Reprinted from U.S. NEWS & WORLD REPORT, June 19, 2006

Big Dog Yanks the Supply Chain

Coca-Cola sells a lot of Coke, and quickly. Its athletic drink, Powerade, doesn’t do as well. So Wal-Mart says it wants the soft drink shipped directly to stores and the athletic drink shipped to warehouses.

Sounds simple, right? It’s part of a new push by Wal-Mart to cut $6.5 billion in inventory, and thus costs—an effort that has already paid off with increased profits in the company’s most recent quarter.

But what’s good for Wal-Mart isn’t always good for its suppliers. Companies ranging from Procter & Gamble to Spectrum Brands, which makes batteries and razors, have reported drops in sales and profits, attributing it to reduced inventories at key retailers. They don’t finger Wal-Mart as the culprit, but analysts do.

Just in time. The risk to Wal-Mart of cutting inventories is that Mom goes to buy Pampers, and they’re out of stock. “Wal-Mart no longer carries the safety stock,” says Jeff Conover of DSC Logistics. On many items, suppliers instead ship the backup boxes to warehouses of third parties, like DSC. Then they’re delivered straight to stores on short notice from Wal-Mart.

Wal-Mart has “remixed” its delivery system around how fast a product moves. So suppliers must ship goods at different times depending on how fast they sell. Wal-Mart’s tracking technology makes this possible, and it’s working. “We’re keeping our shelves stocked at a very high frequency,” Vice Chairman John Menzer recently told analysts.

When it came to Powerade, though, the fallout was ugly. That’s because the parent company, Coca-Cola, agreed to deliver the slower-moving drink to warehouses. Independent bottlers had delivered Powerade, like other Coke products, directly to stores. This spring, some 50 Coke bottlers, who deliver about 10 percent of its products, sued the parent company, saying their contracts with Coke forbid warehouse deliveries, which they fear will cut them out of the action. The suits are still pending.

Other suppliers have complained about Wal-Mart’s moves. And now the retailer’s competitors are asking how they might make similar moves, says Conover at DSC Logistics. “It’s clearly forcing changes in the supply chain,” he says. “Suppliers are going to have to be more nimble.” © Copyright US News & World Report. June 2006. All rights reserved.

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