Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain Analysts believed that

Wal-Marts supply chain management (SCM) practices were the best in the retailing industry. The company used IT/Internet comprehensively in managing all the functions of the supply chain. How did Wal-Mart use IT/Internet to manage its supply chain functions, and what were the benefits? How did Wal-Mart use IT/Internet to manage its supply chain functions? The use of information technology has been an essential part of Wal-Mart's growth. In the early nineteen seventies Wal-Mart trailed K-Mart, which could negotiate lower wholesale prices due to its size. In 1975, Wal-Mart introduced electronic cash registers in more than 100 stores to record point-of-sale (POS) data to maintain inventory. Part of Wal-Mart's strategy for catching up with K-Mart was this point-of-sale computerised system that tracked every item sold, created a verifiable sales receipt for the customer and found the item price in a computerised database. The system also stored this sales information for use in analysing sales and reordering inventory. Wal-Mart eventually became a world leader in inventory and distribution system, having invested over $600 million in information systems over a single 5 year period. Use of IT in procurement In 1983, Wal-Mart began using bar codes for scanning Point-of-Sale (POS) data. At this time, the company also introduced EDI for procurement. Wal-Marts computer systems were connected to those of its suppliers. Using EDI, the suppliers could receive the purchase orders along with the relevant sales information in all stores, relating to the sale of their products. On receiving sales information the suppliers shipped the required goods to Wal-Marts distribution centers. Improved warehouse and logistics management through IT In 1998, Wal-Mart introduced a voice-based order filling (VOF) system for all its grocery distribution centers. This portable (VOF) system comprised a microphone/speaker headset, connected wirelessly to the centres computer system. The persons responsible for order picking were guided by the voice to the specific item locations. The VOF system could also provide details about the product on demand and simultaneously verify the quantities being picked. To make its distribution process more efficient, Wal-Mart made use of a logistics technique called cross-docking. In this system, the finished goods were directly picked up from the manufacturing plant, sorted out and then directly supplied to the customers. The system reduced the handling and storage of finished goods and considerably reduced the load on distribution centres. Facilitating cross-docking was the private satellite communications system that sent point-of-sale (POS) data to all its vendors, allowing them to have a clear picture of sales at all its stores. The reduced costs of sales that resulted from cross-docking allowed Wal-Mart to provide lower prices than their competitors. Managing Inventory through IT/Internet Wal-Mart invested heavily in IT and communication systems to effectively track sales and merchandise inventories in stores across the country. With the rapid expansion, it was essential to have a good communication system. By 1987, Wal-Mart completed a $700 million, two-year

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain satellite communications network installation that sent data from all stores to headquarters, providing real-time inventory data. 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. 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. 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 to replenish inventories. Retail Link connected Wal-Marts EDI network with an extranet, which made it possible for its suppliers to connect to its own system. Using this system, the suppliers had a clear picture of how their own products were performing and what the ideal restocking level was. By the mid 1990s, Retail Link had emerged into an Internet-enabled SCM system whose functions were not confined to inventory management alone, but also covered collaborative planning, forecasting and replenishment (CPFR). In 2002 Wal-Mart switched from its then existing Value Added Networks EDI to the new web enabled EDI, thus choosing the Internet for data exchange with thousands of its global suppliers. In 2004, Wal-Mart announced it will deploy radio frequency identification (RFID) technology on Jan. 1, 2005, thus beginning the move to replace the existing bar code technology with the new RFID technology. With this implementation, it was no longer necessary to physically scan the bar codes of goods entering the stores and distribution centers. This made considerable savings in labor cost and time, while reducing the instances of stock-outs at the stores. Today, Wal-Mart captures all the day's sales and product data across its global operations on an hourly basis. Database queries can start running as soon as data is available. CPFR CPFR is defined as a business practice for business partners to share forecasts and results data through the Internet, in order to reduce inventory costs while at the same time, enhancing product availability across the supply chain. The story of the modern CPFR began in 1995 when Wal-Mart found that Warner-Lamberts (a consumer products and pharmaceutical company) in-stock quantities were not meeting WalMarts vendor performance standards. Wal-Mart, along with Warner-Lambert, and two software companies, spearheaded an effort to define a process that would link customer demand with replenishment needs through the entire supply chain. At the heart of CPFR was the development of a single, shared forecast that supported the joint plans of the two companies and governed their mutual replenishment activities. It also provided a framework within which exceptions could be systematically identified and addressed. Clear performance measures were defined to clarify operational performance expectations. Money value was assigned to risk so that the two partners faced clear financial consequences when the agreement was not met. Incentives were used to motivate collaborative, cooperative behaviour.

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain The initial CPFR pilot with Warner-Lambert helped Wal-Mart to improve in-stock levels on Listerine to 98 percent from 87 percent. 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; Listerine's sales increased by $8.5 million; and there was improved joint communications on merchandise and promotional planning.1 There are two levels of Wal-Mart CPFR suppliers. The full suppliers create a sales forecast and it is compared with Wal-Mart's forecast. Wal-Marts Retail Link system compares the storelevel POS forecasts for 52 weeks and generates exceptions or differences which are reviewed collaboratively on line. The moderate suppliers use Wal-Marts own forecasts. Wal-Mart benefited from better shelf stock rates, lower inventory levels, higher sales and lower logistics cost. The supplier/manufacturer benefited from lower inventory levels, faster replenishment cycles, higher sales and better customer service. -------------------------------------------------------------------------------------------------------------------What were the benefits? The benefits that IT/Internet provided in creating a better supply chain system included reduction in lead time, faster inventory turnover, accurate forecasting of inventory levels, increased warehouse space, reduction in safety stock and better working capital utilisation. The stockout of goods and the losses arising out of it were completely eliminated. Wal-Mart uses telecommunications to link directly from its stores to its central computer system and from that system to its supplier's computers. This allows automatic reordering and better coordination. Knowing exactly what is selling well and coordinating closely with suppliers permits Wal-Mart to tie up less money in inventory than many of their competitors. At its warehouses, many goods arrive and leave without ever sitting on a shelf. Only 10% of the floor space in Wal-Mart stores is used as an inventory area, compared to the 25% average for the industry. By installing the VOF system, Wal-Mart eliminated mispicks and product labeling costs. Wal-Marts aggressive adoption of information technology to improve logistics and back-office efficiency has also been a major driver of productivity. Retailing is about drawing the fine line between preventing both, overstocking and stockouts. By planning the purchases well using IT, Wal-Mart was able to order goods in the right quantities.

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Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain What benefits will Wal-Mart reap by implementing RFID technology in its supply chain processes? How can the company overcome the reluctance shown by its suppliers in implementing RFID? What benefits will Wal-Mart reap by implementing RFID technology in its supply chain processes? An inefficiently managed supply chain often results in a substantial increase in operating costs. According to a study conducted by A.T. Kearney Consulting, inefficiencies in supply chains can waste up to 25 percent of a company's major operational costs. The study also found out that even in companies with profit margins of 3 percent to 4 percent, a 5 percent improvement in supply chain efficiencies focusing just on material flow can double profit margins.2 At its core, RFID is simply an enabling technology that helps retailers provide the right product at the right place at the right time, thus maximising sales and profits. RFID provides the technology to identify uniquely each container, pallet, case and item being manufactured, shipped and sold, thus providing the building blocks for increased visibility throughout the supply chain. Wal-Mart started working with RFID in 2003, essentially to solve inventory problems. The inability to find certain merchandise, when it was needed, was causing the company several headaches, including of-course lost sales. For one, the huge warehouses took hours to search, and once an item was found, the customer was not necessarily around waiting for it anymore. This translated into a lost sale for the company. In 2007, the company estimated that around 2% of all lost sales were due to the simple fact that a store had run out of an item, but 41% of lost sales were due to inventory problems. It was estimated then, that if RFID could fix just 10% of that problem, then the company would have gained $287 million per year by avoiding lost sales3. Wal-Mart expected RFID to have a bigger impact on the company than bar codes did when that technology was introduced in 1984. Bar codes enabled the company to improve inventory control and better track customer buying habits. With RFID, the company expected inventory accuracy to improve tremendously. Wal-Mart believed products will get to shelves faster, thereby reducing lost sales, and that lost or missing merchandise will be a phenomenon of the past. Overall, the benefits to Wal-Mart of using RFID in supply chain could include: 2 3

reduction in out-of-stocks faster replenishment of items with RFID than comparable items using traditional bar codes reduction in manual orders, which mean a reduction of excess inventory.

www.entrepreneur.com Wal-Mart eyes $ 287 million benefit from RFID; www.networkworld.com

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain improving on-shelf availability and creating value not just for Wal-Mart, but also for customers, who benefit from finding the items they want to buy, and suppliers, who benefit from the increase in sales. improve inventory replenishments cycle times and accuracy better promotional displays. Through RFID, the company can track the visibility to a display in the supply chain and through automated tools, can determine whether the display is on the sales floor when it should be. faster speed-to-shelf. There are lots of product launches at Wal-Mart, and the key to success is to get the new product on the shelf for the effective start date. avoiding theft, error and vendor frauds eliminating the need to have people scan barcodes in the supply chain and in-store provides transparency along the supply chain with tracking of all objects. Item level RFID inventory tagging and electronic labeling enables efficient inventory and shelflevel management, and streamlines stocking processes. ease of predicting product demand

In 2007, Wal-Mart established the following baseline goals for benefits from RFID implementation:

Use RFID to reduce out-of-stock incidents in stores by 30%, creating an additional $3.4 billion in sales. Limit inventory growth to half of sales growth through better use of RFID systems. Increase the number of RFID-enabled Wal-Mart stores, Supercenters and Sam's Clubs from 1,000 in April to 1,400 by end of 2007. Boost sales through lower prices, fewer out-of-stocks and faster checkouts and regain sales momentum against rival Target.

By placing RFID tags on cases and pallets shipped from manufacturers to Wal-Mart distribution centers, suppliers would be able to keep close tabs on their shipments. In turn, that would allow Wal-Mart and its suppliers to streamline their supply chains and ultimately ensure shelves were always fully stocked. Wal-Mart is banking on this technology to manage inventory more efficiently, reduce numbers of data entry errors, and lower human labour costs in a distribution center. --------------------------------------------------------------------------------------------------------------------

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain How can the company overcome the reluctance shown by its suppliers in implementing RFID? Price is the biggest deterrent for suppliers to put their entire support behind the RFID initiative. It is ironic to note though that cost of RFID will come down only when there is widespread usage. Usage of-course is not increasing as fast as was anticipated due mainly to the high cost levels. (This is somewhat analogous to the network effect, where the value of a good or service increases in direct proportion to the number of people or companies using that good or service.) One way to break this imbroglio would of-course be for Wal-Mart to subsidise the initial cost of technology procurement and set up for its suppliers. While this concept may be somewhat alien to the American business establishment, it is easy to see that this idea has merit. The core purpose is to allow the movement to gather sufficient momentum such that the vendors of RFID technology can see clear benefits for themselves, allowing more such technology vendors to enter the fray. This will progressively bring down the cost, finally benefitting all concerned. Other tactics that Wal-Mart can employ, to win the battle on price alone, could include: Sourcing of RFID tags, readers and software from more cost effective locations (Asia, for example) Participating in the vendors initial outlay, with an arrangement to recover its own share when the vendor starts to derive financial benefits from using the technology. Creating a system of Preferred vendors who receive preferential rates in proportion to their use of the RFID technology.

It is also a fact that Wal-Mart has not really gained as much as it had hoped to when the company initiated the system in a big way. AMR Research had predicted RFID would achieve widespread adoption by 2008. Now the company predicts that the industry will probably need another five years of conducting pilots to determine how best to deploy the technology.4 Other than price, it is now also becoming increasingly clear that Wal-Mart hasn't proven the value proposition through improved logistics, fewer out-of-stock incidents or better intelligence on consumer buying patterns. Suppliers are therefore not convinced enough to come on board without being pushed. One way for Wal-Mart to overcome this inertia would then be to initiate an independent cost-benefit analysis, and publicise the results of the study, if the study reveals a clear financial benefit that Wal-Mart has accrued so far from the use of RFID technology. If the study is sufficiently transparent and unbiased, and the results are clear, the suppliers will probably not need much convincing after that. There is also the issue of how the technology is to be actually used by the supplier to add value to its own supply chain management. What the RFID system will provide is actually just information (say, about a pallet lying at a specific location in a warehouse). Its what the user does with that information that will eventually determine what benefits are derived from it. Most suppliers of Wal-Mart are not as efficient at handling their supply chains as the
4

Wal-Mart's Faltering RFID Initiative; www.baselinemag.com

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain company itself is. For them therefore, availability of timely and accurate information is not as big a value driver because they are not able to capitalise on it effectively. If Wal-Mart therefore passes on the expertise it has, on managing the supply chain, to its supplier, by training, support, or actual involvement, the vendor will be increasingly able to convert information into benefit, paving the way for a more enthusiastic adoption of RFID. For financially-weak suppliers, Wal-Mart could consider getting buy-in in exchange for some help finding ways to make RFID work for individual suppliers. The trick to getting better ROI from RFID investments is to convert the tag information into meaningful, actionable data something that can be easily analysed to highlight all the bottlenecks that the supply chain is suffering from at any given time. This can only be done through smart software. Wal-Mart will benefit from investing in such a software and making it available to its suppliers. It is a case of supplier being able to see the complete picture, possibly from various angles, such that corrective action can be taken speedily and proactively. Helping their suppliers find the ROI is a much wiser course of action for Wal-Mart, than attempting to bulldoze them into submission. This would help RFID take a better toehold in the supply chain.

Wal-Marts Supply Chain Management Practices (B)- Using IT/Internet to Manage the Supply Chain References 1. Stanford Graduate School of Business - west marine: driving growth through shipshape supply chain management 2. Forrester Research - ForrTel: Supply Chain Collaboration: Market Update 3. www.knowledge.wharton.upenn.edu 4. www.technologyreview.com 5. www.supplychainbrain.com 6. Wal-Mart eyes $ 287 million benefit from RFID; www.networkworld.com 7. Wal-Mart, Suppliers Affirm RFID Benefits; www.rfidjournal.com