Wal-Mart used distribution centers to warehouse inventory for its stores. In most cases Wal-Mart used its own trucks to pick up inventory from its suppliers, proving to be cost-effective aiding in more cost savings for customers. Inventory turnover was very high, about once every two weeks for most inventory items (ICFAI 2004). In some cases, suppliers delivered goods such as automotive and drug products to the stores (ICFAI 2004). About 85% of the goods that were available at the stores passed through the distribution centers (ICFAI 2004). The distribution centers were used to keep a continuous and consistent flow of goods in a support of the supply function. Wal-Mart used technology of the bar coding system making managing the center easier (ICFAI 2004). All employees had access to the inventory information as a means to guide the employee to the particular product inside the distribution center. The computer system also enabled the packaging department to access accurate information about packaging the product, reducing paperwork, and increasing timesavings.
Wal-Mart’s supply chain management also supports a fast and responsive logistics system. More than 3,500 company-owned trucks serviced the distribution centers in delivering the products to the retail stores, replenishing inventory twice a week. Cross-docking was used to make distribution more efficient (ICFAI 2004). The finished goods were picked up directly from the supplier, sorted, and supplied to the customer. This system shifted from the retailer ‘pushing’ products to the customers ‘pulling’ products through the system.
In January 2005, Wal-Mart directed its top 100 suppliers to use RFID tags with embedded electronic product codes (EPC) for tracking and identifying. “RFID uses low-powered radio transmitters to read data stored in tags that are embedded with tiny chips and antennas. Proponents of the technology say such "smart" tags can store more detailed information than conventional bar codes, enabling retailers and manufacturers to track items at the unit level (Brewin 2003).”
The researchers at the University of Arkansas noted a 16% reduction in out-of-stocks since Wal-Mart adopted the RFID system into its supply chain (Healthcare Purchasing News 2005). The study also revealed that EPC items were replenished three times faster than comparable items using standard bar coding system. Wal-Mart has been able to use the new system to reduce excess inventory with more effectiveness than the control stores (Healthcare Purchasing News 2005). To this day, using its detailed supply chain management system Wal-Mart has been able to achieve respectable leadership in the retail industry.
Organization Function
Wal-Mart is a huge and very powerful company and therefore uses its competitive edge as a core competency. Walton, the founder and entrepreneur behind Wal-Mart, opened a retail store with the goal of “offering significant discounts on product prices to expand volumes and increase overall profits (ICFAI 2004).” Walton discovered a value-creating strategy and made it a huge success. Sam Walton realized consumers wanted ‘low prices everyday, customer satisfaction guaranteed, and hours that were realistic for the way people wanted to shop.’
Sam Walton quoted, "People think we got big by putting big stores in small towns. Really, we got big by replacing inventory with information." One of its core functions proved to be Wal-Mart’s success; the company was able to reduce costs through efficient supply chain management practices, and push these savings onto the consumers.
Customers Served
As Wal-Mart offers discount savings its consumers are typically low-income single mothers. “Wal-Mart customer's average incomes are below the national average. Some analysts estimate that more than one-fifth of Wal-Mart's customers have no bank accounts (Welton 2006).” Wal-Mart has been a reform for the retail industry by demanding the lowest prices in order to allow its target market to meets their basic needs.
“Wal-Mart's customers tend to be those who could most benefit from low prices; 80 percent of Wal-Mart's square footage is located in the 25 percent of ZIP codes with the greatest number of poor households (Daily Policy Digest 2005).” Despite the relentless attacks on Wal-Mart by community groups and labor unions, without Wal-Mart many believe the rural poor would pay much more for food and other household goods.
Wal-Mart has made it its belief to strengthen its relationship with customers. The company made changes in store layout and merchandising techniques no matter how small to improve performance and add value for customers. The company made efforts to capitalize cost savings, passing it on to the consumers, adding value at every stage.
Competitor’s Supply Chain Practices
The performance of an individual corporation rests on the strengths and weaknesses of the partners in its supply chain. Wal-Mart has become an expert at using its core competencies to become superior to their competitors. In 1998, Wal-Mart had over 40 distribution centers located at different geographical locations in the US (ICFAI 2004). Wal-Mart’s warehouses directly supplied 85 percent of the inventory, compared to 50-65 percent for its competitors (ICFAI 2004). According to rough estimates, Wal-Mart was able to provide replenishment on an average of two days compared to its competitors who took five on average (ICFAI 2004). Wal-Mart has managed to keep shipping costs at roughly three percent comparable to it competitors at five percent (ICFAI 2004).
Unlike Wal-Mart other companies have not been able to use their supply chain to create competitive advantages. The inability to effectively use its supply chain became an issue for K-mart. In 2002, Kmart the oldest of its competitors, filed for bankruptcy. “Several factors were contributed to the downfall but one of the biggest is that Kmart didn't compete on price, a failure some attribute to its inability to master supply-chain technology and, consequently, benefit from supply-chain efficiencies (Taylor 2005).” Kmart used a promotion-driven model, “which results in sharp spikes and drops in demand for products, analysts say. Sale merchandise often was out of stock when customers got to the store. One reason for that is that it's hard to get supply-chain management software to work in that model without a lot of customization, and Kmart never built a supply-chain planning and execution system to effectively manage demand (Taylor 2005).” Many suppliers have noted that at Kmart stores, the product might not be selling at a certain branch, and upon arrival shelves were empty but products piled up in stockrooms. After the bankruptcy, Kmart has made moves to restructure its supply chain management system in place prior to the filing (Taylor 2005).
Recommendations
Due to dynamic customer needs, supply chain management is an important tool and competitive strategy for many corporations. The success of the system requires an integration of information and organizational functions. Wal-Mart has been able to realize success in making its supply chain management system impeccable. The only recommendation I can make is for Wal-Mart to stay pro-active. It is argued that its success is based solely on it ability to create efficiencies through supply chain. There are many activists groups who attack Wal-Mart for low wages, and its target of low-income consumers. Many activists have realized that supply chain is the best way to hurt Wal-Mart and challenged distribution center employees to unionize against them. With a heavy reliance on supply chain management, Wal-Mart needs to analyze all aspects of its supply chain management and proof it as much as possible against attacks or uncontrollable changes in the environment. Human capital is very essential as a resource to a company, Wal-Mart might need to evaluate its morale of employees and ensure that they are satisfied; else supply chain management can prove to be its weak link. Ethics is about avoiding the appearance of conflict of interest, not just the conflict itself. Wal-Mart has been able to maintain an exceptional relationship with suppliers, and customers adding employees to mix will aid to its core competencies.
Conclusion
Wal-Mart pioneered "just-in-time" inventory in the retail industry. The 'Wal-Mart model' is the leading retail strategy to emerge since the 1970s. “This model features a super-efficient production process in which each component of the supply chain management system is linked to the next in a continuous 'just-in-time' chain (Benson 2006).” Wal-Mart's passion to hold the lowest feasible inventory level while avoiding the risks of stock outs has been its competitive advantage.
References
Benson, J. & B. Kinsella. How Your Supply Chain Can Build or Destroy Your Brand. Retrieved from http://www.marketingprofs.com on December 1, 2006.
Brewin, B. & V. Jaikumar. Wal-Mart Backs RFID Technology: Will require suppliers to use 'smart' tags by 2005. (2003). Retrieved from http://www.computerworld.com on December 2, 2006.
Study of Wal-Mart Reveals First Benefits of RFID. (2005). Healthcare Purchasing News. V. 29 i. 12. p.6
Taylor, D. (2005). Supply Chains - A Manager's Guide. Retrieved from www.businessintelligence.com on December 2, 2006.
Wal-Mart's Supply Chain Management Practices. (2004). ICFAI Center for Management Research.
Wal-Mart's Virtues. (2005). Daily Policy Digest. Retrieved from http://www.ncpa.org on December 2, 2006.
Weston, L. (2006). National Bank of Wal-Mart? Retreived from http://www.moneycentral.msn.com on December 1, 2006.
www.supply-chain.org. Retrieved on December 1, 2006.