PAPER EXPM514-18GM (HAM): Decisions and Supply Chain Management

Lecturer: Cécile & Stuart

Wal-Mart Case Study

Individual Assignment:
Wal-Mart Case Study

Paper: EXPM514-18GM (HAM): Decisions and Supply Chain

Management

Lecturer: Cécile L'Hermitte

Student: Mercedes Isasmendi Escudero (ID:1354305)

Word Count: 2157

Introduction
Traditionally, the supply chain was perceived as a process with different actors that
worked with a certain level of coordination between them in order to move goods from the
manufacturer to the final customer. But as companies were getting bigger due to globalization and
technology, they realized that they could no longer compete in isolation of their suppliers.
Furthermore, they understood that to be successful, they needed to manage across all the nods of
their supply chain and evolved towards a fully integrated supply chain management model
(Lummus & Vokurka, 1999).
Companies that achieved perfect integration of their supply chain from end to end have
been able to outstand among their competitors. Wal-Mart is a perfect example of this evolution to
an integrative system, and the core of it success as the world´s largest and most powerful retailer,
relies on its ability to focus since its origins, on how to improve its supply chain system.
This report focus on five main strategies used by Wal-Mart to take its supply chain to one
of the highest levels ever seen by any retailer and how these operations helped the company to
achieve its most important competitive advantages, everyday low prices (EDLP) and high product
availability. These strategies are VMI, High Technology Investments, CPRF, Strategic Vendor
Relationship and Cross-docking.

VMI
Vendor Managed Inventory is a strategy where the ownership of managing inventory and
replenishment is passed from retailers to vendors (suppliers). These are in charge to track the
number of items shipped to distributors and/or retailers and decide whether it is necessary or not
to deliver more products. This allows suppliers to improve their production plans and replenish the
items only when they are needed (Emigh, 1999).
Before VMI, manufacturers provided the total quantity of items in response to a purchase
order for the retailer, enough to satisfy the demand for a determined period of time, and got paid
after the ordered was delivered. All the products needed to remain in the customer´s warehouses
during long periods of time, leading to high inventory costs, until they were transported to the
stores according to the stock levels in them. With the implementation of VMI, the articles started
to be distributed partially following a “just-in-time” rhythm, lowering inventory in distribution
centres and/or stores. In addition, suppliers started to receive the paid after each delivery, what
improved their financial state (Shister, 2006).
Shister (2006) mentions that the fundamental elements required to put in place an
effective VMI strategy are a deep and trusted collaboration between vendors and customers
(retailers) and a highly developed technology system, both factors that allow sharing confidential
data about demand forecast and production schedules.
According to Tang (2006), there are two reasons for implementing the VMI strategy. The
first one responds to the retailer´s objective to improve its customer service with lower inventory
costs, while the second one comes from the vendor´s willingness to reduce costs derived from
production, transport and inventory processes. However, Tang (2006) also identifies shared
objectives between the two participants of the supply chain: accelerate the flows of goods and
reduce the bullwhip effect.
When Wal-Mart implemented the Vendor Managed Inventory operations with P&G as
part of its supply chain management system in the latest 1980 (Emigh, 1999), its suppliers took
responsibility to manage the products in Wal-Mart´s warehouses. To do that a large investment of
time and money was needed to set up a complex but effective computer system allowing suppliers
to know when their products were sold. POS [Point of Sale] information and demand forecast data
facilitated suppliers to achieve just- in-time deliveries to Wal-Mart´s warehouses and/or stores,
what helped Wal-Mart to achieve higher in-stock levels, or what is the same, higher product
availability and better customer service.
Furthermore, VMI allowed Wal-Mart to minimize time and costs associated to inventory
management, such as leasing costs, taxes or insurance. As a result, the money saved from these
operations helped the company to achieve and maintained another competitive advantage: its
everyday low costs (Nguyen, 2017).

Technology
As mentioned before, in order to achieve excellence in its supply chain, Wal-Mart had to
combine all his operations with complex and well developed computer systems and high
technology elements. The foundation of its supply chain system relies on Retail Link (Lu, 2014),
which is a system connected to a satellite network, that can record and process all the big-data
derived from POS product transactions (Pham, 2015). All this information is then available for Wal-
Mart´s headquarters, which can make accurate demand forecasts, increase the efficiency of its
transportation routes, follow and manage inventory levels in warehouse and store (Lu, 2014).
Suppliers, who also have access to all this information, can calculate their sales, inventory and in-
stock percentage among other variables (Pham, 2015).
Lee, So and Tang (2000), commented that the advantage of Wal-Mart sharing information
with his suppliers relies on the capability of these ones to react to the company´s needs with
agility and flexibility, what leads to minimize uncertainties in the demand process, or what is the
same, to reduce the harmful and expensive impact caused by demand distortion. Again, a
reduction in operational costs can be transferred to a reduction in final product costs.
In addition to Retail Link, other technologies are used by Wal-Mart [and also its suppliers]
to boost the efficiency of its supply chain. For example, the application of RFID [radio frequency
identification tags] which started to replace the traditional bar codes used by the company, made
the process of flowing goods more stable and consistent by allowing employees to monitor the
merchandise allocated in the distribution centres. RFID tags are more efficient in storing data than
bar codes and at the same time, enable employees to access information related to time, location
or expiry date of goods. What is more, RFID technology helps Wal-Mart to track inventory from
manufactures to warehouses and from there to stores (Jones et al., 2005). As an example, Lu
(2014) details in her report that “According to researchers at the University of Arkansas, there was
a 16% reduction in out-of-stocks since Wal-Mart introduced RFID technology into its supply chain.
Researchers also pointed out that the products using an electronic product code were replenished
three times as fast as items that only used bar code technology” (para. 26).
As it is seen, from the beginning, all the technologies implemented by Wal-Mart, from the
first to the last ones, have done nothing but improve and maintain its superb availability of
products at the hand of its customers.

CPFR
Both, high investment in technology and VMI, are models that companies implement as
part of a bigger strategy considered as the core of supply chain management: integration. It is
defined by Autry and Moon (2016) as a continuous process in which the areas of an organization
that have different functions, communicate, coordinate and collaborate in order to achieve a
mutually acceptable outcome for their organization. This integration, to be effective, must be
applied both internally [within the organization] and externally [with suppliers, distributors].
 In this integrative context suppliers and manufacturers started to understand that
collaborative initiatives, such as working together to plan and forecast and sharing information,
have great benefits for both parts of the supply chain (Christopher, 2011). VMI is an excellent
example of supply chain integration, but mostly focus on inventory collaboration where suppliers
make decisions about the customer´s inventory.
Collaborative Planning, Forecasting and Replenishment, CPFR, is an extension of VMI and a
wider approach of supply chain integration (Christopher, 2011). It involves a collaborative effort
between suppliers and manufacturers, not only by exchanging information in both directions, but
also by working together to establish accurate demand forecasts. Decisions on replenishment are
made together as well as planning for future product releases, store openings or closings and
campaigns and promotions (Wisner, Tan & Leon, 2016). These decisions, when taken together,
produce a synergy effect on the supply chain efficiency and bring numerous benefits as detailed in
figure 1.
Wal-Mart was one of the early adopters of this strategy, in 1998-1999 with its supplier
Warner-Lambert. As a result, CPFR allowed Warner-Lambert to improve in-stock levels from 87%
to 98%. In addition, “lead times were reduced from 21 days to 11, on-hand inventory was cut by
two weeks; orders were more consistent; production cycles were smoothed and Listerine's sales
increased by $8.5 million” (Parks, 2001, p.14).
The cooperation and collaboration between Wal-Mart and one of his biggest suppliers,
P&G, is another successful example of CPFR (Lu, 2014). In order to further improve their long-term
collaborative relationship, both companies evolved from a VMI environment of sharing POS data
to a CPFR model, with increased information sharing [including marketing, promotions and pricing
information], sales forecasting and joint strategic planning activities. As a result, the relationship
between P&G and Wal-Mart changed from adversarial to a total partnership that led the
respective companies to better served their mutual customers (Kim & Mahoney, 2010).
Successful collaboration with CPFR partners allowed Wal-Mart to price its products 10%
below most of the competitors (Andraski and Haedicke, 2003), showing that CPFR is another
strategy that has helped the company to achieve its low costs competitive priority.
Furthermore as CPFR involves VMI and technology investment, it is possible to affirm that these
strategy also helped Wal-Mart to minimize distortion of demand information and therefore, to
improve the availability of products in the retail stores.
 Figure 1: Benefits of CPFR [According to Chistopher (2011) and Wisner, Tan & Leon
(2016)]

Strategic vendor partnership

The collaborative examples detailed above showed that implementation of “CPFR depends
not only on extensive information sharing but also on mutual learning about as well as
commitment to the dedicated partners from the repeated interactions” (Kim & Mahoney, 2010,
p.12). This idea introduces an additional strategy that Wal-Mart implements with its suppliers. This
is known as Strategic Vendor Partnership, which is explained by Lu (2014) as the process that Wal-
Mart follows to establish relationships with suppliers that can ensure constant production in
response to the strong demand. By establishing a continuous flow of information, logistic support,
and by offering them long-term contracts and high volume of purchases, Wal-Mart can behave
almost like a single firm with its vendors. As a result, the company can negotiate the lowest price
of their products in the market, achieving again, its EDLP competitive advantage (Lu, 2014).
Cross-docking
One last strategy will be discussed to illustrate how Wal-Mart could successfully stand out
as one of the masters in supply chain management and it is the well known cross-docking logistic
technique, where products are transferred from inbound to outbound trucks, with minimum
intermediate storage time in inventory facilities, sometimes less than 24 hours (Nguyen, 2017).
Figure 2 shows in detail how these facilities operate.

Figure 2: Functioning of Cross-docking system

Stephan and Boysen (2011) explain that cross-docking terminals can have different layouts
according to the needs of each retailer and mention three most important elements that influence
the structuring diversity: location in the distribution network, the technical support of inner
cross-dock transport, and whether or not value-adding services are provided.
 As Mohtashami (2015) explains, cross-docking is generally suitable for companies that
distribute large volume and a wide variety of items to a large number of stores. This is the case of
Wal-Mart where all its products need to be sorted and delivered as fast as possible from its
warehouses to its multiple stores. With this strategy Wal-Mart achieves economies of scale with
full truck optimized loads coming in and out the docking facility, what contributes to reduce
logistic costs [inventory and transportation] and finally ends in products price reduction.
Wal-Mart´s ability to combine cross docking, with its own trucking system and its close-to-
stores warehouses, generally less than 130 miles (Lu, 2014), revolutionized the company´s supply
chain. It allowed Wal-Mart to increase flexibility in its supply chain, reduce lead times
considerably, its costs related to inventory and replenishment and to improve its market share and
profitability (Mohtashami, 2015).
Once again, a strategy applied efficiently to the supply chain, in this case cross-docking,
enhances Wal-Mart´s both competitive priorities of low costs maintenance and high product
availability.

Conclusion
After analyzing all the strategies implemented by Wal-Mart to improve its supply chain
processes, it is very clear that they are all fully integrated and closely related. Because of this, it is
difficult to understand one strategy without considering the influence of the others. For example,
as commented before, VMI is part of CPRF and both operations need technology and tight
collaboration with suppliers to function properly.
Therefore, it is accurate to say that the five strategies mentioned in this report, VMI, CPRF,
High Technology Investment, Strategic Vendor Partnership and Cross-docking contribute to a
greater or lesser extent with the two main competitive priorities settles by Wal-Mart, which are
low costs, passed on to customers in the form of low prices, and product availability, reflected by
having the right products available whenever and wherever customers want to buy them.
Reference List
Andraski, J. C. and Haedicke, J. (2003). CPFR: time for the breakthrough?. Supply Chain
Management Review. May/June, (7), 54–61.

Autry, C., & Moon, M. (2016). Achieving supply chain integration : Connecting the supply chain
inside and out for competitive advantage. Old Tappan, NJ: Pearson Education Inc.

Christopher, M. (2011). Logistics & supply chain management (4th ed.). Harlow, England: Financial
Times Prentice Hall.

Emigh, J. (1999). Vender-managed inventory. Computerworld, 33(34), 52.

Jones M.A. et al. (2005). The adoption of RFID technology in the retail supply chain. The Coastal
Business Journal, 4(1), 29-42.

Kim, S., & Mahoney, J. (2010). Collaborative planning, forecasting and replenishment (CPFR) as a
relational contract: an incomplete contracting perspective. International Journal Of
Learning And Intellectual Capital, 7(3/4), 403. doi: 10.1504/ijlic.2010.034377

Lee, H., So, K., & Tang, C. (2000). The Value of Information Sharing in a Two-Level Supply
Chain. Management Science, 46(5), 626-643. doi: 10.1287/mnsc.46.5.626.12047

Lu, C. (2014, May 7). Walmart's successful supply chain management. Retrieved from:
https://www.tradegecko.com/blog/incredibly-successful-supply-chain-management-
walmart

Lummus, R., & Vokurka, R. (1999). Defining supply chain management: A historical perspective and
practical guidelines. Industrial Management & Data Systems, 99(1), 11-17.

Mohtashami, A. (2015). Scheduling trucks in cross docking systems with temporary storage and
repetitive pattern for shipping trucks. Applied Soft Computing, 36, 468-486. doi:
10.1016/j.asoc.2015.07.021
Nguyen, T. T. H. (2017). Wal-Mart’s successfully integrated supply chain and the necessity of
establishing the triple-A supply chain in the 21st century. Journal of Economics &
Management, 29, 102-117.
Doi:http://dx.doi.org.ezproxy.waikato.ac.nz/10.22367/jem.2017.29.06

Parks, L. (2001). Wal-Mart gets onboard early with collaborative planning. Drug Store News, 23(2),
14.

Pham, Peter. (2015). The impacts of big data that you may not have heard of. Retrieved from
https://www.forbes.com/sites/peterpham/2015/08/28/the-impacts-of-big-data-that-you-
may-not-have-heard-of/#226277536429

Shister, N. (2006). Applying The Ideas Of The Wal-Marts Of The World To Smaller
Companies. World Trade, 19(3), 26-32.

Stephan, K., & Boysen, N. (2011). Cross-docking. Journal Of Management Control, 22(1), 129-137.

Tang, C. (2006). Perspectives in supply chain risk management. International Journal of Production

Economics,103(2), 451-488.

Wisner, J., Tan, K., & Leong, G. (2016). Principles of supply chain management : A balanced
approach (4th ed.). Boston, MA: Cengage Learning.