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Usage of Information Technology

in Supply Chain Management

People think we got big by putting big stores in


small towns. Really, we got big by replacing
inventory with information."
Sam Walton, Founder of Wal-Mart

SUPPLY CHAIN FLOW CHART

Manufacturer

Manufacturer

Radio, headphone
Retail Store

Distribution center
Bar code, RFID

Retail Store
Point of sale terminal

Manufacturer

Retail Store

Satellite system
Company Headquarter

Wal-Mart gets benefited through Supply Chain

Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty

Logistics Management
Cross Docking
Hub and Spoke

Flow-Time Analysis
Wal-Marts merchandise replenishment cycle is no more than 48 hrs.
Customer
made a
purchase

Point-of-sale
system
captures data
in real-time

Data is
transmitted to
warehouses
for Inv. Mgmt.

Orders are
generated from
previous-day
sales

Merchandise is
loaded onto
trucks using
cross-docking

Retail Link
transmits
data to
supplier

Merchandise is
manufactured
based on historical
and real-time data

Merchandise
is shipped to
warehouses

Retail Link real-time point-of-sales (POS)


data transmission
Cross Docking
Fleet of 7,000 trucks in US

Merchandise
is delivered to
the store

The store will restock the shelves


with merchandise

Cross docking
Cross-docking means to take a finished good from
the Manufacturing plant and deliver it directly to the
customer with little or no handling in the process.
In purest form this is done directly, with minimal or
no warehousing.

Cross Docking:
Wal-Mart has invested heavily in its unique crossdocking inventory system.
Cross docking has enabled Wal-Mart to achieve
economies of scale, which reduces its costs of sales.
With this system, goods are continuously delivered to
stores within 48 hours and often without having to
inventory them.

The manufacturer directly forwarded the goods to a


place called the staging area. The goods are packed
there according to the orders received from different
stores and then directly sent to the respective
customers
Lower prices also eliminate the expense of frequent
sales promotions and sales are more predictable.
Cross docking gives the individual managers more
control at the store level.

"Hub and spoke" arrangements,


where materials are brought in to one
central location and then sorted for
delivery to a variety of destinations

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.

What makes Wal-Mart


successful ?

Wal Marts Communication Network


Cross Docking relies on continuous communication
between Wal Marts suppliers, distribution centers,
and every point of sale system in each store.
This enables orders to flow in, get packaged and then
shipped.

How does Wal-Mart do this?


Wal Mart operates their own satellite network.
Wal-Mart introduced its 24 million dollar satellite
communication system in 1987
Wal Marts satellite network sends the point of sale
(POS) data directly to 4000 vendors
Wal-Marts sales in 1985, 2 years before the launch of
its satellite network, were $8.4 billion. By 1995, they
reached $93.6 billion, and currently that number is still
larger yet at $482.2 billion

How does Wal-Mart do this?


This network allows the instantaneous transfer of data
between headquarters, distribution centers, suppliers
and stores

Radio Frequency Identification


Automated Data collection based on an electronics not a barcode
Tag can be imbedded in the product or stuck on the exterior case or
pallet
Reader instead of a barcode scanner
Allows fully automated data collection with the use of portals
Can read many ID tags at a time
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.

Radio frequency identification


Bar code and point-of-sale
Data creates an instantaneous computer record of a sale
Radio frequency identification (RFID)
Technology can send product data from an item to a reader via radio waves
Internet
Allows companies to communicate with suppliers, customers, shippers and
other businesses around the world, instantaneously
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.

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.

$287 Million

Benefits from RFID


Lesser labor requirements
Almost $6.34 billion yearly
Decrease in merchandise thefts
Almost $2 billion
Real time tracking of consumption patterns
Would help enhance JIT Inventory management system
Decrease in stock levels by around 25%[IBM]
Total savings expected to be 8.34 billion per year

How does RFID works ?

Information Technology: A Supply Chain


Enabler
Information links all aspects of supply chain
E-business
replacement of physical business processes with electronic
ones
Electronic data interchange (EDI)
a computer-to-computer exchange of business documents
Setting up Cost $349 Per Yr

RFID could slash 15% or $6.7bn from Wal-Mart's labour


costs because the need for employees to scan barcodes on
pallets and cases in the supply chain would be eliminated.
Indeed, Erwin De Spielgelere of EAN estimates this as
$8.35 billion yearly.

Electronic Data Interchange

Increased productivity
Reduction of paperwork
Lead time and inventory reduction
Electronic transfer of funds
Improved control of operations
Reduction in clerical labor
Increased accuracy

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-Marts distribution centers.

Using IT in supply chain management


In 1977, Wal-Mart set up a computer terminal network
(CTN) to establish a communication link between its
stores and the company headquarters
In 1978, Wal-Mart set up its first fully automated
distribution center

Using IT in supply chain management


Using voice based technologies:
In1998, 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.
Enhancing warehouse and logistics management
Wal-Mart could replenish stock at any of its 1525 stores in US
within 24 hours
It enabled the company to receive goods and dispatch them to
stores in lees than a day

The VOF system also verified quantities picked, and


could respond to a variety of requests such as
providing product detail (type, price, barcode number,
etc.)

Using IT in supply chain management


It installed voice based order filling(VOF) system in all
distribution centers
Is consisted portable Voice Recognition Talkman
Terminals(VRTT) and radio module on companys
wireless LAN
It eliminated mis-picks and product labeling costs since
VOF didnt require paper lists labor

GPS
GPS system in communication in trucks
Any truck can be located
Drivers could activate system by voice and interact with
staff

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.

Retail Link connected Wal-Marts EDI network with an


extranet, accessible to Wal-Marts thousands of suppliers.
The suppliers could find out how their product was
performing vis-a-vis competitors products in a particular
product category.
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.

Using IT in supply chain management


CPFR
(Collaborative
Planning
Forecasting
Replenishment)
Real time bases to determine product wise demand forecast
Wal-Mart shared past data, customer data, demographic data,
stock positions
Both forecasted demand individually and then co-operated
Reduced inventory cost
Product availability across supply chain
$2.5 billion in Yr 1995.

Using IT in supply chain management

As a result lead time was cut to 11 days from 21 days


On-hand inventory was reduced by two weeks
Sales grew by $8.5 millions in six months
Later on it was implemented to other stores
By 1990s, about 90% of suppliers were doing business through
Retail Link

Barriers to CPFR
Barriers to CPFR
Lack of discipline to execute primary phases
Promotions and new items events are not jointly planned
Ineffective replenishment in response to demand
fluctuations
Trading partners focus on traditional supply chain steps
Scalability and critical mass

Recent Supply Chain Initiatives


October 2002- Asked suppliers to replace VAN-EDI to Web based EDI

Direct online communication between trading partners


No transaction costs
Highly secured
Saved millions[ VAN-EDI cost $200 Billion]

No licensing fees
July 2003 Asked suppliers to place RFID tags on goods, packed in pallets and
crates
VAN-EDI = Value Added Network-EDI
RFID = Radio Frequency Identification

Recent Supply Chain Initiatives


2001- Global Procurement Division[Shenzhen, China
Exchange of sales and inventory data
Best deal procurement from any part of world

Strategy Employed
Identify generic products
Enhance product quality
reduce cost by collaborating
2001- copy paper increased sales
[ 46% in UK, 94% in Federal Republic of Germany, 38% in
Canada, 25% in US]

Benefits from RFID


Drastic decrease in Stock out situations
From $400 million to $1.2 billion for P&G
Lesser labor requirements
Almost $6.34 billion yearly
Decrease in merchandise thefts
Almost $2 billion
Real time tracking of consumption patterns
Would help enhance JIT Inventory management system
Decrease in stock levels by around 25%[IBM]
Total savings expected to be 8.34 billion per year

Problems
An estimated cost of $20 million to suppliers
50% of this is integration of system with software and
modification in soft wares
Not a proven technology
Not compatible with liquids and metal packaging

Using IT in supply chain management


The Retail Link system- Supporting Inventory Management
Retail link connected EDI network to extranet ,accessible to
all suppliers
Provided suppliers historical sales data of 24 months, allowed
them to track invoice, can make demand forecast
Suppliers could also study competitors products demand

What we learned
so far.

One of the keys to Wal-Mart's effective logistical


system is the flexibility that it has when choosing
suppliers. When Wal-Mart negotiates with suppliers
and the suppliers know that Wal-Mart will only pay
the most competitive prices. This is because it is very
easy for them to find another supplier of that
particular material with a lower price and very few
logistical problems

Another reason that Wal-Mart's prices are so competitive is


because they buy in such large quantities that transportation from
one end of the supply chain to another is not as costly for
additional units. This aspect of the logistical system does not
come from skill or expertise it simply comes from the sheer size
of the company, but this is still a factor. Wal-Mart buys so many
supplies from different places throughout the world, that they
have the luxury of using bigger trucks and using less fuel to go
back and forth. Also if by chance they have to use shipping
services to transport material from one location to another, WalMart will give them so much business that they will get huge
discounts

TO BE NOTED

One of the keys to Wal-Mart's effective logistical system is the flexibility that it has when choosing suppliers.

When Wal-Mart negotiates with suppliers and the suppliers know that Wal-Mart will only pay the most
competitive prices. This is because it is very easy for them to find another supplier of that particular material with
a lower price and very few logistical problems

Another reason that Wal-Mart's prices are so competitive is because they buy in such large quantities that
transportation from one end of the supply chain to another is not as costly for additional units.

This aspect of the logistical system does not come from skill or expertise it simply comes from the sheer size of
the company, but this is still a factor.

TO BE NOTED

Wal-Mart buys so many supplies from different places throughout the world, that they have the
luxury of using bigger trucks and using less fuel to go back and forth.
Also if by chance they have to use shipping services to transport material from one location to
another, Wal-Mart will give them so much business that they will get huge discounts.
2010 - Walmart created new unit Global.com to establish its online presence - E-commerce. The
major advantage that Walmart has over Amazon is the strong association of the ecommerce/website with actual Walmart stores.

RECENT NEWS

Wal-Mart's online shopping sales grew 30 percent during


2013, but it is a small slice of the company's total profit.

Wal-Mart announced a new line of organic food, to be sold


under the Wild Oats label, at prices comparable with
conventionally-grown products. This broad new line, with
more than 100 items, is sure to undercut existing price points
in the industry.

The concept truck is called W.A.V.E. (Walmart Advanced


Vehicle Experience) and is said to be 20 percent more
aerodynamic than the company's current trucks

RFID

Wal-Mart has mandated the use of these tags by certain suppliers and will penalize suppliers
who do not use RFID tags $2 per pallet. It is also estimated that up to 15,000 suppliers have
still not met Wal-Marts mandate. Furthermore, Wal-Marts stated objective is to have productlevel RFID tagging for all of its 22 US distribution centers by the year 2010 (Logistics Today,
2008, p.4). As the technology improves, RFID transponder unit cost goes down but it has not
reached the point ($0.05) where item-level implementation is viable (Barut et al, 2006, p.292).
Suppliers also do not share equally in the cost/benefit of using the technology. According to
researchers at the University of Arkansas, there was a 16% reduction in out-of-stocks since
Wal-Mart introduced RFID technology into its supply chain (HealthCare Purchasing News,
2005, p. 6). The researchers also pointed out that the products using an electronic product code
were replenished three times as fast as items that only used bar code technology. Other than
being able to retain Wal-Marts business, suppliers find little value in RFID but must bear
much of the costs. While Wal-Mart is able to accrue most of the benefits (improved inventory
management), suppliers are faced with the cost of purchasing the technology and training staff
to use it properly.