The Supply chain management of Walmart

Retail Industry

The retail industry can be defined “as a sector of the economy that is comprised of individuals and companies engaged in the selling of finished products to end user consumers (B. Farfan, 2005)”. Most of the multi chain retailers are publicly traded on the stock exchange and privately owned. The word ‘retail’ comes from the French word ‘retailer’ which literally means ‘cutting off, clip or divide’. The retail industry is not only confined to producing or selling of goods but also provides with subordinate services like delivery, marketing and distribution strategy. Retailers are at the end of the supply chain. The retail industry can be generally divided into two, on the basis of how goods are sold they are

Shop Retailing: A place where people buy goods/products from shops, warehouses or wholesale retailers.

Online Retailing: online retailing is a type of e- commerce; it is basically used for business to consumer (B-2-C) transactions.

Types of Retail outlets

The retailers in the retail industry are classified by the product sold or purchased, they are as follows

Food Products

Soft Goods: Clothing, Accessories and other apparel.

Hard Goods: Electronics etc.

Types of retailers

Department Store: A department store sells a combination of hard goods and soft goods.

Supermarket: A supermarket mostly sells grocery and fresh food products.

Discount Stores: A discount store will generally sell hard goods, but a discount store will provide with a variety of services.

Warehouse: A Place where most of the goods to be sold are stored. Warehouse at times have discounted sales round the year.

Other Types of Retail Store

Convenience Store: A store which is open extended hours, for example a off licence store.

General store: A corner shop.

Big-Box shop: Supermarket, Hypermarket.

The Behemoth of retail industry: WAL-MART

Wal-Mart stores INC branded as walmart runs a chain of large discount department store. Wal-Mart is an American public corporation founded by Sam Walton in 1962 and incorporated on 31st October 1969. It was listed as a public company on New York stock exchange in 1972.

History of Wal-Mart

The birth of discount retailing- 1950

Most of the people think discount retailing started with the opening of stores like Kmart, target and Wal-Mart, but discount retailing started was initiated by many small stores owned by Sam Walton in 1950’s.

1962- Wal-Mart begins

The owner and founder of Wal-Mart travelled across the United States, studied and analysed what the Americans wanted from a store. Sam and his wife Helen invested 95% of the money they had in the first Wal-Mart store in Rogers ARK.

1972 Wal-Mart

Listed on the New York Stock Exchange (NYSE). Wal-Mart opened 276 stores in 11 states in a decade.

1983 Wal-Mart comes of age

1983: Wal-Mart has its own satellite.

Supercenter opened in 1988: 36 departments.

1989: 1402 outlets, 123 Sam’s clubs across the United States.

In the 1980, Wal-Mart sales increased from $1 billion to $26 billion.

1990 technology driven

Develops a retail system and invests extensively in IT.

The 21st Century

Currently one of the most successful retailers in the world. Wal-Mart has 8,446 retail units under 55 different banners in 15 countries. Sales of Wal-Mart in the fiscal year of 2010 are $405 billion.

Facts about Wal-Mart

Type: Public (NYSE: WMT)

Industry: Retailing

Founders: Sam Walton

Headquarters: Bentonville, Arkansas US. Bentonville is increasingly referred to as Vendorville.

Fiscal year 2010 sales: $ 405 billion.

Employees: 2.1 million associates worldwide.

Evaluation of Supply Chain Management practices at Wal-Mart

Supply Chain Management (SCM)

“Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities (Council of Supply Chain Management Professional)”.

Enterprise Resource Planning (ERP)

“Enterprise resource planning (ERP) is an integrated computer-based system used to manage internal and external resources including tangible assets, financial resources, materials, and human resources (B.Hossien, 2004)”.

Major Components of Enterprise Resource Planning are

ERP

Product lifecycle management

Financials

Distribution

Human Resources

The advanced applications of ERP are

ERP Advanced

Purchase

Distribution

Manufacture

Warehouse Management System

Supply Chain Management

CRM

ERP acts as a tool that helps the companies to execute the things in required for managing the supply chain in a proper manner. ERP has helped reduce supply chain inaccuracies. The resources used using ERP attributes increases the performance of the chain/ plan of action and helps co-ordination/ integration of resources.

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Figure 1: The above figure shows the basic mechanism of Supply Chain Management. Basically there are three levels of supply chain management,

Supply chain life cycle

SCM functional processes.

SCM integrated solution

The first phase i.e. the supply chain life cycle has four phases commit schedule make and deliver. In the second phase there are three parameters considered, they are as follows

Strategic sourcing and procurement

It involves forecast and demand planning, customer order fulfilment/service.

Distribution Network and warehouse operations

Production Logistics

The transport and shipment management aspects are appropriately accomplished.

The third level of SCM integrates the first two levels of supply chain management. The SCM integrated solution shares data with supplier manufacturer and retailer. The retailer is at the end of supply chain management and then the product is given to the end user i.e. customer.

Hub and Spoke sytem

In the early 1970s, Wal-Mart became one of the first retailing companies in the world to centralize its distribution system, pioneering the retail hub-and-spoke system. A hub and spoke system can be defined as an architecture that uses a central connecting point. Generally the hub and spoke supply chain system is used by the airline industry. Delta airlines in 1955 were the pioneers of this technique. Wal-Mart was the first to implement the hub and spoke system in the retail industry.

Figure 2: A prototype of a hub and spoke system.

Under the Hub and Spoke system

Goods were centrally ordered

Assembled at a massive warehouse, distribution center’ (hub).

Goods were dispatched to the individual stores (spoke).

With the advances in technology, Wal-Mart installed an “integrated secondary route network design model in the hub and spoke system for dual express delivery (S. Rao,2007)”. It is a variation of the hub and spoke system, where the hubs are connected using primary nodes and the centers are connected using secondary nodes. Implementing the hub and spoke system it requires less human resources and it’s cost effective. The hub and spoke system enabled Wal-Mart to achieve significant cost advantages by the centralized purchasing of goods in huge quantities. The hub and spoke system enabled Wal-Mart to eliminate the wholesalers which saved 5% in sales margin of which 3% went to maintaining an extensive supply chain infrastructure; as a result their retail prices were reduced by 2% on the whole. There are some disadvantages of the hub and spoke system if there is any disruption at the hub such as bad weather or security can cause delays thought the system. One more major drawback is that the operating efficiency is limited to the hubs capacity.

Managing the supply chain

Procurement and Distribution

“Wal-Mart always emphasized the need to reduce cost and the best price to its customers. The company procured goods directly from manufacturers, by passing all the intermediaries. Wal-mart was a tough negotiator on prices and finalized a purchase deal only when it was fully confident that the products were not available elsewhere at a lower price (P.Mohan Chandran, 2003)”. Wal-Mart representative/ officials would periodically meet vendors/retailers/manufacturers and understand their basic cost structure. This transparent process of product procurement would ensure Wal-mart’s retailer’s best buy from its manufacturers. Once the procurement process was implemented with retailers Wal-Mart establishes a long- term relationship with them.

In 2009, Wal-Mart had over 140 distribution centres. The distribution centres had around 12,000 items stocked.

Advantages over competitors

Stock provided by own warehouse

85-90%

Competitors

50-60%

Replenishment

Within 2 days

Competitors

4-5 days

Shipping Cost

3%

Competitors

5%

Table 1: Advantages of appropriate inventory management over Wal-Mart’s competitors

Using Electronic Data Interchange (EDI) for procurement

Electronic Data Interchange (EDI) can be defined “as a standardized method for transferring data between different computer systems or computer networks. It is commonly used for e-commerce purposes, such as sending orders to warehouses, tracking shipments, and creating invoices [6]”. The computer systems of Wal-Mart were connected to those of its suppliers. EDI (Electronic Data Interchange) enabled the suppliers to download purchase orders along with store-to-store sales information relating to their products sold. On receiving information about the sales of various products, the suppliers shipped the required goods to Wal-Mart’s distribution centres. Wal-Mart also implemented JIT Just In Time approach for procurement which enabled Wal-Mart to reduce prices.

Figure 3: Mechanism of EDI. As the above figure shows once an item sold at any Wal-Mart store the data is translated using imbedded EDI translator. The translated data is then distributed using a gateway to the warehouse and the suppliers/ trading partners using a Value Added Network VAN.

Logistics Management

In 1980’s Wal-Mart established its logistics infrastructure which was fast and responsive. In 2002, Wal-Mart owned a fleet of 3,500 trucks. The trucks owned by Wal-Mart replenish stock in 2 days and shipping cost was reduced to 3 %. Wal-Mart hired drivers for the trucks only if they had

300,000 accident free miles

No major traffic violations.

Wal-Mart calculates its fleet efficiency as shown in the figure 3:

Figure 4

Figure 5: Figure 4 shows improvement in fleet efficiency from 2005 to 2008. Wal-Mart plans to add 1900 trucks to its fleet by 2009.

Wal-Mart used a logistics technique that was efficient and reliable known as ‘Cross-Docking’. “In this system the finished goods were directly picked up from the manufacturing plant of the supplier, sorted out and then directly supplied to the customers. The system reduced the handling and storage of finished goods, virtually eliminating the role of the distribution centres and stores (P.Mohan Chandran, 2003)”.

Wal-Mart implemented five types of Cross-docking techniques

Opportunistic Cross Docking

Opportunistic cross docking was primarily implemented by Wal-Mart, it would enable Wal-Mart to procure product of exact quantity from its suppliers and deliver to its customer without storing them in its own warehouses.

Flow-through Cross Docking

In Flow-through Cross Docking, there was a constant inflow and outflow of goods from the hub i.e. the distribution centre.

Distributor Cross Docking

In distributor cross docking the manufacturer delivered goods to the retailer without any intermediaries.

Manufacturer Cross Docking

In this type of cross docking the manufacturer factory would serve as a warehouse or as a distribution centre.

Pre- Allocated Cross Docking

Pre- Allocated Cross Docking is a variation of opportunistic cross docking, where the products are packed and labelled by the manufacturer and delivered to the distribution centre.

Inventory Management

In the early 1990’s, Wal-Mart extensively invested in Information Technology (IT) and communication systems to efficiently track sales and to check level of inventories in stores across the country. In 1983 Wal-mart set up its own satellite system to navigate and transfer data through the linked computer system across the country. Wal-Mart stores across the country were provided with a delivery plan, wherein a store could accelerate the delivery system by making a request to the distribution centre. Wal-Mart established an automated ordering system with its major suppliers like Procter and Gamble P&G. The computer system at a Wal-Mart store would send information to its distribution centre and supplier if the inventory level is low using the automated ordering system. “Employees at the stores had a ‘MAGIC WAND’ hand-held computer which was linked to in-store terminals through a radio frequency network to keep stock of inventory levels (P.Mohan Chandran, 2003)”. The hand held computer system was integrated with the Point of Sales (POS) system wherein if one product is sold the computer system would acknowledge the distribution centre about the sale of the particular product. “In 1991, Wal-Mart had invested approximately $4 billion to build a retail link system. More than 10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales (P. Mohan Chandran, 2003)”. Wal-Mart also installed the bar code technology in their computer system for inventory management.

The way forward RFID (Radio Frequency IDentification)

The recent advances in IT and communication systems have allowed Wal-Mart to shift from traditional bar-coding to modern technology known as RFID. RFID can be defined Radio as “a technology that uses electronic tags and labels on products, pallets or carts along with wireless scanners and other devices to automatically track the location of components and products throughout the manufacturing and/or distribution process[7]”. In 2003, Wal-Mart asked top 100 suppliers like P&G to be RFID compliant. As stated by ‘Rollin Ford’ the vice president of Wal-Mart, “When you have RFID, you have more insights you can tell even faster which stores sell more of which shampoo on Fridays and which ones on Sundays, and whether Hispanics prefer to shop more on Saturday nights rather than Mondays in the stores in their neighbourhoods.”

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Figure 6: A prototype of a RFID tag.

Time-line RFID in Wal-Mart

Advantages of RFID over Bar-code technology

RFID eliminates scanning of each and every item, instead of that you tag the item.

Employees can look at the tags annotate information of the product for e.g.

Description

Colour

Size

Condition of the product inside.

Innovations

Time line of Innovations

1970- Pioneers of using Hub and Spoke supply chain system into the retail industry.

1980- Build its own satellite for communication between stores set up its own meteorological team.

1990- Build a retail system, use of hand-held computers for inventory management and use of bar code technology.

2000- Use of RFID in the retail industry.

Proposed Supply Chain Software

Wal-Mart is the pioneer of discount retailing, it would have been impossible to be one without IT and supply chain infrastructure. Wal-Mart has opened new stores in India and China recently. The proposed software developed by RedSky IT creation UK has seen ASDA £6.8m sales boost from the supply chain software. The software allows Wal- Mart owned ASDA in UK to develop and sell new product in a week’s time. Traditionally to develop and sell a new product it almost takes a month. If Wal-Mart use this supply chain software in countries like India and China their sales will boost ten-fold, as they posses stiff competition from local vendors. Software known as ‘Web Tracks’, which is customised version of the supply chain software of RedSky IT. It is used to manage a single version of information about every own-brand product. Web Tracks software embeds and integrates information of ingredients, nutrition and allergy. This software is mainly used so that raw material supplier can use a single set of data. As India is a developing country, due to the enforcement of laws on foreign retail companies in India Wal-Mart is only allowed to do business as a wholesaler. It is only allowed to supply products to hospitals, hotels vegetable vendors and restaurants. If Web Tracks is implemented in India, the raw material supplier will only have to look at single set of data and the supply chain cost would be reduced to minimal as they are confined to wholesaling.

Conclusion

Wal-Mart has been ranked as number one on the ‘FORTUNE 500’ list in 2009, mainly because of efficient supply chain practices followed from the day it was incorporated in 1969. Wal-Mart is huge success only because it follows three basic principle of business i.e.

Minimization of cost

High production

Lead to maximization of profit

Wal-Mart has been increasingly growing mainly due to they always seek to improve, provide extended services, lowest possible price in the market and appropriate supply chain practices.