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3. What were the supply chain management...
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3. What were the supply chain management processes adopted by Wal-Mart and how far were they effective? Discuss.

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WAL-MART'S SUPPLY CHAIN
MANAGEMENT PRACTICES

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OPER - 020

This case was written by P. Mohan Chandran, under the direction of Vivek Gupta, ICFAI Center for Management
Research (ICMR). It is intended to be used as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.
The case was compiled from published sources.
2003, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic or mechanical, without
permission.
To order copies, call 0091-40-2343-0462/63/64 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna
Hills, Hyderabad 500 082, India or email icmr@icfai.org. Website: www.icmrindia.org

OPER/020

WAL-MART'S SUPPLY CHAIN MANAGEMENT PRACTICES
When you start to collapse the supply chain, accuracy in execution becomes critical. Any lack of
accurate information and processes creates costly bottlenecks in the flow of goods and materials.
-- Bruce Richmond, Global head, Andersen Consulting.

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INTRODUCTION

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The US-based Wal-Mart ranked first in the global Fortune 500 list in the financial year 2001-02
earning revenues of $219.81 billion (Refer Table I). Wal-Mart was the largest retailing company in
the world. The company was much bigger than its competitors in the US Sears Roebuck, KMart, JC Penney and Nordstrom combined (Refer Exhibit I). In 2002, Wal-Mart operated more
than 3,500 discount stores, Sams Clubs and Supercenters in the US and more than 1,170 stores in
all major countries across the world. The company also sold products on the Internet through its
website, walmart.com.

TABLE I

GLOBAL FORTUNE 500 LIST (2002)

No

Company
Wal-Mart Stores
Exxon Mobil
General Motors
Ford Motor
Enron

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Rank
1
2
3
4
5

Revenues (in $ millions)
219,812.0
191,581.0
177,260.0
162,412.0
138,718.0

Source: www.fortune.com

Wal-Mart was one of the largest private sector employers in the world, with employee strength of
approximately 1.28 million. The companys founder, Sam Walton (Walton) had always focused on
improving sales, constantly reducing costs, adopting efficient distribution and logistics
management systems and using innovative information technology (IT) tools.
According to analysts, Wal-Mart was able to achieve a leadership status ((Refer Exhibit II)) in the
retail industry because of its efficient supply chain management practices. Captain Vernon L.
Beatty, aide-de-camp to the commander, Defense Supply Center, Columbus, Ohio said, Supply
chain management is moving the right items to the right customer at the right time by the most
efficient means. No one does that better than Wal-Mart.
This case was written by P. Mohan Chandran, under the direction of Vivek Gupta, ICFAI Center for Management
Research (ICMR).
2003, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic or mechanical, without
permission.

To order copies, call 0091-40-2343-0462/63/64 or write to ICFAI Center for Management Research, Plot # 49, Nagarjuna
Hills, Hyderabad 500 082, India or email icmr@icfai.org. Website: www.icmrindia.org

Wal-Mart's Supply Chain Management Practices

BACKGROUND NOTE
Walton was born in 1918 at Kingfisher, Oklahoma, US. After graduating from the University of
Missouri in 1940, Walton worked for the famous retailer, J C Penney. In his first job, Walton had
displayed the qualities of a good salesman. He realized the importance of building loyalty among
customers as well as employees. In the mid 1940s, Walton gave up his job and decided to set up
his own retail store. He purchased a store franchise from Ben Franklin in Newport, Arkansas. It
was here that he learnt his first lessons in retailing offering significant discounts on product
prices to expand volumes and increase overall profits. The business was successful and Walton
soon acquired a second store within three years.

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Walton not only looked for opportunities to open stores in other small towns but also explored the
possibility of introducing innovative practices such as self-service. As the need for people to
manage his stores increased, Walton tried to attract talented and experienced people from other
stores. By 1969, Walton had established 18 Wal-Mart stores, reporting an annual sale of $44
million. In mid 1970s, Wal-Mart acquired 16 Mohr-Value stores in Michigan and Illinois. By the
late 1970s, the retail chain had established a pharmacy, an auto service center, and several
jewellery divisions.

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In the 1980s, Wal-Mart continued to grow rapidly due to the huge customer demand in small
towns, where most of its stores were located. Commenting on the growth of Wal-Mart, Walton
said: When we arrived in these small towns offering low prices every day, customer satisfaction
guaranteed, and hours that were realistic for the way people wanted to shop, we passed right by
that old variety store competition, with its 45 percent mark ups, limited selection and limited
hours. Wal-Mart stores were located at a convenient place in a big warehouse-type building and
targeted customers who bought merchandise in bulk. Customers could buy goods at wholesale
prices by becoming members and paying a nominal membership fee. By 1984, there were 640
Wal-Mart stores in the US, generating sales of about $4.5 bn and accruing profit of over $200 mn.

Do

Wal-Mart suffered a setback in 1992, when Walton died after a prolonged illness. But it continued
its impressive growth in the 1990s, focusing more on establishing its stores overseas. In 1992,
Wal-Mart expanded its operations in Mexico by entering into a joint venture with Cifra. Two years
later, the company acquired 122 Woolco stores from Woolworth, Canada. By 1997, Wal-Mart had
become the largest volume discount retailer in Canada and Mexico. In 1997, Wal-Mart acquired
the 21-store German hypermarket chain, Wertkauf. Other international expansion efforts included
the purchase of Brazilian retailer Lojas Americans 40 percent interest in their joint venture, and
the acquisition of four stores and additional sites in South Korea from Korea Makro. In January
1999, Wal-Mart expanded its German operations by buying 74 stores of the hypermarket chain,
Interspar. The stores were acquired from Spar Handels AG, which owned multiple retail formats
and wholesale operations throughout Germany.
By 2002, Wal-Mart had emerged as the largest company in the world in terms of revenues.
Analysts felt that Wal-Mart had come a long way since 1979, when the company generated annual
revenues of more than a billion dollar for the first time. By 1993, the company was doing a billion
dollar business in a week and by 2001, it was crossing the billion dollar mark in every 1.5 days.
Analysts attributed this phenomenal growth to Wal-Marts continued focus on customer needs and
reducing costs through efficient supply chain management practices. The company was able to
offer a vast range of products at the lowest costs in the shortest possible time. This was possible
mainly due to two factors Wal-Marts highly automated distribution centers, which significantly
reduced shipping costs and time, and its computerized inventory system, which speeded up the
checking out time and recording of transactions.

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Wal-Mart's Supply Chain Management Practices

MANAGING THE SUPPLY CHAIN
PROCUREMENT AND DISTRIBUTION
Wal-Mart always emphasized the need to reduce its purchasing costs and offer the best price to its
customers. The company procured goods directly from manufacturers, bypassing all
intermediaries. Wal-Mart was a tough negotiator on prices and finalized a purchase deal only when
it was fully confident that the products being bought were not available elsewhere at a lower price.
According to Claude Harris, one of the earliest employees, Every buyer has to be tough. That is
the job. I always told the buyers: You are negotiating for your customer. And your customer
deserves the best prices that you can get. Dont ever feel sorry for a vendor. He always knows
what he can sell, and we want his bottom price. We would tell the vendors, Dont leave in any
room for a kickback because we dont do it here. And we dont want your advertising program or
delivery program. Our truck will pick it up at your warehouse. Now what is your best price?

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Wal-Mart spent a significant amount of time meeting vendors and understanding their cost
structure. By making the process transparent, the retailer could be certain that the manufacturers
were doing their best to cut down costs. Once satisfied, Wal-Mart believed in establishing a longterm relationship with the vendor. In its attempt to drive hard bargains, Wal-Mart did not even
spare big manufacturers like Procter & Gamble (P&G). However, the company, generally,
preferred local and regional vendors and suppliers.

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In 1998, Wal-Mart had over 40 distribution centers located at different geographical locations in
the US. Over 80,000 items were stocked in these centers. Wal-Marts own warehouses directly
supplied 85 percent of the inventory, as compared to 50-65 percent for competitors. According to
rough estimates, Wal-Mart was able to provide replenishments within two days (on an average)
against at least five days for competitors. Shipping costs for Wal-Mart worked out to be roughly 3
percent as against 5 percent for competitors.

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Each distribution center was divided into different sections on the basis of the quantity of goods
received and was managed the same way for both cases and palletized goods. The inventory
turnover rate was very high, about once every two weeks for most of the items. Goods meant for
distribution within the US usually arrived in pallets, while imported goods arrived in re-usable
boxes or cases. In some cases, suppliers delivered goods such as automotive and drug products
directly to the stores. About 85% of the goods which were available at the stores passed through
the distribution centers.
The distribution centers ensured a steady and consistent flow of products to support the supply
function. As Wal-Mart used sophisticated barcode technology and hand-held computer systems,
managing the center became easier and more economical. Every employee had an access to realtime information regarding the inventory levels of all the products in the center. They had to just
make two scans one to identify the pallet, and the other to identify the location from where the
stock had to be picked up. Different barcodes were used to label different products, shelves and
bins in a center. The hand-held computer guided an employee with regard to the location of a
particular product from a particular bin or shelf in the center. When the computer verified the bin
and picked up a product, the employee confirmed whether it was the right product or not. The
quantity of the product required from the center was entered into the hand-held computer by the
employee and then the computer updated the information on the main server.
The hand-held computer also enabled the packaging department to get accurate information about
the products to be packed. It displayed all information about the storage, packaging and shipping
of a particular product thus, saving time on unnecessary paperwork. It also enabled the center

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Wal-Mart's Supply Chain Management Practices

supervisors to monitor their employees closely enabling them to give directions and even guide
them even on the move. This enabled the company to satisfy customer needs quickly and improve
the level of efficiency of the distribution center management operations.
Each distribution center had facilities for maintaining personal hygiene such as shower bath and
fitness centers. It also had provision for food, sleep and personal business. The distribution center
could also be used for meetings and paperwork. The truck drivers of Wal-Mart sometimes availed
these facilities.

LOGISTICS MANAGEMENT

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An important feature of Wal-Marts logistics infrastructure was its fast and responsive
transportation system. The distribution centers were serviced by more than 3,500 company owned
trucks. These dedicated truck fleets allowed the company to ship goods from the distribution
centers to the stores within two days and replenish the store shelves twice a week. The truck fleet
was the visible link between the stores and distribution centers. Wal-Mart believed that it needed
drivers who were committed and dedicated to customer service. The company hired only
experienced drivers who had driven more than 300,000 accident-free miles, with no major traffic
violation.

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Wal-Mart truck drivers generally moved the merchandise-loaded trailers from Wal-Mart
distribution centers to the retail stores serviced by each distribution center. These retail stores were
considered as customers by the distribution centers. The drivers had to report their hours of service
to a coordinator daily. The coordinator scheduled all dispatches depending on the available driving
time and the estimated time for travel between the distribution centers and the retail stores. The
coordinator informed the driver of his dispatches, either on the drivers arrival at the distribution
center or on his return to the distribution center from the retail store. The driver was usually
expected to take a loaded truck trailer from the distribution center to the retail store and return
back with an empty trailer. He had to dispatch a loaded truck trailer at the retail store and spend the
night there. A driver had to bring the trailer at the dock of a store only at its scheduled unloading
time, no matter when he arrived at the store. The drivers delivered the trailers in the afternoon and
evening hours and they would be unloaded at the store at nights. There was a gap of two hours
between unloading of each trailer. For instance, if a store received three trailers, the first one
would be unloaded at midnight (12 AM), the second one would be unloaded at 2 AM and the third
one at 4 AM.
Although, the trailers were left unattended, they were secured by the drivers, until the store
personnel took charge of them at night. Wal-Mart received more trailers than they had docks, due
to their large volume of business.
Wal-Mart maintained a strict vigil over its drivers by keeping a record of their activities through
the Private Fleet Driver Handbook (Refer Exhibit III). The purpose of the book was to educate
the drivers with regard to the code of conduct. It also included the terms and conditions regarding
the safe exchange of trailers with the store personnel and the safety of Wal-Marts property. This
book also contained a list of other activities, the non-compliance of which would result in the
termination of the driver.
To make its distribution process more efficient, Wal-Mart also made use of a logistics technique
known as cross-docking. In this system, the finished goods were directly picked up from the
manufacturing plant of a supplier, sorted out and then directly supplied to the customers. The
system reduced the handling and storage of finished goods, virtually eliminating the role of the
distribution centers and stores. There were five types of cross-docking (Refer Exhibit IV).

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Wal-Mart's Supply Chain Management Practices

In cross docking, requisitions received for different goods from a store were converted into
purchase or procurement orders. These purchase orders were then forwarded to the manufacturers
who conveyed their ability or inability to supply the goods within a particular period of time. In
cases where the manufacturer agreed to supply the required goods within the specified time, the
goods were directly forwarded to a place called the staging area. The goods were packed here
according to the orders received from different stores and then directly sent to the respective
customers.

y

To gain maximum out of cross-docking, Wal-Mart had to make fundamental changes in its
approach to managerial control. Traditionally, decisions about merchandising, pricing and
promotions had been highly centralized and were generally taken at the corporate level. The crossdocking system, however, changed this practice. The system shifted the focus from supply chain
to the demand chain, which meant that instead of the retailer pushing products into the system;
customers could pull products, when and where they needed. This approach placed a premium on
frequent, informal cooperation among stores, distribution centers and suppliers with far less
centralized control than earlier.

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INVENTORY MANAGEMENT

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Wal-Mart had developed an ability to cater to the individual needs of its stores. Stores could
choose from a number of delivery plans. For instance, there was an accelerated delivery system by
which stores located within a certain distance of a geographical center could receive replenishment
within a day.

Do

No

Wal-Mart invested heavily in IT and communications systems to effectively track sales and
merchandise inventories in stores across the country. With the rapid expansion of Wal-Mart stores
in the US, it was essential to have a good communication system. Hence, Wal-Mart set up its own
satellite communication system in 1983. Explaining the benefits of the system Walton said, I can
walk in the satellite room, where our technicians sit in front of the computer screens talking on the
phone to any stores that might be having a problem with the system, and just looking over their
shoulders for a minute or two will tell me a lot about how a particular day is going. On the screen,
I can see the total of the days bank credit sales adding up as they occur. If we have something
really important or urgent to communicate to the stores and distribution centers, I, or any other
Wal-Mart executive can walk back to our TV studio and get on that satellite transmission and get it
right out there. I can also go every Saturday morning around three, look over these printouts and
know precisely what kind of work we have had.
Wal-Mart was able to reduce unproductive inventory by allowing stores to manage their own
stocks, reducing pack sizes across many product categories, and timely price markdowns. Instead
of cutting inventory across the board, Wal-Mart made full use of its IT capabilities to make more
inventories available in the case of items that customers wanted most, while reducing the overall
inventory levels. Wal-Mart also networked its suppliers through computers. The company entered
into collaboration with P&G for maintaining the inventory in its stores and built an automated reordering system, which linked all computers between P&G and its stores and other distribution
centers. The computer system at Wal-Mart stores identified an item which was low in stock and
sent a signal to P&G. The system then sent a re-supply order to the nearest P&G factory through a
satellite communication system. P&G then delivered the item either to the Wal-Mart distribution
center or directly to the concerned stores. This collaboration between Wal-Mart and P&G was a
win-win proposition for both because Wal-Mart could monitor its stock levels in the stores
constantly and also identify the items that were moving fast. P&G could also lower its costs and
pass on some of the savings to Wal-Mart due to better coordination.

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Wal-Mart's Supply Chain Management Practices

Employees at the stores had the Magic Wand, a hand-held computer which was linked to in-store
terminals through a radio frequency network. These helped them to keep track of the inventory in
stores, deliveries and backup merchandise in stock at the distribution centers. The order
management and store replenishment of goods were entirely executed with the help of computers
through the Point-of-Sales (POS) system. Through this system, it was possible to monitor and
track the sales and merchandise stock levels on the store shelves. Wal-Mart also made use of the
sophisticated algorithm system which enabled it to forecast the exact quantities of each item to be
delivered, based on the inventories in each store. Since the data was accurate, even bulk items
could be broken and supplied to the stores. Wal-Mart also used a centralized inventory data system
using which the personnel at the stores could find out the level of inventories and the location of
each product at any given time. It also showed whether a product was being loaded in the
distribution center or was in transit on a truck. Once the goods were unloaded at the store, the store
was furnished with full stocks of inventories of a particular item and the inventory data system was
immediately updated.

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Wal-Mart also made use of bar coding and radio frequency technology to manage its inventories.
Using bar codes and fixed optical readers, the goods could be directed to the appropriate dock,
from where they were loaded on to the trucks for shipment. Bar coding devices enabled efficient
picking, receiving and proper inventory control of the appropriate goods. It also enabled easy order
packing and physical counting of the inventories.

tC

In 1991, Wal-Mart had invested approximately $4 billion to build a retail link system. More than
10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales of their goods at
stores and replenish inventories. The details of daily transactions, which approximately amounted
to more than 10 million per day, were processed through this integrated system and were furnished
to every Wal-Mart store by 4 a.m., the next day. In October 2001, Wal-Mart tied-up with Atlas
Commerce for upgrading the system through the Internet enabled technologies.

No

Wal-Mart owned the largest and most sophisticated computer system in the private sector. The
company used Massively Parallel Processor (MPP) computer system to track the movement of
goods and stock levels. All information related to sales and inventories was passed on through an
advanced satellite communication system. To provide back-up in case of a major breakdown or
service interruption, the company had an extensive contingency plan.

Do

By making effective use of computers in all its companys operations, Wal-Mart was successful in
providing uninterrupted service to its customers, suppliers, stockholders and trading partners.

THE BENEFITS REAPED

Wal-Mart strongly believed and constantly emphasized on strengthening its relationships with its
customers, suppliers and employees. The company was very vigilant and sensed the smallest of
changes in store layouts and merchandising techniques to improve performance and value for
customers. The company made efforts to capitalize on every cost saving opportunity. The savings
on cost were always passed on to the consumers, thereby adding value at every stage and process.
Wal-Mart also enjoyed the benefits of low transportation costs since it had its own transportation
system which assisted Wal-Mart in delivering the goods to different stores within (or sometimes
less than) 48 hours. Transportation costs for Wal-Mart were estimated at approximately 3% of the
total costs as compared to 5% for their competitors. Having its own transportation system enabled
Wal-Mart to replenish the shelves four times faster than its competitors.
Wal-Mart priced its goods economically and the prices varied from day to day. The company
enjoyed good bargaining power as it purchased huge quantities. This enabled it to price its
products competitively and pass on the benefits to the consumers. The company offered higher
discounts than any other retailer and they earned good revenues in the form of higher volumes.
Low pricing ensured that the sales volumes were high and consistent.
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Wal-Mart's Supply Chain Management Practices

The benefits of an efficient supply chain management system included reduction in lead time,1
faster inventory turnover, accurate forecasting of inventory levels, increased warehouse space,
reduction in safety stock and better working capital utilization. It also helped reduce the
dependency on the distribution center management personnel resulting in minimization of training
costs and errors. The stock-out of goods and the subsequent loss arising out of it was completely
eliminated.
Wal-Marts supply chain management practices resulted in increased efficiency in operations and
better customer service. It eliminated old stocks and maintained quality of goods. Bar coding and
radio frequency technologies enabled accurate distribution of goods. Cross-docking also helped
Wal-Mart to reduce inventory storage costs. It also helped to cut down the labor and other
handling costs involved in the loading and unloading of goods.

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Supply chain management processes adopted by Wal-Mart are as follows:
The supply chain management processes was very much efficient and they used a logistics
techniques to create and to maintain...

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