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Wal-Marts Supply Chain Management Practices


Case Study

Table of Contents

1. Introduction Can Wal-Mart sustain its Supply Chain Advantage?...............2
2. Wal-Mart in US Retail Market ........................................................................2
3. Wal-Mart - Company Background..................................................................3
4. Wal-Mart Timeline.......................................................................................4
5. Wal-Mart: Quick Facts ...................................................................................5
6. MANAGING THE SUPPLY CHAIN THE WAL-MART WAY........................6
6.1. Pricing and Procurement Strategy..........................................................6
6.2. Supply Chain Integration through Product/Process Knowledge Sharing 6
6.3. Supply Chain Partnerships .....................................................................7
6.4. Distribution Strategy ...............................................................................7
6.5. Logistics Management............................................................................8
6.6. Cross Docking ........................................................................................8
6.7. Inventory Management ...........................................................................9
7. Store Formats................................................................................................9
8. Wal-Mart - International operating formats ..................................................10
9. Related Reading..........................................................................................11
10. Questions for discussion .............................................................................11


Case Abstract

Wal-Mart in recent years has struggled with its supply chain. The big question is:
Will it be able to revive the competitive advantage it had in the past with its efficient
supply chain? This case discusses the supply chain management practices of Wal-Mart
over the years. A brief of Wal-Marts past distribution, logistics and inventory
management processes is covered. The use of innovative Information Technology (IT)
practices to enable the supply chain is discussed and highlighted. The benefits or
competitive advantage Wal-Mart derived over the years from its supply chain
management practices is also covered.

Please note: This case study was compiled from published sources, and is intended to be used as a basis for
class discussion. While care has been taken to ensure correctness of the facts, Accuracy of information cannot
be guaranteed. January, 2008. www.casestudyinc.com
1. Introduction Can Wal-Mart sustain its Supply Chain Advantage?

While most still believe Wal-Mart's pioneering supply chain to be the world's most
efficient, the retailer is faltering in recent years, and its renowned IT driven supply chain
is a contributor in its woes. In October 2006, Wal-Mart had to sell its stores in South
Korea and Germany. In Germany alone, it incurred a $1 billion loss. This was reportedly
due to its failure to adapt to the local cultures and inability to compete with established
players. In the U.S., Wal-Mart reduced the number of new U.S. supercentres it planned
to open in 2007 by 30 percent. In August 2007, Wal-Mart warned that its profits would be
lower than expected for 2007 (it had missed second-quarter profit estimates). Experts
blamed Wal-Mart's negligence to customer service, merchandising mistakes and its
inattentiveness to local markets abroad for its inefficiency. Tescos entry to the US
market in 2007 may cause further challenges.

A variety of strategies to strengthen growth have mostly not been successful. In
2006, Wal-Mart bought retail applications from HP and Oracle, and quietly contracted
with a social networking company, Bazaarvoice. Wal-Marts online presence with its
website also struggled. It was behind competitors like Amazon.com and Target. Its
promotion experiments using social networking concepts got mixed results. In addition,
there were delays in implementation of radio-frequency identification (RFID) tags
throughout its supply chain. Late in the year, Wal-Mart changed its RFID strategy, with
more focus on promotional items, category management trials, and Sams Club pallet
location management. Vendors were rightly bemused and confused.

For Wal-Mart, one thing remains clear that just squeezing more pennies out of
the supply chain would not be enough. President and CEO Lee Scott commented on the
companys performance in a press release, "It is not what we expect of ourselves, and
not what our shareholders expect of us." He said management would spend the rest of
this year "focused on inventory improvements, delivering quality products at low prices,
and store execution at the highest standards."

2. Wal-Mart in US Retail Market

Wal-Mart is the worlds largest retailer with $345 billion in sales for the fiscal year
ending Jan. 31, 2007. Wal-Mart Stores, Inc. includes Wal-Mart Supercenters, discount
stores, Neighborhood Markets and SAMS Club warehouses. Wal-Mart employs 1.9
million associates worldwide and more than 1.3 million in the United States, making it
one of the largest private employers in the U.S. Wal-Mart has been a dominant player in
the US retail market which is most competitive in the world, a fact well-known to British
retailers Sainsbury's and Marks & Spencer which failed to attract US customers.

Wal-Mart has more than 7,000 stores and wholesale clubs across 14 markets.
Wal-Mart operates more than 4,000 facilities in the United States and more than 2,800
more in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala,
Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom. In 2007,
Wal-Mart became No. 1 on the FORTUNE 500 list and in 2003 and 2004 Wal-Mart was
named Most Admired Company in America by FORTUNE magazine.
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3. Wal-Mart - Company Background

In 1945, Sam M. Walton opened a franchise Ben Franklin variety store in
Newport, Arkansas. In 1946, his brother, James L. Walton, opened a similar store in
Versailles, Missouri. Until 1962, the business focused entirely to the operation of variety
stores. In 1962, Sam Walton started Wal-Marts first discount store Wal-Mart Discount
City. He and his wife, Helen, put up 95 percent of the money for the first Wal-Mart store.
Sam believed that the American consumer was shifting to a different type of general
store and discount stores would be very successful. Wal-Mart was incorporated in
Delaware in October 1969.
[During the initial years, Walton focused on establishing new stores in small
towns, with an average population of 5,000. These towns were largely neglected by
leading retailers like Sears Roebuck & Company, K-Mart and Woolco, which
concentrated more on larger towns and big cities. In his efforts to attract people from the
rural areas to his stores, Walton introduced the concept of every day low prices (EDLP).
EDLP promised Wal-Mart's customers a wide variety of high quality, branded and
unbranded products at the lowest possible price, offering better value for their money.
Wal-Mart's advertisement describing EDLP said, "Because you work hard for every
dollar, you deserve the lowest price we can offer every time you make a purchase. You
deserve our Every Day Low Price.]
In the 60s, Kmart expanded across the country, while Wal-Mart had only 15
stores. But this changed in the 70s when public offering created the capital infusion that
grew the company to 276 stores in 11 states.

In the 1980s, Wal-Mart became one of the most successful retailers in America.
Sales grew to $26 billion by 1989 at 1,400 stores, compared to $1 billion in 1980. Wal-
Mart Stores, Inc. branched out into warehouse clubs with the first Sam's Club in 1983.
The first Supercenter, featuring a complete grocery department along with the 36
departments of general merchandise, opened in 1988. Wal-Mart invented the practice of
sharing sales data via computer with major suppliers, such as Proctor & Gamble.
Walton died after a prolonged illness in 1992. Wal-Mart suffered a setback but it
continued its remarkable growth concentrating more on setting up its stores overseas. In
1991, Wal-Mart entered Mexico in a joint venture with Cifra. In 1994, it acquired 122
Woolco stores from Woolworth, Canada. Three years later, Wal-Mart became the largest
volume discount retailer in Canada and Mexico. In 1997, Wal-Mart acquired the 21-store
German hypermarket chain, Wertkauf. Other international expansion efforts included the
purchase of Brazilian retailer Lojas Americans 40 percent interest in their joint venture,
and the acquisition of four stores and additional sites in South Korea from Korea Makro.
In January 1999, Wal-Mart expanded its German operations by buying 74 stores of the
hypermarket chain, Interspar. The stores were acquired from Spar Handels AG, which
owned multiple retail formats and wholesale operations throughout Germany.
Wal-Mart became the largest company in the world in 2002 revenue-wise. This
was a long way from 1979 when it first made more than a billion dollars in annual
revenues. This in contrast to 1993 when Wal-Mart was making a billion dollars in a week
and in 2001 in every 1.5 days. This extraordinary growth was a result of its sustained
focus on consumer requirements and reducing costs through efficient supply chain
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management practices. Its ability to provide its customers with a wide range of products
at the lowest costs in the shortest possible time was remarkable. Wal-Marts highly
automated distribution centers drastically reduced shipping costs and time. Its
computerized inventory system speeded up the check out time and recording of
transactions. In all, Wal-Marts supply chain management practices resulted in increased
efficiency in operations and better customer service. It eliminated old stocks and
maintained quality of goods.
4. Wal-Mart Timeline

Wal-Mart Timeline
1962
Sam Walton started Wal-Mart in 1962
1970
First distribution center in Bentonville, Arkansas
1972
Listed on the New York Stock Exchange
1970s
276 stores in 11 states
1975
Famous 'Wal-Mart Cheer' was introduced by Walton
1978
Wal-Mart purchased the Hutcheson Shoe Company
1980s
Sales grew to $26 billion by 1989 at 1,400 stores
1983
First Sam's Club
1988
First Supercenter
1991
First international store in Mexico
1992
Wal-Mart entered Puerto Rico
1993
Wal-Mart formed an international division
1994
Expansion into Canada. Wal-Mart acquired 122 Woolco stores from Woolworth,
Canada.
1995
Entry in Argentina and Brazil
1996
Entry in China
1997
Wal-Mart acquired the 21-store German hypermarket chain, Wertkauf
1999
Wal-Mart expanded its German operations by buying 74 stores of the
hypermarket chain, Interspar
2002
Wal-Mart acquired a 6.1 % stake in Seiyu
2003
Majority interest in Seiyu, making it a Wal-Mart subsidiary
2007
Wal-Marts 3000th international store
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5. Wal-Mart: Quick Facts

Wal-Mart: Quick Facts
Company Wal-Mart Stores Inc (NSE: WMT)
Corporate Headquarters U.S.
Revenues $345 billion in sales for the fiscal year ending Jan. 31, 2007
In Japan, Seiyus full year 2006 consolidated sales were US $6.5 billion
Industry Retail, Retailing Services
Employees 1.9 million associates worldwide (38,541 in Japan)
Operations 14 International Markets
Total Stores 7000 (3000 international stores) 275 Seiyu supermarkets in Japan
Store Formats Wal-Mart Supercenters, discount stores, Neighborhood Markets and
SAMS Club warehouses
Major Competitors Tesco Sainsbury Marks & Spencers Carrefour
Major Brands/Labels Sams Choice, Great Value, Everstart, Ol Roy, Puritan, Equate, No
Boundaries, George, Athletic Works, Durabrand,ILO, HomeTrends,
Mainstays, Metro 7,Parents Choice, Ozark Trail, Relion, White Stag and
Kid Connection. MEMBERS MARK, BAKERS & CHEFS and SAMS
CLUB are other private label brands.

Licensed brands include General Electric, Disney, McDonalds, Mary-
Kate and Ashley, and Starter.
Business/Growth Strategy Low-cost Leadership, EDLP Every Day Low Prices,
Offering permanent discounts across all stores
Portfolio optimization and global leverage
Key Executives
Name, Designation
H. Lee Scott, Jr., President and Chief Executive Officer. Michael T. Duke,
Vice Chairman Wal-Mart Stores, Inc.
Johnnie C. Dobbs, Jr., Executive Vice President, Logistics and Supply
Chain
Eduardo Castro-Wright, Executive Vice President, President and Chief
Executive Officer, Wal-Mart Stores Division.
Website www.walmart.com www.samsclub.com

6. MANAGING THE SUPPLY CHAIN THE WAL-MART WAY

6.1. Pricing and Procurement Strategy

In order to offer the best price to its customers, Wal-Mart constantly tried to
reduce its purchasing costs. Wal-Mart ensured this by procuring goods directly from
manufacturers, and bypassing all intermediaries. With overhead costs spread across a
wider footprint, Wal-Mart could price more aggressively with excellent net margins.

Wal-Mart would invest a lot of its time in meeting vendors to understand their
cost structure. A tough negotiator on price, Wal-Mart made a purchase deal based on
the fact that those products being purchased were not available in another place at a
lower price. The same policy would also be applied to big manufacturers like Procter &
Gamble (P&G). As one of the former employees puts it, We would tell the vendors,
dont leave in any room for a kickback because we dont do it here. And we dont want
your advertising program or delivery program. Our truck will pick it up at your
warehouse. Now what is your best price? Such transparency helped Wal-Mart know
that the manufacturers were doing their best to trim down costs. This also helped in
establishing a long-term relationship with the manufacturers. Generally, Wal-Mart
preferred local and regional vendors and suppliers. Also, economies of scale gave Wal-
Mart a negotiating advantage with suppliers, thereby allowing aggressive pricing
strategies.

6.2. Supply Chain Integration through Product/Process Knowledge
Sharing

Wal-Mart always believed that it was negotiating on behalf of the customer and
the best price was passed on to the customer. Wal-Marts advantage created a snowball
effect in which increasing purchase volume lead to more choice for the customer and
lower prices, leading to more purchase volume. This price leverage was backed by
systems and processes in place that enabled Wal-Mart to take its scale advantages to
the next level to achieve unmatched success. Competitors struggled to realize their
potential economies of scale because of the natural limitations of legacy processes and
technological infrastructures (or lack thereof). Wal-Mart excelled at business process
efficiency by involving suppliers/manufacturing in the process. Wal-Mart was more than
willing to share proprietary knowledge and processes into its supplier base to improve
quality and eliminate waste/costs out of the supply chain. This process/product
knowledge sharing enabled super-effective cost management with a constant focus on
continuous incremental improvement. In other words, reducing costs a few pennies at a
time over an extended timeframe.

6.3. Supply Chain Partnerships

Traditionally, suppliers to the retailers had rather monolithic supply chains with
little effective forecasting. A one size fits all approach meant the same price list
irrespective of ordering efficiency. Products delivery was done in the manner the
customers desired and thus came at the cost of efficiency.

Wal-Mart invited its major suppliers to co develop profitable supply chain
partnerships. These partnerships are intended to amplify product flow efficiency and, in
turn, Wal-Mart's profitability.

A case in point is Wal-Marts supplier relationship with P&G. The relationship did
not begin working well together. Wal-Mart saw P&G as one of its bad suppliers because
P&Gs organization and processes were far too complex for Wal-Marts efficiency-
oriented culture. P&Gs culture was to focus on day-to-day results. A long term strategic
plan was not its main focus. Besides, P&Gs systems could not support a relationship
with distribution giant like Wal-Mart. This relationship changed with the process of
enabling interoperation between the companies systems at transactional, operational
and strategic levels. Since 1988, the relationship evolved to yield tremendous value to
both companies and their mutual business grew manifold. Wal-Mart and P&G also
incorporated several other inter-company innovations like vendor-managed inventory,
category management among others. In August 2003, Wal-Mart announced that it would
require all suppliers to put RFID tags with Electronic Product Codes on their pallets and
cases by the end of 2006. By April 2007, 600 suppliers were using RFID (about 3% of its
base of 20,000). A few suppliers felt that Wal-Mart was such a demanding, price-
obsessed customer that making special technology investments at its behest is cost-
prohibitive, especially for small companies scraping by on slim margins. Others felt that
this was one way small suppliers become big suppliers. They could hone their
technology strategies for their biggest potential markets even in the face of considerable
risk.

6.4. Distribution Strategy

During fiscal 2007, approximately 80% of the Wal-Mart Stores purchases of
merchandise were shipped from 121 distribution centers. The remaining merchandise
was shipped directly to stores from suppliers. Wal-Mart owns and operates 40 general
merchandise distribution centers, 38 grocery distribution centers, seven apparel and
shoes distribution centers, 12 professional services and specialty distribution centers,
two import distribution centers and three distribution centers that support walmart.com.
Wal-Mart has 126 distribution facilities located in located in various countries that serve
its international segment stores.

In 1998, Wal-Mart stocked more than 80,000 items in over 40 distribution centers
in the US. While its competitors directly supplied 50-65 percent of inventory from their
warehouses, Wal-Marts own warehouses directly supplied 85 percent of the inventory.
This meant that Wal-Mart was able to provide replenishments within two days (on an
average) while competitors took five days. Shipping costs for Wal-Mart were
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approximately 3 percent as against 5 percent for competitors. The inventory turnover
rate was very high, about once every two weeks for most of the items.

While some suppliers delivered goods such as automotive and drug products
directly to its stores, about 85% of the goods passed through the distribution centers.
Wal-Mart managed each distribution center the same way for both cases and palletized
goods. Goods which were to be distributed within the US usually arrived in pallets, while
imported goods arrived in re-usable boxes or cases.

Wal-Mart used advanced barcode technology and hand-held computer systems
to ensure an unfailing flow of products to support the supply function. Managing the
center became easier and more economical with technology. With real-time information
about inventory levels of all the products in the center, an employee had to just make
two scans one to identify the pallet, and the other to identify the location from where
the stock had to be picked up. Different barcodes were used to label different products,
shelves and bins in a center. The hand-held computer guided an employee with regard
to the location of a particular product from a particular bin or shelf in the center. When
the computer verified the bin and picked up a product, the employee confirmed whether
it was the right product or not. The quantity of the product required from the center was
entered into the hand-held computer by the employee and then the computer updated
the information on the main server.

The packaging department also had accurate information about the products to
be packed. Hand-held computers ensured that unnecessary paperwork was eliminated.
Center supervisors could easily monitor their employees closely and guide them even on
the move. This enabled efficient distribution center management operations and serve
customer needs quickly.

The truck drivers could also avail facilities for maintaining personal hygiene such
as shower bath and fitness centers at each distribution center which also had food, sleep
and personal business provisions. The distribution center could also be used for
meetings and paperwork.

6.5. Logistics Management

A fast and responsive transportation system was key to Wal-Marts logistics
infrastructure. At one point about 3,500 company-owned trucks served its distribution
centers. Dedicated trucks meant Wal-Mart could replenish its stores twice a week from
its distribution centers. Hiring dedicated and experienced drivers was given priority. All
hired drivers had to have 300,000 accident free miles and no major traffic violation. A
coordinator controlled and scheduled dispatches based on driver availability and
estimated time between the distribution center and the retail store. A strict vigil over the
drivers was maintained and a record of their activities was kept in the private fleet driver
handbook. A code of conduct ensured safe delivery.
6.6. Cross Docking

In order to make the distribution process more efficient Wal-Mart used Cross
Docking. Cross Docking involved eliminating the distribution center and the retail store
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but direct delivery to customers after picking and sorting the finished goods directly from
the supplier. This was possible only if the supplier ensured delivery within a specified
time. The requisition from the store was then converted into purchase orders and goods
forwarded to a staging area. The goods were then packed and delivered to customers as
per the order. Such cross docking meant that centralized decision control (for
merchandizing, pricing and promotions) was shifted from the corporate level thereby
transforming the supply chain into a demand chain. That is, instead of retail stores
pushing goods into the system, the customers pulled the goods when required.

6.7. Inventory Management

Wal-Mart was able to reduce inventory because the stores managed their own
stocks. Stores could reduce pack sizes across products and also ensure timely price
markdowns. Using IT applications more inventories could be made available for high
demand goods instead of cutting inventories across the board. By networking with
suppliers a quick replenishment order could be placed via satellite communication
system. Wal-Mart had set up its own satellite communication system in 1983. The
supplier could then deliver the goods directly to the store concerned or to the nearest
distribution center. The supplier was also able to reduce costs due to better co-
ordination. In 1991, Wal-Mart invested 4 billion dollars into a retail link system. Around
10,000 suppliers used the retail link system to monitor the sales of their goods at the
stores ad accordingly replenish inventory. In 2001, Wal-Mart tied up with Atlas
Commerce to upgrade the system with Internet enabled technologies. Wal-Mart used
advanced satellite communication systems, Massively Parallel Processor computer
systems (MPP) and had extensive disaster recovery plans to track goods and inventory
levels. This ensured uninterrupted service to its customers, suppliers and partners.

7. Store Formats


Store Format
Wal-Mart Discount Stores
Average 107,000 square feet, employ an
average of 225 associates and offer 120,000
items.
Wal-Mart Supercenters
Developed in 1988
More than 2,300 nationwide in US
Average 187,000 square feet, employ 350 or
More associates on average and offer 142,000
different items.
Wal-Mart Neighborhood
Markets
First opened in 1998,
More than 120 Neighborhood Markets,
Average 42,000 square feet
Employ 95 associates on average and offer
about 29,000 items.
Sams Club
More than 584 Sams Club locations
Average 132,000 square feet
Average of 160 to 175 associates and offers
approximately 5,500 different products

8. Wal-Mart - International operating formats

Wal-Mart - International operating formats
Argentina Supercenters -13
Brazil
Supercenters 26
Sams Clubs 19
Hypermarkets (Hiper Bompreo, Big) 66
Supermarkets (Bompreo, Mercadorama, Nacional) -57
Cash-n-carry stores (Maxxi Alacado) 11
Combination discount and grocery stores (Todo Dia) -15
General merchandise stores (Magazine) 3
Discount stores (Mini Bompreo) - 2
Canada
Supercenters 7
Discount stores 276
Sams Clubs - 6
China Supercenters -68, Neighborhood Markets -2 and 3 Sams Clubs
Costa Rica
4 hypermarkets (Hiper Mas), 23 supermarkets (Ms por Menos), 8
warehouse stores (Maxi Bodega) and 102 discount stores (Pali)
El Salvador
2 hypermarkets (Hiper Paiz), 32 supermarkets (La Despensa de Don
Juan) and 29 discount stores (Despensa Familiar)
Guatemala
6 hypermarkets (Hiper Paiz), 28 supermarkets (Paiz), 8 warehouse
stores (Maxi Bodega), 2 membership clubs (Club Co) and 88 discount
stores (Despensa Familiar)
Honduras
1 hypermarket (Hiper Paiz), 6 supermarkets (Paiz), 5 warehouse stores
(Maxi Bodega) and 29 discount stores (Despensa Familiar)
Japan
97 hypermarkets (Livin, Seiyu), 293 supermarkets (Seiyu, Sunny) and 2
general merchandise stores (Seiyu)
Mexico
118 supercenters, 77 Sams Clubs, 100 supermarkets (Superama, Mi
Bodega), 219 combination discount and grocery stores (Bodega), 61
department stores (Suburbia), 312 restaurants and 2 discount stores (Mi
Bodega Express)
Nicaragua 5 supermarkets (La Unin) and 35 discount stores (Pali)
Puerto Rico
6 supercenters, 8 discount stores, 9 Sams Clubs and 31 supermarkets
(Amigo)
United Kingdom
23 supercenters (Asda), 291 supermarkets (Asda), 7 general
merchandise stores (Asda Living), 12 apparel stores (George) and 2
discount stores (Asda Essentials)
(Source: Wal-Mart Annual Report)
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9. Related Reading

9.1. Executives at Wal-Mart, Forbes
9.2. Wal-Mart Annual Report
9.3. Wal-Mart Quotes and Info, Reuters
9.4. Wal-Mart says offer to own Japan chain succeeds, AFP
9.5. Rowat, Christine, "Cross docking: The move from supply to demand",
www.dmg.co.uk, August 1998.
9.6. "What is cross docking? The Warehouse Word, www.colofwhousing.com.au,
2001.
9.7. "Wal-Mart.com: The Physical giant goes Virtual," Red Herring Magazine,
www.redherring.com, May 7, 2001.
10. Questions for discussion

1. Wal-Marts focus on supply chain management is responsible for its leadership in
the retail industry. Discuss the distribution and logistics practices adopted by
Wal-Mart. How far has Wal-Marts supply chain contributed to its competitive
advantage? Explain.
2. Companies that have significant buyer power and are very focused on exerting
price pressure on their suppliers rather than seeking increased profitability
through business process innovations. Support this statement with
examples/best practices from your own field.
3. Wal-Mart has always used innovative information technology tools to supplement
its supply chain. In a few words, explain how use of IT tools/enabled processes
have benefited Wal-Mart. How has IT impacted you/your department?
4. What steps can Wal-Mart take in order to revive/sustain its supply chain
advantage?
5. Wal-Mart invited its major suppliers to develop profitable supply chain
partnerships. Discuss how good/bad is sharing knowledge/critical information
with vendors/suppliers or even customers?
6. It's not a sale; it's a great price you can count on every day to make your dollar
go further at Wal-Mart.", as quoted in the article, "Pricing Philosophy," posted on
www.walmart.com. Comment.