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Wal-Mart’s Supply Wal-Mart’s Supply ChainChain

A Business SuccessA Business Success

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Hub and Spoke SystemHub and Spoke System

In the early 1970s, Wal-Mart became one In the early 1970s, Wal-Mart became one of the first retailing companies in the world of the first retailing companies in the world to centralize its distribution system, to centralize its distribution system, pioneering the retail pioneering the retail hub-and-spokehub-and-spoke system.system.

Under the system, goods were centrally Under the system, goods were centrally ordered, assembled at a massive ordered, assembled at a massive warehouse, known as ‘distribution center’ warehouse, known as ‘distribution center’ ((hubhub), from where they were dispatched ), from where they were dispatched to the individual stores (to the individual stores (spokespoke).).

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Hub and Spoke SystemHub and Spoke System……

The hub and spoke system enabled The hub and spoke system enabled Wal-Mart to achieve significant cost Wal-Mart to achieve significant cost advantages by the centralized advantages by the centralized purchasing of goods inpurchasing of goods in huge huge quantitiesquantities.... – and distributing them through its and distributing them through its own own

logistics infrastructurelogistics infrastructure to the retail to the retail stores spread across the U.S.stores spread across the U.S.

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Wal-Mart’s ProcurementWal-Mart’s Procurement

Wal-Mart emphasized the need to Wal-Mart emphasized the need to reduce purchasing costs and offer reduce purchasing costs and offer the best price to the customer.the best price to the customer.

The company The company directlydirectly procured from procured from manufacturers, bypassing all manufacturers, bypassing all intermediaries.intermediaries.

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Wal-Mart’s ProcurementWal-Mart’s Procurement……

Wal-Mart finalizes a purchase deal Wal-Mart finalizes a purchase deal only when it is fully confident that only when it is fully confident that the products being bought the products being bought is not is not available else where at a lower available else where at a lower priceprice..

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Wal-Mart’s ProcurementWal-Mart’s Procurement……

Wal-Mart spends a significant Wal-Mart spends a significant amount of time meeting vendors and amount of time meeting vendors and understanding their cost structure.understanding their cost structure.

By making the process transparent, By making the process transparent, the retailer can be certain that the the retailer can be certain that the manufacturers are doing their best to manufacturers are doing their best to cut down costs.cut down costs.

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Using EDI for ProcurementUsing EDI for Procurement The computer systems of Wal-Mart were The computer systems of Wal-Mart were

connected to those of its suppliers.connected to those of its suppliers.

EDIEDI enabled the suppliers to download enabled the suppliers to download purchase orders along with store-to-store purchase orders along with store-to-store sales information relating to their products sales information relating to their products sold.sold.

On receiving information about the sales On receiving information about the sales of various products, the suppliers shipped of various products, the suppliers shipped the required goods to Wal-Mart’s the required goods to Wal-Mart’s distribution centers.distribution centers.

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Logistics ManagementLogistics Management

An important feature of Wal-Mart’s An important feature of Wal-Mart’s logistics infrastructure was its fast logistics infrastructure was its fast and responsive transportation and responsive transportation system.system.

The distribution centers were The distribution centers were serviced by more than 3500 serviced by more than 3500 company owned trucks.company owned trucks.

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Logistics ManagementLogistics Management……

Wal-Mart believed that it needed Wal-Mart believed that it needed drivers who were committed and drivers who were committed and dedicated to customer service.dedicated to customer service.

The company hired only experienced The company hired only experienced drivers who had driven more than drivers who had driven more than 300,000 accident-free miles, with no 300,000 accident-free miles, with no major traffic violation.major traffic violation.

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Cross-dockingCross-docking

To make its distribution process more To make its distribution process more efficient, Wal-Mart also made use of a efficient, Wal-Mart also made use of a logistics technique called “cross-docking.”logistics technique called “cross-docking.”

In this system, the finished goods were In this system, the finished goods were directly picked up from the manufacturing directly picked up from the manufacturing plant, sorted out and then directly plant, sorted out and then directly supplied to the customers.supplied to the customers.

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Cross-dockingCross-docking The system reduced the handling and The system reduced the handling and

storage of finished goods, virtually storage of finished goods, virtually eliminating the role of the distribution eliminating the role of the distribution centers and stores.centers and stores.

The manufacturer directly forwarded the The manufacturer directly forwarded the goods to a place called the “staging area.”goods to a place called the “staging area.”

The goods were packed here according to The goods were packed here according to the orders received from different stores the orders received from different stores and then directly sent to the respective and then directly sent to the respective customers.customers.

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Inventory ManagementInventory Management

Wal-Mart invested heavily in IT and Wal-Mart invested heavily in IT and communication systems to effectively communication systems to effectively track sales and merchandise inventories in track sales and merchandise inventories in stores across the country.stores across the country.

With the rapid expansion, it was essential With the rapid expansion, it was essential to have a good communication system.to have a good communication system.

Hence, Wal-Mart set up its own satellite Hence, Wal-Mart set up its own satellite communication system in 1983.communication system in 1983.

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Inventory ManagementInventory Management…… Wal-Mart was able to reduce unproductive Wal-Mart was able to reduce unproductive

inventory by allowing stores to manage inventory by allowing stores to manage their own stocks, their own stocks, reducing pack sizesreducing pack sizes across many product categories, and across many product categories, and timely price markdowns.timely price markdowns.

Instead of cutting the inventory across the Instead of cutting the inventory across the board, Wal-Mart made full use of its IT board, Wal-Mart made full use of its IT capabilities to make more inventories capabilities to make more inventories available in the case of items that available in the case of items that customers wanted mostcustomers wanted most, while reducing , while reducing the overall inventory levels.the overall inventory levels.

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Inventory ManagementInventory Management……

Employees at the stores had the “Magic Employees at the stores had the “Magic Wand,” a Wand,” a hand-held computerhand-held computer which which was linked to in-store terminals through a was linked to in-store terminals through a radio frequency network.radio frequency network.

These helped them to keep track of the These helped them to keep track of the inventory in stores, deliveries, and backup inventory in stores, deliveries, and backup merchandise in stock at the distribution merchandise in stock at the distribution centers.centers.

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Inventory Management…Inventory Management… ((quick replenishment)quick replenishment)

Since the floor area of any Wal-Mart store Since the floor area of any Wal-Mart store varied between 40,000 to 200,000 square varied between 40,000 to 200,000 square feet, movement of goods within the store feet, movement of goods within the store was an important part of logistics was an important part of logistics operations.operations.

Wal-Mart made significant investments in Wal-Mart made significant investments in IT to IT to quicklyquickly locate and replenish goods locate and replenish goods at the stores.at the stores.

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Inventory ManagementInventory Management…… ((retail link systemretail link system))

In 1991, Wal-Mart had invested In 1991, Wal-Mart had invested approximately $4 billion to build a approximately $4 billion to build a retail retail link systemlink system..

More than 10,000 Wal-Mart retail suppliers More than 10,000 Wal-Mart retail suppliers used the retail link system to monitor the used the retail link system to monitor the sales of their goods at stores and replenish sales of their goods at stores and replenish inventories.inventories.

Details of daily transactions (~10 million Details of daily transactions (~10 million per day) were processed through this per day) were processed through this system.system.

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Inventory ManagementInventory Management…… ((retail link systemretail link system))

Retail Link connected Wal-Mart’s EDI Retail Link connected Wal-Mart’s EDI network with an extranet, accessible network with an extranet, accessible to Wal-Mart’s thousands of suppliers.to Wal-Mart’s thousands of suppliers.

The suppliers could find out how their The suppliers could find out how their product was performing vis-a-vis product was performing vis-a-vis competitors’ products in a particular competitors’ products in a particular product category.product category.

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CPFRCPFR

By the mid 1990s, Retail Link had By the mid 1990s, Retail Link had emerged into an Internet-enabled emerged into an Internet-enabled SCM system whose functions were SCM system whose functions were not confined to inventory not confined to inventory management alone, but also covered management alone, but also covered collaborative planning, forecasting collaborative planning, forecasting and replenishment (CPFR).and replenishment (CPFR).

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CPFRCPFR

In In CPFRCPFR, Wal-Mart worked together with , Wal-Mart worked together with its key suppliers on a real-time basis by its key suppliers on a real-time basis by using the Internet to jointly determine using the Internet to jointly determine product-wise demand forecast.product-wise demand forecast.

CPFRCPFR is defined as a business practice for is defined as a business practice for business partners to share forecasts and business partners to share forecasts and results data through the results data through the InternetInternet, in order , in order to reduce inventory costs while at the to reduce inventory costs while at the same time, enhancing product availability same time, enhancing product availability across the supply chain.across the supply chain.

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CPFR: Hard to implementCPFR: Hard to implement Though CPFR was a promising supply Though CPFR was a promising supply

chain initiative aimed at a mutually chain initiative aimed at a mutually beneficial collaboration between Wal-Mart beneficial collaboration between Wal-Mart and its suppliers, its actual and its suppliers, its actual implementation required huge implementation required huge investments in time and money.investments in time and money.

A few suppliers with whom Wal-Mart tried A few suppliers with whom Wal-Mart tried to implement CPFR complained that a to implement CPFR complained that a significant amount of time had to be spent significant amount of time had to be spent on developing forecasts and analyzing on developing forecasts and analyzing sales data.sales data.

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VAN EDI vs Web-EDIVAN EDI vs Web-EDI In October 2002, Wal-Mart asked its In October 2002, Wal-Mart asked its

14,000 suppliers to switch over from the 14,000 suppliers to switch over from the existing Value Added Networks (VAN) EDI existing Value Added Networks (VAN) EDI to web enabled EDI.to web enabled EDI.

VANs route and manage EDI messages for VANs route and manage EDI messages for their customers.their customers.

By implementing web-EDI, Wal-Mart can By implementing web-EDI, Wal-Mart can save millions of dollars in the form of save millions of dollars in the form of license fees to the private VANs.license fees to the private VANs.

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RFID TechnologyRFID Technology(Radio Frequency Identification)(Radio Frequency Identification)

In efforts to implement new technologies In efforts to implement new technologies to reduce costs and increase the to reduce costs and increase the efficiency, in July 2003, Wal-Mart asked its efficiency, in July 2003, Wal-Mart asked its top 100 suppliers to be RFID compliant by top 100 suppliers to be RFID compliant by January, 2005.January, 2005.

Wal-Mart planned to replace bar-code Wal-Mart planned to replace bar-code technology with RFID technology.technology with RFID technology.

The company believed that this The company believed that this replacement would reduce its supply chain replacement would reduce its supply chain management costs and enhance management costs and enhance efficiency.efficiency.

Thank YouThank You

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