Wal-Mart Bites China Back

Last month we had a post titled China Bites Wal-Mart, describing how long supply chains coupled with fickle customers created serious inventory problems for Wal-Mart... a shortage of a fashion t-shirt suddenly in high demand.

Wal-Mart failed to order enough of these China-made T-shirts last year, and so they and other George-brand basics will remain in short supply in most of its 3,443 U.S. stores until 2007's second half, depriving the retailer of tens of millions of dollars a week it sorely needs. "The issue with apparel is long lead times," says the quietly intense [Chief Merchandising Officer John] Fleming.

We followed up just last week with a post on how those same long supply chains and fickle customers created the reverse situation - excess inventory - on other fashion apparel items.

Wal-Mart's inventories jumped 10.3% in the fiscal first quarter, ended April 30, to $35.2 billion from a year earlier, driven by unsold apparel, home decor, and outdoor products.  About $2 billion of the increase represents unsold spring clothing and home goods that are expected to depress profit through the summer, analysts estimate.

I then went into the usual rant on total supply chain cost... including the risk of poor planning, obsolescence, demand quakes, quality, cash tied up, etc. etc... you've heard it before so I won't go into it again today.  But I probably will by the end of the week.

Funny thing about supply chains: they have two ends.  Wal-Mart was at one end, and China at the other.  China effectively "bit" Wal-Mart by suckering them into a long supply chain with all the inherent problems.  But when Wal-Mart choked, it then rippled all the way back to China, and now manufacturers in that country are feeling the pain.  From the Wall Street Journal yesterday,

Several months ago, Chinese clothing executive Shao Zhuliang got bad news from his U.S. agent: Wal-Mart Stores Inc., his biggest customer, wouldn't be placing any orders for the spring 2008 season.

The concept that orders for the spring 2008 season are being placed "several months ago"... early 2007... is mindboggling to most of us.  Some guy buried in the bowels of Wal-Mart HQ in Arkansas, probably with an electronic crystal ball, is trying to predict fashion and customer demand over a year in advance.  I'm sure there's some kind of science behind it, backed up with lengthy algorithms from dozens of PhD's, but after the two stories I mentioned earlier Wal-Mart's batting average isn't exactly very good.

The codependency is rather interesting.  Wal-Mart is dependent on Chinese manufacturers for miniscule savings, which are blown out of the water every time the demand chain hiccups.  Chinese manufacturers are dependent on Wal-Mart for a lot of volume that makes very little profit.

Wal-Mart "said they had inventory piled up over there," says Mr. Shao, who heads Boshan's [Linar Garments Co. in eastern China's Shandong province] sales department. "It's always hard to make money from Wal-Mart orders, but without them, we are finished."

Supply chains are complex animals, with costs and impact not very understood by most companies. 

The fallout from Wal-Mart's problems shows how difficulties at one end of the global supply chain can ripple through to the other with the potential for significant economic disruptions.

Are you really sure you understand your total supply chain cost... and risk?

Comments

[Karen Wilhelm]

Right on with this one! It's not like there aren't T-shirt manufacturers here that could respond quickly. Or a number of them in the regions where Wal Mart stores are located. Take a look at Kathleen Fasanella's blog, listed in the "Lean Blog" list at the end of the left column of this one. Zara can do it - Why not WalMart?