Wal-Mart's Supply Chain Success Through Efficient Logistics and Inventory Management
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Wal-Mart pioneered the retail "hub-and-spoke" distribution system in the 1970s, centrally ordering goods at warehouses then dispatching to individual stores. This enabled significant cost savings through bulk purchasing and logistics efficiencies. Wal-Mart also emphasized reducing costs through direct procurement from manufacturers and transparency in the pricing process. The company made major investments in inventory tracking technologies like EDI, RFID, and a proprietary satellite system to monitor sales and replenish stocks in real-time.
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Wal-Mart's Supply Chain Success Through Efficient Logistics and Inventory Management
- 1. 1 Wal-Mart’s Supply Chain A Business Success
- 2. 2 Wal-Mart is the World’s Largest Retail Company
- 3. 3 Ranked first in the Global Fortune 500 list in 2001-2002 financial year
- 4. 4 History 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.
- 5. 5 History of Wal-Mart… This phenomenal growth of Wal- Mart is attributed to its continued focus on customer needs and reducing cost through efficient supply chain management practices.
- 6. 6 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).
- 7. 7 Hub and Spoke System… 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.
- 8. 8 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.
- 9. 9 Wal-Mart’s Procurement… 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.
- 10. 10 Wal-Mart’s Procurement… 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.
- 11. 11 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.
- 12. 12 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.
- 13. 13 Logistics Management… 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.
- 14. 14 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.
- 15. 15 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.
- 16. 16 Inventory Management… 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.
- 17. 17 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.
- 18. 18 Inventory Management… 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.
- 19. 19 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.
- 20. 20 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.
- 21. 21 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.
- 22. 22 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.
- 23. 23 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.
- 24. 24 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).
- 25. 25 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.
- 26. 26 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.
- 27. 27 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.
- 28. 28 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.
- 29. 29 RFID Technology (Radio Frequency Identification) 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.