Supply Chain Management at Walmart

The Retail Industry

Introduction

James Neuhausen was a U.S. stock analyst tasked with preparing a recommendation on what his firm, a large U.S. investment house, should do with its stake in WalMart Stores, Inc. It was an unseasonably warm day in early February 2012, and Neuhausen was reviewing his notes on the firm. Wal-Mart, the world’s largest retailer, was trying to recover from a series of misste ps that had seen competitors such as Dollar Stores and Amazon.com close the performance gap. Competitors had copied many aspects of WalMart’s distribution system, including cross-docking product to eliminate storage time in warehouses, positioning stores around distribution centres and widespread adoption of electronic data interchange (EDI), to manage ordering and shipping from suppliers.

Neuhausen stated: Wal-Mart is believed to have one of the most efficient supply chains in the retail world. What impact will the increasing variety of product, store formats and the growing importance of international stores have on the way it distributes product? What improvements to its supply chain does the company need to make in order to continue to stay ahead of competitors?

The Retail Industry

U.S. retail sales, excluding motor vehicles and parts dealers, reached US$3.9 trillion in 2011. Major categories in the U.S. retail industry included general merchandise, food and beverage, health and personal care and other categories as can be seen in Exhibit 1. In the United States, retailers competed at local, regional and national levels, with some of the major chains such as Wal -Mart and Costco counting operations in foreign countries as well.

In addition to the traditional one-store owner-operated retailer, the industry included formats such as discount stores, department stores (selling a large percentage of soft goods, or clothing), variety and convenience stores, specialty stores, supermarkets, supercentr es (combination discount and supermarket stores), Internet retailers and catalog retailers. Online retail sales were rising in importance, accounting for US$197 billion in 2011.

 Walmart Stores Inc

Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart was the number one retailer in the world with fiscal year 2011 net income, from continuing o perations, of US$16 billion on sales of US$419 billion. It had over 2 million employees and 8,500 stores in 15 countries, the result of a series of acquisitions over the past 20 years. Beginning with its “big box” discount store format in the 1960s, Wal-Mart’s store formats around the world had grown to include supercentr es, which were a larger version of a discount store that included groceries, supermarkets, wholesale outlets, restaurants and apparel stores. Globally, it served about 200 million customers per week.

Walmart Stores Inc

Wal-Mart’s strategy was to provide a broad assortment of quality merchandise and services at “everyday low prices” (EDLP) and was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware. In the U.S. general merchandise arena, Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney.

Grocery store competitors included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco Wholesale. Wal-Mart was facing growing competition for large ticket general merchandise products and from online retailers such as Amazon.com.

 The Development of Walmart Supply Chain

Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and transport these goods to his stores directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of product through low-cost retail outlets — was sweeping the nation, he decided to open up large warehouse- style stores in order to compete. To stock these new stores, initially named “Wal-Mart Discount City,” Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to send their trucks to his stores, which were located in rural Arkansas, self-distribution was necessary.

Wal-Mart undertook an initial public offering in 1969 to ra ise funds to build its first distribution centre in Bentonville, Arkansas. As the company grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the remova l of “resale price maintenance,” which had prevented retailers from discounting merchandise. To keep an eye on his growing network, Walton piloted a small single -engine airplane, which he would land at air strips close to his new stores.

Procurement

As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal- Mart’s U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new items were ordered. Over time, many of Wal -Mart’s largest suppliers maintained offices in Bentonville,
staffed by analysts and managers supporting Wal-Mart’s business.

Distribution

Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution centre was a significant investment for the firm, Walton insisted on saturating the area within a day’s driving distance in order to gain economies of scale. Over the years, competitors had copied this “hub-and- spoke” design of high volume distribution centres s erving a cluster of stores. This distribution -led store expansion strategy persisted for the next two decades as Wal -Mart added thousands of U.S. stores, expanding across the nation from its headquarters in Arkansas.

Store Network

In the early years, Wal -Mart grew rapidly as customers were attracted by its assortment of low -priced product. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. It bought in bulk, bypassing distributors, and passed savings on to consumers. Each Wal-Mart store aimed to be the “store of the community,” tailoring its product mix to appeal to the distinct tastes of that community. Thus, two Wal-Mart Stores a short distance apart could potentially stock different merchandise. In contrast, most other retailers made purchasing decisions at the district or regional level.

Information Systems

Walton had always been interested in gathering and analyzing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent on hiring the smartest person in the class to come to Bentonville to computerize his operations. 19 Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, due to his use of a personal airplane, which he used to observe new construction development (to determine where to place stores) and to monitor customer traffic (by observing how full the parking lot was). In the mid-1980s, Wal-Mart invested in a central database, store level point-of-sale systems and a satellite network.

Combined with one of the retail industry’s first chain -wide implementation of UPC bar codes, store level information could now be collected instantaneously and analyzed. By combining sales data with external information such as weather forecasts, Wal-Mart was able to provide additional support to buyers, improving the accuracy of its purchasing forecasts.