Walmart Supply Chain Low Pricing Strategy

Walmart Supply Chain Low Pricing Strategy A University of San Francisco Online White Paper Internet Marketing 1

Table of Contents 1. Walmart Gets Low Pricing from Suppliers... 4 A Pricing and Procurement Strategy Based on Bulk Buying... 4 Sharing Knowledge and Creating Partnerships... 4 Collaboration with Suppliers Leads to Fewer Links in the Chain... 5 Collaboration... 6 Technology Investments Pay Off... 6 2. Walmart Forecasting and Logistics Management... 6 Collaboration is Key... 7 3. Walmart Logistics... 7 Walmart Regional Distribution Centers... 8 4. Use of Distribution Centers and Warehousing... 9 The Walmart Data Warehouse... 9 Strategic Use of Distribution Centers... 10 Technology and Distribution... 10 Cross-Docking... 10 Experienced Drivers... 10 Supply Chain Management 3

W almart is the world s largest public corporation and one of its major retailers with nearly 11,000 stores in 27 countries, plus a robust online store. Walmart customers are accustomed to paying low prices for everything from home electronics and clothing to breakfast cereal and milk. Those low-price sales added up to $473 billion in 2013. Or to think of it another way, in 2013, Walmart cash registers rang up $1.3 billion a day, $54 million each hour, $900,000 a minute or about $300,000 in the time it took you to read the first paragraph. Feeding that vast retail machine and keeping over 100,000 items lining Supercenter shelves constantly in stock requires Walmart to maintain a superbly efficient supply chain. The retailer employs satellites, technology, fierce efficiency and its clout as retail s 800-pound gorilla to weld a supply chain that may be the world s best at getting products from the supplier and into customers shopping carts. And all while cutting costs to maintain its place as a low-price retail leader. It starts with Walmart s vast market share that gives the company the dominant position when cutting deals with manufacturers combined with a constant, laser focus on keeping costs down. 1. Walmart Gets Low Pricing from Suppliers Walmart s supply chain management established a deliberate strategy to control the process at every step and secure low prices from suppliers. A Pricing and Procurement Strategy Based on Bulk Buying Walmart s purchasing power gives the company plenty of strength when negotiating prices with suppliers. Bulk buying enables Walmart to leverage large discounts, negotiate long-term contracts and leapfrog distributors to deal directly with manufacturers. The company focuses on skipping middle-men in the deal, such as having its own fleet of trucks that eliminates paying a supplier for transportation. Walmart s size gives the company the power to keep suppliers from offering lower prices to other retailers while Walmart can pressure suppliers to lower costs or tamp down price increases. Sharing Knowledge and Creating Partnerships Walmart s strategy to buy at the lowest price and pass savings to customers increased its sales, which led to greater purchasing power and ever-increasing discounts and negotiating muscle. High demand for products allows some large companies such as Kraft Foods room to counter-negotiate with Walmart while the volume of sales to Walmart gives Kraft the ability to offer lower prices than other retailers might see, Reuters said. Supply Chain Management 4

One innovation Walmart developed was its mutually beneficial approach to partnering with suppliers. The company opened access to its sales data and technology which gave suppliers the opportunity to plan more efficiently, resulting in lower costs. Suppliers, in turn, became more transparent with their own information. Procter & Gamble set up an inventory system with Walmart that included an automatic reordering process linking the supplier and retailer that alerted P&G when a product was running low at a store. That triggered an order for the nearest P&G factory to ship the item to a distribution center or directly to the store. For P&G, synchronizing its product data with Walmart s sales saved the supplier millions annually, according to an article on Free Patents Online, originally published by International Academy of Business and Economics. For other suppliers, Walmart s requirements to ship only shelf-ready goods, complete with Walmart pricing, can squeeze their margins. Many Walmart suppliers have changed packaging or manufacturing processes to reduce costs or improve shelf space based on Walmart s specifications. Walmart also requires manufacturers to facilitate its internal timesaving measures by applying RFID tags to pallets and cartons, allowing products to move to the correct loading dock and cut distribution time. Trimming costs in any way possible allows suppliers to remain price competitive and stay on Walmart s store shelves. Consistently among the best Research and analysis company Gartner has ranked Walmart among its top 25 supply chains the past five years. 2010 No. 4 Collaboration with Suppliers Leads to Fewer Links in the Chain Walmart works with other suppliers to set up operations similar to that used between the retailer and P&G. Partnering with its suppliers to implement Vendor Managed Inventory (VMI) allowed Walmart to shorten its supply chain and further reduce costs. Vendors are required to manage their own products inventories in Walmart s warehouses. Powerful software in each retail outlet tracks point of sale data so suppliers know exactly what s selling where and when. 2011 No. 7 2012 No 9 2013 No. 13 2014 No. 14 ----gartner.com Instead of asking Walmart to send purchase orders, suppliers and Walmart buyers use the webbased system to track sales and ship products automatically, saving time and money. Suppliers find Supply Chain Management 5

the estimates of future sales to be helpful in planning and preventing over- or under-supply of products. Technology Investments Pay Off Walmart achieved rapid growth through supply chain innovations, and by taking the company public. The company then invested in even more sophisticated technology, including its satellite network in the late 1980s which links the company s headquarters, retail stores, suppliers and distribution centers and provides real-time exchange of data. The satellite system enabled just-in-time ordering with key suppliers as each store s sales data automatically triggers a restocking order just when needed. The entire process of inventory levels triggering an order with the supplier, purchasing and paying for new stock and transferring shipping information can happen in seconds. Walmart s satellite network offers instant data transfer, two-way voice transmission, lower telephone expenses and quicker checkout services all of which contribute to cost savings and lower prices. In addition, the system allows Walmart to better respond to consumer demand by stocking up on big-selling items and avoiding oversupply of slower sellers. Now, it s hard to believe retailers once had a 90-day ordering window which often meant that by the time a shirt or dress reached the rack, it was already out of style. Walmart s supply chain management and innovative use of technology paid off for the company in time savings, faster inventory turnover and warehouse efficiency. From the early 1990s through 2013, sales climbed from $1 billion per week to over $1.2 billion per day. 2. Walmart Forecasting and Logistics Management Collaboration In 1995, Walmart used the CPFR process in a pilot program connecting retail demand with replenishment with Listerine as a test product. Results showed the in-stock average rose to 98%, sales increased by $8.5 million over the trial Along with securing the lowest possible prices from suppliers, Walmart pioneered the period use of and its sales lead time forecasting and logistics management to ensure the retailer can pass cost savings from suppliers on to customers. fell from 21 days to 11. businessweek.com Supply Chain Management 6

Collaboration is Key Collaboration is key to Walmart s supply chain strategy, which is based on the concept of CPFR Collaborative, Planning, Forecasting and Replenishment. Essentially, CPFR is a planning process between Walmart and its suppliers that includes these steps: 1. Reach an agreement at the beginning: Set objectives, guidelines and rules, establish needs, responsibilities, resources and systems and define service and success. 2. Craft a two-party business plan: Discuss strategies, develop roles and tactics and agree to the business plan. 3. Create sales forecast: Analyze POS data, causal information and identify events such as holidays to create a sales forecast. 4. Identify exceptions for sales forecasts. 5. Create order forecasts and any exceptions. 6. Generate order. CPFR offers substantial benefits to both Walmart and its suppliers as well as to its customers. It reduces forecasting errors, turnaround time, stock shortages and transportation costs, while improving customer service, inventory turnover and revenue. Both Walmart and its suppliers enjoy lower costs as a result. The forecasting method also eliminates the natural tension between the supplier constantly pushing to sell more to the retailer and the retailer trying to cut costs and reduce excess purchasing and inventory. Walmart was a leader in standardizing CPFR technology, which is now considered a fundamental business strategy around the world. Critical to Walmart providing goods and services to our customers throughout the world is our transportation and logistics network. Since the early days of our company, the ability to replenish our Stores and Clubs quickly and at low cost has been a key contributor to success. Tracy Rosser, Senior Vice President of Walmart Transportation addressing a U.S. House transportation panel in 2013 3. Walmart Logistics In addition to dogged negotiation to secure the best price from suppliers and tapping technology to improve inventory management, ordering and forecasting efficiencies, Walmart s proficiency at Supply Chain Management 7

getting products to store shelves through an intricate network of distribution centers and its trucking fleet comprises the third element of its supply chain management. Walmart opened its first distribution center in Bentonville, Arkansas, in 1970 as a general warehouse facility, according to an analysis of the retailer s distribution network by logistics consulting company, MWPVL International, Inc. That center was converted to office space in 1986, MWPVL said. The company now has approximately 150 distribution centers, including nine designated as disaster distribution centers which are stocked and ready to supply needed items in the aftermath of natural disasters. Approximately 80% of merchandise for Walmart s stores ships through the distribution centers, and 64% of Sam Club merchandise, according to MWPVL. Direct store delivery, or DSD, with manufacturers and suppliers shipping to stores handles the balance of merchandise distribution. Each of Walmart s distribution centers: Typically supports 90 to 170 stores within a 200-mile radius. Can exceed 1 million square feet in size. Has from five to 20 miles of conveyer belts. Walmart also maintains a private fleet of 6,500 tractors and 55,000 trailers. Each of their 7,500 drivers average 100,000 miles per year, Walmart s senior vice president of Transportation, Tracy Rosser, told a U.S. House transportation panel in 2013. Walmart s sustainability goals include doubling its fleet efficiency by 2015, Rosser told the House panel. In 2012, its fleet increased delivery by nearly 300 million cases while driving 11 million fewer miles compared to 2011. Walmart Regional Distribution Centers MWPVL s analysis said Walmart s distribution system is divided into six types: Regional General Merchandise Distribution Center More than 40 operate in the United States, totaling 50 million square feet and averaging over 1,000 employees. A portion of each facility is dedicated to the mechanized conveyor system can be up to 20 miles in length. Each regional distribution center supports between 90 and 170 stores with fastmoving dry grocery and general merchandise, such as electronics, sporting goods and health and beauty aids. Walmart Grocery Distribution Center More than 40 operate in the United States totaling about 35 million square feet and averaging 750 employees. These facilities are owned by Supply Chain Management 8

the company and distribute dry grocery, dairy, fresh meat and produce, and frozen food. At least 17 centers support both Walmart and Sam s Club stores. Walmart Fashion Distribution Center There are seven fashion distribution centers and one smaller footwear distribution center totaling about 7.6 million square feet and averaging 700 employees. Each is designed to support upwards of 1,000 stores. Walmart Import Distribution Center Walmart has 11 import distribution center buildings in five United States locations, totaling 15.5 million square feet close to major ports such as Long Beach, Houston and Chicago. Each receives containers of merchandise and redistributes the goods to regional general merchandise and grocery distribution centers. Sam s Club Distribution Centers There are more than 15 Sam s Club distribution centers within the United Sates, exceeding 2.5 million square feet. Third-party logistics (3PL) companies operate some, with the rest company-owned and operated. These cross-dock facilities allow full pallet receiving on one side of the building and shipping on the other. Specialty Distribution Centers These include export distribution, optical laboratory plants, pharmacy distribution centers, a print and mail distribution center, returns centers, tire distribution centers, electronics refurbishment centers and Walmart.com distribution centers. Walmart Center Point Distribution Centers These total nearly 20 facilities. Some are attached to other centers and some are stand-alone buildings. They consolidate merchandise shipped from suppliers and distribute it to the nearest distribution center. 4. Use of Distribution Centers and Warehousing With Walmart s sprawling network of distribution centers, the retailer has to coordinate storage and shipping of its merchandise around the globe. The Walmart Data Warehouse Walmart s data warehouse maintains a centrally managed, easily accessed copy of all the data collected from its retail outlets, suppliers, distribution centers essentially, all the data necessary to run Walmart. Suppliers can access two full years of sales data on their own products, but not that of other suppliers. Suppliers use this data to determine the amount of product they will ship, and when. Most Walmart suppliers send less than 30% of their total production to Walmart. Benefits of selling such large volumes to Walmart include keeping manufacturing facilities running and the brand awareness that comes with occupying space on a Walmart shelf. Supply Chain Management 9

Strategic Use of Distribution Centers Instead of shipping directly to stores, most of Walmart s suppliers transfer goods to the company s web of distribution centers which allows the company to ship about 85% of its merchandise from the centers with the balance shipped directly from the suppliers, the Free Patents Online article said. This cuts restocking time to two days on average compared to competitors five days. Shipping costs are roughly 2% lower compared its competitors. To further reduce costs and increase efficiency, each Walmart store is located within one day s drive of a distribution center. This proximity facilitates the company s just-in-time inventory replenishing system. The quick replenishment allows more store floor space to be devoted to sales rather than inventory storage. Walmart s in-store inventory and staging space is about 10% of total floor space, compared to competitors average of 25%. Technology and Distribution Walmart requires suppliers to use standardized containers and pallets, and barcode technology allows distribution center employees to identify each container s contents, origin and destination. Handheld scanners send all data to the supply chain management satellite network providing employees with access to real-time information on inventory levels of all products in the distribution center. These efforts allow easier and more economical distribution center management by eliminating paperwork and ensuring a steady flow of merchandise. Cross-Docking Walmart s distribution centers also use cross-docking or direct transfers from inbound and outbound truck trailers with no extra storage, to maximize efficiency. Goods from suppliers are picked up by Walmart trucks and delivered to the distribution centers where they are repackaged for delivery to stores. Goods will cross from one loading dock (inbound) to another (outbound) in a 24-hour window, a 2012 article by Arkansas Business said. This allows Walmart drivers to continuously replenish stock at the retail stores, and bring unsold merchandise back to the distribution center. Experienced Drivers Walmart s logistics and distribution system relies heavily on its fleet of tractors and trailers, as well as on the workers who drive them. The company has developed an efficient process for hiring, training and supervising drivers. Walmart s Private Fleet Driver Handbook spells out the rules for following pre-planned routes, unloading safely at stores and docking at the distribution center, according to a case study on the blog site of Jimmy Alyea. For example, a driver can bring a trailer Supply Chain Management 10

to the loading dock only at a specified time. Trailers are unloaded at two-hour intervals during the night regardless of the time the driver arrived at the distribution center. Walmart hires only professional drivers with at least 300,000 miles of accident-free experience and a knack for customer service. Drivers are also held to a standard of conduct, which includes treating retail stores as customers of the distribution centers, and always being polite when interacting with store associates. Walmart s approach to hiring and managing its drivers gets results. Walmart has been held up as an example of proper supply chain management since the early days of the company when founder Sam Walton was developing ways to increase efficiency and lower costs. His goal of always offering customers the lowest possible price is maintained today through collaborations with suppliers, smart logistics and distribution, and some of the retail industry s most innovative advances in technology. Walmart s success shows how successful supply chain management can have a significant positive impact on a company s bottom line. Whether you re a business owner or a professional in logistics, planning or procurement, acquiring the latest skills in supply chain management can provide you with a tremendous advantage in a competitive and complex marketplace. The University of San Francisco s Advanced Professional Supply Chain Management Certificate, which is offered 100% online, provides students with insights into the best practices of supply chain, from planning, procurement, manufacturing and distribution, logistics and beyond.. Disclaimer This research has been done on behalf of the University of San Francisco Online. Any names, logos, and other trademarks that have been referenced belong to their respective trademark owners, who are not affiliated with, nor endorse or sponsor, the institution, its programs, or its materials. Sources Wal-Mart Stores Inc. investing.businessweek.com. Bloomberg Businessweek. Last Ref. Oct. 22, 2014. Geller, Martinne and Wohl, Jessica. Analysis: Wal-Mart s price push tests manufacturers prowess. reuters.com. Thomson Reuters. March 6, 2012. Last Ref. Oct. 22, 2014. Khade, Alan S. and Lovaas, Nathan. Improving supply chain performance: a case of Wal-Mart's logistics. freepatentsonline.com. International Academy of Business and Economics. Jan. 1, 2009. Last Ref. Oct. 22, 2014. The Walmart Distribution Center Network in the United States. mwpvl.com. MWPVL International, Inc. Last Ref. Oct. 22, 2014. Supply Chain Management 11

CPFR Means Process and Practice. businessweek.com. Bloomberg, L.P. Last Ref. Oct. 29, 2014. Statement of Tracy Rosser Senior Vice President of Transportation at Wal-Mart Stores, Inc. transportation.house.gov. U.S. House Panel on 21st Century Freight Transportation. Jan. 26, 2013.Last Ref. Oct. 22, 2014. Traub, Todd. Wal-Mart Used Technology to Become Supply Chain Leader. arkansasbusiness.com. Arkansas Business Limited Partnership, July 2, 2012. Last Ref. Oct. 22, 2014. Alyea, Jimmy. Analyzing Wal-Mart s Distribution and Logistics System. jimmyalyea.blogspot.com. Feb. 11, 2012. Last Ref. Oct. 22, 2014. Supply Chain Management 12