Empty spots for razors are seen inside a Wal-Mart store in North Dakota on March 13, 2013. Photograph: Corbis
Wal-Mart Stores Inc. (WMT) is turning up the pressure to keep its shelves adequately stocked by proposing to tie executive compensation to the issue -- and has asked an outside auditor to alert workers which items to focus on by plastering U.S. stores with neon green dots. 
May 24 (Bloomberg) -- Bloomberg’s Renee Dudley reports on the struggles with stocking shelves at Wal-Mart and their green dot solution. She speaks on Bloomberg Television's "Market Makers." (Source: Bloomberg)
The effort Wal-Mart (WMT) is expending to fix its stocking issues is notable for a chain that became the world’s largest retailer in part by gaining mastery over its supply chain and logistics.
“It’s like Tiffany’s falling down on quality,” said Wallace Hopp, associate dean of faculty and research at the Stephen M. Ross School of Business at the University of Michigan. “It’s the core of their essence. If you can’t manage inventory in retail, then you can’t manage retail.”
On May 16, Wal-Mart (WMT) reported that same-store sales in the U.S. fell 1.4 percent, the first drop after six straight gains. The Bentonville, Arkansas-based company also said second-quarter earnings per share will be $1.22 to $1.27. Analysts projected $1.29, the average of 24 estimates compiled by Bloomberg. The shares rose 1.3 percent to $77.31 at the close in New York.
The compensation proposal was submitted by Wal-Mart to shareholders in April, to be voted on until the company’s annual meeting June 7. On-shelf availability -- known as OSA -- would be one of several new metrics by which managers and executives could be judged.
Calculation Mystery
While Wal-Mart regularly cites OSA figures to investors, the company has declined to say how it has calculated those rates in the past -- although Acosta figures are at least part of them -- or how it would do so in the future. The Acosta audits focus on about 700 important items, which makes it easier to achieve a higher percentage of in-stock merchandise than if the whole store were counted. Wal-Mart supercenters carry about 142,000 items, according to the company’s website, so a typical Acosta audit represents about one half of 1 percent of a store.It’s important to know how OSA data are derived so investors can track progress, said William Atwood, executive director of the Illinois State Board of Investment, which holds about 98,000 Wal-Mart shares.
Investment Decisions
“We want to make sure the data is precise and objectively derived, whether for investment decisions or for compensation decisions,” he said.Carol Schumacher, a Wal-Mart vice president of investor relations, said in an analysts’ call last week that on-shelf availability in the first quarter was in the 93 percent to 95 percent range.
“Management is focused on OSA to drive sales,” she said.
It’s not clear how Wal-Mart derived that figure -- and that is where the story of the green dots comes in.
Wal-Mart audited its on-shelf availability in-house for years, said David Tovar, a company spokesman. In 2011, it hired Acosta to do the job.
Keeping shelves stocked can boost sales significantly, according to Acosta, whose clients have included Target Corp. (TGT), Whole Foods Market Inc. (WFM) and ConAgra Foods Inc. (CAG)
“In a superstore, if we fix a void at the beginning of the month, one single SKU in oral care translates to about $360,000 in sales at the end of the month,” Erick Kritsky, Acosta’s director of application development, said in a 2012 study. He didn’t specify a particular item.
Secret Audits
When Acosta began its Wal-Mart audits in 2011, it conducted them secretly, without telling store managers which items were being monitored or when. Each week, Acosta field auditors searched for a random list of 300 items out of 700 being monitored, according to a copy of Acosta’s rules at the time. They compiled data collected from most of the more than 4,000 Wal-Mart stores in the U.S.Acosta was so committed to secrecy that when some Wal-Mart managers tried to influence the results by finding out what items were being monitored, Acosta managers told their employees to rebuff them and report such incidents, according to internal e-mails.
In an e-mail to auditors sent in May 2011, Ashley Dixon, an Acosta coordinator handling part of the project, said auditors should notify Acosta management if asked “to print or make a copy of the items you are checking so that they can prepare before your next visit” or “if anyone in the store attempts to adjust your audit information in any way.
Management Influence
‘‘This is extremely important,’’ she said. ‘‘We are taking management influence very seriously.’’Kathy Caldwell, an Acosta executive vice president and Wal-Mart team leader, called the OSA auditing system ‘‘best-in-class.’’
‘‘Acosta has had an excellent partnership with Walmart for more than two years,’’ she said in an e-mail.
Wal-Mart seemed pleased with the audits. On a February 2012 earnings call, Bill Simon, chief executive officer of Wal-Mart’s U.S. operations, told investors that the company’s use of weekly ‘‘third-party physical audits” allowed executives to “see what customers see in their store.”
He said the company had “made great progress throughout the year” in improving on-shelf availability and was achieving rates in the mid-90 percent range.
Audits Stopped
After a while, the Acosta audits stopped. Then, earlier this year, following Bloomberg News reports of stocking issues, Wal-Mart asked Acosta to start monitoring the shelves again.“Due to Walmart receiving a lot of negative press regarding their empty shelves, we are reinstituting the On Shelf Availability project,” Dixon said in an e-mail to her employees on April 22.
Acosta’s standard secret audit was almost under way when plans changed suddenly. Tovar, the company spokesman, said Wal-Mart decided that, in this case, it would be better to have Acosta mark the items to be monitored with neon green stickers next to the prices on shelves.
“We thought by not letting the stores know, that we would get a clearer picture, but that wasn’t the case,” Tovar said. “What we learned is it’s actually better to have transparency with stores so they know the key items that particular time of year.”
Boxer Briefs
Wal-Mart prepared a spreadsheet of more than 800 items -- merchandise that included peanut M&Ms, Hanes boxer briefs, Covergirl mascara and Crest toothpaste -- that needed “stickering.” The circle stickers would indicate to Wal-Mart workers which items Acosta would be searching for during its audits.Tovar said the most recent round of auditing was “the first time the green dots were in place.”
He added: “The reason we went to the green sticker process is because we think this is going to help the store associates do a better job of being in stock in key items. Those are the most important items to be in stock on.”
Counting just the key items generates an incomplete picture, Hopp said.
‘Short-Sighted’
“If they green-dotted for the purposes of the audit, that’s short-sighted,” he said. “They should be much more concerned about having stuff in stock in the whole store.”The process of putting stickers on the shelves of hundreds of products in thousands of stores delayed the auditing project. To make sure all the stores were “dotted” before audits began, some Wal-Mart employees were enlisted to help.
Managers at a Wal-Mart supercenter in Sarasota, Florida, told several workers to start putting green stickers next to merchandise that needed to be in stock, said Stu Ruzbacki, who stocked shelves at the store until this month.
“The store manager just picks someone from each department to put them up,” said Ruzbacki, who was fired after a dispute with his boss. “They pulled one from my team. He could be putting stuff on shelves. Instead, he’s putting stickers up all day.”
In a telephone interview on May 17, Matt Davis, who works as a cashier at the Wal-Mart in Putnam, Connecticut, said most of the items that have green stickers “were in stock, or overstocked, while shelves were empty around them.”
