The document discusses Walmart's supply chain management practices over the years. It details how Walmart pioneered efficient practices like pricing strategies, supply chain integration, distribution, and inventory management. While Walmart once had a very efficient supply chain, it has struggled in recent years to maintain its competitive advantage.
The document discusses Walmart's supply chain management practices over the years. It details how Walmart pioneered efficient practices like pricing strategies, supply chain integration, distribution, and inventory management. While Walmart once had a very efficient supply chain, it has struggled in recent years to maintain its competitive advantage.
The document discusses Walmart's supply chain management practices over the years. It details how Walmart pioneered efficient practices like pricing strategies, supply chain integration, distribution, and inventory management. While Walmart once had a very efficient supply chain, it has struggled in recent years to maintain its competitive advantage.
The document discusses Walmart's supply chain management practices over the years. It details how Walmart pioneered efficient practices like pricing strategies, supply chain integration, distribution, and inventory management. While Walmart once had a very efficient supply chain, it has struggled in recent years to maintain its competitive advantage.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online from Scribd
Download as pdf or txt
You are on page 1of 0
1
Wal-Marts Supply Chain Management Practices
Case Study
Table of Contents
1. Introduction Can Wal-Mart sustain its Supply Chain Advantage?...............2 2. Wal-Mart in US Retail Market ........................................................................2 3. Wal-Mart - Company Background..................................................................3 4. Wal-Mart Timeline.......................................................................................4 5. Wal-Mart: Quick Facts ...................................................................................5 6. MANAGING THE SUPPLY CHAIN THE WAL-MART WAY........................6 6.1. Pricing and Procurement Strategy..........................................................6 6.2. Supply Chain Integration through Product/Process Knowledge Sharing 6 6.3. Supply Chain Partnerships .....................................................................7 6.4. Distribution Strategy ...............................................................................7 6.5. Logistics Management............................................................................8 6.6. Cross Docking ........................................................................................8 6.7. Inventory Management ...........................................................................9 7. Store Formats................................................................................................9 8. Wal-Mart - International operating formats ..................................................10 9. Related Reading..........................................................................................11 10. Questions for discussion .............................................................................11
Case Abstract
Wal-Mart in recent years has struggled with its supply chain. The big question is: Will it be able to revive the competitive advantage it had in the past with its efficient supply chain? This case discusses the supply chain management practices of Wal-Mart over the years. A brief of Wal-Marts past distribution, logistics and inventory management processes is covered. The use of innovative Information Technology (IT) practices to enable the supply chain is discussed and highlighted. The benefits or competitive advantage Wal-Mart derived over the years from its supply chain management practices is also covered.
Please note: This case study was compiled from published sources, and is intended to be used as a basis for class discussion. While care has been taken to ensure correctness of the facts, Accuracy of information cannot be guaranteed. January, 2008. www.casestudyinc.com 1. Introduction Can Wal-Mart sustain its Supply Chain Advantage?
While most still believe Wal-Mart's pioneering supply chain to be the world's most efficient, the retailer is faltering in recent years, and its renowned IT driven supply chain is a contributor in its woes. In October 2006, Wal-Mart had to sell its stores in South Korea and Germany. In Germany alone, it incurred a $1 billion loss. This was reportedly due to its failure to adapt to the local cultures and inability to compete with established players. In the U.S., Wal-Mart reduced the number of new U.S. supercentres it planned to open in 2007 by 30 percent. In August 2007, Wal-Mart warned that its profits would be lower than expected for 2007 (it had missed second-quarter profit estimates). Experts blamed Wal-Mart's negligence to customer service, merchandising mistakes and its inattentiveness to local markets abroad for its inefficiency. Tescos entry to the US market in 2007 may cause further challenges.
A variety of strategies to strengthen growth have mostly not been successful. In 2006, Wal-Mart bought retail applications from HP and Oracle, and quietly contracted with a social networking company, Bazaarvoice. Wal-Marts online presence with its website also struggled. It was behind competitors like Amazon.com and Target. Its promotion experiments using social networking concepts got mixed results. In addition, there were delays in implementation of radio-frequency identification (RFID) tags throughout its supply chain. Late in the year, Wal-Mart changed its RFID strategy, with more focus on promotional items, category management trials, and Sams Club pallet location management. Vendors were rightly bemused and confused.
For Wal-Mart, one thing remains clear that just squeezing more pennies out of the supply chain would not be enough. President and CEO Lee Scott commented on the companys performance in a press release, "It is not what we expect of ourselves, and not what our shareholders expect of us." He said management would spend the rest of this year "focused on inventory improvements, delivering quality products at low prices, and store execution at the highest standards."
2. Wal-Mart in US Retail Market
Wal-Mart is the worlds largest retailer with $345 billion in sales for the fiscal year ending Jan. 31, 2007. Wal-Mart Stores, Inc. includes Wal-Mart Supercenters, discount stores, Neighborhood Markets and SAMS Club warehouses. Wal-Mart employs 1.9 million associates worldwide and more than 1.3 million in the United States, making it one of the largest private employers in the U.S. Wal-Mart has been a dominant player in the US retail market which is most competitive in the world, a fact well-known to British retailers Sainsbury's and Marks & Spencer which failed to attract US customers.
Wal-Mart has more than 7,000 stores and wholesale clubs across 14 markets. Wal-Mart operates more than 4,000 facilities in the United States and more than 2,800 more in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom. In 2007, Wal-Mart became No. 1 on the FORTUNE 500 list and in 2003 and 2004 Wal-Mart was named Most Admired Company in America by FORTUNE magazine. 3 3. Wal-Mart - Company Background
In 1945, Sam M. Walton opened a franchise Ben Franklin variety store in Newport, Arkansas. In 1946, his brother, James L. Walton, opened a similar store in Versailles, Missouri. Until 1962, the business focused entirely to the operation of variety stores. In 1962, Sam Walton started Wal-Marts first discount store Wal-Mart Discount City. He and his wife, Helen, put up 95 percent of the money for the first Wal-Mart store. Sam believed that the American consumer was shifting to a different type of general store and discount stores would be very successful. Wal-Mart was incorporated in Delaware in October 1969. [During the initial years, Walton focused on establishing new stores in small towns, with an average population of 5,000. These towns were largely neglected by leading retailers like Sears Roebuck & Company, K-Mart and Woolco, which concentrated more on larger towns and big cities. In his efforts to attract people from the rural areas to his stores, Walton introduced the concept of every day low prices (EDLP). EDLP promised Wal-Mart's customers a wide variety of high quality, branded and unbranded products at the lowest possible price, offering better value for their money. Wal-Mart's advertisement describing EDLP said, "Because you work hard for every dollar, you deserve the lowest price we can offer every time you make a purchase. You deserve our Every Day Low Price.] In the 60s, Kmart expanded across the country, while Wal-Mart had only 15 stores. But this changed in the 70s when public offering created the capital infusion that grew the company to 276 stores in 11 states.
In the 1980s, Wal-Mart became one of the most successful retailers in America. Sales grew to $26 billion by 1989 at 1,400 stores, compared to $1 billion in 1980. Wal- Mart Stores, Inc. branched out into warehouse clubs with the first Sam's Club in 1983. The first Supercenter, featuring a complete grocery department along with the 36 departments of general merchandise, opened in 1988. Wal-Mart invented the practice of sharing sales data via computer with major suppliers, such as Proctor & Gamble. Walton died after a prolonged illness in 1992. Wal-Mart suffered a setback but it continued its remarkable growth concentrating more on setting up its stores overseas. In 1991, Wal-Mart entered Mexico in a joint venture with Cifra. In 1994, it acquired 122 Woolco stores from Woolworth, Canada. Three years later, Wal-Mart became the largest volume discount retailer in Canada and Mexico. In 1997, Wal-Mart acquired the 21-store German hypermarket chain, Wertkauf. Other international expansion efforts included the purchase of Brazilian retailer Lojas Americans 40 percent interest in their joint venture, and the acquisition of four stores and additional sites in South Korea from Korea Makro. In January 1999, Wal-Mart expanded its German operations by buying 74 stores of the hypermarket chain, Interspar. The stores were acquired from Spar Handels AG, which owned multiple retail formats and wholesale operations throughout Germany. Wal-Mart became the largest company in the world in 2002 revenue-wise. This was a long way from 1979 when it first made more than a billion dollars in annual revenues. This in contrast to 1993 when Wal-Mart was making a billion dollars in a week and in 2001 in every 1.5 days. This extraordinary growth was a result of its sustained focus on consumer requirements and reducing costs through efficient supply chain 4 management practices. Its ability to provide its customers with a wide range of products at the lowest costs in the shortest possible time was remarkable. Wal-Marts highly automated distribution centers drastically reduced shipping costs and time. Its computerized inventory system speeded up the check out time and recording of transactions. In all, Wal-Marts supply chain management practices resulted in increased efficiency in operations and better customer service. It eliminated old stocks and maintained quality of goods. 4. Wal-Mart Timeline
Wal-Mart Timeline 1962 Sam Walton started Wal-Mart in 1962 1970 First distribution center in Bentonville, Arkansas 1972 Listed on the New York Stock Exchange 1970s 276 stores in 11 states 1975 Famous 'Wal-Mart Cheer' was introduced by Walton 1978 Wal-Mart purchased the Hutcheson Shoe Company 1980s Sales grew to $26 billion by 1989 at 1,400 stores 1983 First Sam's Club 1988 First Supercenter 1991 First international store in Mexico 1992 Wal-Mart entered Puerto Rico 1993 Wal-Mart formed an international division 1994 Expansion into Canada. Wal-Mart acquired 122 Woolco stores from Woolworth, Canada. 1995 Entry in Argentina and Brazil 1996 Entry in China 1997 Wal-Mart acquired the 21-store German hypermarket chain, Wertkauf 1999 Wal-Mart expanded its German operations by buying 74 stores of the hypermarket chain, Interspar 2002 Wal-Mart acquired a 6.1 % stake in Seiyu 2003 Majority interest in Seiyu, making it a Wal-Mart subsidiary 2007 Wal-Marts 3000th international store 5 5. Wal-Mart: Quick Facts
Wal-Mart: Quick Facts Company Wal-Mart Stores Inc (NSE: WMT) Corporate Headquarters U.S. Revenues $345 billion in sales for the fiscal year ending Jan. 31, 2007 In Japan, Seiyus full year 2006 consolidated sales were US $6.5 billion Industry Retail, Retailing Services Employees 1.9 million associates worldwide (38,541 in Japan) Operations 14 International Markets Total Stores 7000 (3000 international stores) 275 Seiyu supermarkets in Japan Store Formats Wal-Mart Supercenters, discount stores, Neighborhood Markets and SAMS Club warehouses Major Competitors Tesco Sainsbury Marks & Spencers Carrefour Major Brands/Labels Sams Choice, Great Value, Everstart, Ol Roy, Puritan, Equate, No Boundaries, George, Athletic Works, Durabrand,ILO, HomeTrends, Mainstays, Metro 7,Parents Choice, Ozark Trail, Relion, White Stag and Kid Connection. MEMBERS MARK, BAKERS & CHEFS and SAMS CLUB are other private label brands.
Licensed brands include General Electric, Disney, McDonalds, Mary- Kate and Ashley, and Starter. Business/Growth Strategy Low-cost Leadership, EDLP Every Day Low Prices, Offering permanent discounts across all stores Portfolio optimization and global leverage Key Executives Name, Designation H. Lee Scott, Jr., President and Chief Executive Officer. Michael T. Duke, Vice Chairman Wal-Mart Stores, Inc. Johnnie C. Dobbs, Jr., Executive Vice President, Logistics and Supply Chain Eduardo Castro-Wright, Executive Vice President, President and Chief Executive Officer, Wal-Mart Stores Division. Website www.walmart.com www.samsclub.com
6. MANAGING THE SUPPLY CHAIN THE WAL-MART WAY
6.1. Pricing and Procurement Strategy
In order to offer the best price to its customers, Wal-Mart constantly tried to reduce its purchasing costs. Wal-Mart ensured this by procuring goods directly from manufacturers, and bypassing all intermediaries. With overhead costs spread across a wider footprint, Wal-Mart could price more aggressively with excellent net margins.
Wal-Mart would invest a lot of its time in meeting vendors to understand their cost structure. A tough negotiator on price, Wal-Mart made a purchase deal based on the fact that those products being purchased were not available in another place at a lower price. The same policy would also be applied to big manufacturers like Procter & Gamble (P&G). As one of the former employees puts it, We would tell the vendors, dont leave in any room for a kickback because we dont do it here. And we dont want your advertising program or delivery program. Our truck will pick it up at your warehouse. Now what is your best price? Such transparency helped Wal-Mart know that the manufacturers were doing their best to trim down costs. This also helped in establishing a long-term relationship with the manufacturers. Generally, Wal-Mart preferred local and regional vendors and suppliers. Also, economies of scale gave Wal- Mart a negotiating advantage with suppliers, thereby allowing aggressive pricing strategies.
6.2. Supply Chain Integration through Product/Process Knowledge Sharing
Wal-Mart always believed that it was negotiating on behalf of the customer and the best price was passed on to the customer. Wal-Marts advantage created a snowball effect in which increasing purchase volume lead to more choice for the customer and lower prices, leading to more purchase volume. This price leverage was backed by systems and processes in place that enabled Wal-Mart to take its scale advantages to the next level to achieve unmatched success. Competitors struggled to realize their potential economies of scale because of the natural limitations of legacy processes and technological infrastructures (or lack thereof). Wal-Mart excelled at business process efficiency by involving suppliers/manufacturing in the process. Wal-Mart was more than willing to share proprietary knowledge and processes into its supplier base to improve quality and eliminate waste/costs out of the supply chain. This process/product knowledge sharing enabled super-effective cost management with a constant focus on continuous incremental improvement. In other words, reducing costs a few pennies at a time over an extended timeframe.
6.3. Supply Chain Partnerships
Traditionally, suppliers to the retailers had rather monolithic supply chains with little effective forecasting. A one size fits all approach meant the same price list irrespective of ordering efficiency. Products delivery was done in the manner the customers desired and thus came at the cost of efficiency.
Wal-Mart invited its major suppliers to co develop profitable supply chain partnerships. These partnerships are intended to amplify product flow efficiency and, in turn, Wal-Mart's profitability.
A case in point is Wal-Marts supplier relationship with P&G. The relationship did not begin working well together. Wal-Mart saw P&G as one of its bad suppliers because P&Gs organization and processes were far too complex for Wal-Marts efficiency- oriented culture. P&Gs culture was to focus on day-to-day results. A long term strategic plan was not its main focus. Besides, P&Gs systems could not support a relationship with distribution giant like Wal-Mart. This relationship changed with the process of enabling interoperation between the companies systems at transactional, operational and strategic levels. Since 1988, the relationship evolved to yield tremendous value to both companies and their mutual business grew manifold. Wal-Mart and P&G also incorporated several other inter-company innovations like vendor-managed inventory, category management among others. In August 2003, Wal-Mart announced that it would require all suppliers to put RFID tags with Electronic Product Codes on their pallets and cases by the end of 2006. By April 2007, 600 suppliers were using RFID (about 3% of its base of 20,000). A few suppliers felt that Wal-Mart was such a demanding, price- obsessed customer that making special technology investments at its behest is cost- prohibitive, especially for small companies scraping by on slim margins. Others felt that this was one way small suppliers become big suppliers. They could hone their technology strategies for their biggest potential markets even in the face of considerable risk.
6.4. Distribution Strategy
During fiscal 2007, approximately 80% of the Wal-Mart Stores purchases of merchandise were shipped from 121 distribution centers. The remaining merchandise was shipped directly to stores from suppliers. Wal-Mart owns and operates 40 general merchandise distribution centers, 38 grocery distribution centers, seven apparel and shoes distribution centers, 12 professional services and specialty distribution centers, two import distribution centers and three distribution centers that support walmart.com. Wal-Mart has 126 distribution facilities located in located in various countries that serve its international segment stores.
In 1998, Wal-Mart stocked more than 80,000 items in over 40 distribution centers in the US. While its competitors directly supplied 50-65 percent of inventory from their warehouses, Wal-Marts own warehouses directly supplied 85 percent of the inventory. This meant that Wal-Mart was able to provide replenishments within two days (on an average) while competitors took five days. Shipping costs for Wal-Mart were 8 approximately 3 percent as against 5 percent for competitors. The inventory turnover rate was very high, about once every two weeks for most of the items.
While some suppliers delivered goods such as automotive and drug products directly to its stores, about 85% of the goods passed through the distribution centers. Wal-Mart managed each distribution center the same way for both cases and palletized goods. Goods which were to be distributed within the US usually arrived in pallets, while imported goods arrived in re-usable boxes or cases.
Wal-Mart used advanced barcode technology and hand-held computer systems to ensure an unfailing flow of products to support the supply function. Managing the center became easier and more economical with technology. With real-time information about inventory levels of all the products in the center, an employee had to just make two scans one to identify the pallet, and the other to identify the location from where the stock had to be picked up. Different barcodes were used to label different products, shelves and bins in a center. The hand-held computer guided an employee with regard to the location of a particular product from a particular bin or shelf in the center. When the computer verified the bin and picked up a product, the employee confirmed whether it was the right product or not. The quantity of the product required from the center was entered into the hand-held computer by the employee and then the computer updated the information on the main server.
The packaging department also had accurate information about the products to be packed. Hand-held computers ensured that unnecessary paperwork was eliminated. Center supervisors could easily monitor their employees closely and guide them even on the move. This enabled efficient distribution center management operations and serve customer needs quickly.
The truck drivers could also avail facilities for maintaining personal hygiene such as shower bath and fitness centers at each distribution center which also had food, sleep and personal business provisions. The distribution center could also be used for meetings and paperwork.
6.5. Logistics Management
A fast and responsive transportation system was key to Wal-Marts logistics infrastructure. At one point about 3,500 company-owned trucks served its distribution centers. Dedicated trucks meant Wal-Mart could replenish its stores twice a week from its distribution centers. Hiring dedicated and experienced drivers was given priority. All hired drivers had to have 300,000 accident free miles and no major traffic violation. A coordinator controlled and scheduled dispatches based on driver availability and estimated time between the distribution center and the retail store. A strict vigil over the drivers was maintained and a record of their activities was kept in the private fleet driver handbook. A code of conduct ensured safe delivery. 6.6. Cross Docking
In order to make the distribution process more efficient Wal-Mart used Cross Docking. Cross Docking involved eliminating the distribution center and the retail store 9 but direct delivery to customers after picking and sorting the finished goods directly from the supplier. This was possible only if the supplier ensured delivery within a specified time. The requisition from the store was then converted into purchase orders and goods forwarded to a staging area. The goods were then packed and delivered to customers as per the order. Such cross docking meant that centralized decision control (for merchandizing, pricing and promotions) was shifted from the corporate level thereby transforming the supply chain into a demand chain. That is, instead of retail stores pushing goods into the system, the customers pulled the goods when required.
6.7. Inventory Management
Wal-Mart was able to reduce inventory because the stores managed their own stocks. Stores could reduce pack sizes across products and also ensure timely price markdowns. Using IT applications more inventories could be made available for high demand goods instead of cutting inventories across the board. By networking with suppliers a quick replenishment order could be placed via satellite communication system. Wal-Mart had set up its own satellite communication system in 1983. The supplier could then deliver the goods directly to the store concerned or to the nearest distribution center. The supplier was also able to reduce costs due to better co- ordination. In 1991, Wal-Mart invested 4 billion dollars into a retail link system. Around 10,000 suppliers used the retail link system to monitor the sales of their goods at the stores ad accordingly replenish inventory. In 2001, Wal-Mart tied up with Atlas Commerce to upgrade the system with Internet enabled technologies. Wal-Mart used advanced satellite communication systems, Massively Parallel Processor computer systems (MPP) and had extensive disaster recovery plans to track goods and inventory levels. This ensured uninterrupted service to its customers, suppliers and partners.
7. Store Formats
Store Format Wal-Mart Discount Stores Average 107,000 square feet, employ an average of 225 associates and offer 120,000 items. Wal-Mart Supercenters Developed in 1988 More than 2,300 nationwide in US Average 187,000 square feet, employ 350 or More associates on average and offer 142,000 different items. Wal-Mart Neighborhood Markets First opened in 1998, More than 120 Neighborhood Markets, Average 42,000 square feet Employ 95 associates on average and offer about 29,000 items. Sams Club More than 584 Sams Club locations Average 132,000 square feet Average of 160 to 175 associates and offers approximately 5,500 different products
8. Wal-Mart - International operating formats
Wal-Mart - International operating formats Argentina Supercenters -13 Brazil Supercenters 26 Sams Clubs 19 Hypermarkets (Hiper Bompreo, Big) 66 Supermarkets (Bompreo, Mercadorama, Nacional) -57 Cash-n-carry stores (Maxxi Alacado) 11 Combination discount and grocery stores (Todo Dia) -15 General merchandise stores (Magazine) 3 Discount stores (Mini Bompreo) - 2 Canada Supercenters 7 Discount stores 276 Sams Clubs - 6 China Supercenters -68, Neighborhood Markets -2 and 3 Sams Clubs Costa Rica 4 hypermarkets (Hiper Mas), 23 supermarkets (Ms por Menos), 8 warehouse stores (Maxi Bodega) and 102 discount stores (Pali) El Salvador 2 hypermarkets (Hiper Paiz), 32 supermarkets (La Despensa de Don Juan) and 29 discount stores (Despensa Familiar) Guatemala 6 hypermarkets (Hiper Paiz), 28 supermarkets (Paiz), 8 warehouse stores (Maxi Bodega), 2 membership clubs (Club Co) and 88 discount stores (Despensa Familiar) Honduras 1 hypermarket (Hiper Paiz), 6 supermarkets (Paiz), 5 warehouse stores (Maxi Bodega) and 29 discount stores (Despensa Familiar) Japan 97 hypermarkets (Livin, Seiyu), 293 supermarkets (Seiyu, Sunny) and 2 general merchandise stores (Seiyu) Mexico 118 supercenters, 77 Sams Clubs, 100 supermarkets (Superama, Mi Bodega), 219 combination discount and grocery stores (Bodega), 61 department stores (Suburbia), 312 restaurants and 2 discount stores (Mi Bodega Express) Nicaragua 5 supermarkets (La Unin) and 35 discount stores (Pali) Puerto Rico 6 supercenters, 8 discount stores, 9 Sams Clubs and 31 supermarkets (Amigo) United Kingdom 23 supercenters (Asda), 291 supermarkets (Asda), 7 general merchandise stores (Asda Living), 12 apparel stores (George) and 2 discount stores (Asda Essentials) (Source: Wal-Mart Annual Report) 11 9. Related Reading
9.1. Executives at Wal-Mart, Forbes 9.2. Wal-Mart Annual Report 9.3. Wal-Mart Quotes and Info, Reuters 9.4. Wal-Mart says offer to own Japan chain succeeds, AFP 9.5. Rowat, Christine, "Cross docking: The move from supply to demand", www.dmg.co.uk, August 1998. 9.6. "What is cross docking? The Warehouse Word, www.colofwhousing.com.au, 2001. 9.7. "Wal-Mart.com: The Physical giant goes Virtual," Red Herring Magazine, www.redherring.com, May 7, 2001. 10. Questions for discussion
1. Wal-Marts focus on supply chain management is responsible for its leadership in the retail industry. Discuss the distribution and logistics practices adopted by Wal-Mart. How far has Wal-Marts supply chain contributed to its competitive advantage? Explain. 2. Companies that have significant buyer power and are very focused on exerting price pressure on their suppliers rather than seeking increased profitability through business process innovations. Support this statement with examples/best practices from your own field. 3. Wal-Mart has always used innovative information technology tools to supplement its supply chain. In a few words, explain how use of IT tools/enabled processes have benefited Wal-Mart. How has IT impacted you/your department? 4. What steps can Wal-Mart take in order to revive/sustain its supply chain advantage? 5. Wal-Mart invited its major suppliers to develop profitable supply chain partnerships. Discuss how good/bad is sharing knowledge/critical information with vendors/suppliers or even customers? 6. It's not a sale; it's a great price you can count on every day to make your dollar go further at Wal-Mart.", as quoted in the article, "Pricing Philosophy," posted on www.walmart.com. Comment.