Rising Costs in Supply Chain

One morning, a Costco store in Los Angeles began

running a little low on size-one and size-two Huggies.

Crisis loomed.

So what did Costco managers do? Nothing. They

didn’t have to, thanks to a special arrangement with

Kimberly-Clark Corp., the company that makes the

diapers.

Under this deal, responsibility for replenishing

stock falls on the manufacturer, not Costco. In return,

the big retailer shares detailed information about

individual stores’ sales. So, long before babies in

Los Angeles would ever notice it, diaper dearth was

averted by a Kimberly-Clark data analyst working at

a computer hundreds of miles away in Neenah, Wis.

“When they were doing their own ordering, they

didn’t have as good a grasp” of inventory, says the

Kimberly-Clark data analyst, Michael Fafnis. Now,

a special computer link with Costco allows Mr. Fafnis

to make snap decisions about where to ship more

Huggies and other Kimberly-Clark products.

Just a few years ago, the sharing of such data

between a major retailer and a key supplier would

have been unthinkable. But the arrangement between

Costco Wholesale Corp. and Kimberly-Clark underscores

a sweeping change in American retailing.

Across the country, powerful retailers fromWal-Mart

Stores Inc. to Target Corp. to J.C. Penney Co. are

pressuring their suppliers to take a more active role

in shepherding products from the factory to store

shelves.

CHANGING SIZES

In some cases, that means requiring suppliers to shoulder

the costs of warehousing excess merchandise. In

others, it means pushing suppliers to change product

or package sizes. In the case of Costco and Kimberly-

Clark, whose coordinated plan is officially called

“vendor-managed inventory,” Kimberly-Clark oversees

and pays for everything involved with managing

Costco’s inventory except the actual shelf-stockers in

store aisles.

Whatever the arrangement and the terminology, the

major focus for these big retailers is the same: Cutting

costs along the so-called supply chain, which comprises

every step from lumber mill to store shelf. The

assumption is that suppliers themselves are in the best

position to spot inefficiencies and fix them.

For consumers, it all translates to lower prices at

the cash register. Indeed, big companies’ increasing

focus on the supply chain is one reason U.S. prices for

general merchandiseвЂ"goods from laundry detergent

to wool sweatersвЂ"fell 1.5 percent in 1998 and again

last year and are falling at the same rate this year,

according to Richard Berner, chief U.S. economist at

Morgan Stanley DeanWitter. “Supply-chain management

has had a major impact,” says Mr. Berner, who

compiled his analysis from government data.

RETURN TO UNISEX

There is also a potential downside for consumers:

Fewer choices in brands and types of packages. For

example, two years ago, Kimberly-Clark stopped

making separate diapers for boys and girls and

reverted to unisex-only. Less variety makes for easier

inventory-tracking in its factories and trucks, the

Dallas-based company says.

To a great extent, better cooperation between retailers

and suppliers has been made possible by improved

technologyвЂ"such as the computer link Kimberly-

Clark uses. It’s also a consequence of the greater

strength of major retailers as they consolidate and

expand globally. Many economists say that closer

retailerвЂ"supplier coordination on the supply chain is

the model of the future and will ultimately determine

which companies succeed in the new millennium.

“A shopper buys a roll of Bounty paper towel,

and that would trigger someone cutting a tree in

Georgia,” says Steve David, who heads supply-chain

work for Procter & Gamble Co., the Cincinnati

consumer-products giant. “That’s the holy grail.”

These days, P&G stations about 250 people in