Supply Chain Management At Wal-Mart:-

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).

Background of Wal-mart:-

~Well known retailer with heavy

investment in IT Types of industry: one stop shopping

center Founder: Sam Walton Year of establishment: 1962 First store: in Arkansas

Sam Walton

Wal-mart Supply Chain Flow Chat:-

Manufacturer

Manufacturer

Manufacturer

Retail Store

Retail Store

Retail Store

Point of sale terminal

Satellite system

Bar code, RFID

Radio, headphone

Distribution center

Company Headquarter

5

Hub and Spoke System 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.

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.

6

Wal-Mart’s Procurement Wal-Mart emphasized the need to reduce purchasing costs and offer the best price to the

customer.

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.

7

Using EDI for Procurement

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.

8

Logistics Management

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 customer service.

The company hired only experienced drivers who had driven more than 300,000 accident-free miles, with no major traffic violation.

9

Cross-docking 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.

10

Inventory Management 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.

11

Inventory Management… 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.

12

Voice-based Order Filling (VOF)

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 distribution centers.

13

Inventory Management… (quick replenishment)

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 logistics operations.

Wal-Mart made significant investments in IT to quickly locate and replenish goods at the stores.

14

Inventory Management… (retail link system) 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 of their goods at stores and replenish inventories.

Details of daily transactions (~10 million per day) were processed through this system.

15

Inventory Management… (retail link system) 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 category.

16

Inventory Management… (retail link system) Wal-Mart owned the largest and most sophisticated computer system in the

private sector.

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.

17

CPFR

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 replenishment (CPFR).

18

CPFR 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.

19

CPFR: Hard to implement

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.

20

RFID Technology(Radio Frequency Identification)

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.

21

RFID Technology(Radio Frequency Identification)

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 time.

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.

GPS

Porter’s Five Forces

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 competitors.   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 in sometime.

◦ 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

techniques.◦ 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 consumer.

How Wal-Mart’s First Mover Advantage Pays Off

Wal-Mart is first to locate discount stores in cities with less than 50,000 population. Wal-Mart targets greater than 25 percent of all retail purchases in those cities.

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, 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 advertising costs, wages, and rents by locating in small town markets.

1

2

3

4

28

Why Wal-Mart’s Advantage is Sustainable

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.

Thank You