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Essay: Secrets to Wal-Mart’s Global Rank As World’s #1 Retailer

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The United States based Wal-Mart is ranked first in the fortune 500 globally. In 2001-02 the earning revenues of the company was $219.81 billion. Wal-Mart has remained a largest retailing company in the world. The company is much bigger compared to its competitors in the US- K-mart, Sears Roebuck, Nordstrom and JC penny combined. The company operated in more than 3500 discount stores, Sam’s Clubs and supercenters in the United States in 2002. Wal-Mart had more than 1,170 stores in the major countries of the world. Wal-Mart also sells its products through its corporate website, walmart.com.  

Wal-Mart is also one of the biggest private sector employers globally, with the employee strength of almost 1.3 million. The Wal-Mart’s founder, Sam Walton always focused on reducing costs consistently, improving sales, adopting efficient distribution techniques and logistics management system along with using information technology tools.

According to analysts, the company was successfully able to achieve leadership status in the retail sector because of its efficient and effective supply chain management practices. It was said that SCM is moving the right items towards the right customers with the right time and by the most efficient and effective means. No-one did it better than Wal-Mart.

Managing the Supply Chain

The Supply Chain is considered as the set of frameworks and processes helping organizations in delivery and development of products. The supply chain of an organization represents the complex relationships of the firm with its trading partners through whom it sources materials, manufactures products and finally delivers products or services to the customers. The supply chain links of an organization all the activities in the procurement, transformation and storage of raw materials and intermediate products, and sale of finished goods.

Procurement and Distribution

Integrating of the supply chain for improving supply chain efficiency is a key challenge. The competition today is not between the companies but between the supply chains. Hence, for the logistics and supply chains to be successful, it should integrate the three individual business processes of procurement and distribution by consolidating the sub-components in each of the above functional areas.

Procurement: It is one of the major cost drivers in the supply chan. Procurement cost is influenced by the following factors:

1. decision making

2. Procedures adopted in the procurement process

3. Suppliers relationship

4. Firms credibility

5. Market Intelligence

Procurement cost in an organization can be controlled through long-term relationships with suppliers by considering the supply chain as an extension of the manufacturing facility. The philosophy of co-partnership has relied heavily on the sharing of resources and benefits on a long term basis. The crucial step in this process is the reduction in supplier’s base and induction of a few reliable suppliers into the supply chain of the organization that are ready to work for the firm and can align themselves with the policy framework along with requirements of the supply chain.

MRP is a critical element in the procurement process. In a mapped and integrated supply chain, material planning has a cascading effect in the entire supply chain. Hence, in co-partnership arrangements between organizations & suppliers the material planning will cover inventory requirements in the entire supply chain, including both firms and suppliers.

Processing: For a lean supply chain in an organization the emphasis today is not on curtailing the processing/ manufacturing cost through economies of scale, but bringing down the huge inventory carrying cost resulting from mass production ahead of demand. In the past, the emphasis was on building capacity factories for produce standard products in millions in order to reduce manufacturing costs and flood the market with low priced products. This approach had resulted in the building up of the large reservoir of finished goods, which remained unsold and dead due to its inability in responding to the changing needs of the consumers. Therefore, today firms instead of banking on cost reduction through economies of scale are thinking of strategies of reducing the total supply chain cost through manufacturing flexibility to rapidly respond to changing markets demands of products volumes and varieties.

Distribution: Historically, the role of distribution in the business process is warehousing transportation. But in the supply chain model, the major task of distribution has been the management of demand, i.e. to making available the right product, at the right place, at the right time, and at the least cost. Demand management covered all the activities involving anticipating the customer requirements of products and fulfils those requirements against defined customer service norms. Requirement fulfilment is done through a proper distribution network.

The first and foremost task in demand management is to forecast customer requirement accurately. This is done only if the firm is able to satisfy the customer as per the service level acceptable to the customer. Logistics play a vital role in understanding the demand through improved informational flow by way of quick response to customer’s demands.

The company always emphasized on the need of reducing its purchasing costs for offering best prices to its customers. Wal-Mart procured its products directly from manufacturers, by passing all the involved intermediaries. Wal-Mart always remained a tough negotiator on prices, finalizing a deal only if it feels confident that the products it bought are not available at lower prices anywhere else.

The company also spent its significant time in meeting its vendors an understanding different cost structures if their businesses. By this process of transparency, the company was certain that the manufactures are doing their best to cut down costs. Wal-Mart always believed in building long-term relationships with their manufacturers, once they are satisfied with them. The company did not spared even big manufacturers like P&G (Procter & Gamble).

In 1998, the company had developed more that 40 distribution centres, at different geographical location in the United States. Company’s own ware-houses supplied almost 85% of the inventory, compared to the level of 55-65 percent for its competitors. Wal-Mart also provided replenishment for its products within 2 days against the level of 5 days for its competitors. Shipping costs for the company was almost 3% compared to the 5% of its customers.

Each distribution centre of the company was divided into multiple sections on the basis of quantity of goods received and managed the same way for both the cases and palletized goods. Inventory turnover rate for the company was quite high almost once in every two weeks for most of the items. Products for distribution in US arrived in pallets and imported products arrived in re-usable cases. About 85% of the goods that were available in the stores passed through the distribution centres.

The company’s distribution centres ensured consistent and steady flow of products in supporting the supply function. As the company used sophisticated technology of barcode and hand held computer systems, management of the centre became easier and even more economical. Real time information regarding the levels of inventory was accessed by every employee for all the products within the centre. Different barcodes were used for labelling different product, bins and shelves in the centre. Hand-held computer system guided the employee in regard to the location of the location of any particular product in the centre. The quality of product required was entered in the hand-held computer by the employee and the computer system updated the information about it on the main server.   

Logistics Management

Primary feature of Wal-Mart’s logistics infrastructure is its responsive and fastest transportation system. Distribution centres of the company were serviced more than 3,600 company owned trucks. These truck fleets allowed Wal-Mart to ship goods from distribution centres to its stores within 2 days and allowed replenishment of the store shelves 2 times a week. Truck fleet showed visible link between distribution centres of the company and its stores. The company believed that drivers that are committed and dedicated towards customer service are needed. The drivers hired were experienced and had driven at least 300,000 accident free miles and with no major traffic violation.

Truck drivers of the company moved the trailers that were merchandise loaded from the company’s distribution centre to its retail stores that was services by each distribution centre. The distribution centres considered these retail stores as their customers. The coordinator took daily report of the service hours by the driver. All the dispatches were scheduled by the coordinator depending upon the available driving time and estimated time of travel between the retail stores and the distribution centres.  Drivers were usually advised to take the loaded trailer to the retail store and come back with the empty trailer.  Gap of two hours was necessary between the unloading of each trailer. The trailers were secured by the drivers, unless the store personnel took charge of them.

For making the process of distribution more efficient, the company also used a supply chain technique known as cross-docking. According to this technique, the finished goods were picked directly from the supplier’s manufacturing plant where it was sorted out and then supplied directly to the customers. This system helped in reducing the storage and handling costs of the final goods, and virtually eliminating the role of stores and all distribution centres. The company use five type of cross-docking referred to as follows:

1. Opportunistic Cross docking

2. Flow-through Cross docking

3. Distributor Cross docking

4. Manufacturing Cross docking

5. Pre-Allocated Cross docking

All these cross docking techniques used by the company helped its aim of efficient logistics management. Also to gain maximum out of above referred docking techniques, company made fundamental changes in its approaches in its managerial controls. The system also shifted the focus from supply chain towards demand chain. It meant that consumers will pull the products wherever needed, instead of retailers pushing products in the systems.

Inventory Management

Inventory management has been a strategic area in logistics operations and that had an impact on the effectiveness of the overall logistics systems. As the cycle of productions, manufacturing  and consumption never matches within an organization, goods have to be kept in stocks and warehouses to get over the uncertainties in demand and supply. However, higher inventory levels also affect the bottom line of the company. This has been a high risk and high impact area, which has to strike balance between two polemic goals of lower cost and higher level of customer service.

The phenomenon, in which variability is customer demand, if not covered properly or if covered with distortion, as it travels upstream in the supply chain supply chain hierarchy, is known as the ‘bullwhip effect’. It can cause either stock-outs or inventory pile ups in the distribution logistics chain. The immediate effect of the demand volatility results in inventory problems, EOQ problems affecting the profitability and customer service of a firm. This happens due to lack of smooth and speedy informational flow in the organization, it results in improper coordination and synchronization between supply chain partners. The after effects of the Bullwhip can be minimized by adopting latest inventory control techniques supported by an efficient and effective information flow system for supply chains. The ultimate objective of the inventory control system program is to provide maximum customer service at minimum cost.

Wal-Mart developed the ability of catering the individual needs of all its stores. Stores chose from a number of delivery plans. The company invested heavily in the stores across the US. Along with the rapid expansion of stores within the country, it became essential to quip itself with the good communication system. The company set up its own satellite communication system in 1984. The company also allowed stores to manage their own inventory, reducing sizes across major product categories along with timely price markdowns. This helped the company in reducing un-productive inventory. Wal-Mart also made use of it information technology capabilities for making inventories available in the situation of high demand towards certain products, further reducing the overall inventory levels. The suppliers of the company were also networked through computers.  The system at the company identified the item which was low in stock and accordingly signal was sent to P&G. The collaboration between P&G and the company was win-win proposition for both the companies as Wal-Mart could monitor stock levels in its stores constantly and could also identify the items that are moved out fast as the result of high demand.   

9.2.8 Use of RFID

RFID tags were attached to manufactured products. The tags emit signals that were read using transmitters. These transmitters were connected to the ERP systems in the company. When the product with the RFID tag passed through an electro-magnetic zone, the tag responded to the reader’s signal and transmitted the information back to its reader. The accurate information regarding the movement of goods from the supplier’ plants to the distribution centre of Wal-Mart and finally to the retail stores of the company, is captured in real-time.

RFID provided the benefits to both retailers and suppliers by tracking the movement of a product from the time of production stage, to the point of stocking stage, to the point where the end-customers purchases it. By keeping products with RFID tags on shelves with build-in readers, the movement of the tagged products is monitored and communicated to the computers in the stores. Thus the stock situation is brought to the notice of the concerned department concerned department constantly and replenished accordingly.

Wal-Mart owned the most sophisticated and the largest computer system in the whole private sector globally. The company employed MPP (Massively Parallel Processor) computer system for tracking the movements of inventory and stock levels. The information related to inventories and sales were passed through the company’s advanced satellite communication system. The company also had an extensive contingency plan that enabled t to provide backup in case of some major breakdown or interruption in service. By effectively using computers in all of the company’s operations, Wal-Mart became successful in providing uninterrupted service to everyone in its supply chain.

The benefits Reaped

The company strongly emphasized on strengthening its relations with its employees and all the suppliers and customers. The company remained very vigilant in sensing the smallest of changes within merchandising techniques and store layouts for improving performance and value for the customers. Wal-Mart always made an initiative to capitalize on cost saving opportunities. The cost savings were further passes on to customers, thereby adding value at each and every stage and process.

The company also enjoyed benefits from low transportation costs as it had its own transportation system that assisted it in delivering goods to multiple stores within 48 hours. The company’s transportation costs were estimated almost 3% of the total costs in comparison to 5% for their competitors.

The company priced its goods at the cheapest rate and its prices varied each day. Wal-Mart also enjoyed good bargaining power as it made a bulk purchase from it suppliers. This enabled cost reduction and benefits were consequently passed on to the customers. The discounts offered by the company were the highest compared to its competitors that helped Wal-Mart in earning good revenues in the way of high volume sales.

The benefits of an effective and efficient SCM includes fastest inventory turnover, reduced lead time, accurate forecasting of inventory and demand levels, additional warehouse space, reduction of safety stock and superior working capital utilization. The company’s SCM practices resulted in high efficiency in operations along with better customer service.  


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