a case of wal-mart's logistics

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Improving supply chain performance: a case of Wal-Mart's logistics.

This study examines the logistics system of Wal-Mart. Advantageous logistics system components include: contingency production, "pull" pointsof sale (POS) data, information technology training for suppliers, and owning core competencies. Wal-mart's logistics system offers manyadvantages. Other retailers can model these components and develop a logistic system for a competitive supply chain.

Keywords: Supply Chain, Contingency Production, Just-in-time, Mass-Customize, Dyad Supplier-Customer Partnerships, Electronic DataInterchange, Radio Frequency Identification

Report

Logistics

Khade, Alan S.Lovaas, Nathan

01/01/2009

Name: International Journal of Business Strategy Publisher: International Academy of Business and Economics Audience: Academic

Format: Magazine/Journal Subject: Business Copyright: COPYRIGHT 2009 International Academy of Business and Economics ISSN: 1553-9563

Date: Jan, 2009 Source Volume: 9 Source Issue: 1

Event Code: 200 Management dynamics Computer Subject: Company business management

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The Wal-Mart logistics system delivers results that have catapulted the retail giant to the top revenue earning company in 2007. They are the firstretailer to place first in sales in the Fortune 500 rank, surpassing energy giants: Exxon Mobil and Chevron; and manufacturer: General Motors.Wal-Mart's growth is based on a business model founded on logistic excellence--and logistics are important. "Getting the supply chain right is no

longer just an exciting opportunity. It's a survival skill," (Taylor). Jay Fitzsimons, Wal-Mart senior vice president and treasurer says, "Themisconception is that we are in the retail business, but in reality we are in the distribution business. It's Wal-Mart job to bring product from thedock to the customer's trunk in as little as 72 hours" (Berhdahl).

One could argue that the power of Wal-Mart grows from its ability to control suppliers through huge purchasing power. This is true. Wal-Mart is in

the position to tell manufacturers what to produce, when, and at what price. The retail industry is semimonopsonistic because of Wal-Mart--meaning the market situation is such that products several sellers is sought by only one buyer (Bonacich and Willson). "In the retail andconsumer market, the supreme being known as Wal-Mart now calls the supply chain shots." (Johnson) Yet, size is not the advantage used byWal-Mart during its initial growth. An examination of several successful logistics componants reveal principles that Wal-Mart has executedconsistantly throughout their growth that can be adopted by smaller competators.

2. PURPOSE OF STUDY

This study identifies several successful logistic system components of Wal-Mart, their advantages, and how they can be adopted by smaller

competitors. Our finding will help other retailers and other businesses to improve their supply chin performance.

3. TECHNOLOGY IN SUPPLY CHAINS

3.1 Leverage Technology

3.1.1 Point of Sales (POS) Data is Power

Power has switched in the retail industry from a "push" to a "pull"--Retailers are now in the position of power because they have sales informationand know when and where products are flowing. POS information is key. Wal-Mart uses software--Retail Link--to share POS data with suppliers.Suppliers who find Wal-Mart prices too low (and nearly impossible to do business with) can use the software to examine the market situation andpropose alternatives. Training sessions are available to suppliers to learn how to use the system and find cost savings of their own. There is no

need for Wal-Mart to send purchase orders. Suppliers can act according to the sales of their product. (Bonacich and Willson) In addition to salesdata, transportation data is being formatted for interactive manipulation. Transportation providers are now being included in the Electronic DataInterchange (EDI) through Collaborative Transportation Management, developed by Voluntary Inter-industry Commerce Standards (VICS) forWalMart. (Bonacich and Hardie)

Wal-Mart has two years of full sales data online and available to partners from their data warehouse. International Wal-Mart buyers and outsidesuppliers use the data. Sales data from Wal-Mart and Sam's Club stores are shared with suppliers. Suppliers see information only on theproducts they supply. A web-based extranet site connects Wal-Mart buyers to manage inventory and aid replenishment decisions. Vendors'store-by-store sales data are available daily. The database is over 130 terabytes in size.

Wal-Mart's best practice MPC system passes on knowledge about future demand even if the data is only approximate. Suppliers find thisattractive. Wal-Mart works jointly with suppliers to create state-of-the-art MPC systems for Supply Chain Management (Vollmann).

3.1.2 Supply Chain Technology

"[Wal-Mart] is synchronizing product data such as packaging dimensions, color, and weight with about 800 suppliers across 2,000 productcategories and 60,000 unique items. Procter & Gamble estimates it saves more than $1 million annually in administrative costs by synchronizingits product data with Wal-Mart and eliminating the need for clerks to manually correct inconsistent information. It also has cut the time it takes toset up new product information in Wal-Mart's database from four days to four hours." (Sullivan). Suppliers are not the only ones saving money.

Proctor and Gamble sells 17% of their goods to Wal-Mart. Yet, retailer savings are at the expense of the manufacturer. Retailers are beingrequired to ship good "store ready" with labels and prices. "Flexible specialization" allows minor variations based on a central theme to offerconsumers more choices. The flexible production allows manufacturing to match quick variations of shifting demand. This is also known ascontingency production. Wal-Mart forced the use of bar-codes in the 1980's. Now Wal-Mart is requiring suppliers to use Radio Frequency

Identification (RFID) technology that will potentially save the retailer $8 billion a year (Bonacich and Willson). Yet, suppliers are resisting.


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delivery process from a key supplier. "There were two days we couldn't account for [product] between their shipment and its arrival at ourdistribution center,"" (Sullivan). Bar Code technology was also unproven when first adopted by Wal-Mart, yet it has ultimately lead to enormouslypowerful transaction efficiency and data collection.

3.2 Training Supply Chain Users

Wal-Mart trains people in supplier companies. Wal-Mart has partnered with Accenture to create a six to twelve month program that finishes in afour-hour exam known as the Supply Chain Academy (SCA). The pilot SCA brought 20 Wal-Mart associates from different disciplines and several

suppliers. One hundred supply chain associates then participated in the full curriculum at the company's headquarters in Bentonville, AR. Eightywere certified.

After the initial class the program was expanded to 300 cross-functional and cross-divisional employees. Wal-Mart can hire and train goodpeople; this benefits Wal-Mart and their suppliers. According to one supplier, "I was able to take what I learned about the symptoms of poor

inventory management and immediately apply them to our business to make improvements."

3.3 Own and Control Core Competencies

3.3.1 Information Technology

The first core competency of Wal-Mart is their data handling. Wal-Mart purchased a satellite system in the 1980's and by 1988 held the largestprivately owned communications network in the country to handle Electronic Data Interchange (EDI) (Bonacich and Hardie). This networkdelivers massive POS and transportation data in addition to broadcasting an in-store television network. The in-store TV network is one of the

largest private television networks in the world. The retailer has more than 27,000 screens that display supplier-purchased ads in effort topromote their product over all others. Additionally, EDI is efficient and current.

"The key communication protocol is XML, which has already become the standard for information exchange between companies. The next keyingredient is the Simple Object Access Protocol (SOAP), which allows applications to make remote procedure calls to one another using XML to

format their requests and replies. SOAP is the enabling technology for Web services, which allow applications to be more loosely coupled andcall upon each other on an ad hoc basis." (Taylor) EDI has very practical and profound business model impositions. For example, PhillipsConsumer Electronics USA has a partnership with Wal-Mart. Phillips uses EDI to know the stock locations and rate of sale for their product inWal-Mart stores--through POS data. This allows Phillips to know--not forecast--when Wal-Mart will need more product.

3.3.2 Transportation

The second core competency of Wal-Mart is transportation knowledge. Production is moving from mass production to smaller lots of specializeditems produced according to what is selling. This requires a complex efficient transportation network.

3.3.2.1 Truck Fleet

Wal-Mart purchased their own truck fleet to distribute shipments within their supply-chain. Stores expand around distribution centers (DCs).During initial growth expansion was kept to locations that were within a one day drive from a DC to a store. The newest of their US campuses is a

2.7 million square foot import campus of 4 DC's in Mira Loma, CA. See Figure 1 below.

[FIGURE 1 OMITTED]

3.3.2.2 Logistics Coordination

Wal-Mart not only benefits from finding lower production costs offered by foreign labor markets, but works within the foreign systems to lowercosts even further. Wal-Mart Global Procurement is based in Shenzhen, China. They source products from 5000 factories in 65 countries. Theysource 15%-20% of general merchandising for Wal-Mart. Wal-Mart moved 291,000 TEUs in 2005 (Bonacich and Willson).

Wal-Mart has established buying offices around the world. They then ship via the land bridge. The land bridge is offloading containers from shipsin Western United States shipping ports and delivering them by rail their Eastern United States destinations. This is faster and more flexible thatwaiting for ships to transit the Panama Canal. (Bonacich and Willson) Wal-Mart uses ocean transportation with Flags of Convenience (FOC)(Bonacich and Hardie). FOC offer lower transportation costs than US shipping lines.

Intermediate warehouses and distributers are not used. Removing the middlemen reduces costs. (Bonacich and Hardie) Wal-Mart prefers tomove goods directly from the production source to the "customer's trunk".

Wal-Mart has 610 suppliers that replenish inventory daily through just-in-time (JIT) practices. The periodic quantity shipped varies depending on


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manufacturing, planning, and control (MPC) system provides foresight to avoid excess warehouse costs. At the final stage of the supply chainthey use the big-box format to display and move large amounts of inventory. (Bonacich and Hardie)

3.3.3 "Everyday Low Price"

A third core competency of Wal-Mart is their dedication to the company mission, "...to help people live better by saving them money." Findingsuppliers that can produce according to specifications at an "everyday low price" is demanding. One of the main goals of Global Procurement isto source the lowest cost suppliers. This is also known as the "race to the bottom"--the lowest in terms of labor standards. (Bonacich and Willson)

Labor is low paid and compliant. It allows for contingency production through contingency labor.

Wal-Mart researches the cost of production and raw materials of their suppliers to avoid excess spending. The suppliers find ways to meet lowcosts demanded by Wal-Mart if they want to stay in business. (Bonacich and Willson)

3.4 Intermediaries Allow Flexibility

The big stable companies--those that thrived under the "push" system--are inclined toward unionization. This adds costs that Wal-Mart choosesto avoid. The increased costs threaten the cole value of Wal-Mart ("Everyday Low Price"). If unions establish themselves in factories or

transportation networks parent companies (and suppliers to Wal-Mart) will look elsewhere, putting the higher priced labor out of business.Contractors are motivated to keep unions out. Wal-Mart can deny responsibility through their supply chains. (Bonacich and Willson) Wal-Mart hasno direct control over the internal practices and procedures of their suppliers.

Production contingency means labor contingency. Wal-Mart uses layers of intermediaries between the parent company and employees. Retailers

benefit from lower price labor rates, temporary and part time positions, and independent contracting. Work is irregular and low paid. There are noemployee benefits. (Bonacich and Willson)

3.5 Supplier Size

3.5.1 Purchasing Power

Wal-Mart has great partnering power. Wal-Mart global strategy includes searches for large suppliers that will support their strategy. Wal-Mart isdeveloping sophisticated systems to work with dyad partners. Suppliers often must conform to enhance the dyad relationship (Vollmann).

Wal-Mart has joined with several large companies such as Proctor & Gambol.

Wal-Mart suppliers generally do not supply more than 30% of their production to Wal-Mart. Manufacturers who allow too much of their productionto go directly to Wal-Mart lose control of their destinies. Tandy Brands 39%, Clorox 23, Revlon 20%, RJR Tobacco 20%, Proctor and Gamble17%. Why would vendors rely on Wal-Mart for such a large portion of their retail annual sales volume? They will break even or even lose money

selling huge quantities because of Wal-Mart negotiating prowess and low prices. They do it to keep their manufacturing facilities running and toget excellent brand advertising by being a vendor of choice at Wal-Mart. (Bergdahl) Wal-Mart supplies stores from their own warehouse for 85%of their merchandise; competitors use 5065%. Wal-Mart can replenish in two days on average; competitors need five. Shipping costs forWal-Mart are 3% of business costs; costs for compotators are 5%.

3.5.2 Custom Bundles in Dyad Relationships

A just-in-time (JIT) system based on two firms constitutes a dyad relationship. This is a "critical supply chain relationship between two firms thatis designed to produce a joint benefit." Each customer need is slightly unique and requires differentiated bundles of goods and services. Forexample, a jar of Nescafe on a grocery shelf is the same jar as one sitting in a different store's shelf. Yet, the bundle is different. Each store has

its own ordering systems, MPC, ways of interacting with suppliers, ways to go to market, and individual measures of performance (sales persquare meter of shelf space, inventory turns, stockouts, customer service). The best-practice supplier (Nestle in this example) helps each firmobtain their own objective. It designs and implements MPC systems that support mass customization. Companies such as Nestle and Unileveruse dyad relationships with each customer through e-based systems (Vollmann).

The globalization strategy of Wal-Mart also includes a mass-customized MPC system that maintains a dyad relationship with each supplier.Internal integration uses MPC systems that can better plan and control operations within a firm. MPC systems still conform to the business modelof each individual partner company.

3.5.3 Creative Investing

Wal-Mart uses financial acumen to leverage investments. They have buying terms of 30 days after delivery. They try to get delivery at the lastminute, causing companies to scramble to meet delivery times. Items are then sold before the 30 days have expired. Wal-Mart has the benefit of30 days of money from suppliers. (Bonacich and Willson)


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complicated to be implemented in stores. In 2004 Wal-Mart used a fleet of 5000 tractors and 23,000 trailers to make JIT replenishment possible."Each store has to be within a day's drive of a distribution center, so we would go as far as we could from a warehouse and put in a store. Thenwe would fill in a map of that territory state by state, county seat by county seat until we had saturated that market." (Bergdahl) This maximizes

efficiency and lowers the cost of sales for warehousing distribution and logistics. Strategic location of distribution centers and cross-dockinglowered the amount of square footage in the store devoted to storage--staging an inventory--to 10%. Competitors allow 25%. This increases theefficiency of the Wal-Mart sales floor by increasing the amount of square footage devoted to merchandizing; at the same time, lowering inventorycosts.

Wal-Mart distribution centers provide personal hygiene facilities for drivers, including: showers, fitness centers, sleeping quarters, and businessservices. (Chandran)

Accounting, IT professionals, and human resource managers are not in silos. Functional managers are expected to travel to the field in the storesto understand the real issues related to customers. Everything else is secondary to developing strategies that improve the level of service in

stores (Bergdahl). They even ask vendors to get into the customer service act.

3.7 Wal-Mart Branding

Wal-Mart asked Hormel Foods to develop a snack that they could place alongside the riffles and fishing rods. Within weeks, Smapouflage--Spamin camouflage cans--were "blowing out doors" in 760 rural Wal-Mart. (Bergdahl)

Retailers are now becoming brand managers, according to Dan Stanek, executive vice president at consulting company Retail Forward. Retailerslove this trend because overhead is low and marketing costs are zero, private label products bring 10% higher margins on average than branded

goods do. Additionally, a store brand can differentiate a chain from competitors. Shoppers drive the extra mile to buy Kirkland brand Cashews,filling their carts with other goods while they're at it. Twenty percent of items sold in US stores are store branded. In Europe, the percentage isforty.

4 ADAPTING WAL-MART LOGISTIC COMPONANTS

4.1 Leverage Technology

Leverage technology to track products or services. Know everything about when products are sold, how long they take to sell, where are they are

sold. Use tools that allow data to be captured, viewed, and made useful--transforming data into knowledge. Use this knowledge to refine the flowof products or services. Power is switching from "push" to "pull"--the service or product manufacturer no longer drives the final transaction at thecustomer contact point. The final transaction in the supply chain (with the customer) is the most important. Learn from these transactions toshape the start and middle of the supply chain.

4.2 Train Supply Chain Users

Teach people how to use the supply chain. For example, in a shipping company, inform customers how to complete delivery orders. Teachmaintenance providers how to apply or bid for equipment repair contracts. Teach partners how to integrate service (provide route planningcourse; standards and expectations for delivery times; service level measurements). Teach packaging agents how to best pack items for flow

through the delivery system.

4.3 Own and Control Core Competencies

Identify the essential components of the business. Focus on the aspect of service performed best, indeed better, than competition. Use resources

to enhance this competitive advantage. Other functions may best be handled by providers who can provide it more efficiently. Ensure that thebusiness core remains in direct supervision and control.

Communicate the core competency through the company mission statement. Be clear on where--and in what respect--the business is competing

and excelling. Direct every action of the business to further the goal in the mission statement.

4.4 Use Intermediaries To Limit Threats

Limit or eliminate business practices that threaten the mission statement. Look elsewhere for innovations. For example, Wal-Mart chooses

suppliers in countries where production costs are lower than in the United States. Yet, they go even further to innovate within foreign countries tolower production costs further. They distance their business from business practices that may raise prices; they limit threats to their companymission statement.

4.5 Size Matters


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4.6 Harness Power and Creativity of Management

Management has the power to create an institutional culture and values. Create a culture that promotes and reinforces the company mission

statement and core competencies. Training, policies, and visual space are opportunities for management to mold, promote, and sustain businessinstitution culture and values.

4.7 Branding

Promote goods or services in attractive form. Wrap products in a creative or unusual package. Bundle services or provide delivery of services innew forms or methods. Let the customer be surprised, delighted, and satisfied by their choice of business provider.

5 CONCLUSIONS

Several successful logistics componants reveal principles that Wal-Mart has executed consistantly throughout their growth that can be adoptedby smaller competators. The retailer excels at seven integrated logistic functions: Leverage Technology, Training supply chain users, owning andcontrolling core competencies, utilizing intermediaries, leverage investing, using size, management that reinforces core values, and branding.Smaller companies can adopt and benefit from Wal-Marts logistic principles.

REFERENCES:

Bergdahl, Michael. What I learned from Sam Walton : how to compete and thrive in a Wal-Mart world. Hoboken, N.J. : John Wiley & Sons, c2004.

Bonacich, Edna with Khaleelah Hardie. Wal-Mart and Logistics Revolution: Wal-Mart: The Face of Twenty-First Century Capitalism. NelsonLichtenstein. Ed. The New Press. New York. 2006.

Bonacich, Edna and Jake B. Wilson. Wal-Mart World: Global Production and Distribution: Wal-Mart's Global Logistics Empire (with specialreference to the China/Southern California Connection). Brunn, Stanley D. Ed. Talyor and Francis Group, LLC. 2006.

"Chain reaction." Economist 379.8482 (17 June 2006): 14-14. Academic Search Elite. EBSCO. CSU Stanislaus Library, Turlock, CA. 4 Nov. 2008.

Chandran, P. Mohan. Wal-Mart's Supply Chain Management Practices. Center for Management Research. Plot #49 (2003), Oper. 020

Johnson, Maryfran. "Supply Chain Cure." Computerworld 38.20 (17 May 2004): 20. Academic Search Elite. EBSCO. CSU Stanislaus Library,Turlock, CA. 4 Nov. 2008 .

Sullivan, Laurie. "LIVE AND LEARN, THE RFID WAY." InformationWeek (24 Jan. 2005): 12-12. Academic Search Elite. EBSCO. CSU StanislausLibrary, Turlock, CA. 4 Nov. 2008 .

Sullivan, Laurie. "WAL-MART TO SUPPLIERS: CLEAN UP YOUR DATA." InformationWeek (30 May 2005): 24-24. Academic Search Elite.EBSCO. CSU Stanislaus Library, Turlock, CA. 4 Nov. 2008 .

Taylor, David A. "SUPPLY CHAIN VS. SUPPLY CHAIN." Computerworld 37.45 (10 Nov. 2003): 44. Academic Search Elite. EBSCO. CSUStanislaus Library, Turlock, CA. 4 Nov. 2008 .

Vollmann, Thomas E. Manufacturing planning and control for supply chain management. Boston : McGraw-Hill/Irwin, c2005

Alan S. Khade, California State University Stanislaus, Turlock, California, USA

Nathan Lovaas, California State University Stanislaus, Turlock, California, USA

TABLE 1: BENEFITS FROM WAL-MART TRAINING SUPPLIERS

Improved ability to put the right product in the right place at the

right time (making better decisions that result in lowerinventories and/or higher in-stock positions.)

Improved ability to put the right employee in the right job at theright time.

More-advanced technology skills for supporting replenishment (e.g.,


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Increased career-enhancement potential, job satisfaction andworkforce retention.

Better metrics for evaluating store- and company-wide replenishment

performance.

Opportunity to use inventory/replenishment/forecasting competenciesas market differentiators.

Copyright 2009 Gale, Cengage Learning. All rights reserved.

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a case of wal-mart's logistics

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