the cause, could adversely affect our financial performance."
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