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Jennifer Marks

Terms of enrichment

Inventory has always been the lifeblood of the retail industry. Inventory standards, however, are poised to get a lot bloodier going into 2002.

The first retailer to signal the advent of a new wrinkle in term negotiations was — no surprise — Wal-Mart, the bellwether of operational trends.

When Wal-Mart points into the future and says "This is where we're headed," it's a sure bet that a lot of other companies are going to check their compasses.

Its focus now is the ratio of inventory to accounts payable — or the amount of stuff that's already been sold to consumers by the time payments to vendors come due.

Wal-Mart currently has boosted that ratio to 65 percent.

That's extremely impressive, but in Wal-Mart terms, it falls short of the mark. In discussing third quarter results earlier this month, Wal-Mart executive vp and cfo Tom Schoewe said the company is looking toward the day when vendors foot the bill completely.

"Our goal remains to have 100 percent of our inventory financed by our suppliers," Schoewe said. "This does not mean that we're going to be waiting for months to pay our suppliers. Rather, it means increasing our inventory turns to a point where we have sold the merchandise before we have to pay for it."

Enter Kmart. During its discussions about third quarter results last week, ceo Chuck Conaway and executive vp/cfo John McDonald talked a great deal about the company's efforts to improve its supply chain operation, and more than once turned to the subject of the ratio of inventory to accounts payable.

"Kmart is woefully uncompetitive on terms and costs compared to competitive benchmarking," Conaway told analysts, acknowledging Wal-Mart's 65 percent ratio.

However, he noted, at the end of the second quarter, Kmart's ratio was 32 percent. It's now up to 38 percent, and the company is committed to hit 40 percent by yearend.

And with the final integration of all its vendors into the new Elmo supply chain system by the end of the fourth quarter, he indicated, the gloves will come off. Negotiations are already under way with vendors that have completed the switch — which includes 50 percent of soft home vendors — and "we expect nothing less than to be fully competitive on terms and costs with any vendor who deals with Kmart," Conaway said.

Now, here's the $64,000 question: If your goal is to have sold every sku of merchandise before you have to pay the vendor for it, how finely calibrated does your system have to be?

If you're Wal-Mart, where in-stocks in the third quarter were running 99 percent, or Kmart, where third quarter in-stocks were 86 percent, it's all got to come on the back end.

Wal-Mart can exert this kind of pressure. Kmart, aside from being a decent-size fish itself, also has whacked 25 percent of its vendor base, and plans to due more chopping — specifically of those who won't play ball.

So it looks like 2002 is shaping up to be the year of a new kind of inventory paradigm. That's going to be something to come to terms with all the way down to the bottom of the supply chain.

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