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Wal-Mart, the largest retail store in the world, uses the supply chain as a strategy to save money costs and provide thousands of items for customers’ needs. This paper will discuss the supply chain of Wal-Mart, the retail store, by discussing the IT supply chain, logistics management, and supplier relationships and inventory management to determine how Wal-Mart has used its supply chain as the weapon to gain profit and become the leader in the retail industry.
Keywords: supply chain, retail, IT, logistics
Supply Chain in Retail: Wal-Mart as an Example
On July 2, 1962, Sam Walton opened the first Wal-Mart discount store in Rogers, AR. Seven years later, he incorporated as Wal-Mart Stores, Inc. By the 1970s, the company started trading its shares on over-the-counter (OTC) markets and, in 1972, Wal-Mart was listed on the New York Stock Exchange. Today, Wal-Mart has become the largest enterprise company in the world with divisions such as Wal-Mart Stores US, Wal-Mart Discount Stores, Wal-Mart Supercenters, and Neighborhood Markets. Wal-Mart employs about 2.1 million people in 15 countries, and has 8,416 units around the world and earns its total net sales are $405 billion, net income is $24 billion, and the company projects a net sales increase in profit of 1% in 2010. (walmartstores.com; Wal-Mart 2010 Annual Report)
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In addition, according to Wal-Mart’s Annual Report, in fiscal 2010, Wal-Mart US significantly increased its cash flow and return on invested capital through gross margin improvements, tight expense control, strong inventory management, and efficient capital allocation. Wal-Mart reduced year-end inventory by $1.8 billion or 7.6%, and it increased inventory turns. For more than three consecutive years, Wal-Mart has held the top position in the Fortune Global 500 companies (walmartstores.com; Wal-Mart 2010 Annual Report).
What is the Supply Chain? Value Chain and Retail Industry
Tan’s 2001 paper, “A Framework of Supply Chain Management Literature,” uses Farley’s idea regarding a “supply management focuses on how the firms utilize their supplier’s processes, technology, and capability to enhance competitive advantage” (Tan, 2001, p. 40). He also utilizes the thoughts advanced by Lee and Billington (1992) regarding the idea that supply chain means the coordination of manufacturing, logistics, and materials management functions within an organization. In addition, Ketchen, Rebarick, Hult, and David (2008) mention that the “supply chain is a system of people, activities, information, and source involved in creating a product and then moving it to the customer” (p. 235). In other words, the supply chain is the mechanism by which the firms connect with each other as integrated units based on overall function in the system; this maximizes the advantages and competitiveness as well as creating the end value of the product for the customers. By using the supply chain, the participants in that chain can create a competitive advantage and improve their performances; the supply chain can use many organizations as elements, integrated and coordinated with each other to improve performance and efficiency, thereby creating a win-win situation (Ketchen et al., p. 235). This also increases the value of the product during the process of the supply chain (Stevenson, 2008).
The supply chain is the focus of the total value added to the customer, providing high quality, performance, speed, cost quality, and flexibility. The supply chain priorities are the keys to influencing such matters as strategic sourcing, logistic management, supply chain information, and relationship management (Meredith & Shafer, 2006).The supply chain is integrated as part of that system by exchanging information and providing the product or service based on function (Ketchen et al., 2008). When mentioning the retail industry, P.Fraser (2006) states that competition is in three distinct areas: local, regional, and national. Further, the retail industry not only includes the traditional retail store-one store, owner operated-but also includes formats such as discount and specialty stores, supermarket, supercenters, Internet retailers, and catalogues, as well as the biggest global retailers such as Wal-Mart (P.Fraser, 2006). In 2009, according to Gibson, B. J.et al., The state of the retail supply Chain : results and findings of the 2009 study., the supply chain in retailing changed, with more e-commerce increasing opportunities for the competition and creating new selling channels for retailers. Further, the supply chain has changed from its previous focus on costs and operations to become more focused on the participant’s integrative discipline, which includes process, strategy, and cross-organization collaboration. Wal-Mart, one of the well-known retail companies, is one example of using the supply chain as a successful strategy to reduce costs and improve service and responsiveness.
IT System in Supply Chain: RFID
In the supply chain, an information system means that “participants have data at the same time or after the product’s movement” or “participants have data prior to a product’s movement”; the member of a supply chain is allowed to read the data from other participants and share data while protecting each company’s proprietary information (Ketchen et al., 2008). Wal-Mart uses satellite technology and point-of-sale to track the location and quantity of items. To better track its products, Wal-Mart installed new technology and communicates with its suppliers using radio frequency identification (RFID). According to Meredith and Shafer (2006), RFID is a technology which can help the user to better track the product:
RFID tags provide much more information than bar codes and come in two visions, passive and active. The passive tags are as small as the head of a pin and as thin as a sheet of paper; readers can interrogate them as they pass by, typically within 20 feet. Active tags broadcast their information and can be read from much greater distances. (p. 289).
This new technology not only assists Wal-Mart in tracking inventory and increasing the rate of product replenishment in real time, but it also provides data to let the employee know where the product is and the exact time it will arrive. By using RFID, Wal-Mart not only reduces tracking costs but also increases the rate of merchandise in stock. Further, Wal-Mart has the benefit of data that tells management which product promotions are effective, cutting out-of-stock sale losses and overstock expenses (P.Fraser, 2006). In other words, Wal-Mart improves its inventory management by using RFID to reduce out-of-stock and incorrectly shelved product and increase the ability to track inventory. However, while reducing out-of-stock by 16%, it also cost 17 cents for each item’s RFID tag (P.Fraser). Ramaswamy (2004) states that, by using RFID, Wal-Mart makes its suppliers closer to the customer because the system also provides the data for the manufacturer to interpret customers’ preferences, and to monitor inventory and stock moved at each store. The supplier can redesign and package its product to reduce processing costs (Ramaswamy). Wal-Mart creates a win-win situation for itself and its suppliers to reduce costs by using a supply chain with the newest technology tools. This makes the supply chain more efficient, saves time and money, and offers data sharing to link the customer and the supplier.
Logistics management is the transportation mechanism or strategic inventory mechanism. Distribution is logistics throughout the supply chain (Ketchen et al., 2008). According to Meredith and Shafer (2006), “When the retailers order the item from local warehouse, the warehouse are supplied from regional centers and regional center draw from the central distribution facility, which gets its inventory directly from factory” (p. 281). The conception of distribution explains how retail stores operate their businesses by using the supply chain and knowing how the supply chain system works in the retail industry. In the early 1970s, Wal-Mart started use a supply chain as its strategy to operate. The company invested money to build distribution centers, selecting low-rent areas close to major highways, with the average distance to any given store around 130 miles. This average distance helped distribution reach the economies of scale (P.Fraser, 2006). By the 1980s, using this method of distribution helped
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Wal-Mart create a more efficient logistic network than its retail store competitors (P.Fraser). In addition, the logistic system in Wal-Mart is based on a faster, more responsive transportation system. Wal-Mart has a 75,000-person logistic division with 7,800 drivers and trucks, delivering the majority of merchandise sold at stores from 114 distribution centers in the United States (Fraser). The drivers are expected to take a loaded truck from the distribution center to the retail store, and then return with an empty trailer. The drivers need to unload the truck at the retail store. Based on the schedule, the unloading time for the trailer is two hours (Chandran, 2003). To make sure this process of the shipping moves efficiently, Wal-Mart uses cross-docking and works with suppliers to standardize the case size and labeling. This allows the cases to directly transfer from inbound to outbound without any extra storage. By using cross-docking, Wal-Mart reduces inventory costs as well as the costs of handling and operating (Fraser). In recent years, Wal-Mart’s idea of the cross-docking has changed the idea of the supply chain, because the retailer switches the role of demand from the retailer “pushing” products into the system to one where customers could “pull” product based on data from the supplier, knowing which product needs replenishing and where (Chandran, 2003). Wal-Mart made its distribution center and suppliers play important roles in centralizing control of merchandising, pricing, and promotion. The cross-docking system-a revolution for logistics management-makes the distribution center and supplier from centralized control not as important as earlier (Chandran, 2003).
Supplier Relationship: Wal-Mart and Procter & Gamble
According to David in “Best Value Supply Chains,” two ways to efficiently integrate the participants in a supply chain to make it successful are cooperation and collaboration (Ketchen et al., 2008). Cooperation includes outsourcing and subcontracting; it is a contractual relationship that is highly structured and complex. This kind of cooperation requires more negotiation during the relationship, and it must be aligned among the supply chain participants (Miles, Miles, & Snow, 2005). Another way to link the relationship in the supply chain is collaboration. Collaboration is based on trust through sharing purposes in the relationship, each partner regarding the other as an extension of itself. Therefore, building a collaborative relationship requires sophistication, time, and effort (Miles, Miles, & Snow, 2006).
Selecting a supplier is an important step in the supply chain, and it relates to providing the product and service with on-time delivery and good quality. When selecting the supplier, a company needs to be concerned about price, quality, and the prestige of the supplier in addition to customer service after the product is sold. Wal-Mart uses collaborative planning forecasting and replenishment (CPFR) and electronic data interchange (EDI) as the technologic strategies to integrate participants in sharing information for a continuous replenishment process (CRP) in the supply chain. This not only meets customers’ needs but also enhances the supply chain’s efficiency.
By sharing information and CRP with its supplier, Wal-Mart also reduces the cost of inventory based on the supply chain’s better performance “in financial returns, service level, and turnaround times” (Grean, 2002, p.10). From the manufacturer’s side, gaining data from the retailer reinforces an opportunity to know the frequency, quantity, and time of shipment and then manage the delivery when the customer needs it instead of waiting for the retailer to order (Clack & Lee, 2000). In this way, the manufacturer is the first to know the customers’ preferences rather than spending money to do marketing research to understand trends.
Wal-Mart developed the relationship with its supplier into a partnership relationship by sharing the information electronically to improve performance. Procter & Gamble (P&G) and Wal-Mart is an example of how that manufacturers and retailers integrate into the supply chain as partners and build benefits for each other by reducing costs and improving service. P&G is one of the manufacturers to link up with Wal-Mart’s computer system. In the 1990s, Wal-Mart became P&G’s largest customer, accounting for 10% of P&G’s total revenues (Ghemawat, Bradley, & Mark, 2004). P&G started to collaboration with Wal-Mart at the end of the 1980s. P&G decided to install the IT system Electronic Data Interchange (EDI), recommended by Wal-Mart, which then allowed Wal-Mart to get and share data, reducing the costs and making higher profits. Further, Wal-Mart and P&G use the CRP to reduce the reorder cycle time. Using these systems, P&G replenishes Wal-Mart’s inventory. This assists P&G in managing its inventory levels and ensures that P&G products are in stock in Wal-Mart at all times (Grean, 2002).
According to Stevenson, he mention that the inventory management is also an important key in the supply chain because it related to the inventory velocity and the risk of the “bullwhip effect” which mean the small increase in the ended of supply chain retail order will influence the wholesaler to increase its order which is greater than that of the retailer and it lead to fluctuate to inventory however this problem could be reserve by vendor managed inventory and IT system. (Stevenson, 2008, p. 380) Additionally according to the Floyd D. el.et, in the paper “Inventory Management” they refer that ” Successful inventory management involves balancing the costs of inventory with the benefits of inventory” and it related to purchasing plan and control inventory. (Hedrick, Barnes, Davis, Whybark, Krieger, & Budding, 2008) Inventory management is one of the main strategic in the supply chain especially in the retail industry and Wal mart use the supply chain system to control the inventory efficiency to reduce the cost to increase the revenue. Wal Mart by using “external alignment” strategy to connect the supplier (Gibson, Defee, & Randall, 2009) and use the IT technology such as the RFID and Bar codes to make the company system to understand the time to replenish the item to reduce the risk of over replenishment; besides, using the IT system to enhance the management inventory control, Wal-Mart reduces the risk of lose money from the misleading place which happened in retail industry mostly (P.Fraser, 2006). It improves the Wal- Mart inventory management on controlling the time and number that the item should be order or replenishes exactly while Wal Mart use the supply chain system make to reduce the process of “transit inventories” and “anticipation inventories “exactly (Meredith & Shafer, 2006).
Wal-Mart as an example to insert the supply chain into the retail industry by corporate its supplier and use IT system on Logistics and inventory management. This supply chain system assist Wal- Mart to not only reduce the cost from inventory and the expense from operating cost ;it also improves the quality of value chain such as speed by saving the time and money and causes the company close to customer and its supplier when operate this system. Low cost strategy approach by improving the supply chain efficiency continuously while Wal-Mart use the Logistic-distribution requirements to respond the customers and supplier fast and focus on speed improve in the supply and use the IT system to improve the inventory management to control the item efficiency and connect to more connect with the supplier to create the win-win situation by close to customers and progress the inventory management reduce the inventory cost and make supply be more useful. These strategies made the Wal-Mart to strength on reduce the inventory cost, the cost on transportation fee, and the cost operating to makes Wal-Mart successful to get the top of the retailer.
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