The Wal Mart Global Supply Chain Management - Case Study Example

Supply Chain Management: The Wal-Mart Case EXECUTIVE SUMMARY The supply chain strategy of Wal-Mart has indeed set the standard for other businesses. With its advanced IT-enabled systems of procurement, inventory and logistics management, it has catapulted itself to become the most dominant force in the retail industry. The superiority of its supply chain management solutions is largely due to its emphasis on optimizing all facets of its supply chain which although aiming for reduced costs, still striving to achieve overall efficiency. Through the aid of various technologies, it has automated its supply chain process thereby increasing its edge with its competitors. Its fast replenishment process has been made possible through its inventory management practices which efficiently meet customer’s needs. With all these, Wal-Mart has faced the challenges of globalization by taking advantage of its impact on the supply chain management. INTRODUCTION Wal-Mart Stores Inc. is the world’s largest retail store, having around 7,870 stores worldwide. Samuel Moore Walton founded Wal-Mart in 1962 as a discount store characterized by its “low prices.” With its successful growth and continued international expansion, it has in fact become the largest corporation in the world in terms of revenue according to Fortune 500. The rapid rise of Wal-Mart into a global economic force has been analyzed as a by-product of its vision of “everyday low prices” which captured the largest marketing base: the lower and middle class consumers. However, its successful operation is said to be due to its well-managed supply chain strategies that is both consumer-oriented and cost-efficient. TRENDS AND CHARACTERISTICS OF RETAIL INDUSTRY The retail industry has annual sales of over $3.8 trillion making it the second biggest industry in the United States. In fact, it provides approximately 12% of employment in the US (“Retail”). In 2007, the US Census Bureau accounted around $4.48 trillion sales for Retail Industry, while it had total sales of $4.475 trillion in 2008 (Farfan). Of the total revenue, the greater part has always been because of retail chains companies, such as the Wal-Wart, which earned a total of $344 billion last fiscal year (“Retail”). The innovative trend of e-commerce has changed the retail industry over the decade. The technological advantage like the internet has revolutionized the ways of retail industries, which have even resulted to the birth of non-traditional retailers who transact business through the World Wide Web. The inflow of novel products created a trend in sales and growth. The product cycles influenced retailers’ growth factors because of the maximized profits from new products’ high prices (“Retail”). But because of the competition, prices have gone down over time. In terms of growth and revenue, Wal-Mart has dominated the retail industry’s market shares. The “Wal-Mart effect,” which emphasizes efficiency coupled with a very low price forced the lowering of prices throughout the industry. Being the largest retailer, it has controlled the consumers resulting to closure of small retail stores and the need to adapt to the Wal-Mart model (“Retail”). As compared to its closest competitors, Wal-Mart has maintained its edge in terms of performance and has dominated the retail industry market share in the year 2009 (see table 1). Table 1 Peer Performance 30-day % change 52-week % change 3-month avg. vol. Wal-Mart Stores Inc. –1.53% –3.48% 3.4M Tesco PLC. –3.99% +37.11% 41.5K Target Corporation –0.81% +31.38% 1.7M Sears Holdings Corporation –0.05% +88.85% 287.2K Source: Wal-Mart’s Peer Performance, The New York Times, 18 Dec. 2009, Web, 21 Dec. 2009. Supply Chain Strategies adopted by Retail industries procurement and distribution. Retail industries usually build strong relationships with their vendors and try to establish an efficient system of information-sharing. Wal-Mart for instance, spends time with vendors in order to know their cost structure which will later develop into a long-term relationship. When a strong relationship is built, it enables them to create external as well as internal vendor collaboration enhanced by “standard-based, open, scalable technology” which makes it possible to hold information in a centralized yet readily accessible system (“Supply Chain Management solutions”). Therefore, “supply chain reliability” is in effect enhanced as manifested in “delivery performance” and “perfect order fulfillment.” This close retailer-vendor collaboration ensures the correct goods delivered to the right place and customer, at the right time, in the right condition and packaging, and with the right quantity and documentation (“SCOR Metrics”). Logistics. A low-priced but reliable transport system is the key to an effective logistics solution among retailers. Wal-Mart for example relies in its responsive and speedy transportation system (own fleet of 7000 trucks) which caters to a fast replenishment distribution system in US. Retail stores foster constant communication with its distribution teams to better coordinate the monitoring of products. Through the logistics solution called “cross-docking” which speeds up the flow of inventory by “receiving products at an inbound dock and immediately moving them ‘crossdock’ for outbound shipment to customers” (Galbreth, Hill, and Handley). Through this best logistics and distribution tactics, the “supply chain responsiveness,” that is the speed of providing merchandise to the customers is efficiently achieved (“SCOR Metrics”). Inventory. Retailers especially the big ones uses the system known as “Vendor Managed Inventory,” which grants to the vendor the full responsibility of dealing and managing the inventory. The vendor himself, pursuant to an agreement, is in charge of organizing the spaces and shelves. This system also enhances the “supply chain responsiveness” or “order fulfillment” since it guarantees that the stores do not become out of stock. Retail industries likewise utilize the “Point of Sale Information System,” which enables the personnel to track stock levels. When merchandise is purchased and moves out of the shelves, the supplier is automatically informed through this system. “A re-order point can be imposed based on consumption pattern and the supplier is asked to fill the shelf upon inventory reaching the re-order point” (Krishnan and Kumar). wal-mart’s SUPPLY CHAIN STRATEGY: COMPARISON Retail stores have diverse ways of looking at business strategies, which also lead to different supply chain tactics. There are those who invest much on basic necessities, while some concentrate in self-expression and high fashion, which all depends on the need of the company. Some companies use supply chain approach which is compatible for short-term products, while other retailers need “high availability and good range management” (O’Byrne). Large retailers (like Wal-Mart), on the other hand, invests in low-cost yet very efficient supply chains for it to thrive (O’Byrne). Wal-Mart capitalizes on its innovative approach in logistics, technology, transportation and distribution. “The Wal-Mart Way” focuses on its capacity to “drive costs out of its supply chain and manage it efficiently:” taking advantage of advanced technology or IT system (“Why Wal-Mart's Supply”). It optimized every aspect of the supply chain in order to achieve its goal of bringing down the prices of its merchandise. This lowering of prices is indeed reinforced by “supply chain metrics” which measure cost reduction (Goldsmith). Wal-Mart emphasized on the “productivity loop,” which focuses on lower prices through lower costs, selling more units, and increased profit; and then process repeats itself (Hoske). Maxwell advanced the thought that supply chain implementation starts with internal sales endeavor, nonetheless the “power of supply chain management” must be introduced within the organizations—that is marketing the concepts within Wal-Mart itself (qtd. in Hoske). Wal-Mart uniquely implemented the CPRF system to promote a “just-in-time delivery program,” thereby reducing costs for both the suppliers and retailers. Collaborative Planning, Forecasting and Replenishment (CPFR) system is characterized by shared plans by trading partners which controls the activities of manufacturing, delivering and selling products in a daily basis. Vendor partnerships have led Wal-Mart to collaborate with large manufacturers in implementing leading logistics tactics designed to reduce costs and at the same time increase profit. Comparatively, mass retailers’ supply chain strategy largely differs in their management approach. Wal-Mart has a management approach which considers international factors, such as utilizing a "best in market" supply chain strategy as opposed to a "world class one" in serving its markets abroad (Cooke). This is what differentiates Wal-Mart from other retail stores since most of them have limited overseas markets. Maxwell explained that this denotes "thinking like a customer" and "understanding where the market is in the maturity curve" (qtd. in Cooke). Aside from this, by using this best-in-market approach Wal-Mart has ensured its compliance with both international and local laws, creating great expectations with a low cost and promoting sustainable operation. On the contrary, Target Corp. and Costco—two of its biggest competitors—having no international markets have used a much more conventional supply chain approach. While Wal-Mart’s major component of supply chain strategy used inland ports which are accessed through rail, Target Corp. has a different routing tactic. Its imported merchandise is solely routed via a “handful of import distribution centers located on the East and West coasts, and relaying goods by truck or rail to the regional DCs that feed its 1,600 retail locations” (Tirschwell). Wal-Mart is focused on lowered transportation costs and price strategy in order to sell the lowest price possible for its products. Costco’s business model, however, is primarily concentrated on delivering their merchandise to the shoppers in a very efficient and timely manner rather than shifting costs to the vendors (“Supply Chain News”). This is quite different to Wal-Mart’s “everyday low price strategy” which sometimes makes suppliers break even. Costco is said to be competing not on price but on other aspects, that is why its supply chain strategy does not mainly take into consideration price reduction, unlike Wal-Mart which grabs cost saving opportunities in supply chain. GENERAL INVENTORY MANAGEMENT PRACTICES Maxwell raised the importance of “inventory optimization,” which places inventory policies on top of the pyramidal design; forecasting and event planning below that, while supply chain fundamentals, namely performance metrics, lead times, and order constraints are at the base (qtd. in Hoske). With integration and collaboration, inventory optimization is achieved. Wal-Mart’s inventory management has improved with its use of “Just in Time” inventory, which is directed towards minimization of the costs related to inventory maintenance. Wal-Mart monitors the inventory process by coordinating inventory purchases with anticipated demand; hence the system requires Wal-Mart to make an accurate prediction of the demand for its products. In order to fulfill all the demands of its stores, Wal-Mart made a huge investment in IT systems that would enable it to track country-wide store inventories. That is why managing the inventory almost always involve advanced communication system, thereby rapidly innovating Wal-Mart’s operations. Wal-Mart has decreased its counter-productive errors by scrapping its old and manually managed inventory strategy—thus avoiding unproductive inventory. Taking advantage of this IT-enabled system, the company has increased its inventories demanded by customers, yet minimizing the “overall inventory levels” (Chandran). Wal-Mart enabled its stores to administer their own inventories through the use of centralized and sophisticated inventory data system which makes it easier for the workers to know the location of the merchandise while at the same time knowing its inventory level. This system likewise shows whether the goods are currently in transit for distribution or being loaded in the distribution spots (Chandran). Indeed, Wal-Mart has made this system its ultimate mechanism for determining demands and expectations—making sure that the customers are sufficiently supplied with their needs. Wal-Mart also pioneered the system called Vendor Managed Inventory (VMI) which is a process of monitoring, planning and managing of the inventory or stocks by the vendor on behalf of the organization consumer (“Vendor Managed Inventory”). It is the supplier of the product who is responsible for the maintenance of the inventory of the goods which includes the proper display and organizing of the product lines. Thus, Wal-mart is ensured that its stores will not be out-of-stock. “The real benefits of VMI come with driving a lean supply chain centered on creating an end-to-end pull system, which is based on end user demand cascading through the chain” (“Vendor Managed Inventory”). TECHNOLOGIES SUPPORTING SUPPLY CHAIN MANAGEMENT Wal-Mart has capitalized in innovative methods to supply chain management—achieving effective productivity through Internet-based and IT-enabled systems. Its proactive use of Information Technology enhanced its efficiency in managing procurement, logistics, inventory, and demand management. As a matter of fact, Wal-Mart was able to amplify its control over its supply chain system through massive computerization and private satellite system: a move to ensure the expansion of its overall operation and to meet the demand for a technological system which would capacitate the company to supply the fast growing need of retail outlets and distribution centers. Some of its revolutionary technologies used include EDI, Retail Link System, RFID, conveying, voiced-based tools, and automated sorting. The barcode system was the first universal labeling scheme used by Wal-Mart. The system enabled it to effectively keep track of items sold from which stores—allowing the reduction of inventories and reliance on “just-in-time delivery” of merchandise—thus resulting to a decreased cost of warehousing. Wal-Mart implemented the system in effecting the process of picking, receiving, inventory control, and physical counting of the supplies. However, with its unhampered advancement, Wal-Mart has decided to replace the barcode system with the latest logistics strategy: the Radio Frequency Identification (RFID). The advantage of RFID is its facility in maintaining lower costs, identifying out-of-stocks merchandise, and increasing sales. In terms of inventory management, RFID is a revolutionary intelligence technology which enables real-time supply chain. It works through the attached tags in all items, boxes and products which are automatically tracked when they flow through the supply chain. It provides an accurate and real-time view of the inventory because the tags contain model and serial numbers, color, size and quantity, which are data profiles captured and transmitted to a centralized data system (Bauer). This RFID mechanism is different from the UPC codes since it does not require manual intervention in exchanging the data and saving it to a data store. It does not need any “line of sight between the reader and the tag,” yet allowing to carry the same data as that of UPC bar codes (Bauer). On the logistics side, the hand over process is streamlined by RFID, while at the same time eliminating “human-intensive reconciliation activities”—readily routing correct goods and reconciling products and customer orders (Bauer). In warehousing, practices have been radically advanced through RFID tagging. It has enhanced detection and “manifest mapping,” improved automatic identification, developed a more accurate vehicle assignment, “real-time notice of arrivals/delays,” and minimized shipping errors (Bauer). Managing of orders and replenishing the stores became computer-enabled through the “Point of Sales System” (POS). Through the aid of computers, employees are able to monitor stock levels or sales in the store shelves—making it easier for them to track the inventory, deliveries, and product stocks in the distribution centers (Chandran). Similarly, Wal-Mart’s “retail link system” likewise enables it to track down the sales of merchandise and to quickly replenish its inventories. Therefore, when a customer buys something from Wal-Mart, the flow of the transaction is recorded in the internal systems which will then flow outside to prompt a replenishment order, and then the supplier will restock the merchandise through the distribution system (Fello and Everaert). In pioneering the use of Vendor Managed Inventory (VMI), Wal-Mart uses Electronic Data Interchange (EDI) as its primary component. It is considered to be effective in Wal-Mart’s exchange of information with its suppliers—usually by transmission of electronic documents from Wal-Mart’s computer system to its suppliers’ system. It is an electronic process used in the exchange of item information, shipping information, purchase orders, and planning or forecast data: allowing it to improve its efficient operations, customer services, productivity, and lower costs. Wal-Mart has reaped the convenience of electronically manipulating and storing information without the hassle of manual intervention—avoiding wasteful operational errors and benefitting from its speed and efficiency. company’s performance vis a vis its supply chain strategy Wal-Mart’s supply chain practices are said to have “significant cost and cycle time reductions;” resulting in the rise of inventory turns, lowering of out-of-stock occurrences, and a very efficient replenishment process which has significantly decreased from weeks to mere hours (“Supply Chain Management”). In the logistics area, Wal-Mart has maintained an “in-stock” character, which means that its logistical efforts have prevented it from being out-of-stock. This is largely due to its innovation in supply chain management backed by technological means. “Inventory turn at high velocity backed by automated replenishment insures Wal-Mart sells 100% of its inventory between 72 hours and 60 days upon taking possession of it from its suppliers” (Bergdahl). Wal-Mart’s IT-enabled logistics, containerization, and manufacturing have been the keys to its low price effect. In fact, it has been reported that despite the overall decline of store sales in the United States, Wal-Mart had performed better than expected as it earned a total sales of $99.4 billion from $98.3 billion a year ago (Ferrari). The strategy of Wal-Mart which took advantage on its RFID-enabled systems became the cause to improving the company’s performance particularly when it improved the “on-shelf availability” and “overall inventory levels” of its stores (Ferrari). However, it has been recommended that since RFID is still in its premature stages, there is a need to study the ways in using the technology. Wal-Mart, thus still needs to understand and examine the potential use of RFID so that it will be able to truly detect the gaps that can still be improved (“Retail: Supply Chain”). The company’s performance has also been bolstered by its “best in” supply chain strategy which has made Wal-Mart’s international division earned a staggering amount of around $100 billion (Cooke). Since Wal-Mart has a proven track record of its effective supply chain strategy, the recommended approach that it should take should now incline towards sustaining customer’s needs through the same low price strategy yet dispelling the public impression of mediocrity of its products. Therefore, Wal-Mart should not lose sight of its emphasis on reliability, quality and consistency of services and goods. The goal to maintain the low costs will be its edge in this era of economic recession. It should always give attention to the supply chain by focusing not only on IT-enabled systems to reduce costs but also on the customer satisfaction through the delivered results. Another recommended point is what Microsoft called “technology confusion,” which implies the negative effects of too much reliance on technology that sometimes does not have a “clear business benefit” (“Retail: Supply Chain”). Since the success of Wal-Mart has largely been due to its technologically controlled SCM, it is recommended that it also invests in deeper education of the new technologies that it uses and plans to use in the future so that the supply chain process will not be disturbed by uncertain effects of these technologies. IMPACT OF GLOBALIZATION Young argued that economic globalization coupled with the aid of information technology has revolutionized Wal-Mart’s supply chain management (qtd. in “Overview”). Cohn argues that it has consequently rearranged the power relationship between retailers and suppliers placing Wal-Mart at the core of retail industry which mandates demands to manufacturers (“Overview”). Globalization has immensely affected the supply chain practices of retail industries. Generally speaking, it demands better integration with distant partners and requires superior “scalability of applications,” thus pushing companies to fight for survival through adaptation in a globalized environment (Songini). “These global companies, facing ever-thinner profit margins, see an increasing need for centralized, accurate data, greater integration and the ability to respond nimbly to changes in demand” (Songini). Wal-Mart has however faced the challenges of globalization by adapting to the need of spreading its supply chain over continents, regions and countries. While the differing languages, cultures and business approaches seem to be an obstacle, companies like Wal-Mart developed a sophisticated yet efficient strategy in order to distribute productions all over the world. In fact, most companies nowadays have taken into account worldwide sources of supply and have taken advantage of the opportunities abroad. “This era is characterized by the globalization of supply chain management with the goal of increasing competitive advantage, creating more value-added, and reducing costs through global sourcing” (Phani). And Wal-Mart has been one of the first who increased their advantage by a globalized supply chain. Through globalization, Wal-Mart has emphasized the need to innovate its logistics in order to cater to the demands of its expansion into other regions of the world. It thus attempts to invest in new regions through newly built distribution centers. The “best-in” strategy is a by-product of this globalized approach of Wal-Mart. Since it seeks to dominate the retail industry through moving into international markets, Wal-Mart operates not through a world-class supply chain tactic but instead through the so called “best-in” strategy which involves examining the local situation—analysis of various factors such as labor, land, costs, risk, asset, utilization, and local regulations (Maxwell, as qtd. in Cooke). It most especially takes into consideration the status of consumers, which means determining what they can afford. CONCLUSION In the advent of Internet-based supply chain solutions, Wal-Mart is at the top among all retail stores. With its IT-enabled integrated system of supply chain tactics, it has met the projected needs and demands of the customer. With its unique blend of strong supplier partnership and technological innovations, it has dominated the retail industry and outlasted its competitors. 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