Wal-Mart_Supply_Chain

Company Background Wal-Mart was founded by Sam Walton, who was born in 1918 in Oklahoma. Growing up in the Great Depression, Walton had numerous jobs to help make financial ends meet for his family. After high school, he decided to go to college, hoping to find a better way to help support his family. He attended the University of Missouri as an ROTC cadet. During this time, he worked various odds and ends jobs, including waiting tables for meals (Wikipedia). It is no wonder that Sam Walton has the reputation of being the most frugal billionaire ever! Upon graduating in 1940 with a B.A. in economics, Walton joined JC Penney as a management trainee in Des Moines, Iowa. The position earned him $75 a month. According to Wikipedia, Walton joined the military soon afterwards in the U.S. Army Intelligence Corps, supervising security at aircraft plants and prisoner of war camps. In this position he served at Fort Douglas in Salt Lake City, Utah. He eventually reached the rank of captain. In 1945, after leaving the military, Walton took over management of his first variety store at the age of 26. With the help of a $20,000 loan from his father-in-law, plus $5,000 he had saved from his time in the Army, Walton purchased a Ben Franklin variety store in Newport, Arkansas (Gross, 1997). As is the case with most neophyte businessmen who become successful, Walton had access to resources to get started. According to Clayton Christensen (Hesselbein, Goldsmith and Somerville, 2002), three factors affect what an organization can do: resources, processes, and values. Sam Walton acquired the necessary resources to transform these resources into products of greater worth and ensured his values guided the decision-making of the organization. This is how Walton pioneered many concepts that would prove to be crucial to his success. Walton made sure the shelves were consistently stocked with a wide range of goods. He opened a store in 1950 as the "Eagle" department store, but it didn't fare as well. This failure like did not hinder him trying again – a classic case of “failing forward” (Jim Collins). When Walton bought the franchise from the previous owner in 1945, the store was doing $72,000 in sales annually. By 1950, the store was doing $250,000 in sales annually, due to Walton's innovative ideas and practices (Wikipedia). Because of the store's enormous success, the landlord refused to renew the lease when it expired. The lack of a renewal option and the outrageous rent of 5% of sales were early business lessons to Walton (Wikipedia). In 1992, Sam Walton died after a prolonged illness and Wal-Mart suffered a setback. It bounced back five years later by staying true to its values and focusing on growth in overseas stores. Wal-Mart in US Retail Market Today, Wal-Mart is the world’s largest retailer with $405 billion in sales for the fiscal year ending January 31, 2010 (walmartstores.com/download/2230.pdf). Wal-Mart Stores, Inc includes Wal-Mart Supercenters, discount stores, Neighborhood Markets and SAM’s Club warehouses. Wal-Mart employs more than 2.1 million associates worldwide, including more than 1.4 million in the United States, making it not only one of the largest private employers in the U.S., but the largest in Mexico and one of the largest in Canada as well (walmartstores.com/download/2230.pdf). Wal-Mart Innovations in Supply Chain Management A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request (Chopra, Sunil and Meindl, 2004). It includes not only the manufacturer and suppliers of goods, but also the transporters, warehouses, retailers, and the customer. For example, the supply chain for a customer desiring to purchase detergent from a Wal-Mart store consists of first the customer and their need for detergent. The next stage is the warehouse Wal-Mart uses to stock the detergent or a third party distributor who stocks it. The distributor is stocked by the manufacturer of the detergent and the manufacturer must receive raw materials from its suppliers to make the detergent. In many cases, the suppliers also have lower tier suppliers for packaging, etc. The supply chain is vast and can be a very complicated set of networks with the primary purpose of satisfying customer needs. It is in this area of retail business that Wal-Mart set the benchmark for the industry. The following sections will describe some of the innovative supply chain management practices that escalated Wal-Mart into the behemoth entity it is today. Hub & Spoke System – In the early 1970s, Wal-Mart became one of the first retailing companies in the world to centralize its distribution system (www.gyte.edu.tr/dersler/546/.../2-Wal-Mart%20Supply%20Chain.ppt). Goods were centrally ordered, assembled at a massive warehouse (distribution center or hub) and then dispatched to the individual stores (spokes). This enabled Wal-Mart to achieve significant cost advantages by purchasing goods in huge quantities through its own logistics infrastructure (warehouses). Electronic Data Interchange – Wal-Mart was one of the first companies to use computer systems to connect to those of its suppliers (http://www.casestudyinc.com/case-study-walmart-supply-chain). This was a huge innovative leap because many companies were leery to partner and share information. Sam Walton was not enamored with information technology or computers. Innovative leaders have to make calculated risks and as described by Jim Collins, determine if it’s going to be “above or below the water line”. In other words, will the decision make the company sink or swim' Sam Walton insisted on supplier’s transparency with their purchase order systems and basically coerced suppliers to make it simple. This calculated risk produced a huge payoff. These steps changed the relationship for manufacturers and suppliers forever and enabled the interoperation between the companies’ systems at transactional, operational and strategic levels (www.gyte.edu.tr/dersler/546/.../2-Wal-Mart%20Supply%20Chain.ppt). Distribution Strategy – During fiscal year 2007, approximately 80% of the Wal-Mart store purchases of merchandise were shipped from its 121 distribution centers (http://www.casestudyinc.com/case-study-walmart-supply-chain). The remaining was shipped directly to stores from suppliers in a process called “cross-docking” (http://www.casestudyinc.com/case-study-walmart-supply-chain). In this system, the finished goods are directly picked up from the manufacturing plant, sorted out and then directly supplied to the customers. Cross-docking reduced the number of times goods were handled and virtually eliminated the role of distribution centers required for storage. Wal-Mart demonstrated innovation in this area by empowering people to search for new ideas based upon existing practices that resulted in dramatic breakthroughs (Hesselbein et al, 2002). Wal-Mart’s distribution system was already a pioneering idea and it paved the way to efficiencies because its competitors directly supplied 50-65 percent of inventory from their warehouses (http://www.casestudyinc.com/case-study-walmart-supply-chain). This meant that Wal-Mart was able to provide stock replenishments within 2 days on average while competitors took 5 days and incurred more shipping costs. Although cross-docking may have seemed to be counterintuitive to distribution centers, this new innovative practice increased profits and produced even more efficiencies in the supply chain. Information Technology – Wal-Mart pushed the retail industry to establish the universal bar code, which forced manufacturers to adopt common labeling (Wilbert, 2006). Wal-Mart used advanced barcode technology and hand-held computer systems to ensure a flow of products to ensure the supply chain never became a bottleneck. With real-time information about inventory levels of all the products in a distribution center, an employee only had to make two scans to determine the pallet and identify the location from where the stock had to be picked up. Managing the distribution centers became easier and more economical with technology, but it was not an easy sell to implement. As noted by Hesselbein, et al (2002), innovative leaders need to have respected people in their circle to challenge their decisions. That person for Sam Walton was David Glass. Glass ran the company from 1988 to 2000 and was famous for persuading Sam Walton, who thought “damn computer” was one word, to invest heavily in new inventory management systems (Kapner, 2009). Hand-held computers ensured that unnecessary paperwork was eliminated and customer’s needs satisfied quickly. RFID - Wal-Mart became the first major retailer to demand manufacturers use Radio Frequency Identification Technology (RFID). The technology uses radio frequencies to transmit data stored on small tags attached to pallets or individual products (Wilbert, 2006). RFID tags hold significantly more information than bar codes. In July 2003, Wal-Mart asked its top 100 suppliers to be RFID compliant by January, 2005. Wal-Mart expected that RFID would reduce the instances of stock-outs at the stores. And true to their prediction, during the first eight months of 2005, Wal-Mart experienced a 16 percent drop in out-of-stock merchandise at its RFID-equipped stores, according to a University of Arkansas study (Wilbert, 2006). However, many suppliers were reluctant to implement this technology because of the cost, but risked losing Wal-Mart’s business to competitors who were willing to do so if they do not (Millsap, 2009). By April 2007, 600 suppliers were using RFID technology - only 3% of Wal-Mart’s base of 20,000 suppliers. In this instance, Wal-Mart’s decision to force suppliers to use expensive technology backfired. It never caught on as a business practice. This is another example of how Wal-Mart is an innovative organization. Hesselbien et al (2002) and speakers from Ted.com all explain that innovative companies can’t be afraid of failing. It is inevitable that when developing cutting-edge strategies, mistakes will happen. The key is to grow and learn from the mistakes. Wal-Mart realized that their goal for suppliers was too ambitious and costly and has since relaxed some of its requirements. Conclusion The phenomenal growth of Wal-Mart is attributed to its continued focus on customer needs and reducing cost through efficient supply chain management practices. This value of customer service is evident in the following quote from the Corporate Facts of Wal-Mart (walmartstores.com/download/2230.pdf): “We’re all working together; that’s the secret. And we’ll lower the cost of living for everyone, not just in America, but we’ll give the world an opportunity to see what it’s like to save and have a better lifestyle, a better life for all. We’re proud of what we’ve accomplished; we’ve just begun.” – Sam Walton (1918-1992) Sam Walton was not only a shrewd businessman; he pursued social innovation (Hesselbein et al, 2002). According to Jim Collins (2002), social innovation means to create an environment that stimulates innovation – it is one who in which a leader is innovative in the way one leads, manages and builds an organization. At Wal-Mart, innovation was ingrained in the culture and it became the company’s brand – a way of life and the key to its prolonged success. References Chandran,, P. Mohen. Wal-Mart’s Supply Chain Management Practices. Retrieved from http://mohanchandran.files.wordpress.com/2008/01/wal-mart.pdf. Chopra, Sunil and Meindl, P (2004). Supply Chain Management. 2ed. Upper Saddle River: Pearson Prentice Hall. Hesselbein, F., Goldsmith, M., Somerville, I. (2002). Leading for Innovation and organizing for results. Jossey-Bass. A Wiley Company: San Francisco, CA. Kapner, S. (February 18, 2009). Changing of the guard at Wal-Mart. Retrieved from http://money.cnn/2009/02/17/news/companies/kapner_scott.fortune/index.htm. Millsap, D.F. (2009). Wal-Mart’s use of RFID in global supply chain management. Retrieved from http://www.danielmillsap.com/research/rfid-in-wal-mart-global-supply-chain-management.html. Samuel Moore “Sam” Walton (May 31, 2011). Retrieved from http://en.wikipedia.org/wiki/Sam_Walton. Schein, E. H. (2004). Organizational culture and leadership (3rd ed). San Francisco, CA: Jossey-Bass. Wal-Mart Corporate Facts. Retrieved from http://walmartstores.com/download/2230.pdf. Wal-Mart’s Supply Chain. A Business Success. Retrieved from www.gyte.edu.tr/dersler/546/.../2-Wal-Mart%20Supply%20Chain.ppt. Wilbert. C. How Wal-Mart works. Retrieved from http://money.howstuffworks.com/wal-mart.htm.