Sam Walton decided to build a company that would serve a mass market and compete on the basis of price. He did this by creating one of the world’s most efficient supply chains. The structure and operations of this company have been defined by the need to lower its costs and increase its productivity so that it could pass these savings on to its customers in the form of lower prices.
The techniques that Walmart pioneered have been widely adopted by its competitors and other companies serving entirely different markets. Walmart introduced concepts that are now industry standards.
Four Supply Chain Concepts from Walmart
Many of these concepts come directly from the way the company builds and operates its supply chain. Let’s look at four such concepts:
- The strategy of expanding around distribution centers (DCs)
- Using electronic data interchange (EDI) with suppliers
- The “big box” store format
- “Everyday low prices”
1. The strategy of expanding around DCs is central to the way Walmart enters a new geographical market. The company looks for areas that can support a group of new stores, not just a single new store. It then builds a new DC at a central location in the area and opens its first store at the same time. The DC is the supply chain bridgehead into the new territory. It supports the opening of more new stores in the area at a very low additional cost. Those savings are passed along to the customers.
2. Using EDI with suppliers provides the company two substantial benefits. First of all this cuts the transaction costs associated with the ordering of products and the paying of invoices. Ordering products and paying invoices are, for the most part, well defined and routine processes that can be made very productive and efficient through EDI. The second benefit is that these electronic links with suppliers allows Walmart a high degree of control and coordination in the scheduling and receiving of product deliveries. This helps to ensure a steady flow of the right products at the right time, delivered to the right DCs by all Walmart suppliers.
3. The “big box” store format allows Walmart to, in effect, combine a store and a warehouse in a single facility and get great operating efficiencies from doing so. The big box is big enough to hold large amounts of inventory like a warehouse. And since this inventory is being held at the same location where the customer buys it, there is no delay or cost that would otherwise be associated with moving products from warehouse to store. Again, these savings are passed along to the customer.
4. “Everyday low prices” are a way of doing two things. The first thing is to tell its price conscious customers that they will always get the best price. They need not look elsewhere or wait for special sales. The effect of this message to customers helps Walmart do the second thing. The second thing is to accurately forecast product sales. Sales and other events designed to sway customer purchasing tend to make demand forecasting much more difficult and this affects supply chain planning. By eliminating special sales and assuring customers of low prices, it smooths out demand swings making demand more steady and predictable. So stores are more likely to have what customers want when they want it.
Taken individually, these four concepts are each useful but their real power comes from being used in connection with each other. They combine to form a supply chain that drives a self-reinforcing business process. Each concept builds on the strengths of the others to create a powerful business model for a company that has grown to become a dominant player in its markets.
Use these Concepts to Lower Costs and Inventory in any Supply Chain
Apply these concepts to design supply chains and see how they solve problems in SCM Globe supply chain simulations . For example:
- Use the strategy of expanding around central DCs to lower transportation costs. This enables a “hub and spoke” distribution model where a central fleet of delivery trucks efficiently services a ring of surrounding stores.
- EDI or other electronic connections between suppliers enables JIT or just-in-time delivery schedules. Set up your delivery schedules in SCM Globe use the economic order quantity or EOQ equation to set delivery amounts and frequencies to minimize on-hand inventories and meet demand with JIT deliveries (see Cutting Inventory and Operating Expenses)
- Use the big box store format by expanding storage space at the store facilities enabling them to maintain a lot of on-hand inventory to meet high levels of demand. This also enables fewer and larger deliveries to the stores from the DCs and that will lower transportation costs.
SCM Globe supply chain simulations and case studies show how using these concepts when you design supply chains will lower costs and inventory levels across a supply chain. One example of this is the “Fantastic Company” case study, the screenshot below illustrates how a regional DC supports surrounding stores.
The simulations generate daily operations data and that data can be used to create monthly Profit & Loss reports and generate supply chain key performance indicators (KPIs). Use daily operations data from simulations and apply classic supply chain equations such as the economic order quantity (see how to apply the EOQ equation in Cutting Inventory and Operating Expenses). The EOQ equation will guide you to set delivery amounts and schedules so as to lower on-hand inventory and transportation costs while still meeting product demand.
Don’t just blindly follow the equations but see for yourself how they work. The new beta test reporting template will help you apply optimizing equations to the daily simulation data to select the best delivery routes and locate new supply chain facilities and simulations illustrate how and why those equations work (here is the link to an explanation of the beta test reporting template).
Part of this article is excerpted from my book Essentials of Supply Chain Management, 4th Edition, 2018
Copyright © 2014, 2018 by SCM Globe Corp.