Supply Chain Management:Supply chain management is the integration of all network activities which
manufacturers, suppliers, , retailers and distributers are involved to
improve products, services, and information flow throughout the chain
from suppliers to the end customers, without ignoring the need for cost
reduction while maintaining target service level(Acc to Stapleton 2006).
Types of industry: one stop shopping
Founder: Sam Walton
Year of establishment: 1962
First store: in Arkansas
Bar code, RFID
Point of sale terminal
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
Under the system, goods were centrally ordered, assembled at a massive
warehouse, known as „distribution center‟ (hub), from where they were
dispatched to the individual stores (spoke).
The hub and spoke system enabled Wal-Mart to achieve significant cost
advantages by the centralized purchasing of goods in huge quantities..
and distributing them through its own logistics infrastructure to the retail
stores spread across the U.S.
Wal-Mart emphasized the need to reduce purchasing costs and offer the best price to the
The company directly procured from manufacturers, by passing all intermediaries
Wal-Mart finalizes a purchase deal only when it is fully confident that the products being
bought is not available else where at a lower price.
Wal-Mart spends a significant amount of time meeting vendors and
understanding their cost structure.
By making the process transparent, the retailer can be certain that the
manufacturers are doing their best to cut down costs.
The computer systems of Wal-Mart were connected to those of its suppliers.
EDI 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 centers.
An important feature of Wal-Mart‟s logistics infrastructure was its fast and
responsive transportation system.
The distribution centers were serviced by more than 3500 company owned trucks.
Wal-Mart believed that it needed drivers who were committed and dedicated to
The company hired only experienced drivers who had driven more than 300,000
accident-free miles, with no major traffic violation.
To make its distribution process more efficient, Wal-Mart also
made use of a logistics technique called “cross-docking.”
In this system, the finished goods were directly picked up
from the manufacturing plant, sorted out and then directly
supplied to the customers.
Wal-Mart invested heavily in IT and communication systems to effectively track sales and
merchandise inventories in stores across the country.
With the rapid expansion, it was essential to have a good communication system.
Hence, Wal-Mart set up its own satellite communication system in 1983.
Wal-Mart was able to reduce unproductive inventory by allowing stores to manage their own
stocks, reducing pack sizes across many product categories, and timely price markdowns.
Instead of cutting the inventory across the board, Wal-Mart made full use of its IT capabilities
to make more inventories available in the case of items that customers wanted most, while
reducing the overall inventory levels.
Employees at the stores had the “Magic Wand,” a hand-held computer which was
linked to in-store terminals through a radio frequency network.
These helped them to keep track of the inventory in stores, deliveries, and backup
merchandise in stock at the distribution centers.
The order management and store replenishment of goods were entirely executed
with the help of computers through the Point-of-Sales (POS) system.
Through this system, it was possible to monitor and track the sales and
merchandise stock levels on the store shelves.
In 1998, Wal-Mart installed a voice-based order filling (VOF)
system in all its grocery distribution centers.
Each person responsible for order picking was provided with a
microphone/speaker headset, connected to the portable (VOF)
system that could be worn on waist belt.
They were guided by the voice to item locations in the
Since the floor area of any Wal-Mart store varied
between 40,000 to 200,000 square feet, movement of
goods within the store was an important part of
Wal-Mart made significant investments in IT to
quickly locate and replenish goods at the stores.
In 1991, Wal-Mart had invested approximately $4 billion to build a retail
More than 10,000 Wal-Mart retail suppliers used the retail link system to
monitor the sales of their goods at stores and replenish inventories.
Details of daily transactions (~10 million per day) were processed through
Retail Link connected Wal-Mart‟s EDI network with an
extranet, accessible to Wal-Mart‟s thousands of suppliers.
The suppliers could find out how their product was performing
vis-a-vis competitors‟ products in a particular product
Wal-Mart owned the largest and most sophisticated computer system in the
The company used Massively Parallel Processor (MPP) computer system
to track the movement of goods and stock levels.
All information related to sales and inventories was passed on through an
advanced satellite communication system.
By the mid 1990s, Retail Link had emerged
into an Internet-enabled SCM system whose
functions were not confined to inventory
management alone, but also covered
collaborative planning, forecasting and
In CPFR, Wal-Mart worked together with its key suppliers on
a real-time basis by using the Internet to jointly determine
product-wise demand forecast.
CPFR is defined as a business practice for business partners
to share forecasts and results data through the Internet, in
order to reduce inventory costs while at the same time,
enhancing product availability across the supply chain.
Though CPFR was a promising supply chain initiative aimed at a mutually
beneficial collaboration between Wal-Mart and its suppliers, its actual
implementation required huge investments in time and money.
A few suppliers with whom Wal-Mart tried to implement CPFR
complained that a significant amount of time had to be spent on developing
forecasts and analyzing sales data.
In efforts to implement new technologies to reduce costs and increase the
efficiency, in July 2003, Wal-Mart asked its top 100 suppliers to be RFID compliant
by January, 2005.
Wal-Mart planned to replace bar-code technology with RFID technology.
The company believed that this replacement would reduce its supply chain
management costs and enhance efficiency.
Because of the implementation of RFID, employees were no longer required to physically
scan the bar codes of goods entering the stores and distribution centers, saving labor cost and
Wal-Mart expected that RFID would reduce the instances of stock-outs at the stores.
Although Wal-Mart was optimistic about the benefits of RFID, analysts felt that it would
impose a heavy burden on its suppliers.
To make themselves RFID compliant, the suppliers needed to incur an estimated $20 Million.
Of this, an estimated %50 would be spent on integrating the system and making
modifications in the supply chain software.
GPS system in communication.
Any truck can be located.
Drivers can active system by voice and
interact with staff.
Potential Competitors: Medium pressure
◦ Grocers could potentially enter into the retail side.
◦ Entry barriers are relatively high, as Wal-Mart has an outstanding
distribution systems, locations, brand name, and financial capital to
fend off competitors.
◦ Wal-mart often has an absolute cost advantage over other
Rivalry Among Established Companies: Medium Pressure
◦ Currently, there are three main incumbent companies that exist in the
same market as Wal-Mart: Sears, K Mart, and Target. Target is the
strongest of the three in relation to retail.
◦ Target has experienced tremendous growth in their domestic markets
and have defined their niche quite effectively.
◦ Sears and K-Mart seem to be drifting and have not challenged K-Mart
◦ Mature industry life cycle.
The Bargaining Power of Buyers: Low pressure
◦ The individual buyer has little to no pressure on Wal-Mart.
◦ Consumer advocate groups have complained about Wal-Mart’s pricing
◦ Consumer could shop at a competitor who offers comparable
products at comparable prices, but the convenience is lost.
Bargaining Power of Suppliers: Low to Medium pressure
◦ Since Wal-Mart holds so much of the market share, they offer a lot of
business to manufacturers and wholesalers. This gives Wal-Mart a lot
of power because by Wal-Mart threatening to switch to a different
supplier would create a scare tactic to the suppliers.
◦ Wal-Mart could vertically integrate.
◦ Wal-Mart does deal with some large suppliers like Proctor & Gamble,
Coca-Cola who have more bargaining power than small suppliers.
Substitute Products: Low pressure
◦ When it comes to this market, there are not many substitutes
that offer convenience and low pricing.
◦ The customer has the choice of going to many specialty
stores to get their desired products but are not going to find
Wal-Mart‟s low pricing.
◦ Online shopping proves another alternative because it is so
different and the customer can gain price advantages
because the company does not necessarily have to have a
brick and mortar store, passing the savings onto the
How Wal-Mart’s First Mover Advantage Pays Off
Wal-Mart is first to locate discount stores in cities
1 with less than 50,000 population. Wal-Mart targets
greater than 25 percent of all retail purchases in
In 1987, 33% of Wal-Mart’s stores are in “single store” towns with
no direct competitors compared to 12% for the industry. In 1993,
2 W-Mart has 22% of stores without competition from either K-Mart
or Target; K-Mart & Target do not compete with W-Mart in only
18% and 15% of markets, respectively.
Wal-Mart’s store prices are 6 percent higher in “no
competition” markets than in markets with direct
competitors (for every 10 percent more stores without
competition, W-M makes .06% higher overall profits, or .10
x .06) In 1987, 1.3% of W-Mart’s higher profits [.21x.06] are
due to no competition.
Wal-Mart incurs lower
4 advertising costs, wages, and
rents by locating in small town
Competitors rationally refuse to enter Wal-Mart towns because:
◦ Wal-Mart is first in the small town with a minimum
efficient scale (MES) store
◦ There is no feasible way to increase local demand
(relatively fixed demand)
◦ If the second mover builds a store (makes a MES
investment, which is necessary to compete
successfully) it will create substantial overcapacity;
neither firm will make money.
Wal-Mart’s advantage is sustainable due to a natural
geographic monopoly. This has more to do with strategy and
positioning than operational efficiency.