Wal-Mart Supply Chain Essay
Wal-Mart Supply Chain
With over US$444 billion in 2012 sales from operations in 27 countries, Wal-Mart Stores, Inc. is the world’s largest retailer. Wal-Mart is the world’s third largest public corporation, according to the Fortune Global 500 list in 2012 and world’s biggest private employer with 2.2 million associates worldwide. Wal-Mart serves customers and members more than 200 million times per week. Wal-Mart operates under 69 different banners. Wal-Mart’s supply chain, a key enabler of its growth from its beginnings in rural Arkansas, has long considered by many to be a major source of competitive advantage for the company. In fact, when Wal-Mart was voted “Retailer of the Decade” in 1989, its distribution costs were estimated at 1.7 per cent of its cost of sales, comparing favorably with competitors such as Kmart (3.5per cent of total sales) and Sears (five per cent of total sales). Their distribution system is generally regarded as the most emphasized visibility through the sharing of information with their suppliers. Wal-Mart slipped to No. 2 in the Fortune 500 in 2011 after holding onto the top spot for two years in a row. Wal-Mart’s international business continues to be a source of growth for the company – revenues outside the U.S. rose by 13.1% last year, to $35.5 billion.
Wal-Mart has come a long way since its inception and undergone many changes on the way. Sam Walton’s initial strategy was to target low-income families in rural areas by offering significantly lower costs. Through use of technology in distribution and supply chain logistics Wal-Mart has been able to cut costs and lower prices for end users. Wal-Mart is one of the best supply chain operators at the moment. Using a supply chain management system that is progressively against its competitors and they don’t even stop evolving. Pushing the limits of supply chain management, searching for and supporting better technology that promises to make its IT infrastructure more efficient. The company has 4 strategies driving its operations: * Becoming a truly global company
* Solving Business Challenges
* Leading on social issues
* Keeping its culture strong
Wal-Mart has also taken various initiatives in its approach towards its operations. Some of them include following: In 1992 Wal-Mart developed Ethical sourcing program to verify the products they sell are produced in a way that provides dignity and respect for workers in the supply chain, while protecting the environment. For eight straight years, Wal-Mart U.S. Logistics’ recordable injury rates have been below industry average. This year the entire Wal-Mart U.S. Logistics Network introduced an Enhanced Behavior Based Safety Program. Wal-Mart has implemented a Supplier Development Program, in which the Ethical Sourcing Team works closely with suppliers to improve working conditions in factories.
Background of Wal-Mart Inc
Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart is the world’s largest retailer with more than 8,500 stores worldwide, including stores in all 50 states as well as international stores in Argentina, Brazil, Canada, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Puerto Rico and the United Kingdom, as well as joint venture agreements in China and a stake in a leading Japanese retail chain. The company has over 2.2 million employees (known as “associates”). It was estimated that Wal-Mart served more than 200 million customers each week.
Wal-Mart’s strategy is to provide a broad assortment of quality merchandise and services at “everyday low prices” (EDLP) and is best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware, but also ran combined discount and grocery stores (Wal-Mart Super Centers), membership-only warehouse stores (Sam’s Club), and smaller grocery stores (Neighborhood Markets). In the general merchandise area, Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco Wholesale.
The Development of Wal-Mart’s Supply Chain
Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and then transport these goods to his stores directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of product through low-cost retail outlets — was sweeping the nation, he decided to open up large, warehouse-style stores in order to compete. To stock his new warehouse-style stores, initially named “Wal-Mart Discount City,” Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to send their trucks to his stores, which were located in rural Arkansas, self-distribution was necessary.
The initial competitive advantage for Wal-Mart was its supply chain management. As Wal-Mart grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of “resale price maintenance,” which had prevented retailers from discounting merchandise. A strong and efficient supply chain is the key to distribution and keeping their customers satisfied with the promise of “Everyday Low Prices.” Things within the supply chain in which Wal-Mart excelled at would include logistics, purchasing, retail decisions, and limiting the overall bullwhip effect of the supply chain.
The key attributes to Wal-Mart’s hugely developed logistics department are Cross docking or direct transfers from inbound or outbound trailers without extra storage, Working with suppliers to standardize case sizes and labeling. The cross docking system was originated by Wal-Mart, this innovation allows a distribution center to direct incoming shipments straight to a cross-docking system, products are delivered to a warehouse on a continual basis, where they are stored, repackaged, and distributed to stores without sitting in inventory. Goods “cross” from one loading dock to another, usually in 24 hours or less. While working with suppliers on labeling will increase efficiency in transporting goods from distribution centers to retail stores.
As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart’s U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new items were ordered. Over time, many of Wal-Mart’s largest suppliers had offices in Bentonville, staffed by analysts and managers supporting Wal-Mart’s business. In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the mid-1980s. Wal-Mart’s international purchasing offices worked directly with local factories to source Wal-Mart’s private label merchandise. Private label sales at Wal-Mart, first developed in the 1980s, were believed to account for 20 per cent of 2005 sales. Private label products appealed to customers since they were often priced at a significant discount to brand name merchandise; for Wal-Mart, the private label items generated higher margins than did the suppliers’ branded products.
Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and review a fully–merchandised prototype store, located within a warehouse. In order to gather field intelligence, buyers toured stores two or three days a week, working on the sales floors to help associates stock and sell merchandise. Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increased bargaining clout was a contributing factor in Procter & Gamble’s (P&G) acquisition of chief rival Gillette. Prior to the acquisition, sales to Wal-Mart accounted for 17 per cent of P&G’s revenues and 13 per cent of Gillette’s revenues. On the other hand, these two suppliers combined accounted for about eight per cent of Wal-Mart’s sales. Some viewed Wal-Mart’s close co-operation with suppliers in a negative light.
Wal-Mart dictates that its suppliers must accept payment entirely on Wal-Mart’s terms, share information all the way back to the purchasing of raw materials. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods and even encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and what materials and ingredients to use in those products. When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting or distribution. Globally, Wal-Mart is believed to have around 90,000 suppliers, of whom 200 — such as Nestle, P&G, Unilever and Kraft — are key global suppliers. With Wal-Mart’s expectations on sales data analysis, category management responsibilities and external research specific to their Wal-Mart business, it was not uncommon for a supplier to have several dozen employees working full-time to support the Wal-Mart business.
All these steps have allowed Sam Walton’s empire to increase its company’s relationship with suppliers by using a collaboration planning, forecasting, and replenishment model. This will coincidently, along with the income smoothing of having everyday low costs, reduce the bullwhip effect, lower costs, increase capacity utilization, and improve customer service levels. The income smoothing concept is since Wal-Mart uses resourceful use of collaborative planning, forecasting, and replenishment it will sufficiently lower the bullwhip effect.
This effect is caused by slight demand variables which are magnified as information moves back upstream from consumer back the raw materials in the supply chain. Another benefit of reducing the bullwhip effect and successful in its supply chain management techniques is reducing the uncertainty and lowering the amount of inventory needed in house. Uncertainty will have the negative effects of lateness and incomplete orders between Wal-Mart’s distribution centers. However in having a sufficient supply chain management system in place it will lower the amount of inventory needed in house and insure against supply chain uncertainty.
Wal-Mart recognized the importance of controlling inbound logistics and expended considerable efforts in mastering this function. The company acknowledged the value of controlling the inbound logistics, made it a company- wide mission, developed the technology required and teams were formed specifically to implement the mission. Today Wal-Mart has almost total inbound control of all DC-to-store shipments. Wal-Mart has decided to take this to next level by asking its vendors to directly ship to Wal-Mart DC’s. On implementation, this will provide Wal-Mart with greater control over the management of the logistics and more efficiency by taking over the vendor-to- DC leg and use those savings to further reduce prices. This will further help in better matching of demand and supply.
Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution centre in the early 1970s was a significant investment for the firm, Walton insisted on saturating the area within a day’s driving distance of the distribution centers in order to gain economies of scale. Over the years, competitors copied this “hub-and-spoke” design of high volume distribution centers serving a cluster of stores. This distribution-led store expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores, expanding across the nation from its headquarters in Arkansas. Stores were located in low-rent, suburban areas, close to major highways. In contrast, key competitor Kmart’s stores were thinly spread throughout the United States and were located in prime, urban areas. By the time the rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient logistics network of any retailer.
Wal-Mart’s 75,000-person logistics division and its information systems division included the largest private truck fleet employee base of any firm — 7,800 drivers, who delivered the majority of merchandise sold at stores. Wal-Mart’s 114 U.S. distribution centers, located throughout the United States, were a mix of general merchandise, food and soft goods (clothing) distribution centers, processing over five billion cases a year through its entire network. Product was picked up at the suppliers’ warehouse by Wal-Mart’s in-house trucking division and was then shipped to Wal-Mart’s distribution centers. Shipments were generally cross-docked, or directly transferred, from inbound to outbound trailers without extra storage. To ensure that cases moved efficiently through the distribution centers, Wal-Mart worked with suppliers to standardize case sizes and labeling. The average distance from distribution centre to stores was approximately 130 miles. Each of these distribution centers was profiled in a store-friendly way, with similar products stacked together. Merchandise purchased directly from factories in offshore locations such as China or India was processed at coastal distribution centers before shipment to U.S. stores.
On the way back from stores, Wal-Mart’s trucks generated “back-haul” revenue by transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart’s backhaul revenues — its private fleet operated as a for-hire carrier when it was not busy transporting merchandise from distribution centers to stores — were more than US$1 billion per year. Because its trucking employees were non-unionized and in-house, Wal-Mart was able to implement and improve upon standard delivery procedures, coordinating and deploying the entire fleet as necessary. Uniform operating standards ensured that miscommunication between traffic coordinators, truckers and store level employees was minimized. Wal-Mart improve the efficiency of its private fleet by almost 69 percent in 2012 compared to its 2005 baseline. Throughout their network they delivered 65 million more cases, while driving 28 million fewer miles, by increasing their pallets per trailer and managing their routes.
The heavier loads have minimal impact on their fuel efficient equipment, which includes an average tractor age of three years and the addition of more than 13,000 skirted trailers. The network efficiency improvement equates to avoiding nearly 41000 metric tons of CO2 emissions, the equivalent of taking about 7900 cars off the road. Continued enhancements in routing and scheduling software, coupled with advancements in GPS and mobile technologies are helping in better management of routes. Wal-Mart has also shown improved efficiency by focusing on the problem of backhauls. In 2011 alone with focusing on backhauls, the practice of picking up a load from a vendor and delivering to the distribution centers, rather than running an empty truck between the store and distribution center, saved more than 56000 trips. From 2005 to 2008 Wal-Mart increase the fuel efficiency in the private fleet by 38%.
Much of this fuel efficiency was achieved through technology and the use of more aerodynamic trucks. They looked at alternative fuels, auxiliary power units and aerodynamic fairings on both tractors and trailers. Wal-Mart not only uses the technology to track the location of the rigs, they track the fuel burn and monitor the driver’s right foot, gear selection and other driver decisions. Altering driver behavior is the next frontier of driving more fuel efficiency. Wal-Mart’s published goal is to double the truck fleet efficiency by October of 2015, so in 5 years they expect to almost double what they achieved between 2005 and 2008. There’s many ways to skin the fuel efficiency cat. One clear methodology is to run fewer empty miles. According to Wal-Mart’s own press their efforts to reduce empty miles and optimizing how merchandise is stacked in the trailers the private fleet logged 87 million fewer miles in 2008 while transporting 161,000 more cases, allowing the company to save 15,000,000 gallons of diesel fuel.
Investments in GPS-based routing applications, strong load optimization tools for load planning and cube utilization, developing new loading practices, all will help improve costs. Reducing package size and increasing “value density” helps reduce miles. Wal-Mart is working hard to reduce packaging by 5% by 2013. But packaging does not even touch on the impact of improved value density. As the product mix changes and the cost of products continue to decline, Wal-Mart is challenged to get even more product into less space, not only of transport, but for warehousing and store space. Detergent formulations that reduce the water content, package redesigns that change the shape of the cartons to increase the count loaded onto the truck, carton designs that reduce the “dead space” around the product but sill provide the protection needed, all of these efforts will directly reduce transit cost and carbon footprint.
Wal-Mart’s first stores were filled with merchandise that had been bought by Walton in bulk, as he was convinced that a new trend — discounting merchandise off the suggested retail price — was here to stay. In the 1960s, Wal-Mart grew rapidly as customers were attracted by its assortment of low-priced products. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. To generate additional volume, Wal-Mart buyers worked with suppliers on price rollback campaigns. Price rollbacks, each lasting about 90 days, were funded by suppliers, with the goal of increasing product sales between 200 and 500 per cent. The company also ensured that its store-level operations were at least as efficient as its logistics operations. The stores were simply furnished and constructed using standard materials. Efforts were made to continually reduce operating costs.
For example, light and temperature settings for all U.S. stores were controlled centrally from Bentonville. As Wal-Mart distribution centers had close to real-time information on each store’s in-stock levels, the merchandise could be pushed to stores automatically. In addition, store-level information systems allowed manufacturers to be notified as soon as an item was purchased. In anticipation of changes in demand for some items, associates had the authority to manually input orders or override impending deliveries. In contrast, most of Wal-Mart’s retail competitors did not confer merchandising responsibility to entry-level employees as merchandising templates were sent to stores through head office and were expected to be followed precisely.
To ensure that employees were kept up-to-date, management shared detailed information about day/week/month store sales with all employees during daily 10-minute-long “standing” meetings. The display of merchandise was suggested by a storewide template, with a unique template for each store, indicating the layout of Wal-Mart’s various departments. This template was created by Wal-Mart’s merchandising department, after analyzing historical store sales and community traits. Associates were free to alter the merchandising template to fit their local store requirements.
Shelf space in Wal-Mart’s different departments — from shoes to household appliances to automotive supplies — was divided up, each spot allocated to specific SKUs. Each Wal-Mart store aimed to be the “store of the community,” tailoring its product mix to appeal to the distinct tastes of that community. Thus, two Wal-Mart Stores a short distance apart could potentially stock different merchandise. In contrast, most other retailers made purchasing decisions at the district or regional level. In order to harness the knowledge of its suppliers, key category suppliers, called “category captains,” were introduced in the late 1980s, and they provided input on shelf space allocation.
Walton had always been interested in gathering and analyzing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent of hiring the smartest person in the class to come to Bentonville to computerize his operations. Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, due to his use of a personal airplane, which he used to observe new construction development (to determine where to place stores) and to monitor customer traffic (by observing how full the parking lot was). In the mid-1980s, Wal-Mart invested in a central database, store-level point-of-sale systems, and a satellite network.
Combined with one of the retail industry’s first chain-wide implementation of UPC bar codes, store-level information could now be collected instantaneously and analyzed. By combining sales data with external information such as weather forecasts, Wal-Mart was able to provide additional support to buyers, improving the accuracy of its purchasing forecasts. In the early 1990s, Wal-Mart developed Retail Link. At an estimated 570 terabytes — which Wal-Mart claimed was larger than all the fixed pages on the Internet — Retail Link was the largest civilian database in the world. Retail Link contained data on every sale made at the company during a two-decade period. Wal-Mart gave its suppliers access to real-time sales data on the products they supplied, down to individual stock-keeping items at the store level.
In exchange for providing suppliers access to these data, Wal-Mart expected them to proactively monitor and replenish product on a continual basis. In 1990, Wal-Mart became one of the early adopters of collaborative planning, forecasting and replenishment (CPRF), an integrated approach to planning and forecasting by sharing critical supply chain information, such data on promotions, inventory levels and daily sales.15 Wal-Mart’s vendor-managed inventory (VMI) program (also known as continuous replenishment) required suppliers to manage inventory levels at the company’s distribution centers, based on agreed-upon service levels. The VMI program started with P&G diapers in the late 1980s and, by 2006, had expanded to include many suppliers and SKUs.16 In some situations, particularly grocery products, suppliers owned the inventory in Wal-Mart stores up to the point that the sale was scanned at checkout.
To support this inventory management effort, supplier analysts worked closely with Wal-Mart’s supply chain personnel to co-ordinate the flow of products from suppliers’ factories and resolved any supply chain issues, from routine issues such as ensuring that products were ready for pickup by Wal-Mart’s trucks, and arranging for the return of defective products, to last-minute issues such as managing sudden spikes in demand for popular items. When Wal-Mart buyers met, on a frequent basis, with a supplier’s sales teams, two important topics of review were the supplier’s out-of-stock rate and inventory levels at Wal-Mart, indications of how well replenishment was being handled. Suppliers were provided with targets for out-of stock rates and inventory levels. In addition to managing short-term inventory and discussing product trends, Wal-Mart worked with suppliers on medium- to long-term supply chain strategy including factory location, co-operation with downstream raw materials suppliers and production volume forecasting.
Wal-Mart’s satellite network, in addition to receiving and transmitting point-of-sale data, also provided senior management with the ability to broadcast video messages to the stores. Although the bulk of senior management lived and worked in Bentonville, Arkansas, frequent video broadcasts to each store in their network kept store employees informed of the latest developments in the firm. In an effort to emulate Wal-Mart’s ability to share information with suppliers, Wal-Mart’s competitors relied on a system similar to Retail Link. Agentrics LLC, a software service provider, developed, in conjunction with several of global retailers, a software platform called “Retail Interface,” which collectedstore level sales data which could then be shared with suppliers. Agentrics’ customer base included many of the world’s top retailers – including Carrefour, Tesco, Metro, Costco, Kroger and Walgreen’s – who were also investors in Agentrics.
By visiting each store and by encouraging associates to contribute ideas, Walton was able to uncover and disperse best practices across the company in the 1960s and 1970s. To ensure that best practices were implemented as soon as possible, Walton held regular “Saturday morning meetings,” which convened his top management team in Bentonville. At 7 a.m. each Saturday, the week’s business results were discussed, and merchandising and purchasing changes were implemented. Store layout resets were managed on the weekend, and the renovated stores were ready by Monday morning. Walton and his management team often toured competitors’ stores, looking for new ideas to “borrow.” Wal-Mart believed that centralization had numerous benefits, including lower costs and improved communications between different divisions.
All of Wal-Mart’s divisions, from U.S. stores, International, Sam’s Club, to its logistics and information systems division were located in Bentonville, a town of 28,000 people in Northwest Arkansas. Regional managers and in-country presidents were the few executives who were stationed outside of Bentonville. Another key to Wal-Mart’s ability to enjoy low operating costs was the fact that it was non-union. Without cumbersome labor agreements, management could take advantage of technology to drive labor costs down and make operational changes quickly and efficiently.
Being non-union, however, had its drawbacks. As its store network encroached on the territory of unionized –grocers, unions, such as the United Food and Commercial Workers’ Union, started to become more aggressive in their anti-Wal-Mart publicity campaigns, funding so-called grassroots groups whose goals were to undermine Wal-Mart’s expansion. Wal-Mart’s size also made it a target for politicians: every stumble was magnified and played up in the press. Two of Wal-Mart’s key supply chain improvement initiatives included “Remix” and RFID (radio frequency identification tags).
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 19 October 2016
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