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Wal-Mart Increases its Supplier's Inventory Levels

With all the Just-In-Time talk and knowledge regarding better management and understanding of inventory, you'd think that average levels would be decreasing. Well, I still think that at a well-managed company, they should be, but Susan K. Lacefield, accociate editor of Logistics

Management, wrote a pretty interesting article that found otherwise.

In a poll of her magazine's internet readers, she found that over 60% of companies expect to seeinventory levels rising over the next year. The specifics regarding why are some prettyinteresting reasons.

Most notably, Wal-Mart's JIT efforts are leaving their suppliers with more inventory. If youthink about this, it makes a lot of sense. Wal-Mart does not want to hold inventory. At the sametime, they do not want backorders. The only way to do this is to be able to replenish their stock at a moment's notice. So what does this do to their suppliers? According to LogisticsManagement, it shoots supplier's inventories straight up.

The demands that Wal-Mart places on its suppliers are incredible because of the power Wal-Mart places on its suppliers. Personally, I'm waiting for the day when Wal-Mart's suppliers form amassive supplier's union (sounds like collusion to me), but until then, good for Wal-Mart for leveraging what it can out of its suppliers. Also in the mean time, suppliers are forced to holdincredible safety stocks to make sure they can satisfy Wal- Mart's demands.

Basically, the suppliers don't have a choice in the matter. Wal-Mart's business, even with thedemands on service, is too good to pass up. But, Wal-Mart is not about to have a stockout due tosome supplier's inability to provide a 99% service level. Wal-Mart, like many huge companies,will not wait. Many companies are:

requiring shorter lead times even as more companies implement 'zero tolerance' policies for lateshipments.

Zero tolerance is a hell of a statement from a company that knows service level. To provideeven a 97% service level compared to a 95% service can result in a huge increase in inventory.Zero-tolerance is wild. In fact it is actually impossible. No matter what a company holds ininventory, there is always the possibility that Wal-Mart could order one more than that. Couplethis with a shorter lead time to Wal-Mart and inventories are stagerring.

Not only does Wal-Mart demand what they want when they want it, but also, as one Logtistics

Management survey respondant said regarding why he has to hold more inventory:

Wal-Mart is ordering fewer cases more frequently

For a company, this means that they can either produce smaller batches, or hold onto moreinventory. Because if a company cannot produce less and faster, than they have to produce alarge amount and then, instead of producing a large amount and getting rid of it all at once, theyhave to get rid of it slowly over time, which increases average inventory.

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While Wal-Mart may be getting the good end of the deal, one thing is for sure, there's a reasonsuppiers put up with these demands, and it's not because the business with Wal-Mart is bad.

If you would like more informatin regarding this article, Shippers are seeing inventory rising, itcan found in the October 2005 Logistics Management Vol. 44, No. 10 issue. Additionally, feel

free to leave comments with a question and your email address.

Study in Software Implementation

I recently had the pleasure of attending a guest lecture delivered by Optiant director of research,

Ph.D. John Neale on the topic of multi-echelon inventory management softwareimplementation. Optiant is a supply chain software solutions provider for companies includingGillette and HP. His discussion described how the implementation of Optiant's PowerChain software suite helped to dramatically decrease inventory and increase service for a well-knownmanufacturer of consumer adhesives. This post will give a history of the adhesivemanufacturer's supply chain problems and the solution they chose. The results of that solutionwill be explained with a brief lesson on multi-echelon inventory.

Supply Chain The manufacturer being discussed operates primarily in North America. Their supply chain hasthe following characteristics:

Raw M aterials First, they procure over 3000 raw materials from multiple sources and hold the raw materials atone of their two manufacturing sites until they are processed. This is the first stage (echelon)where inventory is held. After the raw materials are turned into finished goods, they areimmediately shipped to a distribution center (DC).

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F inished Goods The firm has two DCs and over 1800 SKUs (stock keeping units. This is basically how manydifferent products and package variations they have on those products). The DCs are the finalstop for finished goods inventory before they are shipped to a myriad of retailers. Of thoseretailers, Wal-Mart, Staples, Home Depot, and other mass market stores constituted one third of

their overall volume. The DCs also receive some finished goods which come from other manufacturers in the form of finished goods. The DCs are the second stage (second echelon,thus making more than one echelon, hence the name, multi-echelon) where safety stock is held.

O ld Inventory Policy Prior to Optiant's consulting work and software implementation, the manufacturer had no realmethod for determining their safety stock. Essentially, they used a trial and error method wherethey would set a level and if they were stocking out too often, they would increase inventory.When they stopped stocking out, they would scale back inventory. Their inventory was alsohigh because of expansion in their product line and high service levels demanded by stores likeWal-Mart.

The manufacturer lacked the expertise regarding how to set a safety stock level that optimizedeach local inventory stage, and additionally, they were without the experience necessaryregarding how to optimize the overall system. As John Neale put it, this is a problem becausewhile safety stock formulas can be useful for local optimization, one point he made was,

"Don't just optimize things in isolation."

Upon realizing that there were better ways of doing things, they contacted Optiant.

O ptiant

What Optiant did for them was more than just selling them a software package. Optiant spentmany weeks learning about their supply chain constraints and gathering data, and then usedPowerChain to optimize the safety stocks for each of the 1500 SKUs and each of their 3000raw materials.

D ata Requirements Much of this data is demand data. In order to get a feel for demand, Optiant uses historicaldemand projections. In order to figure out what kind of deviation there is on these projections,they look at historical projections and compare them with historical demand realizations. As youcan imagine, a lot of companies don't keep accurate records regarding this data. The less acompany has in the way of records, the less effective software initially is. Keep this in mind

before you bring in any consultants: start collecting data before they get there, so you're ready toroll once they're on the clock.

Optiant also required supplier data, including lead times, costs, and a bill of materials (list of parts required for each SKU).

Software Once they have the data, they can start to use their software model. I'm not clear on the math

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that runs the program other than that it uses algorithms to minimize holding costs whilemaintaining service level requirements. I didn't bother asking for more detail, because what Iunderstand is this: the software they have works and is based on the kind of framework that youwould expect to come from someone with a Ph.D. from MIT, which is precisely what Optiantco-founder, Sean Willems, has. The point is, the program is complex, but it is not baseless, and

it is not a hoax. It is exactly the kind of complex software I was referring to when I wrote aboutthe kind of advantage that professional software can offer that Excel can't even come close to providing.

R esults Before you refuse to believe the software works without understanding every detail behind it,consider that Optiant's solution allowed this adhesive manufacturer to raise their service levelwhile lowering safety stock value by over 20%. First of all, 20% is a very large reduction insafety stock value on its own. In addition to this, they were able to raise their service level whilelowering safety stock. At first glance, this seems too good to be true. Normally, the way to raisea service level is by raising safety stock, not by lowering it. Why is this case any different?

Multi-Echelon Inventory Management This case is different because it is a multi-echelon inventory model. What this means in this caseis that they had the opportunity to hold inventory at two stages: the raw materials stage and thefinished goods stages.

B alancing Raw M aterials and F inished Goods Remember, holding costs are a function that involves the value of the inventory and at the rawmaterials stage the value is considerably less expensive. This means that if the adhesive

manufacturer has short production lead times from raw materials to finished goods, which theydo, then they can afford to hold large amounts of raw materials, small amounts of finished goods,and still be in a position to meet demand. Thus, by reducing finished goods inventory andincreasing raw materials inventory, they can increase service level because of their ability toquickly turn raw materials into finished goods, and they can reduce inventory costs because theyare holding less finished goods.

Risk Pooling The other reason they are able to reduce safety stock value while increasing service is becausethey have so many SKUs that all use the same basic raw materials. The importance here is theinherent flexibility that raw materials when they can become a variety of different finished

goods. This allows them to keep materials raw for as long as possible, which reduces their vulnerability to fluctuations in demand. The vulnerability to these fluctuations is limited becausemany of their glue product SKUs are essentially pooled as one product with an overall demandthat is less likely to fluctuate as long as products are kept as raw materials that can be turned intoany product once demand projections are closer to demand realizations. To further illustrate thisis an example from the MITSloan Management Review about apparel manufacturer BennettonGroup SpA and how they delay final goods production by keeping raw materials in a positionready to be turned into finished goods:

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An inventory of undyed sweaters gets stockpiled in one location; coloring takes place only after specific orders have been received. This pooling of demand across geographical areas, andacross colors, helps Benneton greatly reduce inventory risk while more effectively meetingcustomer demand. 1

Another example cited in the article is how the house paint industry holds only base paints whichcolors are added into instead of holding onto hundreds of different colors at each retail location.

The effects of this are incredible because for the adhesive manufacturer, paint companies, andBenneton, the risk of each individual product in the product line can be vastly reduced by simplykeeping finished goods as raw materials for as long as possible.

Paint companies no longer have to worry about having too much blue paint and not enough red paint. Statistically, the variations in each type of paint will even out. So if yellow doesn't sell asmuch as expected and green sells twice as much as expected, paint companies are still ok as longas they have the right amount of base paint. Unfortunately for the consumer this makes it

difficult to return paint.Luckily for the adhesive manufacturer, risk pooling works. So does the software Optiant creates.

Final Notes on PowerChain Originally, the adhesive manufacturer only hired Optiant so that Optiant could use to use their software to tell provide a report detailing how to optimize each of their 1800 SKUs and 3000 rawmaterials. The CFO of the adhesive firm was so impressed with the forecasting abilities of thesoftware that he eventually invested in a license of the software. I'm not sure whether or not theyworked with Optiant to adapt the PowerChain software to their other computer programs for automated entry of optimal safety stock into their other systems, although this is something

Optiant does.I'm not trying to suggest that you dive right into the investment of such software, although I can'timagine Optiant would mind, but hopefully this post has given you a better understanding of what inventory management software packages can do for you and what the implementation

process entails.

1 Sunil Chopra & ManMohan Sodhi, "Avoiding Supply Chain Breakdown", MIT Sloan M anagement Review , Fall 2004,Vol. 46, No. 1

W al- M art Instead of having particularly large holding costs, Wal-Mart recognized that they were in a

position to make ordering costs very small. Because of their importance to their suppliers, alongwith their software made affordable through economies of scale, Wal-Mart has made ordering avery small percent of their overall costs. By lowering ordering costs, Wal-Mart has madeordering small batches with greater frequency a profitable reality.

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High holding costs and low ordering costs are the factors that drive JIT. Generally, it's theability to lower ordering costs that make it a feasible solution. McDonald's and Dell were bothslaves to the high holding costs. It was just the nature of their industry. The solution for themwas that while they couldn't lower holding costs, they could lower ordering costs. Wal-Martdidn't even have particularly high holding costs, but they realized it would be profitable to lower

ordering costs which led to high holding costs as a ratio of holding costs to ordering costs.What McDonald's, Wal-Mart, and Dell have in common is very high holding costs incomparison to their ordering costs. Ultimately, this, coupled with the ability to lower safetystock, is when JIT is effective. EOQ determines how much you should order and there are twofactors that drive economic order quantities down: low ordering costs and high holding costs.Depending on the product and the industry, one or both of these qualities may exist in your operations. If they do, JIT may be right for you. Without the ability to make ordering costs lowas a percentage of holding costs then there is no need for JIT. In fact, the increased frequency inordering will result in cost increases.

Safety Stock R

eductions The other aspect of JIT is the drastic reduction in safety stock. My previous article on safetystock discussed the two reasons safety stock exists: variability in demand and variability in leadtimes from suppliers (in McDonald's case, the supplier is the internal production process).

It is because of this variability that safety stock exists in the first place. What JIT does is tries toreduce the lead times and variation in lead times in order to help reduce safety stock. Let'srevisit the safety stock formula to figure out why this is:

Safety Stock: {Z*SQ RT(Avg. Lead T ime*Standard D eviation of D emand^2 + A vg. D emand *Standard D eviation of Lead T ime^2}

The first term is Lead Time*Standard Deviation of Demand^2. This is the inventory needed toaccount for fluctuations in demand during the lead time. If lead time is shorter, which JIT triesto accomplish, then this part of the safety stock is smaller, this lowering safety stock inventory.

Wal-Mart and Dell accomplished this by using better software and communication with their suppliers. McDonald's accomplished this by creating a system that allowed a faster burger

production (remember, McDonald's lead times are internal).

The second term is Avg. Demand*Standard Deviation of Lead Time^2. This is the inventoryneeded to fill demand because of lead time variance. If lead time has no variance or is reducedthen this term can be eliminated or at least reduced. Again, this is what JIT try to accomplish.

Wal-Mart accomplishes this by demanding it, Dell by working with suppliers, and McDonald's by standardizing production.

In order to accomplish the tasks of shortening lead times and reducing their variances, aconsiderable amount of work needs to be done with suppliers/internal operations. For somefirms this is worth the trouble, for others, it is not.

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Conclusively, there are two major parts to JIT inventory operations: lowering the ratio betweenordering costs and holding costs and shortening lead times. What results is a firm with such highholding costs that ordering very small batches very frequently is the most profitable solution.This eliminates average inventory above the safety stock level. Then, if lead times and lead timevariability can be decreased, safety stock can be decreased. The result is inventory coming in as

it needs to come in. In other words, it comes in just-in-time. November 08, 2005 in Case Studies , Just-in-Time | Permalink | Comments (1)

September 26, 2005

D ell Computers: A Case Study in Low Inventory

When managers discuss low inventory levels, Dell is invariably discussed. Hell, even I've mentioned Dellon this site. So why all the commotion? Has their low inventory REALLY helped out that much? In short,yes. This article is primarily going to discuss how much it helped. This article will not discuss how theyachieved such high inventory turns using a state of the art just in time inventory system.

Reasoning behind need for lower inventory

The first thing that needs to be discussed is why low inventory has such a great effect on Dell's overallperformance. The reason is quite simple: computers depreciate at a very high rate. Sitting in inventory, acomputer loses a ton of value.

As Dell's CEO, Kevin Rollins, put it in an interview with Fast Company:

"The longer you keep it the faster it deteriorates -- you can literally see the stuff rot," he says. "Becauseof their short product lifecycles, computer components depreciate anywhere from a half to a full point aweek. Cutting inventory is not just a nice thing to do. It's a financial imperative."

We're going to assume that the depreciation is a full point per week (1%/week) and use that todetermine how much money high inventory turns can save Dell.

This means that for every 7 days a computer sits in Dell's warehouses, the computer loses 1% of itsvalue. Ok, now that we know how much Dell loses for each day, let's take a look at some of Dell's dataover the past 10 years that I pulled from www.themanufacturer.com

What I got from this was the inventory turns. An inventory turn, as this website successfully describes it,is "cost of goods sold from the income statement divided by value of inventory from the balance sheet".Typically, this is turned into a value showing how many days worth of inventory a firm has by dividinginventory turnover by 365. I divided the inventory turnover by 52 in order to show how many weeksworth of inventory Dell holds.

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Here are the results:

D ell s Inventory Turnover D ata

Year Inventory Turnover Week's Inventory

1992 4.79 10.8561993 5.16 10.0781994 9.4 5.5321995 9.8 5.3061996 24.2 2.1491997 41.7 1.2471998 52.40 0.9921999 52.40 0.9922000 51.4 1.012

2001 63.50 .819

Key point to notice here is that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001,Dell was carrying less than 1 week's worth of inventory. This essentially means that inventory used to sit around for 11 weeks and now it sits around for less than 1 week.

S o what does this mean for D ell?

Remember, computers lose 1 percent of their value per week. This isn't like the canned food industrywhere managers can let their supplies sit around for months before anyone bats an eye. Computers

aren t canned goods, and as Kevin Rollins of Dell put it, computers rot . The longer a computer sitsaround, the less it is worth.

That said, due to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowingcomputers to sit around before they were sold. In 2001, Dell was losing less than a percent. B ased onholding costs alone, Dell reduced costs by nearly 9%.

Since 2001, Dell has continueed to lower inventory. Looking at their latest annual reports , day'sinventory has dropped by approximately a day.

Hopefully this article provided you with a practical example that demonstrates the positive effects lowerinventory can have on a firm's overall costs. For more information regarding lawyers in the Texas area,check out Dallas Fort Worth trucking accident attorney . For more basic information regarding holdingcosts, please read A Simplified Look at the Pros and Cons of Inventory.

September 26, 2005 in Case Studies , Just-in-Time | Permalink | Comments (4)

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Augus t 15, 2005

Notes From an Inventory Management Consulting Job: Part IV of IV

This is the final post of a series detailing a consulting job I recently completed. This post discusses the

pros and cons of employing Excel as the decision support system.

The spreadsheets built for this job are a very good example of an automated inventory tracking systemthat can be built for much less than the price of purchasing a real inventory management softwarepackage. There are however some definite pros and cons to look at when building your own softwarepackage using excel.

The main pro is the price. Excel is a software package that just about every office already owns and witha little bit of know how, you can build whatever you want. In some cases you might now even need tohave any clue in terms of writing code to use excel to get it to do what you want it to do. It s also a nice

package to use because everyone in the office should already know how to use it.

The downside of using excel is that it might not be able to do everything you want it to do, nor may it doeverything it should do. For example, in this project I encountered a problem with the inventorycounting. The counts should really be updated every 6-8 weeks just to be safe. But when they are, theused materials that are subtracted out of them need to be cleared. Unfortunately this involves theinventory manager at the mailing room to update the values in excel. Really this isn t a huge deal butultimately it cuts down on the automation of the system. (As it turns out, I found a way to get aroundthis about 2 weeks after I wrote this, but I can assure you, it was a serious hassle).

Another serious hassle is getting these spreadsheets onto the internet. After completing this consulting job, I was recommended by the firm I consulted to do a job almost identical to this job. The only notabledifference is that I had to put the spreadsheets onto a webpage that gets updated daily. Althoughpossible with excel, the interface is not as friendly as I have seen with other software packages.

Another problem with excel for this project is that I ended up using it as a daily and weekly demanddatabase when really, Excel is a terrible database system. What makes it so terrible is that it does closeto nothing to verify that the data is complete. Ensuring the integrity of the demand data is very usingExcel.

Overall, considering I m not a information system specialist and yet I did manage to build this systemusing excel, I would have to say that for low level jobs such as this one, excel is an excellent tool that isalready at hand and ready to be utilized by those who know what they are doing with it. As for theintegrity of the data, had I teamed up Access with Excel, I could have ensured the data s integrity to abetter degree. In the end, the company got a software package that meets their needs for a sliver of theprice that it would cost to buy a real inventory management system.

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Photo courtesy Dreamstime

Inventory management systems ensure that stores are stocked.

With those kinds of numbers, having an effective, efficient inventory controlsystem, or inventory management system, is imperative. Wal-Mart's systemhelps it maintain its signature "everyday low prices" by telling storemanagers which products are selling and which are taking up shelf andwarehouse space.

Inventory management systems are the rule for such enterprises, butsmaller businesses and vendors use them, too. The systems ensurecustomers always have enough of what they want and balance that goalagainst a retailer's financial need to maintain as little stock as possible.

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Mismanaged inventory means disappointed customers, too much cash tiedup in warehouses and slower sales. Factors such as quicker productioncycles, a proliferation of products, multi-national production contracts andthe nature of the big-box store make them a necessity.

Modern inventory management systems must have the ability to track salesand available inventory, communicate with suppliers in near real-time andreceive and incorporate other data, such as seasonal demand. They alsomust be flexible, allowing for a merchant's intuition. And, they must tell astoreowner when it's time to reorder and how much to purchase.

To achieve this, inventory management systems pull together severaltechnologies into one cohesive approach. Read on to learn about thehistory of inventory management systems and how modern systems work.

Inventory Management History

The constant "beep, beep, beep" of bar codes being scanned at a check-out lane represents a pillar of modern inventory management systems:stock tracking.

In the earliest days of shop keeping, merchants wrote down purchases, or they looked at how many units were gone at the day's end and then did

their best to forecast future needs. Experience and intuition were key skills,but it remained an inexact method, even when applied to operations thatwere quite small by today's standards.

After the Industrial Revolution, efficiency and mass production became themain goals of businesses, along with an improved customer experience atthe point of sale. A team at Harvard University designed the first moderncheck-out system in the early 1930s. It used punch cards thatcorresponded with catalog items. A computer would read the punch cardsand pass the information to the storeroom, which would then bring the itemup front to the waiting customer. Because of the automated system, themachines could also generate billing records and manage inventory. Thesystem proved to be too expensive to use, but a version of it is in use todayin some stores, where merchants place cards with product information onthe aisle for customers to select and bring to the checkout line. This usuallyapplies to items that are expensive or large and to controlled items, such asmedicines.

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Merchants knew they needed a better system, and researchers created theforerunner of the modern bar-coding system in the late 1940s and early1950s. It used ultraviolet light-sensitive ink and a reader to mark items for sale. Again, the system was too cumbersome and lacked the computingpower needed to make it work. Technology had yet to catch up with their ideas.

The development of affordable laser technology in the 1960s revived theconcept. Lasers allowed smaller, faster and cheaper readers or scanners.The modern bar code, or the Universal Product Code (UPC), was born andcaught on just before the 1970s. As computing power became better, thepower of UPC codes to help track and manage inventory improvedexponentially.

Photo courtesy Dreamstime B ar codes help retailers and

vendors track inventory.

During the mid to late 1990s, retailers began implementing moderninventory management systems, made possible in large part by advancesin computer and software technology. The systems work in a circular process, from purchase tracking to inventory monitoring to re-ordering andback around again.

In recent years, another promising technology for tracking inventory hasalso has made its way into stores, warehouses and factories. Radiofrequency identification, or RFID, uses a microchip to transmit productinformation -- such as type, manufacturer and serial number -- to a scanner or other data collection device. It's superior to bar codes in several ways.For instance, a scanner reads the information from an RFID from several

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yards away, making it ideal for tracking items stacked on high shelves inwarehouses. It also can encode more data than a bar code and in somesystems tell merchants if an item is out of place in the store, providingexcellent anti-theft characteristics.

Another popular means of automated inventory control is vendor-managedinventory. In this arrangement, the vendor is responsible for keeping itsproducts stocked on a store's shelf. The vendor and retailer work closelytogether and share proprietary information.

This system also has many advantages for vendors. It allows them toensure their products are properly displayed and available, and it also putsthem in close contact with the retailer and its sales data. The feedback thevendor receives can play an important role in its marketing, research and

development.

D o Inventory Management Systems Really Work?

Essentially, the systems work like this. First, bar codes or RFIDs tellscanners which items consumers are buying. The scanners transmit theinformation to computers by reading the bar codes and sending thatinformation to the software. The software then interprets the numbers fromthe bar code and matches those numbers to the type of merchandise theyrepresent. This allows the merchant to track sales and inventory -- either atthe checkout counter or with a hand-held scanner -- keeping the storeabreast of which items are selling.

Specialized software keeps track of how much stock is going out the door via purchases and how much remains on shelves and in the warehouse,giving managers a real-time picture of what's happening. The software alsoanalyzes the data and makes recommendations for re-ordering strategies.Sometimes, they're programmed to automatically order at a certain point.It's important to note, however, that good systems leave room for human

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decision-making. The systems provide good information to supportdecisions but leave the final call up to managers.

Once managers make a re-order decision, the system uses electronicdata interchange to communicate its needs for additional merchandise toa vendor. Electronic data interchange is the process of sending andreceiving data between two parties -- a retailer and a vendor, for example --using data transmission lines, such as the Internet. The data is stored in acomputer's memory bank and read by managers at both ends of the line.

Photo courtesy Dreamstime With automated inventory management,vendors can ship merchandise directly.

While inventory management systems offer retailers and vendors manyadvantages, there are some pitfalls. Because the system aims to keep abare minimum of stock in store, retailers can be caught short if an itemunexpectedly becomes a big seller. Retailers traditionally kept additionalstock on hand -- known as buffer or safety stock -- to prevent thatoccurrence, but many have discontinued the practice. And, as with alltechnology, these types of systems are subject to the effects of awidespread computer crash or software failure.

Some consumer groups have objected to RFID technology, too, claiming itinvades their privacy by providing additional information about their buyinghabits and personal data. They argue the information could be used topush other products on individual consumers, or be sold to other businesses for similar purchases.

The RFID signals can also "step on" or "collide" with each other, makingaccurate readings difficult.

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Most retailers, however, have bought into the vast advantages offered bysuch systems. They include the high efficiency, the need for lesswarehouse space, less cash tied up in inventories and better sales. Thesystems also promote better information sharing between the retailer andthe vendor, which helps drive down cost for both, as well as for theconsumer.

The benefits of modern inventory management systems aren't just for theretail and manufacturing sectors. They also offer great advantages for anyorganization that manages a supply chain for consumable items, such asthe military and medical facilities.

And it may not be long before such systems penetrate the household. In2001, the U.S. Patent and Trademark Office issued a patent for a

household "consumable item automated replenishment system includingan intelligent refrigerator," according to Patent Storm . The refrigerator usesan array of sensors to tell its owner when a consumable item -- such asmilk -- is running low.

Everywhere you look inventory management systems are making sure theproducts are there when we need them.

For more information on inventory management systems and relatedtopics, check out the links on the next page.

Wal-Ma rt to throw it s wei ght behind RFID

By Richard ShimStaff Writer, CNET News

y 1 comment y Yahoo! Buzz

Related Stories

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Maj or ret a iler s to te s t ' s m a rt s he lv e s ' J anuary 8, 2003

Inventory management technology that uses wireless signals to track products from the factory tostore shelves is set to win a major new ally next week: Wal-Mart.

The retail giant is expected to throw its weight behind RFID(radio frequency identification) technology at the Retail Systems2003 industry conference in Chicago on Tuesday. Sourcesfamiliar with the company's plans said executives will make a

presentation encouraging its top 100 suppliers to start usingwireless inventory tracking equipment--chips affixed to products,and scanners in warehouses--by 2005.

Wal-Mart's endorsement of RFID gives an important boost toefforts to overhaul the world's supply chains, a makeover thatcould provide a shot in the arm for technology companies

struggling to find buyers for the latest products and services. RFID is expensive, but backers sayit offers long-term benefits that could dwarf the impact of the bar code on inventory control anddistribution.

RFID spending will be "bigger than...Y2K," predicted AMR Research analyst Pete Abell. "Iimagine there will be a rush on investing in RFID."

Suppliers are already exploring the use of RFID technology in tracking goods from the factory towarehouses. But backing from retailers is considered important because it could ultimately allow

products to be tracked on store shelves.

Executives from Bentonville, Ark.-based Wal-Mart are expected to aggressively push for theadoption of RFID technology during a presentation at an upcoming event for retailers, suppliersand distributors, sources said. Part of the discussion will involve the significance of standardsdevelopment and its effect on the widespread adoption throughout the supply chain.

Wal-Mart representatives did not return calls for comment.

RFID tags have the potential to streamline and improve inventory management by allowingmanufacturers to more efficiently enter and track the flow of goods. For example, RFID could leta company add a boxful of goods to its inventory systems all at once, without having to unpack the carton and scan each piece separately. An RFID scanner can pick up signals from all thechips in the sealed box, something bar code systems can't do.

The cost savings could be substantial for Wal-Mart, the world's biggest retailer with sales of $217.8 billion in 2002. AMR's Abell estimates that Wal-Mart's costs associated with supply

Reader Resources RFID technology CNET White Papers

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chain--including storing, transporting and keeping track of goods--are about 10 percent of overallsales. RFID, Abell said, could save 6 percent to 7 percent of those costs annually. Using the 2002figures as a model, that would amount to about $1.3 billion to $1.5 billion saved.

Such savings are an attractive brass ring, but installing the technology is no small task. Wal-Mart

suppliers "may find it difficult to meet the early 2005 time frame," Abell said.

Problems aside, chip and equipment makers are already gearing up for expected demand.

"In 2004, we are going to see a broad range of serious (RFID) pilots," said Vinny Luciano, vice president of product management, mobile computing systems, at Symbol Technologies. "We'llsee full-scale rollouts of RFID systems in 2005. It's not too soon to start looking at the impact of RFID on business and what the opportunities will be."

In the past, Wal-Mart has helped to promote other technologies that have helped to streamlineinventory and supply-chain management. Teaming with K-Mart and other retailers in the 1980s,

Wal-Mart helped to promote the use of bar code scanning.A bar code standard was approved in 1973, but by 1984 only 15,000 suppliers were using codeson their products. Wal-Mart threw its weight behind bar codes in 1984, and by 1987 there were75,000 suppliers using bar codes, according to AMR Research.

As it looks to cut costs, Wal-Mart has been quicker with its support of RFID technology thanwith bar codes. And others are following, such as CVS, Target, Lowe's and Home Depot.

RFID-related technologies such as EPC (Electronic Product Codes) are gradually gainingindustry support, which should help penetration.

"While still being developed, EPC will be a common method of tracking inventories and objectsusing RFID technology," said Ian McPherson, analyst with Wireless Data Research Group. "Thetwo are related in the same way that bar codes and scanners are related."

EPC is being developed by the Auto-ID Center and the Uniform Code Council, and many see it becoming commonplace in pallets and cases over the next five years, according to Paul Fox, aGillette representative.

Although cartons and pallets are the focus of RFID now, the technology isn't expected to trulytake off until RFID tags are used on store shelves to give more up-to-date information on sales

and in-store inventory. Trials are ongoing, but cost is the major hitch with such tags.Currently tags cost 50 cents to 60 cents apiece. To be practical for manufacturers to use, they'llhave to drop to around 5 cents, according to Dave Krebs, an analyst with research firm VDC.

"As volumes increase, prices will come down, but suppliers don't really have an incentive at this point," Krebs said. "They are footing the majority of the tag cost, and retailers are reaping amajority of the benefit."

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Krebs added that for the benefits of supply chain, products have to be tagged at the source:suppliers.

A large retail company issuing favorable terms or promotions for suppliers could certainlyencourage the adoption of the technology.

"Right now, everyone involved in RFID technology is examining the costramifications, but we're optimistic that the price hurdles will be overcome," saidFox, who said the tags can be had already for as low as 10 cents each. "The cost of tags and readers will decrease over time."

N ews.com's Alorie Gilbert contributed

Read more: http://news.cnet.com/2100-1022_3-1013767.html#ixzz15LrHoObO

UPC codes were first used in grocery stores.

If you go look in your refrigerator or pantry right now, you will find that justabout every package you see has a UPC bar code printed on it. In fact,nearly every item that you purchase from a grocery store, department storeand mass merchandiser has a UPC bar code on it somewhere.

Have you ever wondered where these codes come from and what theymean? In this article, we will solve this mystery so that you can decode anyUPC code you come across.

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"UPC" stands for U niversal P roduct C ode . UPC bar codes were originallycreated to help grocery stores speed up the checkout process and keepbetter track of inventory, but the system quickly spread to all other retailproducts because it was so successful.

UPCs originate with a company called the Uniform Code Council (UCC). Amanufacturer applies to the UCC for permission to enter the UPC system.The manufacturer pays an annual fee for the privilege. In return, the UCCissues the manufacturer a six-digit manufacturer identification number and provides guidelines on how to use it. You can see the manufacturer identification number in any standard 12-digit UPC code. The UPC symbolhas two parts:

y The machine-readable bar codey

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The manufacturer identification number is the first six digits of the UPCnumber -- 639382 in the image above. The next five digits -- 00039 -- arethe item number . A person employed by the manufacturer, called the UPC coordinator , is responsible for assigning item numbers to products,

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making sure the same code is not used on more than one product, retiringcodes as products are removed from the product line, etc.

In general, every item the manufacturer sells, as well as every sizepackage and every repackaging of the item, needs a different item code.So a 12-ounce can of Coke needs a different item number than a 16-ouncebottle of Coke, as does a 6-pack of 12-ounce cans, a 12-pack, a 24-cancase, and so on. It is the job of the UPC coordinator to keep all of thesenumbers straight!

The last digit of the UPC code is called a check digit . This digit lets thescanner determine if it scanned the number correctly or not. Here is howthe check digit is calculated for the other 11 digits, using the code63938200039 from "The Teenager's G uide to the Real World" example

shown above:1. Add together the value of all of the digits in odd positions (digits 1, 3, 5, 7, 9

and 11).6 + 9 + 8 + 0 + 0 + 9 = 32

2. Multiply that number by 3.32 * 3 = 96

3. Add together the value of all of the digits in even positions (digits 2, 4, 6, 8and 10).3 + 3 + 2 + 0 + 3 = 11

4. Add this sum to the value in step 2.96 + 11 = 107

5. Take the number in Step 4. To create the check digit, determine thenumber that, when added to the number in step 4, is a multiple of 10.107 + 3 = 110

The check digit is therefore 3.

Each time the scanner scans an item, it performs this calculation. If thecheck digit it calculates is different from the check digit it reads, the scanner knows that something went wrong and the item needs to be rescanned.

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Wal-Ma rt lay s down the la w on RFID

August 17, 2010

in Sales/Marketing Management

Although radio frequency identification (RFID) has been around for decades, it mostly sat on thetechnological bench until retail giant Wal-Mart Stores Inc, began to mandate that its keysuppliers would adopt and implement these chips on every pallet shipped to Wal-Marts Dallas,Texas based distribution centers (DCs) with the eventual goal of having RFID deployed in everyWal-Mart DC and retail store. While many suppliers have complied to date with Wal-Martsdictates that compliance has been half hearted at best leading the retailer to take forcefulapproach to its arm twisting. Beginning with a Sams Club DC in the Dallas area, every supplier who fails to tag their shipments with RFID devices will be fined $2 per pallet beginning October 2008.

The tags basically are designed to help locate stuff, with the obvious benefits being improvedvisibility into available backroom stock. Reducing out of stocks and keeping the shelvesreplenished is the be all and end all of retail theoretically there should be a trickle down effectthat results in increased sales of the manufacturers as well, but those sales are somewhat muted

by the significant costs of purchasing as well as affixing the tags on every shipment to Wal-Martor any of the other large retail chains with an RFID mandate.

In a bid to demonstrate the tangible worth of RFID, Wal-Mart is sponsoring a research effort atthe University of Arkansas to demonstrate the positive effects the technology has no improvinginventory accuracy. Preliminary analysis at the universitys RFID Research Center indicates thatan automated RFID enabled inventory systems in test stores improved accuracy by 13%.

With RFID technology in place at its distribution centers Wal-Mart believes it can significantlyreduce unnecessary inventory its backrooms. The test stores were equipped with RFID readersand antennas the key backroom locations, such as receiving doors, sales floor doors and boxcrushers. A perpetual inventory adjustment system automatically adjusted understand inventory.The test stores were compared to an equal number of control stores with similar demographicswhich were not equipped with RFID technology.

Emphasizing the importance of more accurate inventory management techniques Hardgrave points out that the net result of inventory inaccuracy is an estimated 10% reduction in profit

To date, Wal-Marts suppliers have been required to apply RFID tags to cases and pallets butthat could change in the future early results fm the RFID Research centers efforts indicate thattagging individual items could potentially eliminate some of the root causes of inventoryinaccuracy. One recent study from RNCOS predicts that the market for item tagging will grow

by 55% over the next 10 years. The costs for suppliers to tag every item shipped to a Wal-MartDC would of course increase significantly.

The Wal-Mart Way

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In the long term, is there more good than bad in being a Wal-Mart vendor? One article

published in December 2003 that looked at that issue in the general sense is "The Wal-Mart

You Don't Know," published here by Fast Company.com and written by Charles Fishman.

The subhead read: The giant retailer's low prices often come with a high cost. Wal-Mart's

relentless pressure can crush the companies it does business with and force them to send jobs

overseas. Are we shopping our way straight to the unemployment line?"

Of course, not a lot of current suppliers wanted to be quoted, but here are some pithy sum-

up statements from the article.

For many suppliers, though, the only thing worse than doing business with Wal-Mart may be

not doing business with Wal-Mart.

Many companies and their executives frankly admit that supplying Wal-Mart is like getting

into the company version of basic training with an implacable Army drill sergeant. The

process may be unpleasant. But there can be some positive results.

Here is more of the substance offered by Fishman...

There is no question that Wal-Mart's relentless drive to squeeze out costs has benefited

consumers. The giant retailer is at least partly responsible for the low rate of U.S. inflation,

and a McKinsey & Co. study concluded that about 12% of the economy's productivity gains in

the second half of the 1990s could be traced to Wal-Mart alone.

By now, it is accepted wisdom that Wal-Mart makes the companies it does business with more

efficient and focused, leaner and faster. Wal-Mart itself is known for continuous improvement

in its ability to handle, move, and track merchandise. It expects the same of its suppliers. But

the ability to operate at peak efficiency only gets you in the door at Wal-Mart. Then the real

demands start. The public image Wal-Mart projects may be as cheery as its yellow smiley-face

mascot, but there is nothing genial about the process by which Wal-Mart gets its suppliers to

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provide tires and contact lenses, guns and underarm deodorant at every day low prices. Wal-

Mart is legendary for forcing its suppliers to redesign everything from their packaging to their

computer systems. It is also legendary for quite straightforwardly telling them what it will pay

for their goods.

What does Wal-Mart care about? Here is coverage from The Packer from November 2004:

Describing Wal-Mart's produce operations as "young" and "having a lot of room to grow," Scott

Clubine, soft fruit buyer for Wal-Mart Stores Inc, Bentonville, Ark., spoke to the Houston

Fresh Fruit & Vegetable Association at its November meeting.

Clubine emphasized the culture at Wal-Mart remains firmly focused on serving the customer

and less on trying to work the art of the deal.

"We try to spend less time haggling over prices or packaging and a lot more time worrying

whether we're satisfying the customer," he said.

In the end, Clubine said, if the price is great but the customer doesn't want the product, Wal-

Mart loses.

Software tools: Clubine reviewed three Wal-Mart software tools that measure customer

behavior and offered them to anyone who becomes a vendor.

The effort, Clubine said, is to help vendors understand where their product is selling and

where it is not.

"At Wal-Mart, it's all about turns, and we're constantly measuring how well our inventory turns

on each customer's visit," he said.Clubine described the tools as the following: M-CAPS, which reports sales density by

commodity; Market Basket, a system that tracks what customers combine in their shopping

cart; and Customer Insights, a demographic profiling system for Wal-Mart sales areas.

The software supports Wal-Mart's cluster store concept for managing inventory levels, Clubine

said.

And better inventory management adds immediate benefit by reducing the number of

distribution centers needed to maintain inventories.

"We used to plan on one (distribution center) for every 50 stores. Now, with better inventorymanagement, we see the ratio growing to 100 stores for every DC."

"But if you want to do business with us, you have to come to us with a marketing plan that

speaks to our customers," he said. "As a buyer, I spend more time working on succeeding at

produce sales, and at Wal-Mart, it's all about turns."

In the issue of May 28, The Packer's David Mitchell has reported on changes to Wal-Mart's

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procurement policies.

Wal-Mart Stores Inc. has altered its procurement procedures during the past two years, but

recent criticisms that the Bentonville, Ark.-based retailer has violated terms of its supplier

agreements are unwarranted, the company's vice president and divisional merchandisemanager for produce and floral said.

"Wal-Mart honors (its) contracts and offers the suppliers the right to talk to Lee Scott, our

CEO, or Rob Walton, our chairman, through the open-door process if we do not," said Ron

McCormick, vice president and divisional merchandise manager for produce and floral.

Later in the story:

McCormick said a number of factors led to the demise of distribution center assignments,

including the growth of the company's consolidation facilities that allow the company to send

full truckloads to its 38 food distribution centers.

"Our local purchase program also means that we have many more small growers we are doing

direct business with, often combining them to meet the demand of a single (distribution

center)," he said. "That single supplier per DC consistency no longer adds value, and actually

impedes better customer service."

TK: Wal-Mart's utilization of consolidation facilities, opportunity buys and its growing businesswith local suppliers may explain changes in procurement policy. But why are more suppliers

apparently more apprehensive about their vendor relationship with Wal-Mart? With 17% of the

perishables market (Business Week stat) and growing, Wal-Mart's influence won't wane

anytime soon. Again I ask, is being a Wal-Mart supplier good for a produce shipper, or, as

Fishman so smartly wrote about Vlasic pickles, is the experience "a devastating success?"