Since 2010, respondents to our annual Merchandising benchmark survey have cited underperforming inventory as a top-three business challenge more than most any other option, certainly more than “out-of-stocks. ” We mostly viewed this as a lasting aftereffect of the Great Recession, when working capital suddenly was at a minimum and every inventory buy mattered. But while investors may bemoan the lack of inventory productivity, it’s the out-of-stocks that cause lost sales and lost customer good will. And that brings us to the subject of Walmart.

Deloitte observed in early 2013 and Forbes contributor Walter Loeb that same summer, that out of stocks were rampant across the chain. Walmart issued denials in both instances. But times, and management have changed. At this year’s company meeting, management finally came clean. Walmart is suffering from the dual problem of out-of-stocks AND unproductive inventory. Basically inventory has increased at a greater pace than the rate of sales even as shelves remain empty. Management recognized that a big part of the problem was too much work for employees, and it is taking steps to put some payroll back in the stores. But is that enough?

To me, this was newsworthy enough that I wrote a Forbes blog on the subject. You can read it here. The piece has been widely read, but the most fascinating thing for me was the comments received from Walmart employees. These guys try really hard! And they care. They also painted a somewhat sad picture. Several things came through loud and clear. Most of them are retail basics, and I was surprised to find Walmart had fallen into some of these traps:

• By all accounts, there are not enough employees in the store to keep the back room organized, and product “binned ” (I’m not familiar with Walmart’s in-house terms, but it sounds like the putaway / locator process in the back room). Because the product is not entered into the locator system, it’s not brought out onto the selling floor.
• Some product is ordered at store level, other product is ordered by employees at the home office. Often, instructions are not sent to the store about new items, and where they are meant to go in the planogram. So befuddled (and uncaring) employees just bring it back to the back room, where it languishes.
• I bemoaned the lack of exception reports and alerts that should be telling store management that there is merchandise somewhere in the store, while sales have dropped off to nothing. I was assured those reports do exist, but no one has the time to go through them. Even if they did, the chaos in the back rooms makes product difficult to find.
• Stores that turn quickly are often starved for new product…and there is really no way to deliver smaller, more frequent shipments. And so the stores remain “D ” stores because they cannot generate enough sales with missing product. This is one of the most common problems I’ve found in retail inventory and transportation control systems. Planning and replenishment systems keep “D ” stores as poor performers as a self-fulfilling prophecy.
• The inventory system was declared “workable ” but suffering from too much human intervention into the numbers. This quote is jaw-dropping: “Between the lack of bodies in stores, a P.I. system that isn’t managed properly and the product that is forced out to the stores by the buyers, WM backrooms are packed while the sales floor is smoked. “

Here’s the most ironic thing to me. Walmart’s quarterly reports have been filled with explanations about its falling comps: all of them external to things the company itself could control. I have a habit (good or bad) of not believing a lot of what management says when a company has had a bad quarter. I was part of enough retail operating committees to know how story-boarding for a bad quarter happens. The goal is always two-fold: to explain why the bad quarter happened, and detail explanations for why it won’t happen again. Rinse and repeat if the next quarter also disappoints.

We’re starting to hone in on a big part of Walmart’s problem. A $3 billion dollar out-of-stock issue explains a good portion of the comp sales shortfall. Not all of it, but enough to make your eyes bulge. And so the lesson learned is straightforward, and pretty traditional. It’s a two-parter.

Part 1: No company can ‘expense control’ their way to long term business success. Not one. No matter how large or how small. It’s a short term fix while the company figures out what’s really wrong. It should not take 11 quarters to get real about it.

Part 2: Employees are assets, not just expense line items on a P&L. It sounds like if Walmart had listened to its employees early on, it might have been able to change its course. My impression was that these people were dancing as fast as they could, and frustrated at not being heard. In the end, I felt really bad for them.

I still get the sense that the technology and its associated processes are both inefficient and inadequate, but the bigger issue is certainly the need for more employees in the store. Yes, it’ll damage earnings in the short term. But over the longer term, it might restore some of Walmart’s luster. Whether Walmart does the right thing or it doesn’t, I think it presents a pretty compelling object lesson for all of us.

Retail Winners (even those selling commodities in tonnage) focus on their customers and they leverage their employees to create a successful business. If Walmart wants to become a Winner again, and not just remain “the behemoth from Bentonville, ” it’ll have to do just those things. It’s solely a matter of corporate will and determination. And usually, the customers will follow.