CONESTOGA

Supply Chain Management at Wal-Mart

International Logistics

By: Sally Loewen For: Dino Ficic

4/11/2014

1

To: Johnnie Dobbs, Executive Vice President of Logistics From: Sally Loewen, Supply Analyst Consultant Date: April 11, 2014

Issue: Keeping Wal-Mart’s Supply Chain a Key Competitive Advantage

How can Wal-Mart’s supply chain remain a key competitive advantage for Wal-Mart as it sees it’s first profit decline in over a decade? Because Wal-Mart is able to offer the lowest prices, maintain a centralized

operating base, use self-distribution and maintain tight supplier relationships it continues to be North America’s number one retailer. Even though distribution

costs are only 1.7% of sales, Wal-Mart recognizes that there is excess inventory. With the aim to reduce inventory by $6 billion and to meet a target of holding inventory growth to half the level of sales growth, Wal-Mart needs to make

changes. Changes need to be made to keep their supply chain more efficient maintaining a higher net profit and in the end offering the lowest price to its

customers.

Recommendations for Wal-Mart’s supply chain in the immediate future are to further analyze the current inventory level and it’s cost.

It is also recommended to upgrade the Retail Link Software and analyze the current forecasting methods and communication to the distribution centers.

The next steps would be to establish cross-functional teams implementing lean initiatives with the main objective of minimizing inventory levels. One

example of excess inventory exists at the store level when employees spend time sorting through truckload to find fast selling items.

Information for the cross-functional team would include benchmarking other

retail chains inventory restocking systems. The competition is threatening to Wal-Mart with competing information systems, through a broad range of

products and services and other low cost large retailers.

It is recommended that Wal-Mart design new transportation trucks and trailers.

In the long term it is recommended that to ship directly to the stores to help

eliminate inventory carrying costs.

Finally it is also recommended that Wal-Mart mandate that all merchandise or

packaging get RFID tags. Radio frequency identification tags can be put on individual or case package.

The metrics include monitoring the financials to previous years, gross margin, and percentage of inventory to net sales and cost of sales to net sales. Competitors financial information should also be monitored and know the

percentage increase in sales from the competition is important for Wal-Mart maintaining it cost leadership position. A complete supply chain performance

metrics will include customer satisfaction, employee satisfaction, time, and costs; forecast accuracy, inventory levels and stock out. If Wal-Mart can minimize inventory substantially and operate with a leaner

distribution system it will be more competitive in when establishing stores in other countries.

2

Problem Statement How can Wal-Mart’s supply chain remain a key competitive advantage for Wal-Mart as it sees it’s first profit decline in over a decade? With the aim to reduce

inventory by $6 billion and to meet a target of holding inventory growth to half the level of sales growth, Wal-Mart needs to make changes. Changes need to be

made to keep their supply chain more efficient maintaining a higher net profit and offering the lowest price to its customers.

Size-Up

Johnnie C. Dobbs, new executive vice-president of logistics wondered what he could do to ensure that Wal-Mart’s supply chain remained a key competitive

advantage for his firm. As of late the company had been unable to meet its self-imposed target of holding inventory growth to half the level of sales growth.

Wal-Mart wanted to stay above the competition but other retailers were also using upgraded information systems. Other retailers were also using bar codes,

shared sales data with suppliers, had in house trucking fleets, and possessed computerized point of sale systems that collected item level data.

The background of Wal-Mart began with the strategy of offering a broad assortment of quality merchandise and service at the lowest prices. The stores

were supplied through self-distribution and tight relationships were developed with suppliers. Some of Wal-Mart’s initiatives to drive prices down include the rollback campaign funded by suppliers, standardized case sizes.

Currently Wal-Mart’s strengths are a high volume of sales spanning 15 countries.

Distribution costs are low at only 1.7% of sales. Wal-Mart also has backhaul revenue of $1 billion a year to utilize empty return trucks. Wal-Mart still uses a centralized operating base.

Currently some of Wal-Mart’s weaknesses exist in a timely unloading system at

the store level. Wal-Mart also has excess inventory and is hoping to reduce $6 billion. Threats from competition come from various segments and other retailer using advanced data information systems. Wal-Mart also has a negative

reputation due to its tight relationship with supplier and treatment of employees.

Wal-Mart uses a system called Retail Link to communicate and refill warehouses and to communicate real-time sales data with suppliers. They also were one of the first to use a central database, store level point of sale, satellite network and

barcode system. The communication to suppliers also included forecasting. The vendor managed inventory program required suppliers to restock to agree upon

service levels.

3

Remix is a system aimed to reduce the percentage of out of stock merchandise at stores by redesigning its network of distribution centers. The aim was that fast

moving merchandise would go to dedicated “high velocity” food distribution centers. These centers were smaller, had temperature controls and had less

automation. Due to the broad range of products and services it provides it competes with a

broad segment of stores including grocery, clothing, department and wholesale. Wal-Mart’s large retailer competition is retailers such as Costco, Target Corp,

Home Depot and the Kroger Company in the U.S. When looking at comparable same store sales for retail competitor we see those Wal-Mart stores show a 3% increase and Sam’s Club store show a 5% increase in sales. Wal-Mart’s strong

competition is with Costco with a 7% increase in sales, Kroger Co. with a 5.9% increase in sales, Safeway Inc. with a 5.9% increase in sales and Target Corp a

5.6% increase in sales. Larger retailer competition in other countries includes Carrefour SA in France, Metro AG in Germany and Royal Ahold in Holland. Wal-Mart’s is one of the top retailers that accounts for only 30% of worldwide retail

sales and with billions sold in various categories Wal-Mart could capture more sales per category.

Analysis

S.W.O.T. Analysis Strengths

$312.4 billion in sales from operations spanning 15 countries

Distribution costs only 1.7% of its cost of sales

In 2006 Wal-Mart operated approximately 3,900 stores in the United States and 2,600 stores in 13 other countries

Wal-Mart has internal analysts that work to forecast demand as well as

working with suppliers. External data goes into the forecast and these include weather and economic forecasts.

The supplier network is able to access real time sales data

Wal-Mart had backhaul revenue of more than $1 billion per year

Due to trucking employees that were non-unionized and in-house Wal-Mart was able to improve delivery procedures, make adjustment to the entire

fleet and improve on communication.

Wal-Mart believed in centralization because of lower costs and improved communication between different divisions and their head office continues

to be located in Bentonville, Arkansas.

Wal-Mart caters to the areas demographics called the “stores of the

community

Employees are kept up to date with detailed information at daily meetings

Distribution centers had real time information and manufactures received

4

information as soon as an item was purchased

Employees were able to manually input orders in anticipation of changes in

demand. This was different for retail competitors.

Weaknesses

Delays in restocking shelves occurred when there was an increase of

grocery store items and employees spent time sorting through truckloads of arriving merchandise to find fast selling merchandise

Wal-Mart had excess inventory and by 2006 was hoping to eliminate as

much as $6 billion in excess inventory.

Wal-Mart relies on it warehouses and distribution centers to keep the

logistics distribution system efficient but this involves additional warehousing costs that may not be most beneficial to the company

Opportunities

Wal-Mart could further increase its net sales from the competition with

increased services

Wal-Mart could expand and open stores to cater to various demographics

that there current product and services haven’t captured.

With technology always advancing Wal-Mart could improve its

communication and data collection from suppliers

Wal-Mart could continue to locate in various countries

Wal-Mart could continue to learn more effective distribution systems by

benchmarking the competition

Wal-Mart’s is one of the top retailers that accounts for only 30% of

worldwide retail sales and with billions sold in various categories Wal-Mart could capture more sales per category. A full list of sales in each category

that could be captured is listed in quantitative analysis.

In March 2006 Wal-Mart purchased a majority share in Central American Holding Company, giving it control over 375 supermarkets and stores in

Central America

In Mexico and Canada Wal-Mart is the largest retailer and enjoys strong

profits Threats

Other retailers were using bar codes, shared sales data with suppliers, had in house trucking fleets, and possessed computerized point of sale

systems that collected item level data

Due to the broad range of products and services it provides it competes

with a broad segment of stores including grocery, clothing, department and wholesale

Wal-Mart’s large retailer competition is retailers such as Costco, Target

Corp, Home Depot and the Kroger Company in the U.S. Larger retailer competition in other countries includes Carrefour SA in France, Metro AG

in Germany and Royal Ahold in Holland. When looking at comparable same store sales for retail competitor we see those Wal-Mart stores show

5

a 3% increase and Sam’s Club store show a 5% increase in sales. Wal-Mart’s strong competition is with Costco with a 7% increase in sales,

Kroger Co. with a 5.9% increase in sales, Safeway Inc. with a 5.9% increase in sales and Target Corp a 5.6% increase in sales.

With Wal-Mart being non-unionized, union started targeting Wal-Mart and because of its size it became a target for the competition

Wal-Mart has a negative reputation due to its tight relationship with

suppliers dictating what they do, payment entirely on Wal-Mart’s terms, which the supplier’s suppliers are.

In the U.K. Wal-Mart doesn’t hold as strong a presence as the market leader TESCO.

Wal-Mart wasn’t as successful in South Korea as it hoped to be.

Wal-Mart exited the German market with losses of about 1 billion

Qualitative Background

Wal-Mart’s strategy is to provide a broad assortment of quality merchandise and services at “everyday low prices”. Due to the broad range of products

and services it provides it competes with a broad segment of stores including grocery, clothing, department and wholesale

From Sam Walton’s experience and realizing there was a new trend toward discount retailing he opened warehouse style stores and from necessity

supplied this store through self-distribution. Sam Walton and senior management worked directly with suppliers to ensure that the correct mix of staples and new items were ordered. The suppliers began to set up

offices in Bentonville, the home of Wal-Mart head office, with analysts and managers to support Wal-Mart’s business.

Wal-Mart introduced their private label in the 1980’s generating higher margins that branded products

Wal-Mart was one of the first to use a hub and spoke design for distribution

to saturate the area within a day’s driving distance of the distribution centers in able to gain economies of scale. To ensure that cases moved

efficiently through the distribution centers, Wal-Mart worked closely with suppliers to standardize case sizes and labeling. Merchandise purchased from offshore locations was processed at coastal distribution centers

before shipment to U.S. stores.

The retail strategy of Wal-Mart displayed products at a steady price and not

discounted on a regular basis. Wal-Mart introduced the price rollback campaign which were funded by suppliers with the goal of increasing

product sales between 200 and 500 percent

Wal-Mart stores operated with real-time information and merchandise could be sent to stores automatically and manufactures were notified as soon as

an item was purchased. Employees could manually input orders in

6

anticipation in changes of demand.

In the mid 1980’s Wal-Mart invested in a central database, store-level point

of sale systems, and a satellite network. It also implemented UPC bar codes and used external information in its forecast.

In the 1990’s Wal-Mart developed Retail Link, the largest civilian database in the world. Wal-Mart expected their suppliers to proactively monitor and

replenish product on a continual basis. Wal-Mart also becomes one of the first to use CPRF-collaborative planning, forecasting and replenishment. The vender managed inventory program required suppliers to restock to

agree upon service levels.

Sam Walton and his management team would often benchmark its

competition.

Wal-Mart believed in centralization because of lower costs and improved communication between different divisions and their head office continues

to be located in Bentonville, Arkansas.

Wal-Mart was able to thrive in a non-union environment

Remix

Remix aimed to reduce the percentage of out of stock merchandise at stores by redesigning its network of distribution centers. The aim was that fast moving

merchandise would go to dedicated “high velocity” food distribution centers. These centers were smaller, had temperature controls and had less automation.

RFID Tags

RFID tags were mandated on merchandise shipped by Wal-Mart’s top 100 suppliers and were an attempt to increase the ability to track inventory. This was

a way to increase in stock rates and reduce tracking costs. It also meant that smart applications would be able to direct our associates to where the product is so that shelves can be replenished sooner. This would also help Wal-Mart track

promotion effectiveness and reduce out-of-stock sales losses and overstock expenses. RFID rage readers were at the dock where merchandise came in,

throughout the back room, at the door from the stockroom to the sales floor and at the box crushing station.

Retail Link Database

Wal-Mart’s Retail Link Database gathers information at the store level and then the data is transmitted to the supplier network and the distribution centers. Data is transmitted via a Global Satellite Network. The database is located in

Bentonville headquarters. The supplier network is able to access real-time sales data. Wal-Mart’s internal analysts work to forecast demand, working with

suppliers. Included in this forecasting is external data such as weather forecasts and economic forecasts. Merchandise is then shipped to distribution centers.

7

Quantitative

Wal-Mart stores sold $312.4 billion in sales in 2006 and the next biggest

global retailer is $88.2 billion in sales.

In 2006 Wal-Mart operated approximately 3,900 stores in the United States

and 2,600 stores in 13 other countries

Wal-Mart stocked more than 100,000 SKU’s

Researchers estimated that 25 percent of out-of-stock inventory was either

misplaced on the floor or miss-shelved in the back room and 8 percent of merchandise was out of stock at any given time resulting in lost sales.

Wal-Mart stores with RFID had 16 percent fewer stock outs. RFID tags cost 17 cents each

Wal-Mart as the world’s largest retailer has more than 6,500 stores

worldwide. The company has 1.8 million employees worldwide. It is estimated that Wal-Mart serves more than 138 million customers per week

Wal-Mart had backhaul revenue of more than $1 billion per year

$312.4 billion in sales from operations spanning 15 countries

Distribution costs only 1.7% of its cost of sales

Wal-Mart had 75,000 people working in the logistics department and 114

U.S. distribution centers.

In the 2006 fiscal year ended January 31, the company posted a sales

increase of 9.5 % from the previous year while its inventory grew 8.2%. The previous year sales increased by 11.3% while inventory grew 11.8%.

U.S. retail sales reached 2.8 trillion in 2005. Listed are the various

categories and sales for that category

8

When looking at comparable same store sales for retail competitor we see those Wal-Mart stores show a 3% increase and Sam’s Club store show a 5% increase

in sales. Wal-Mart’s strong competition is with Costco with a 7% increase in sales, Kroger Co. with a 5.9% increase in sales, Safeway Inc. with a 5.9%

increase in sales and Target Corp a 5.6% increase in sales.

Competitors Financial Information in Millions

Company Sales COGS SG & A Net

Income % of Total

Companies % of

Sales Inv entories % of

Sales Assets

Albertsons Inc. 40,358 29,038 10,082 446 2.35% 1.11% 3,036 7.52% 17,871

Federated

Department

Stores

22,390 13,272 6,980 1,406 7.41% 6.28% 5,459 24.38% 33,168

Gap Inc. 16,023 10,154 4,124 1,113 5.86% 6.95% 1,696 10.58% 8,821

Kroger Co. 60,553 45,565 11,027 958 5.05% 1.58% 4,886 8.07% 20,482

Sears Holding

Corp. 49,124 35,505 10,759 858 4.52% 1.75% 9,068 18.46% 30,573

Safeway Inc. 38,416 27,303 11,113 561 2.96% 1.46% 2,766 7.20% 15,757

Target Corp. 52,620 34,927 11,185 2,408 12.69% 4.58% 5,838 11.09% 34,995

Wal-Mart Stores 312,427 240,391 56,733 11,231 59.17% 3.59% 32,191 10.30% 138,187

Total 18981

The table above shows Wal-Mart’s financial information in 2004 compared to other retail segments. These amounts are in millions of dollars for example sales for Wal-Mart was $312,427,000,000. Wal-Mart sales are almost 60% of these

top 10 retailers. When looking a percentage of net income compared to sales we see that Wal-Mart is in the midrange and this would be due largely to Wal-

Mart’s pricing strategy. Wal-Mart requires to and does sell more to make more. When looking at the percentage of inventory compared to sales Wal-Mart once again is in the midrange at 10.3%. From comparing these top ten retailers we

see that the lowest inventory level is 7.2% of sales. Wal-Mart could benefit from benchmarking inventory levels and restocking systems with Safeway, Kroger Co. and Albertsons Inc. Although these are all grocery stores, implementing a leaner

and just in time inventory system it would be a huge cost savings to Wal-Mart.

9

This table shows the key financial figures for 2000 to 2006. From table we can see that the increase in net sales in 6 years almost doubled. The cost of sales

also almost doubled and net income did double and was an increase of $5,907,000,000. The percentage of cost of sales to net sales went down over 6 years by 1%. This is a positive trend but there is room for improvement in this

area. High inventory levels would be one area that this percentage could improve. Percentage of net income to net sales shows a growth of 0.19%.

Although this is an increase it is not by much and once again reducing high inventories and eliminating waste could help improve this area. The last comparison is in % of inventory to net sales. We see here that the percentage is

decreasing. This is a good indicator that inventory levels per sales are decreasing. At 10.3% there are improvements to be made. But the question is

what is the target level and at this level what is the risk of stock-outs.

Key Financial Figures

2000 2001 2002 2003 2004 2005 2006 Range

Net Sales 156,249 180,787 204,011 229,616 256,329 285,222 312,427 156,178

Cost of Sales 121,825 140,720 159,097 178,299 198,747 219,793 240,391 118,566

Gross Profit Margin

0.22032 0.22163 0.22015 0.22349 0.22464 0.22940 0.23057 0.01025

% of Cost of Sales to Net

Sales

77.97% 77.84% 77.98% 77.65% 77.54% 77.06% 76.94% -1.03% 75.92%

Net Income 5,324 6,235 6,592 7,955 9,054 10,267 11,231 5,907

% of Net Income

to Net Sales 3.41% 3.45% 3.23% 3.46% 3.53% 3.60% 3.59% 0.19% 3.78%

Inv entories 19,296 20,987 22,053 24,401 26,612 29,762 32,191 12,895

% of Inv entory to Net Sales

12.35% 11.61% 10.81% 10.63% 10.38% 10.43% 10.30% 8.26%

10

Alternatives

1. Divide transportation of goods into fast selling and slow selling and refrigeration.

This would mean three shipment types. This would be set up to reduce delays in

restocking shelves that occurred when there was an increase of grocery store items. Employees spend time sorting through truckloads of arriving merchandise to find fast selling merchandise.

Advantages to dividing the transportation are that employees could differentiate

between what requires a sense of urgency and what does not. It would also mean that the sorting of fast selling, slow selling and refrigeration could happen at the warehouse level. Disadvantages to this are that more trucks may be

needed and the planning would have to happen at the distribution level. The feasibility of this is reasonable considering the volume of merchandise those

Wal-Mart ships. More trucks may be needed and there may be more effective ways to get the result of a more effective inventory system.

2. Rework existing distribution centers to handle the shipping of fast selling and slow selling items more effectively.

Delays in restocking shelves occurred when there was an increase of grocery store items and employees spent time sorting through truckloads of arriving

merchandise to find fast selling merchandise Implement RFID tags on all items or on all packaging. The effective of the distribution centers has really not been

addressed but two indicators are the problem above and the fact that Wal-Mart has high levels of inventory and would like to reduce this by $6 billion.

Advantages to this are that the distribution centers would be more effective and in store employees would save time when restocking shelves. Disadvantages to

this are that it would be time consuming to plan and may take some time to implement. Although time consuming, this would be a feasible option. Effective distribution centers should be standardized and can help with cost savings.

3. Continue with Remix program.

Remix is aimed to reduce the percentage of out of stock merchandise at stores by redesigning its network of distribution centers. The aim was that fast moving

merchandise would go to dedicated “high velocity” food distribution centers. These centers were smaller, had temperature controls and had less automation.

This alternative could be put into place if reworking the existing distribution centers was not an option and if there is adequate space at the food distribution centers.

Advantages to this are that the faster moving merchandise would automatically

11

be separated from the slower moving merchandise. Disadvantages to continuing with the remix program are that it would require planning and may be costly if the

food distribution centers need expansion. The remix program is already in place so this option is more feasible. This could also be done on a trial basis until Wal-

Mart implements a more effective system and is able to reduce the level of inventory.

4. Establish a cross functional team to work together to eliminate waste.

One of the wastes that would be most important to eliminate is inventory. Wal-Mart’s goal is to reduce their inventory by $6 billion. Other waste that the cross-functional team would look at would be overproduction or transportation and the

effective handling of inventory. The processing of inventory both at an ordering level and a receiving level would need to be analyzed and recommendations and

policies implemented. Advantages to this would be that there would be a thorough understanding of

waste at the supplier, distribution center, store, and transportation and data collection level. A cross-functional team brings diversity and a shared purpose to

problem solving. Disadvantages to developing a cross functional team to help reduce inventory levels is that diversity can lead to conflict and employees would either need to be hired or taken from other positions that would then need to be

filled. The feasibility of this would work since there are a lot of people trained in six-sigma methodology. Wal-Mart could hire a Conestoga College Supply Chain

graduate.

5. Upgrade Retail Link Software and analyze forecasting methods and

communication to distribution centers.

This would be looking at the effectiveness of the current system. Benchmarking other retail chain inventory stocking systems could do this. It could also be done by looking at various metrics such as forecasting, stock out levels, inventory

costs, and transportation costs. This would also help to improve the vendor managed inventory program and improve communication of supplier out of stock

rate. Wal-Mart’s Retail Link Database gathers information at the store level and then the data is transmitted to the supplier network and the distribution centers.

Advantages to this would that it would help to minimize inventory and reduce stock outs at the same time resulting in cost savings. Disadvantages to this are

that it would be time consuming and may need a small investment. It also may need some outside consultation from technology experts and commodity traders and forecasting analysts. The feasibility of this is great and it is something that

should be done immediately to maintain the benefits.

12

6. Ship direct to stores from suppliers.

Advantages to this would be that warehouse and distribution center space would be minimized reducing the level of inventory required. A disadvantage to this is

that it would take a lot of planning but with the high level of merchandise shipped it could be feasible. Some of the merchandise that Wal-Mart could do a trial run on would be Kraft products, toilet paper, seasonal distribution of Wal-Mart brand

clothing, seasonal goods such as outdoor furniture and barbecues, Christmas merchandise.

7. Mandate that all merchandise or packaging get RFID tags.

RFID packaging could be on the shipping packaging and for the majority of products this may be more feasible. RFID tags were mandated on merchandise

shipped by Wal-Mart’s top 100 suppliers and were an attempt to increase the ability to track inventory. This was a way to increase in stock rates and reduce tracking costs. It also meant that smart applications would be able to direct our

associates to where the product is so that shelves can be replenished sooner. This would also help Wal-Mart track promotion effectiveness and reduce out-of-

stock sales losses and overstock expenses. RFID rage readers were at the dock where merchandise came in, throughout the back room, at the door from the stockroom to the sales floor and at the box crushing station.

Advantage to this is that inventory would be tracked and employees would know

how to better locate merchandise. A disadvantage to this is the cost at 17 cents each and well it would mean planning and be time consuming for employees and suppliers.

8. Further analyze the current inventory level and its cost.

The amounts of inventory at each distribution center should be analyzed to see how long it is staying at the distribution center. It should also be noted what

types of merchandise are causing high inventory costs. It would also take into account the various carrying costs of inventory such as insurance, damage,

obsolescence, storage costs, handling, taxes and interest. The analysis would also take a look at the reasons for having inventoried such as minimize stock outs, in transit inventory, speculative, buffer stock and operating inventory. An

ABC inventory analysis would also be completed. Inventory at the supplier would also be analyzed for potential cost savings.

An advantage to this would be that it would show inefficiencies in the vendor managed inventory programs. Other than being time consuming there really isn’t

any real disadvantages. This could be done by the cross-functional team establish or by the materials department with the help of the forecasting

department. Recommendations would then be made to senior management.

13

9. Design new transportation trucks and trailers.

Currently Wal-Mart has a fleet of 6,500 tractor-trailers. Trucks could be designed to be more aerodynamic and be more fuel-efficient. The trailers could have

departments for refrigeration and could have separate doors to help with the separation of fast and slow moving merchandise. Other materials for trailers could be utilized such as carbon finer panels.

Advantages to this are increased cubic capacity, a lighter trailer, increased fuel

mileage, improved environmental impact and flexibility in shipping. Disadvantage would be the cost of the new trailers and the cost of disposal for the old trailers. This could be feasible because shipping performance would be improved and the

trailers could be phased in gradually.

10. Benchmark other retail chain inventory restocking systems. When looking at the percentage of inventory compared to sales Wal-Mart once

again is in the midrange at 10.3%. From comparing these top ten retailers we see that the lowest inventory level is 7.2% of sales. Wal-Mart could benefit from

benchmarking inventory levels and restocking systems with Safeway, Kroger Co. and Albertsons Inc. Although these are all grocery stores, implementing a leaner and just in time inventory system it would be a huge cost savings to Wal-Mart.

Stores that are not grocery stores that could be benchmarked are Costco, Home Depot, and Target Corp.

Advantages to this would be ways to incorporate cost savings could be found; new and improved supply chain systems would be implemented. This could

prove to be time consuming though

11. In Wal-Mart’s case making little to no changes may be a viable option since Wal-Mart already stands above the competition. Advantages to this are to minimize any costly changes. Disadvantages are that there may be

lost opportunity that a company such as Wal-Mart would want to capitalize on. This could be a feasible option.

Recommendation

Immediate

In the immediate future it is recommended that Wal-Mart further analyze the current inventory level and its cost. It is also recommended that Wal-Mart upgrades the Retail Link Software and analyze forecasting methods and

communication to distribution centers.

14

This would be looking at the effectiveness of the current system. It could also be done by looking at various metrics such as forecasting, stock out levels,

inventory costs, and transportation costs. This would also help to improve the vendor managed inventory program and improve communication of supplier out

of stock rate. The amounts of inventory at each distribution center should be analyzed to see how long it is staying at the distribution center. It should also be noted what types of merchandise are causing high inventory costs. It would also

take into account the various carrying costs of inventory such as insurance, damage, obsolescence, storage costs, handling, taxes and interest. The

analysis would also take a look at the reasons for having inventoried such as minimize stock outs, in transit inventory, speculative, buffer stock and operating inventory. An ABC inventory analysis would also be completed. Inventory at the

supplier would also be analyzed for potential cost savings.

Short Term In the short term it is recommended to establish cross-functional team working

towards lean initiatives and benchmark other retail chains inventory restocking systems.

When looking at the percentage of inventory compared to sales Wal-Mart once again is in the midrange at 10.3%. From comparing these top ten retailers we

see that the lowest inventory level is 7.2% of sales. Wal-Mart could benefit from benchmarking inventory levels and restocking systems with Safeway, Kroger Co.

and Albertsons Inc. Although these are all grocery stores, implementing a leaner and just in time inventory system would be a huge cost savings to Wal-Mart. Stores that are not grocery stores that could be benchmarked are Costco, Home

Depot, and Target Corp.

When working towards lean initiatives the waste that would be most important to eliminate is inventory. Wal-Mart’s goal is to reduce their inventory by $6 billion. Other waste that the cross-functional team would look at would be

overproduction or transportation and the effective handling of inventory. The processing of inventory both at an ordering level and a receiving level would

need to be analyzed and recommendations and policies implemented. Advantages to this would be that there would be a thorough understanding of

waste at the supplier, distribution center, store, and transportation and data collection level. A cross-functional team brings diversity and a shared purpose to

problem solving. Disadvantages to developing a cross functional team to help reduce inventory levels is that diversity can lead to conflict and employees would either need to be hired or taken from other positions that would then need to be

filled. The feasibility of this would work since there are a lot of people trained in six-sigma methodology. Wal-Mart could hire a Conestoga College Supply Chain

graduate.

15

Medium Term

Design new transportation trucks and trailers. Currently Wal-Mart has a fleet of 6,500 tractor-trailers. Trucks could be designed to be more aerodynamic and be more fuel-efficient. The trailers could have departments for refrigeration and

could have separate doors to help with the separation of fast and slow moving merchandise. Other materials for trailers could be utilized such as carbon finer

panels. Advantages to this are increased cubic capacity, a lighter trailer, increased fuel mileage, improved environmental impact and flexibility in shipping. Disadvantage would be the cost of the new trailers and the cost of disposal for

the old trailers. This could be feasible because shipping performance would be improved and the trailers could be phased in gradually.

Long Term

In the long term it is recommended to ship directly to the stores and mandate that all merchandise or packaging get RFID tags.

Advantages to shipping directly to the store would be that warehouse and distribution center space would be minimized reducing the level of inventory

required. A disadvantage to this is that it would take a lot of planning but with the high level of merchandise shipped it could be feasible. Some of the merchandise

that Wal-Mart could do a trial run on would be Kraft products, toilet paper, seasonal distribution of Wal-Mart brand clothing, seasonal goods such as outdoor furniture and barbecues, Christmas merchandise.

RFID packaging could be on the shipping packaging and for the majority of

products this may be more feasible. RFID tags were mandated on merchandise shipped by Wal-Mart’s top 100 suppliers and were an attempt to increase the ability to track inventory. This was a way to increase in stock rates and reduce

tracking costs. It also meant that smart applications would be able to direct our associates to where the product is so that shelves can be replenished sooner.

This would also help Wal-Mart track promotion effectiveness and reduce out-of-stock sales losses and overstock expenses. RFID rage readers were at the dock where merchandise came in, throughout the back room, at the door from the

stockroom to the sales floor and at the box crushing station.

Metrics Wal-Mart’s Financials should be monitored. Some of the comparisons with

previous years should be gross margin, percentage of inventory to net sales, cost of sales to net sales.

16

Competitors Financial Information This financial information includes the segment or category of competition. It

also includes financial information such as sales, costs of goods sold, SG & A, net income, inventories and assets.

The accuracy of forecasting demand should be measured. This should be monitored at the store level as well as with individual suppliers. This should be

done on a monthly basis to be able to communicate accurate forecast. For the suppliers this is important communication for a continued mutually beneficial

relationship.

Supply Chain Performance Metrics Category Outcomes Diagnostics

Customer Satisfaction Order fulfi l lment Customer satisfaction Product quality

Delivery to order date Returns

Time Order fulfi l lment lead time Cycle time Response time

Costs Total supply chain costs Value-added productivity

Inventory Levels Days of supply

Forecast accuracy Inventory obsolescence Capacity utilization Category

Stock outs Category

Employee Satisfaction Efficiency Performance Engagement

Check drivers, warehouse employees,