"People think we got big by putting big stores insmall towns. Really, we got big by replacinginventory with information."Sam Walton, Founder of Wal-Mart
History of Wal-MartHistory of Wal-Mart• The company’s founder is Sam Walton.• He was born in 1918 at Oklahoma.• In 1940, he worked for the famous retailer, J C Penney.• Walton gave up the job and decided to set up his own retailstore.• He purchased a store franchise in Arkansas.• Offering significant discounts on prices, he becamesuccessful and acquired a second store in 3 years• By 1969, Walton had established 18 Wal-Mart stores.
• By late 1970s, the retail chain had established a pharmacyand an auto service center.• In 1980s, Wal-Mart continued to grow due to hugecustomer demands in small towns.• Wal-Mart was offering low prices, customer satisfactionguaranteed, and hours that were realistic for the way peoplewanted to shop.– Open all night, for university students• By 1984, there were 640 Wal-Mart stores in U.S.• Wal-Mart suffered a setback in 1992, when Walton died
• But it continued its growth in the 1990s, focusing onoverseas stores.– 1992, Mexico (joint venture with Cifra)– 1994, Canada (acquired 122 Woolco stores from Woolworth)– 1997, Germany (acquired 21 store of Wertkauf)– Korea, Brazil, and so on.
Supply Chain: The sequence of organizations -their facilities, functions, and activities - thatare involved in producing and delivering aproduct or service.Sometimes referred to asSometimes referred to as value chains
Wal-mart Supply Chain Flow ChatManufacturerManufacturerManufacturerRetail StoreRetail StoreRetail StorePoint of sale terminalSatellite systemBar code, RFIDRadio, headphoneDistribution centerCompany Headquarter
• Lower inventories• Higher productivity• Shorter lead times• Higher profits• Greater customer loyaltyWal-Mart gets benefited through Supply Chain
Wal-Mart Strategy• “Everyday low price”• Effective use of logistics management• Effective inventory control• Bargaining power over suppliers• Global Expansion for new market opportunity
Supply Chain Management of Wal-Mart• Procurement and Distribution• Logistics management• Inventory management
Wal-Mart’s Procurement• Wal-Mart emphasized the need to reduce purchasing costsand offer the best price to the customer.• The company directly procured from manufacturers, byavoiding all intermediaries.• Wal-Mart finalizes a purchase deal only when it is fullyconfident that the products being bought is not availableelse where at a lower price.
Electronic Data Interchange• Increased productivity• Reduction of paperwork• Lead time and inventory reduction• Facilitation of just-in-time systems• Electronic transfer of funds• Improved control of operations• Reduction in clerical labor• Increased accuracy
Distribution Management of Wal-Mart• Bull whip effect• Vendor managed inventory
Bull Whip Effect The bullwhip effect (or whiplash effect) is an observedphenomenon in forecast-driven distribution channels.- Customer demand is rarely perfectly stable.- Businesses must forecast demand in order to properlyposition inventory and other resources. The concept first appeared in Jay Forresters IndustrialDynamics (1961) and thus it is also known as the Forrestereffect
Forecasts are based on statistics, and they are rarelyperfectly accurate.Companies often carry an inventory buffer called "safetystock".Moving up the supply chain from end-consumer to rawmaterials supplier, each supply chain participant has greaterobserved variation in demand and thus greater need forsafety stockIn periods of rising demand, down-stream participants willincrease their orders.In periods of falling demand, orders will fall or stop inorder to reduce inventory.
Vendor Managed Inventory• The vendor (supplier) manages the stock levels andavailability for the customer based on safety stock levelsthe as per the agreed Terms & Conditions.• Vendor Managed Inventory (VMI) is a planning andmanagement system in which the vendor is responsiblefor maintaining the customer’s inventory levels.• Manufacturers generate orders, not distributors orretailers Stocking information is accessed using EDI• A first step towards supply chain collaboration• Increased speed, reduced errors, and improved service
Logistics Management• An important feature of Wal-Mart’s logistics infrastructurewas its fast and responsive transportation system.• The distribution centers were serviced by more than 7000company owned trucks.• Wal-Mart believed that it needed drivers who werecommitted and dedicated to customer service.• The company hired only experienced drivers who haddriven more than 300,000 accident-free miles, with nomajor traffic violation.
Logistics Management of Wal-Mart• Cross Docking• Hub and Spoke
Flow-Time AnalysisPoint-of-salesystemcaptures datain real-timeData istransmitted towarehousesfor Inv. Mgmt.Retail Linktransmitsdata tosupplierOrders aregenerated fromprevious-daysalesMerchandise isloaded ontotrucks usingcross-dockingMerchandiseis delivered tothe storeMerchandise ismanufacturedbased on historicaland real-time dataMerchandiseis shipped towarehousesCustomermade apurchaseThe store will re-stock the shelveswith merchandise
Cross docking• Cross-docking means to take a finished good fromthe Manufacturing plant and deliver it directly to thecustomer with little or no handling in the process.• In purest form this is done directly, with minimal orno warehousing.
Hub and SpokeIn the early 1970s, Wal-Mart became one of the firstretailing companies in the world to centralize itsdistribution system, pioneering the retail hub-and-spokesystem.Under the system, goods were centrally ordered,assembled at a massive warehouse, known as ‘distributioncenter’ (hub), from where they were dispatched to theindividual stores (spoke).
The hub and spoke system enabled Wal-Mart to achievesignificant cost advantages by the centralized purchasingof goods in huge quantities..And distributing them through its own logistics infrastructureto the retail stores spread across the U.S.
Wal -Marts CommunicationNetwork• Cross Docking relies on continuous communicationbetween Wal Mart’s suppliers, distribution centers,and every point of sale system in each store.• This enables orders to flow in, get packaged and thenshipped.• Wal Mart operates their own satellite network.• Wal Mart’s satellite network sends the Point Of Sale(POS) data directly to 4000 vendors
Inventory ManagementWal-Mart invested heavily in IT and communicationsystems to effectively track sales and merchandiseinventories in stores across the country.With the rapid expansion, it was essential to have a goodcommunication system.Hence, Wal-Mart set up its own satellite communicationsystem in 1983.
Inventory Management(cont……)Wal-Mart was able to reduce unproductive inventory byallowing stores to manage their own stocks, reducing packsizes across many product categories, and timely pricemarkdowns.Instead of cutting the inventory across the board, Wal-Mart made full use of its IT capabilities to make moreinventories available in the case of items that customerswanted most, while reducing the overall inventory levels.
Inventory Management(cont……)Employees at the stores had the “Magic Wand,” a hand-held computer which was linked to in-store terminalsthrough a radio frequency network.These helped them to keep track of the inventory in stores,deliveries, and backup merchandise in stock at thedistribution centers.
CPFR• By the mid 1990s, Retail Link had emerged into anInternet-enabled SCM system whose functions werenot confined to inventory management alone, but alsocovered collaborative planning, forecasting andreplenishment (CPFR).• CPFR is defined as a business practice for businesspartners to share forecasts and results data throughthe Internet, in order to reduce inventory costs whileat the same time, enhancing product availabilityacross the supply chain
Though CPFR was a promising supply chain initiativeaimed at a mutually beneficial collaboration betweenWal-Mart and its suppliers, its actual implementationrequired huge investments in time and money.A few suppliers with whom Wal-Mart tried toimplement CPFR complained that a significant amount oftime had to be spent on developing forecasts andanalyzing sales data.
Radio Frequency Identification• In efforts to implement new technologies to reducecosts and increase the efficiency, in July 2003, Wal-Mart asked its top 100 suppliers to be RFIDcompliant by January, 2005.• Wal-Mart planned to replace bar-code technologywith RFID technology.• The company believed that this replacement wouldreduce its supply chain management costs andenhance efficiency.
• Because of the implementation of RFID, employeeswere no longer required to physically scan the barcodes of goods entering the stores and distributioncenters, saving labor cost and time.• Wal-Mart expected that RFID would reduce theinstances of stock-outs at the stores.• Although Wal-Mart was optimistic about the benefitsof RFID, analysts felt that it would impose a heavyburden on its suppliers.• To make themselves RFID compliant, the suppliersneeded to incur an estimated $20 Million.• Of this, an estimated %50 would be spent onintegrating the system and making modifications inthe supply chain software
Information Technology: A Supply ChainEnabler• Information links all aspects of supply chain• E-business– replacement of physical business processes withelectronic ones• Electronic data interchange (EDI)– a computer-to-computer exchange of businessdocuments
One of the keys to Wal-Marts effective logistical systemis the flexibility that it has when choosing suppliers.When Wal-Mart negotiates with suppliers and thesuppliers know that Wal-Mart will only pay the mostcompetitive prices. This is because it is very easy forthem to find another supplier of that particular materialwith a lower price and very few logistical problems
Another reason that Wal-Marts prices are so competitiveis because they buy in such large quantities thattransportation from one end of the supply chain to anotheris not as costly for additional units.This aspect of the logistical system does not come fromskill or expertise it simply comes from the sheer size ofthe company, but this is still a factor.
Wal-Mart buys so many supplies from different placesthroughout the world, that they have the luxury of usingbigger trucks and using less fuel to go back and forth.Also if by chance they have to use shipping services totransport material from one location to another, Wal-Martwill give them so much business that they will get hugediscounts