08/10/2019 Print canvas 1/14 08/10/2019 Print canvas 2/14 08/10/2019 Print canvas 3/14 08/10/2019 Print canvas 4/14 08/10/2019 Print canvas 5/14 08/10/2019 Print canvas 6/14 08/10/2019 Print canvas 7/14 08/10/2019 Print canvas 8/14 08/10/2019 Print canvas 9/14 08/10/2019 Print canvas 10/14 08/10/2019 Print canvas 11/14 08/10/2019 Print canvas 12/14 08/10/2019 Print canvas 13/14 08/10/2019 Print canvas What Is the Right Supply Chain for Your Products? Master Notes Enter notes here 14/14 SCHM6201: Operations and Supply Chain Management Reading 1 Read the following:  Fisher, M.L. (1997) “What is the right supply chain for your product?” Harvard Business Review (March/April), pp.105–116. Lesson 1: Why Focus on Supply Chain Management? Introduction The rapid growth of global business has resulted in large quantities of goods and materials moving between countries and continents. Raw materials are shipped from producing countries to manufacturing facilities. The manufacturing plants in their turn ship their products (finished goods) to markets all over the world. When the manufacturer and the customer were in a small region or in one country, the coordination of the various stages in the supply chain was not very difficult. Additionally, until recently, each stage of the supply chain just described acted independently. The steel plant dealt only with the ore producers on the raw-material side and the steel distributors on the market side as far as its production decisions were concerned; it did not look at the impact of its decisions on the automobile manufacturer or other producers that used steel. However, this is no longer the case. Increasingly, businesses rely on multiple firms for resources, supplies, services, access to innovation, and so on. Many firms focus on areas of their core competency and outsource other functions. As such, many firms have to manage a complex network of supply chain partners that affect its operations and competitiveness in different ways. They have to focus on and manage an entire supply chain. What is a Supply Chain Management? A supply chain can be defined as the network of organizations that are involved in the design, production, delivery, consumption, and disposal of goods, services, and related information. Supply chain management entails integrating business functions and processes within and across companies to achieve seamless, efficient, and effective performance. A supply chain entails a network of supply-side partners (for example, component suppliers; sub-component suppliers; suppliers in tier 1, tier 2, tier 3 levels; and so on) and demand-side partners (such as distributors, retailers, and logistics service providers) of a focal firm. As shown in the following diagram, the supply chain of a typical manufacturer can extend over a number of tiers. (This image shows only three tiers, but it can extend to many tiers depending on the complexity of the product.) The vendors at different levels provide not only materials but SCHM6201: Operations and Supply Chain Management also services. An efficient supply chain has to manage both the material flow and the service flow through the chain such that the materials and the services are available to the different stages when needed in adequate quantities and at the lowest cost. Supply Chain Chart Alternate Version Dynamics of Supply Chains Uncertainty in the Supply Chain Uncertainty and risk in the supply chain can make or break any supply chain member. What are the causes of risk and uncertainty, and how can companies alleviate them? Uncertainty in the supply chain stems from many factors, some of which are demand driven, others supply created, and yet others produced by further aspects of the supply chain. Some issues include fluctuations in demand, receiving variability, quality problems, transportation matters, and seasonality, to name just a few. The major negative impacts of poor supply chain decisions are widely known in the public domain. One case in point is Cisco, which wrote off $2.25 billion in inventory in 2001. Pfizer Pharmaceuticals is another example of a company that suffered disastrous losses of about $2.8 billion as a result of ill-advised supply chain decisions. Finally, Boeing’s global outsourcing strategy for building the new 787 Dreamliner highlights yet another notorious failure. Although on the surface Boeing’s strategy made sense to cut costs, it completely backfired and led to severe product delivery delays caused by defective components and unplanned outlays of more than $2 billion. SCHM6201: Operations and Supply Chain Management There are various frameworks to understand and mitigate uncertainty in the supply chain. One distinguishes between uncertainties within a company and those external to it. The internal uncertainties can be dealt with by managerial responses. While companies cannot control external uncertainties, they might be able to take actions over time as various scenarios become clearer. External uncertainties stem from the supply chain being an association of entities with some common goals and some explicitly individual company goals. Postponement, in its many forms, has been one of the primary means to mitigate uncertainty in the supply chain. It involves, wherever possible, delaying supply chain activities to reduce uncertainty. Postponement can involve purchasing, manufacturing, and distribution activities and other areas of the supply chain. Regardless of the stage in the supply chain, the underlying strength of postponement is that it allows better-informed managerial decisions because the decisions are made closer to the decision point. That positively affects forecasting, inventory, and distribution. Postponing examples abound, but here are just a few:    A retail company redesigns its supply chain to delay the dyeing of its garments until much closer to the selling season. An appliances manufacturer restructures its distribution system to delay shipments until customer orders are received. A manufacturer moves the final assembly of its printers to a later stage in the supply chain. As stated, uncertainty in the supply chain stems from many factors including demand, supply, and other aspects of the supply chain. Let’s examine it within the SCOR (Supply Chain Operations Reference) model created by the APICS Supply Chain Council. The SCOR framework illustrates a closed-loop supply chain. The Plan, Source, Make, and Deliver aspects deal with the forward supply chain. The Return facet handles reverse logistics. Specifically, the Plan area shows that a supply chain should be a competitive weapon embedded in the corporate strategy. Demand forecasting is essential to this endeavor. Sourcing includes procurement and outsourcing. The Make aspect of the framework deals with production scheduling and inventory management. The Deliver phase includes order and distribution management. Finally, the framework deals with reverse logistics, which involves product returns among other things. The simulation game covers most of these aspects. How can we now categorize uncertainty according to this framework? On the demand side, it comes from each company simply dealing with the customers it supplies. Because companies do not integrate into the supply chain and exchange information with all other constituents, this leads to the bullwhip effect, otherwise known as the amplification effect. On the supply side, the quality and timeliness of the suppliers contribute to this concern. In particular, manufacturers use metrics to evaluate suppliers related to cost, quality, lead time, and time to market for new products. In addition, the manufacturing process also contributes to uncertainty in the supply SCHM6201: Operations and Supply Chain Management chain. The lack of flexibility and inefficiency in this process can also add to the uncertainty. Finally, if planning and control systems, such as ERPs, are not effectively implemented or managed, they will also result in increased uncertainty. References:    Johnson, Luo, Margherita, Patil. “787 Dreamliner,” MBA Project, Northeastern University. Hult, Craighead, Ketchen. (2010). Risk Uncertainty and Supply Chain Decisions: A Real Options Perspective, Decision Sciences, Volume 41 Number 3, pp. 435-458. Prater and Whitehead. (2013). An Introduction to Supply Chain Management: A Global Supply Chain Support Perspective, Chapter 9. HBSP Publishing. The Bullwhip Effect The behavior by the P&G supply chain participants has been widely documented in a whole host of instances throughout the global economy. It is known as the bullwhip effect. It is a phenomenon exhibited by supply chains where relatively minor shifts in downstream demand generate disproportional variability in the supply position of upstream entities. This volatility amplifies as you move further upstream in the supply chain. The bullwhip effect is characteristic of uncoupled or loosely coupled supply chains, where each member entity makes myopic decisions solely related to their own bottom line. The bullwhip effect results in major issues involving increased cost, poorer service, and sustainability issues. What are the specific supply chain limitations that lead to such actions by its constituency and their dire consequences? Bullwhip Effect Alternate Version SCHM6201: Operations and Supply Chain Management Causes of the Bullwhip Effect Broadly speaking, the bullwhip effect arises from the impact of the aforementioned decisions on the time dimension in the supply chain. That is to say that these decisions, albeit rational, inevitably lead to delays in goods manufacturing and shipping downstream, upstream information communication, and financial transactions throughout the supply chain. More specifically, there are quite a number of causes of escalating demand fluctuations in the supply chain. In their seminal article, Lee, Padmanabhan, and Whang identified four major reasons for the bullwhip effect:1     Demand forecast updating o Managers at each level in the chain make adjustments to the demand estimates received from their immediate downstream operation. This, in turn, obscures the actual customer demand. Order batching o Volume cost reductions (such as quantity discounts) and transportation discounts created by lower full truckload rates are among the factors that lead to this situation. Price fluctuation o Promotions of all sorts involve desirable prices that skew the consumers’ buying pattern with respect to their actual consumption behavior. Rationing and shortage gaming o To counter product rationing by manufacturers in periods of supply shortages, customers order more than they need. This behavior provides suppliers little visibility of real customer demand. In addition to these factors, lack of coordination and/or communication among the supply chain partners, irregular or magnified orders designed to decrease inventory or address backlog positions, and free return policies create an environment prone to the bullwhip effect. Moreover, quality problems, strikes, natural disasters, and security issues only make the situation worse. Realizing the severe impact of this phenomenon, many corporations have implemented successful countermeasures. [1] Lee, H.L., Padmanabhan, V., & Whang, S., 1997. The bullwhip effect in supply chains. MIT Sloan Management Review, vol. 38, issue 3 (Spring), pp. 93-102 SCHM6201: Operations and Supply Chain Management How to Overcome the Bullwhip Effect According to Lee, Padmanabhan, and Whang, the bullwhip effect can be mitigated in a number of ways:  Improve forecasting throughout the supply chain o Share demand information with upstream supply chain partners, such as point of sale (POS) data. o Collaborate with suppliers to allow them control over replenishment decisions known as Vendor Managed Inventory (VMI). o Forecast closer to the downstream’s entity stocking decision, by means of information sharing and better forecasting software.  Break order batches o Provide frequent production and work-in-process (WIP) information to customers over the Internet to determine whether partial orders are acceptable. o Use just-in-time (lean) delivery management. o Rely on third-party logistics providers to consolidate loads with those of other companies to derive better transportation rates.  Stabilize prices o Replace promotion pricing with everyday low pricing policies. However, this is very difficult to implement given the history and nature of different industries. o Provide incentives aimed at ordering at regular intervals in order to eliminate customer buying surges. o Limit or discontinue discounts for buying in bulk and address the causes of order reductions or cancellations.  Eliminate gaming in shortage o Fulfill orders based on past sales. o Share capacity and inventory information with all members of the supply chain. o Ask customers to place orders well ahead of the sales season. References:  Lee, H.L., Padmanabhan, V., & Whang, S., 1997. The bullwhip effect in supply chains. Sloan Management Review, vol. 38, issue 3 (Spring), pp. 93-102 Elements of Supply Chain Management Measures of Effectiveness of Supply Chain Management The main objective of good supply chain management is to get the products to the customer in the needed quantities at the right time with the least amount of inventory at the various stages in the manufacture and distribution. With this as the guiding principle, we can devise a number of SCHM6201: Operations and Supply Chain Management measures to evaluate the effectiveness of a supply chain, such as:       Aggregate inventory Weeks of supply Inventory turns Percentage defects Percentage on-time delivery Supplier lead times An important measure is total inventory in the system. More inventory in the system means more money is tied up in inventory. An efficient supply chain should have as little inventory as needed to provide an adequate level of service. Another related measure is the number of weeks of supply in the system. For example, in a manufacturing plant, the number of weeks the plant can run with the existing inventory of purchased parts and raw materials is an important measure. More weeks of supply indicates poor management of the supply chain because the firm has invested in idle inventory. Inventory turns can be a measures of the efficiency of the purchasing and inventory management in providing materials to the plant and in maintaining finished goods inventories. For example, if the average inventory of all items (including finished goods) is $10 million and the annual sales is $100 million, then the inventory turns is 10 per year ($100 million/$10 million). Good supply chain management should focus on increasing the number of inventory turns. Most firms using traditional methods of materials management have inventory turns of right to 12 per year. Firms using some of the just-in-time (JIT) techniques in their manufacturing and having a good vendor management program have achieved inventory turns of 60 or more. This means that their supply chain and operations are so efficient that they can run their operations with about a week's supply of materials. These measures all refer to the quantity of inventories held at different stages in the supply chain. Other measures evaluate other important characteristics. An important measure is the percent of defects. This indicates the care with which the vendors have been chosen as well as the manufacturing plants performance in terms of quality. A good supply chain must enable the firm to keep to its delivery commitments. Delays in delivery are usually the result of problems in the supply chain. Finally, a good supply chain should have vendors that can respond quickly, as measured by the lead time for their deliveries. These measures should be evaluated frequently to monitor the performance of the supply chain. Just in Time During the latter part of the last century, Japanese manufacturers, and especially Toyota Motor Co., developed and implemented in their manufacturing operations a new system of scheduling and materials management called Just in Time (JIT). As the name implies, the system provided materials and components in the correct quantities just when they were needed—not early or late. Such a system is called a pull system, where material is pulled along depending on the SCHM6201: Operations and Supply Chain Management demand. Traditionally, firms would procure components from vendors in large quantities, taking into account the long lead times (the time for delivery from the vendor), the lower quality, and the variability of both demand and delivery times. It was very common to add additional quantities (usually called safety stocks) to the expected demand just to be sure that the materials were available when needed. Such systems are called push systems and were facetiously called JIC (Just in Case) systems. JIT is usually employed in repetitive manufacturing situations and requires the following conditions to be satisfied: 1. 2. 3. 4. Have a reasonably steady demand. Produce only as much as needed by the next stage. Produce and deliver in smaller batches. Maintain a very high quality level. It is claimed that by producing in smaller batches and in exact quantities needed by the next stage, thereby reducing inventory, mistakes that lead to quality problems and other issues are exposed, which can then be corrected or eliminated. JIT leads to smaller inventories of WIP (work in process). Some of the leading practitioners of JIT claim keeping only a day’s worth of WIP. The main benefits of JIT include:        Reduced setup time More efficient use of employees with multiple skills Greater synchronization of production scheduling with demand Receiving supplies at regular intervals throughout the production day Increased emphasis on supplier relationships Minimizing the need for storage space A more comprehensive approach using this philosophy is called Lean Manufacturing. The basic idea is to eliminate waste—waste of materials, waste of time, waste of effort, and any other type of waste. You may want to see the following YouTube videos to enhance your understanding of JIT. o o 25 JIT at McDonalds (Closed captioning is available on the YouTube player.) Four Principles Lean Management - Get Lean in 90 Seconds (Closed captioning is available on the YouTube player.) SCHM6201: Operations and Supply Chain Management Summary This lesson discussed the supply chain and explored the impact of various operational decisions relating to the supply chain on the efficiency and costs of operation. Supply chain management has become important with the globalization of industries and markets. Products are produced in relatively low-wage countries and sold all over the world. Materials for these operations have to travel long distances over long periods of time, resulting in large amounts held in inventories at various points in the chain. Efficient supply chain management looks at the entire chain and attempts to minimize the total costs of inventory and handling of these materials by maintaining minimum amounts of inventories without affecting the service level. New integrative software such as Enterprise Resource Planning (ERP) has helped many firms to achieve efficient supply chain management. Lesson 2: Operations Management Introduction In this lesson, we will explore a typical operations system and its components. We will discuss the interactions between different components of the system, the information flow among them, and the mechanisms available to the manager for controlling the outputs of the system. This lesson will further discuss the capacity of an operations system and the factors that contribute to limiting that capacity. Utilization and efficiency of an operations system are also discussed. The Components of an Operations System An operations system takes in the right inputs, processes them through the transformation process, and produces outputs of goods and services desired by the society. Note: Manufacturing typically produces tangible goods, while services usually produce intangible "goods". Also, typically with services, there is more direct contact with the customer. SCHM6201: Operations and Supply Chain Management The Operations System Alternative Text From the input stage, the materials flow to the process stage where they are processed, and finally, they are pushed through to the output stage. From the output stage, they reach the customers. Although materials flow in the forward direction, a number of information flows travel through the system in both forward and backward directions. Information about the quantity and quality of output is a feedback step that flows from the output stage to the process stage and also back to the input stage. For example, if the quality of output is not up to the specifications, that information comes to the process stage, where corrective steps can be taken, and also to the input stage, where the incoming materials can be thoroughly checked. Similarly, other information flows affect the operation. For example, information about external factors such as weather, economy, and market trends flow to all three stages, because they affect all three. For instance, weather may dictate the product mix, and the economy might suggest slowing down the rate of production in the process, which in turn affects the input rate. The operations manager's job is to maintain the process in the presence of all these factors to produce the output needed by the market and to be profitable. In service operations, the input is usually the customer. For example, in a restaurant, we can think of the hungry patron as the input to the restaurant system, while a satisfied customer is an output. The services provided by the restaurant—such as food preparation (chef), order processing and customer service (wait staff), and clean up (busboys)—are part of the SCHM6201: Operations and Supply Chain Management transformation process. The external influences operating on a restaurant are usually things such as weather, restaurant reviews, and advertisements. The number of meals served in a day and the satisfaction of customers after eating at the restaurant are measures of the output. Operations Management Although the operations manager manages these three stages (inputs, transformation process, and outputs), the emphasis is on the transformation process. Thus, an operations manager in a manufacturing operation is responsible for the transformation of raw materials and purchased parts into finished goods to be sold in the market. He/she has to see that the operations run smoothly, the output schedules are met, and the products are of the right quality. In a service operation such as a hotel, the manager is responsible for the satisfaction of the customers through the services provided by the hotel and its employees. He/she has to see that the employees are performing their jobs well to the satisfaction of the customers, that the restaurant is serving quality food consistent with the hotel's reputation, and that customer requests and complaints are met with appropriate courtesy and promptness. The operations manager manages the transformation stage after evaluating how the process is performing in terms of the output quantity and its quality. If the output deviates from the desired or planned output, the process must be adjusted to bring it into line. The deviation could be because of quantity problems that reduce the output. The manager must take corrective action to improve the quality by examining the process or the incoming material. If the output's quality deviates from the desired quality level, the manager should examine the process and incoming materials to correct the problem. An operations manager has to take corrective action for events that occur over which he/she has no control, such as weather conditions or the state of the economy. These events have an effect on the output quantities and input materials, so the operations manager has to take corrective action to compensate for these changes. Process Capacity and Bottleneck In any process, material moves through the different steps (or machines) in the process. In this passage, the material gets worked on; when the material reaches the end of the process, the operation is complete and the output can be released to the outside world or the next department. The rate of output from the process is called the capacity of the process. The processing capacity is usually expressed as a rate: units/hour. For example, the process capacity of an automobile assembly line is 60 cars/hour. Note: Capacity = Units/Hour SCHM6201: Operations and Supply Chain Management The capacity of a process depends on the individual capacities of the machines or steps that make up the process. Each step or machine feeds into other steps or machines. The capacity of the process is not the sum of the individual machines, but is controlled by the step or machine with the least capacity. For analytical purposes, a process flow diagram is used. A process flow diagram is shown here. In this representation, each step or machine where something is done to the material or information is represented as a block; the details of the step (processing time or capacity) are shown under the corresponding block. The sequence of steps is represented by the arrows connecting the steps. Example of a Process Flow Diagram Alternative Text In this process, Machine 3 (or Step 3) has the smallest capacity (the longest processing time). It can process only 25 pieces/hour, while the other machines can process more than that. Such a machine or step (the one with the smallest capacity) is called a bottleneck. The bottleneck step determines the maximum output of the process. The process illustrated in the diagram can never produce more than 25 pieces per hour. The capacity of the whole process, therefore, is 25 per hour even though individual machines or steps can produce more than that. We can therefore conclude the following. Note: The capacity of a process consisting of a series of steps or machines is equal to the capacity of the bottleneck step. Because bottlenecks determine the maximum output from a process, identifying the bottleneck step becomes very important. Although other machines in the process can produce more in a given time, the final output cannot be more than what the bottleneck produces. To increase the output of a process, we must increase the capacity of the bottleneck step. In the illustrated process example, we can increase the output of the process by increasing the capacity of Machine 3. But how much can we increase Machine 3's capacity? If we add another Machine 3, the capacity of this step increases to 50 pieces per hour (25 from each). Has the capacity of the SCHM6201: Operations and Supply Chain Management process increased to 50 pieces per hour? No, because, now Machine 1 becomes the new bottleneck with a capacity of 30. The new output capacity of the process will now be only 30 per hour, even though we doubled the capacity of the earlier bottleneck machine. Increasing the capacity of the bottleneck will increase the output of the system; however, we can only increase the capacity of the bottleneck until some other machine becomes the bottleneck. The bottleneck is a very important concept in determining the capacities of plants, factories, or departments. Many wrong decisions of capacity increase can be avoided if we identify the correct bottleneck step or machine. Analyzing the capacities of individual steps or machines in a process is a key step in the evaluation of a process. Not every process has this sequential arrangement, where the output of one step or machine enters the next step. In many situations, the flow is relatively jumbled, where there are many flows in different directions depending on the process requirements. Even in such cases, it is the bottleneck step that determines the capacity of the system. How do we identify a bottleneck step if we do not have all the process details? From the preceding description of a process, we can infer that the output from the steps preceding the bottleneck step will be at a faster rate than that of the bottleneck. Therefore, work piles up before the bottleneck step, waiting for its turn at the bottleneck step. Note: A bottleneck step or machine can usually be identified by the work piling up before it. In the process flow example discussed earlier, the process involves four machines. The production of a piece will take 7.1 minutes (2 + 1.5 + 2.4 + 1.2 = 7.1) to pass through the entire process if it does not have to wait at any of the steps. This time is called the total processing time. If we include the wait times at some of the steps (resulting from the unavailability of a machine when a piece arrives), the total time a piece spends in the process will be longer. The total time a piece spends in the process (from the time Step 1 starts processing to the time Step 4 completes the work on the piece, including waiting) is called the throughput time (flow time). Because there is inevitable waiting at many machines or steps, the throughput time is generally longer than the total process time. To reduce throughput time, we need to reduce the wait times before different steps. We can accomplish this by making the processing time at each step approximately the same and move the items from step to step in a constant flow. With such an arrangement, the throughput time will be almost equal to the total processing time. There will still be some waiting at some steps that could be avoided by letting the faster steps remain idle for part of the time so that they produce at the same rate as the bottleneck step. This concept is often applied to assembly lines, where the time for each step is made very close to the bottleneck time. This bottleneck time is usually called cycle time in assembly lines. In the previous example, step 3 is the bottleneck and its time is the cycle time (2.4 minutes) for this process. SCHM6201: Operations and Supply Chain Management Gantt Charts (1 of 2) The Gantt chart is a visual representation of the activities in a process and identifies when they take place on a time scale. Such charts are very useful for representing project activities, especially when many different activities are scheduled. The chart helps to plan activities before some required preceding activity is completed. It also shows whether a resource is being called into use by more than one task. This chart represents the activities of different resources (labor, machines, and so on) as bars along a timeline. The length of the bar corresponds to the length of time of the activity. Many commercial software programs such as Microsoft Project can help a planner develop Gantt charts for any project. You can also use an Excel spreadsheet to draw a Gantt chart. Let us revisit the admitting procedure in a hospital consisting of the following steps with additional information about who performs the task: Time Needed to Complete the Step Resource 1. Check-in with receptionist 5 minutes/patient Clerk 2. Filling out forms 8 minutes/patient Patient 3. Interview with doctor 10 minutes/patient Doctor, Patient 4. Other administrative chores 6 minutes/patient 2nd Clerk Step These activities can be represented in a Gantt chart as shown. From the example Gantt chart, we see that the first patient does not have to wait anywhere. However, the second patient has to wait five minutes for the doctor to finish with the first patient. On the other hand, the second clerk finishes with first patient and then has to wait for the second patient to come from the doctor, resulting in an idle time of four minutes for this clerk. This process repeats for every patient (as long as the patients are arriving in a constant stream). Thus for every patient, the second clerk is idle for four minutes, while the patient has to wait for at least five minutes for the doctor. (The wait will be longer as the number of patients arriving increases) SCHM6201: Operations and Supply Chain Management Admitting Procedure in a Hospital Alternate Version Gantt Charts (2 of 2) Question: Assuming the patients are arriving constantly, determine how long the fourth patient has to wait for the doctor. Type your answer in the space provided and then select Compare to view your instructor's answer. Log in to the course to access interactive course content and alternative version. Gantt Charts Operations Systems Alternate Version Utilization Because of imbalances in process capacities and waiting between steps, the process will not produce as much as it could under ideal circumstances. The actual output will usually be less than what the process can produce. The ratio of actual output to the capacity is called utilization. Note: Utilization = Actual Output/Capacity Thus, in the previous process, if the actual output was 20/hour, the utilization of this process would be 20/25 = 80%. The lower output (compared to what the process could produce) may result from inefficiencies in the system, such as waiting, bad quality, and other factors that SCHM6201: Operations and Supply Chain Management reduce output. Additional Notes about Capacity Some of the terms used in this lecture have a more precise meaning. Capacity refers to two different things: design capacity and effective capacity.   Design capacity is the amount that the designers planned to have when they designed the process. This assumes that everything in the process goes smoothly and that there are no delays or holdups. Effective capacity is what we get because of inefficiencies in the process, such as machine breakdowns, bad quality, poor planning, change of product mix, and such other factors. For our purposes, we will refer to effective capacity as simply capacity. Actual output is what we get from the process. Actual output is what one gets from the process. With these terms, we can define two measures for the effectiveness of a process: efficiency and utilization.   Efficiency of a process = Actual Output/Effective Capacity Utilization = Actual Output/Design Capacity Summary This lesson discussed the operations system and the processes employed in such systems. It described the capacities of operations systems and how to determine a system's capacity. It introduced specific terms used in this context—bottleneck, throughput time, and capacity utilization. Lesson 3: Case Study 1 - Wal-Mart Case Reading 2 Read the following:  Half a century of supply chain management at Wal-Mart (Ivey, #W12894). 08/10/2019 Print canvas 9B12D010 HALF A CENTURY OF SUPPLY CHAIN MANAGEMENT AT WALMART1 Ken Mark wrote this case under the supervision of Professor P. Fraser Johnson solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2012, Richard Ivey School of Business Foundation Version: 2013-11-12 INTRODUCTION James Neuhausen was a U.S. stock analyst tasked with preparing a recommendation on what his firm, a large U.S. investment house, should do with its stake in Wal-Mart Stores, Inc. It was an unseasonably warm day in early February 2012, and Neuhausen was reviewing his notes on the firm. Wal-Mart, the world’s largest retailer, was trying to recover from a series of missteps that had seen competitors such as Dollar Stores and Amazon.com close the performance gap. Competitors had copied many aspects of Wal-Mart’s distribution system, including cross-docking product to eliminate storage time in warehouses, positioning stores around distribution centres and widespread adoption of electronic data interchange (EDI), to manage ordering and shipping from suppliers. Neuhausen stated: Wal-Mart is believed to have one of the most efficient supply chains in the retail world. What impact will the increasing variety of product, store formats and the growing importance of international stores have on the way it distributes product? What improvements to its supply chain does the company need to make in order to continue to stay ahead of competitors? Last year, Wal-Mart suffered nine consecutive quarters of declining same store sales. Procter & Gamble’s Chief Executive, Robert McDonald, pointed out that part of the problem was that there were execution issues at WalMart’s U.S. stores.2 More nimble competitors such as Dollar General are rolling out small format stores that are eating into Wal-Mart’s share. In the online space, Amazon.com has become a major threat. Wal-Mart has also changed over the years and it now operates a variety of store formats under 60 different banners around the world. International sales hit US$109 billion in fiscal year 2011, more than a quarter of its business. Can its supply chain keep up and still deliver efficiency gains? THE RETAIL INDUSTRY U.S. retail sales, excluding motor vehicles and parts dealers, reached US$3.9 trillion in 2011. Major categories in the U.S. retail industry included general merchandise, food and beverage, health and personal care and other categories as can be seen in Exhibit 1. In the United States, retailers competed at local, regional and national levels, with some of the major chains such as Wal-Mart and Costco counting operations in foreign countries as well. In addition to the traditional one-store owneroperated retailer, the industry included formats such as discount stores, department stores (selling a large percentage of soft goods, or clothing), variety and convenience stores, specialty stores, supermarkets, supercentres (combination discount and supermarket stores), Internet retailers and catalog retailers. Online retail sales were rising in importance, accounting for US$197 billion in 2011.3 The top 200 retailers accounted for approximately 30 per cent of worldwide retail sales.4 Major retailers competed for employees and store locations as well as customers. There were two broad strategies in global retailing: variable pricing, or 1/19 08/10/2019 Print canvas “hi-lo pricing,” and everyday low price (EDLP). Hi-lo pricing, practiced by retailers for decades, involved adjusting the retail price of items to optimize gross margins. For example, at traditional grocery stores, while prices of key items — such as milk, sugar, eggs and butter — were kept consistently low, items such as toothpaste, detergent and tissue had high prices. The goal in a hi-lo environment was to generate increased sales by having the manufacturer fund the trade promotions on some items — lowering prices by 25 to 30 per cent — every month or quarter. On the other hand, an EDLP strategy meant that prices on items were generally consistent from week to week but were kept as low as possible so as to generate the highest consumer foot traffic. Running an EDLP strategy generally required the retailer to focus on keeping operational costs as low as possible and investing any savings into lowering retail prices. The goal, in an EDLP environment, was to generate higher aggregate gross profit by increasing the volume of items sold. As many of the top global retailers faced intense competition in their home markets, a growing trend for these global retailers was international expansion, especially into developing markets such as Asia, South America and Africa. The objective of international expansion was to find a way to continue to grow earnings at a faster pace than was possible domestically. Retailers going abroad sought to capitalize on global purchasing economies of scale and to leverage international expertise from one market to another. But international expansion was fraught with risk, and it was not uncommon for retailers to pull out of a market if they were unable to build profitable operations. WAL-MART STORES, INC. Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart was the number one retailer in the world with fiscal year 2011 net income, from continuing operations, of US$16 billion on sales of US$419 billion. It had over 2 million employees and 8,500 stores in 15 countries, the result of a series of acquisitions over the past 20 years. Beginning with its “big box” discount store format in the 1960s, Wal-Mart’s store formats around the world had grown to include supercentres, which were a larger version of a discount store that included groceries, supermarkets, wholesale outlets, restaurants and apparel stores. Globally, it served about 200 million customers per week.5 Wal-Mart’s strategy was to provide a broad assortment of quality merchandise and services at “everyday low prices” (EDLP) and was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware. In the U.S. general merchandise arena, Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco Wholesale. Wal-Mart was facing growing competition for large ticket general merchandise products and from online retailers such as Amazon.com. THE DEVELOPMENT OF WAL-MART’S SUPPLY CHAIN Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and transport these goods to his stores directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of product through low-cost retail outlets — was sweeping the nation, he decided to open up large warehouse-style stores in order to compete. To stock these new stores, initially named “Wal-Mart Discount City,” Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to send their trucks to his stores, which were located in rural Arkansas, self-distribution was necessary. Wal-Mart undertook an initial public offering in 1969 to raise funds to build its first distribution centre in Bentonville, Arkansas. As the company grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of “resale price maintenance,” which had prevented retailers from discounting merchandise. To keep an eye on his growing network, Walton piloted a small single-engine airplane, which he would land at air strips close to his new stores. Wal-Mart’s supply chain, a key enabler of its growth from its beginnings in rural Arkansas, was long considered by many to be a major source of competitive advantage for the company. It was one of the first firms to rely on data to make operational decisions, using bar codes, sharing sales data with suppliers, controlling its own trucking fleet and installing computerized point-of-sale systems that collected item-level data in real time. When Wal-Mart was voted “Retailer of the Decade” in 1989, its distribution costs were estimated at 1.7 per cent of its cost of sales, comparing favourably with competitors such as Kmart (3.5 per cent total sales) and Sears (5 per cent of total sales).6 2/19 08/10/2019 Print canvas Its successes were widely publicized, and competitors had adopted many of Wal-Mart’s management techniques. Yet WalMart continued to lead the industry in efficiency, achieving inventory turns of 11.5 times in fiscal year 2011. For perspective, for the same period, key U.S. competitors Target Corp., Amazon.com and Sears had inventory turns of 8.7 times, 6.2 times, and 4.7 times, respectively. But Kroger Co., the second largest grocery retailer in the United States, had inventory turns of 14.2 times, primarily due to its focus on high-turning perishable food items.7 Procurement As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart’s U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new items were ordered. Over time, many of Wal-Mart’s largest suppliers maintained offices in Bentonville, staffed by analysts and managers supporting Wal-Mart’s business. In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the mid-1980s. WalMart’s international purchasing offices worked directly with local factories to source Wal-Mart’s private label merchandise. Private label products were appealing to customers as they were often priced at a significant discount to brand name merchandise; for Wal-Mart, the private label items generated higher margins than suppliers’ branded products. Private label sales at Wal-Mart, first developed in the 1980s, were believed to account for just 16 per cent of Wal-Mart’s sales, compared to 25 per cent at U.S. rivals Safeway and Kroger.8 This was because Wal-Mart’s stated strategy was to be a “house of brands,” procuring top brands in volume and selling them at low prices.9 Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and review a fully merchandised prototype store, which was located in a warehouse. In order to gather field intelligence, buyers toured stores two or three days a week and worked on sales floors helping associates stock and sell merchandise. Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increase bargaining clout was a contributing factor in Procter & Gamble’s (P&G) acquisition of chief rival Gillette.10 Prior to the acquisition, sales to WalMart accounted for 17 per cent of P&G’s and 13 per cent of Gillette’s revenues.11 On the other hand, these two suppliers combined accounted for about 8 per cent of Wal-Mart’s sales.12 Some viewed Wal-Mart’s close cooperation with suppliers in a negative light: Wal-Mart dictates that its suppliers ... accept payment entirely on Wal-Mart’s terms ... share information all the way back to the purchasing of raw materials. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods and even encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and what materials and ingredients to use in those products.13 When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting or distribution. Globally, Wal-Mart was thought to have around 40,000 suppliers, of whom 200 — such as Nestle, P&G, Unilever, and Kraft — were key global suppliers. With Wal-Mart’s expectations on sales data analysis, category management responsibilities and external research specific to their Wal-Mart business, it was not uncommon for a supplier to have several employees working full-time to support the Wal-Mart business. Distribution Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution centre was a significant investment for the firm, Walton insisted on saturating the area within a day’s driving distance in order to gain economies of scale. Over the years, competitors had copied this “hub-and-spoke” design of high volume distribution centres serving a cluster of stores. This distribution-led store expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores, expanding across the nation from its headquarters in Arkansas. Stores were located in low-rent, suburban areas close to major highways. In contrast, key competitor Kmart’s stores were thinly spread throughout the U.S. and located in prime urban areas. By the time the rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient logistics network of any retailer. Wal-Mart’s 75,000-person logistics and its information systems division included the largest private truck fleet employee base of any firm — 6,600 trucks and 55,000 trailers, which delivered the majority of merchandise sold at stores.14 Its 150 distribution centres, located throughout the United States, were a mix of general merchandise, food and soft goods (clothing) distribution centres, processing over five billion cases a year through its entire network. 3/19 08/10/2019 Print canvas In the United States, Wal-Mart’s distribution centres received about 315,000 inbound truckloads, of which 115,000 were shipped “collect,” which meant they were picked up directly from suppliers’ warehouses by Wal-Mart’s trucking fleet, The remaining 200,000 loads were shipped by suppliers’ trucks or by logistics providers. The goal at Wal-Mart’s distribution centres was for high turning items — such as fresh food or other perishable merchandise — to be cross-docked, or directly transferred from inbound to outbound trailers without extra storage. The average distance from distribution centre to stores was approximately 130 miles. Each of these distribution centres were profiled in a store friendly way, with similar products stacked together. Merchandise purchased directly from factories in offshore locations such as China or India were processed at coastal distribution centres before shipment to U.S. stores. On the way back from delivering product to stores, Wal-Mart’s trucks generated “backhaul” revenue by transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart’s backhaul revenues — its private fleet operated as a forhire carrier when it was not busy transporting merchandise from distribution centres to stores — were more than US$1 billion per year.15 In mid-2010, Wal-Mart was looking to expand its backhaul program, to pick up more product directly from suppliers’ factories. It was seeking, in some cases, a 6 per cent reduction in the manufacturer’s selling price. For perspective, suppliers estimated the actual transportation expense was just 3 per cent of the selling price.16 Because their trucking employees were non-unionized and in-house, Wal-Mart was able to implement and improve upon standard delivery procedures, coordinating and deploying the entire fleet as necessary. Uniform operating standards ensured that miscommunication between traffic coordinators, truckers and store level employees were minimized. During an analyst meeting in October 2011, Johnnie Dobbs, Wal-Mart Stores’ (Wal-Mart’s) EVP Logistics, had stated: Everyday low cost is the foundation for everyday low prices. So our focus across the organization is delivering products that our customers need in the most efficient method and process available. So, here’s an example of a sustained cost reduction in our transportation area. We have improved visibility and routing tools. We’ve reengineered processes that have decreased the number of empty miles and out-of-route miles that our drivers drive. Our merchants and our suppliers have improved packaging, and we’ve adjusted methods that we use to load our trailers, resulting in increased cases in cube in every trailer that we ship.... (This year) we’ll ship 335 million more cases while we’ll drive 300 million fewer miles.17 Store Network In the early years, Wal-Mart grew rapidly as customers were attracted by its assortment of low-priced product. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. It bought in bulk, bypassing distributors, and passed savings onto consumers. Each Wal-Mart store aimed to be the “store of the community,” tailoring its product mix to appeal to the distinct tastes of that community. Thus, two Wal-Mart Stores a short distance apart could potentially stock different merchandise. In contrast, most other retailers made purchasing decisions at the district or regional level. The display of merchandise was suggested by a store-wide template, with a unique template for each store, indicating the layout of Wal-Mart’s various departments. This template was created by Wal-Mart’s merchandising department after analyzing historical store sales and community traits. Associates were free to alter the merchandising template to fit their local store requirements. Shelf space in Wal-Mart’s different departments — from shoes to household appliances to automotive supplies — was divided up, each spot allocated to specific SKUs. Unlike its competitors in the 1970s and 1980s, Wal-Mart implemented an EDLP policy, which meant that products were displayed at a steady price and not discounted on a regular basis. In a “hi-lo” discounting environment, discounts would be rotated from product to product, necessitating huge inventory stockpiles in anticipation of a discount. In an EDLP environment, demand was smoothed out to reduce the “bullwhip effect.” Because of its EDLP policy, Wal-Mart did not need to advertise as frequently as their competitors and channeled the savings back into price reductions. To generate additional volume, Wal-Mart buyers worked with suppliers on price rollback campaigns. Price rollbacks, each lasting about 90 days and funded by suppliers, had the goal of increasing product sales between 200 and 500 per cent. A researcher remarked: “Consumers certainly love Wal-Mart’s low prices, which are an average of 8 per cent to 27 per cent lower than the competition.”18 The company also ensured that its store level operations were at least as efficient as its logistics operations. The stores were simply furnished and constructed using standard materials. Efforts were made to continually reduce operating costs. For example, light and temperature settings for all U.S. stores were controlled centrally from Bentonville. 4/19 08/10/2019 Print canvas As Wal-Mart distribution centres had close to real-time information on stores’ in-stock levels, the merchandise could be pushed to stores automatically. In addition, store level information systems allowed manufacturers to be notified as soon as an item was purchased. In anticipation of changes in demand for some items, associates had the authority to manually input orders or override impending deliveries. In contrast, most of Wal-Mart’s retail competitors did not confer merchandising responsibility to entry level employees as merchandising templates were sent to stores via head office and were expected to be followed precisely. To ensure that employees were kept up-to-date, management shared detailed information about day/week/month store sales with all employees during daily 10-minute long “standing” meetings. Information Systems Walton had always been interested in gathering and analyzing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent on hiring the smartest person in the class to come to Bentonville to computerize his operations.19 Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, due to his use of a personal airplane, which he used to observe new construction development (to determine where to place stores) and to monitor customer traffic (by observing how full the parking lot was). In the mid-1980s, Wal-Mart invested in a central database, store level point-of-sale systems and a satellite network. Combined with one of the retail industry’s first chain-wide implementation of UPC bar codes, store level information could now be collected instantaneously and analyzed. By combining sales data with external information such as weather forecasts, Wal-Mart was able to provide additional support to buyers, improving the accuracy of its purchasing forecasts. In the early 1990s, Wal-Mart developed Retail Link. At an estimated 570 terabytes — which, Wal-Mart claimed, was larger than all the fixed pages on the Internet — Retail Link was the largest civilian database in the world. By 2008, Retail Link had 2.5 petabytes (2,500 terabytes) in data storage capacity, second only to eBay’s 4-petabyte installation.20 For a description of how Retail Link fits in with Wal-Mart’s supply chain, see Exhibit 2. Retail Link contained data on every sale ever made at the company during a two-decade period. Wal-Mart gave its suppliers access to real-time sales data on the products they supplied, down to individual stock-keeping items at the store level. In order to harness the knowledge of its suppliers, key category suppliers, called “category captains,” first introduced in the late 1980s, provided input on shelf space allocation. As an observer noted: One obvious result [of using category captains] is that a producer like Colgate-Palmolive will end up working intensively with firms it formerly competed with, such as Crest manufacturer P&G, to find the mix of products that will allow Wal-Mart to earn the most it can from its shelf space. If Wal-Mart discovers that a supplier promotes its own products at the expense of Wal-Mart’s revenue, the retailer may name a new captain in its stead.21 In 1990, Wal-Mart became one of the early adopters of collaborative planning, forecasting and replenishment (CPRF), an integrated approach to planning and forecasting through sharing critical supply chain information, such as data on promotions, inventory levels and daily sales.22 Wal-Mart’s vendor managed inventory (VMI) program (also known as continuous replenishment) required suppliers to manage inventory levels at the company’s distribution centres, based on agreed service levels. The VMI program started with P&G diapers in the late 1980s and by 2006 had expanded to include all major suppliers.23 In some situations, particularly grocery products, suppliers owned the inventory in Wal-Mart stores up to the point that the sale was scanned at checkout. Retail Link had an estimated 100,000 registered users, working for suppliers, who accessed the system. They ran approximately 350,000 weekly queries of the data warehouse that contained two years of weekly point-of-sale information.24 Wal-Mart buyers held regular meetings with category captains, who would come to the meeting prepared with category analyses and recommendations for how shelf space for the various competitors should be allocated. In exchange for providing suppliers access to these data, Wal-Mart expected them to proactively monitor and replenish product on a continual basis. To support this inventory management effort, supplier analysts worked closely with Wal-Mart’s supply chain personnel to coordinate the flow of products from suppliers’ factories and resolved any supply chain issues, from routine issues such as ensuring that products were ready for pick up by Wal-Mart’s trucks and arranging for the return of defective products, to last minute issues such as managing sudden spikes in demand for popular items. When Wal-Mart buyers met, on a frequent basis, with a supplier’s sales teams, two important topics of review were supplier’s out-of-stock rate and inventory levels at WalMart, indications of how well replenishment was being handled. Suppliers were provided targets for out-of-stock rates and inventory levels. 5/19 08/10/2019 Print canvas In addition to managing short-term inventory and discussing product trends, Wal-Mart worked with suppliers on medium- to long-term supply chain strategies including factory location, cooperation with downstream raw materials suppliers and production volume forecasting. Wal-Mart’s satellite network, in addition to receiving and transmitting point-of-sale data, also provided senior management with the ability to broadcast video messages to the stores. Although the bulk of senior management lived and worked in Bentonville, Arkansas, frequent video broadcasts to each store in their network kept store employees informed of the latest developments in the firm. In an effort to emulate Wal-Mart’s ability to share information with suppliers, Wal-Mart’s competitors began developing systems similar to Retail Link. Available through Agentrics LLC, a software service provider, the software platform, built with the input of dozens of global retailers, was made available through a subscription and collected and made available store level data by retailer. Agentrics’ customer base included many of the world’s top retailers including Carrefour, Tesco, Metro, Costco, Kroger and Walgreen’s. Many of these retailers were also investors in Agentrics. RFID To ensure that cases moved efficiently through the distribution centres, Wal-Mart worked with suppliers to standardize case sizes and labeling. Since 2003, Wal-Mart had required its top 100 suppliers to affix RFID (radio-frequency identification) tags to shipping cases to facilitate the tracking and sorting of inbound product. RFID tags allowed Wal-Mart to increase stock visibility as stock moved in trucks through the distribution centres and on to the stores. Wal-Mart would be able to track promotion effectiveness within the stores while cutting out-of-stock sales losses and overstock expenses. The company placed RFID tag readers in several parts of the store: at the dock where merchandise came in, throughout the backroom, at the door from the stockroom to the sales floor and in the box-crushing area where empty cases eventually wound up. With those readers in place, store managers would know what stock was in the backroom and what was on the sales floor. According to researchers, about 25 per cent of out-of-stock inventory in the United States was not really out of stock: the items could be misplaced on the floor or mis-shelved in the backroom. U.S-wide, about 8 per cent of merchandise was out of stock at any given time, leading to lost sales for retailers.25 In a study performed by the University of Arkansas, Wal-Mart stores with RFID showed a net improvement of 16 per cent fewer out-of-stocks on the RFID-tagged products that were tested. However, RFID tags cost approximately 17 cents each.26 It was estimated that Wal-Mart saved US$500 million a year by using RFID in its operations.27 Human Resources By visiting each store and by encouraging associates to contribute ideas, Walton was able to uncover and disperse best practices across the company in the 1960s and 1970s. To ensure that best practices were implemented as soon as possible, he held regular “Saturday morning meetings” that convened his top management team in Bentonville. At 7:00 a.m. each Saturday, the week’s business results were discussed and merchandising and purchasing changes implemented. Store layout resets were managed on the weekend, and the rejigged stores were ready by Monday morning. Walton and his management team often toured competitors’ stores, looking for new ideas to “borrow.” Wal-Mart believed that centralization had numerous benefits including lower costs and improved communications between different divisions. All of Wal-Mart’s divisions, from U.S. stores, International and Sam’s Club, to its logistics and information systems division, were located in Bentonville, a town of 28,000 people in Northwest Arkansas. Regional managers and in-country presidents were the few executives who were stationed elsewhere. Another key to Wal-Mart’s ability to enjoy low operating costs was the fact that it was non-union. Without cumbersome labour agreements, management could take advantage of technology to drive labour costs down and make operational changes quickly and efficiently. Being non-union, however, had its drawbacks. As its store network encroached on unionized grocers’ territory, unions, such as the United Food and Commercial Workers’ Union, started to become more aggressive in their anti-Wal-Mart publicity campaigns, funding so-called grassroots groups whose goals were to undermine Wal-Mart’s expansion. Wal-Mart’s size also made it a target for politicians: every stumble was magnified and played up in the press. FOCUSING ON THE SUPPLY CHAIN Wal-Mart remained focused on improving its supply chain. A recent initiative was Remix, which was started in the fall of 2005 and aimed at reducing the percentage of out-of-stock merchandise at stores by redesigning its network of distribution centres. As Wal-Mart stores increased its line-up of grocery items (Wal-Mart was the U.S.’s largest grocer in 2005), the company noticed that as employees sorted through truckloads of arriving merchandise to find fast-selling items, delays in restocking shelves occurred.28 Moving from its original model of having distribution centres serve a cluster of stores, WalMart envisioned that fast-moving merchandise, such as paper towels, toilet paper, toothpaste and seasonal items, would be 6/19 08/10/2019 Print canvas shipped from dedicated “high velocity” food distribution centres. Food distribution centres — of which there were 40 — were designed to handle high-turn food items. High velocity distribution centres differed from general merchandise distribution centres in the following ways: as primarily food distribution centres, they were smaller and had temperature controls and less automation.29 In contrast, general merchandise distribution centres required automation and conveyor belts to move full pallets of goods. Wal-Mart did not elaborate on how much savings this move was expected to generate, but it was believed to be an incremental improvement to the current system. Wal-Mart’s CIO, Rollin Ford, stated: We could have done nothing and been fine from a logistics standpoint ... but as you continue to increase your sales per square foot, you’ve got to do things differently to make those stores more productive.30 In 2006, Wal-Mart continued to seek improvements to its supply chain. Although the company publicly declined to outline its targets for inventory reduction, its suppliers stated that Wal-Mart’s top executives spoke in January 2006 about eliminating as much as $6 billion in excess inventory.31 In addition, the firm was undertaking a significant program to remodel most of its U.S. stores to improve “checkout speed, customer service and store appearance.” The company reported that remodeled stores could drive 125 to 200 basis points of improvement in both sales and gross margin and 8 to 9 per cent in lower inventories.32 From fiscal year 2008 to fiscal year 2011, Wal-Mart had remodeled just under 70 per cent of its store base. The company was opening fewer large format supercenters, down to 113 a year in fiscal year 2011 from 277 in fiscal year 2006, and was facing competition from online competitors such as Amazon.com, which enjoyed annual sales increases of 40 per cent from 2009 to 2011. And smaller format stores, or Dollar Stores, which were 10,000 square feet in size or smaller, were becoming popular. Wal-Mart had a small store format as well, Wal-Mart Express, aiming to be a fill-in store for space-constrained urban areas. But even as competitors such as Dollar General were opening over 500 new stores in 2011, Wal-Mart seemed hesitant with its small store format, opening only 35 small stores that year (see Figure 1).33 Figure 1: Net New Small Store Plans — FY 2011 But execution issues at the store level and disruption from the remodeling had a negative impact on Wal-Mart’s sales. There was also the financial crisis that started in 2008, along with a cutback on staffing levels. The result was nine consecutive quarters of same store sales decline starting in the second quarter of 2009.34 Figure 2: Wal-Mart Same Store Sales Increases (Decreases) 7/19 08/10/2019 Print canvas By October 2011, due to its lacklustre topline and earnings growth prospects, Wal-Mart’s stock price had languished in the $45 to $55 dollar range for the entire decade. The stock price seemed to be a topic of conversation at every analyst meeting that Neuhausen had attended for the past few years. This year, however, he wondered whether Wal-Mart’s management’s efforts to drive additional gains from its already efficient operations could help its lagging stock price. NEW INITIATIVES AND A REORGANIZATION There were three significant initiatives at Wal-Mart whose goals were to improve its supply chain as the firm operated an increasingly varied number of store types and grew its global operations. There were changes to the way it procured product (Global Sourcing), optimizing product delivery to stores to increase on-shelf availability (Project One Touch) and finding ways to leverage its strength in physical store locations to boost its online business (Multi-Channel). To facilitate the improvements, Wal-Mart reorganized, combining its real estate division with store operations and logistics. Wal-Mart was split into three geographic business units (GBUs) in the United States: West, South, and North.35 Global Sourcing In February 2010, the Wal-Mart buying group was reorganized into Global Merchandising Centers: general merchandise; food; consumables, health and wellness and Wal-Mart.com; and softlines.36 For its private label business, instead of purchasing directly from factories, it entered into a partnership with Li & Fung. The latter would assist with product sourcing in a range of categories and markets where Wal-Mart did not “have the scale or the competencies and skills to leverage.”37 In 2010, the first year of the agreement called for approximately $2 billion in goods to be purchased through Li & Fung.38 WalMart was targeting 5 to 15 per cent savings on the $100 billion in product it was purchasing through non-direct channels.39 Project One Touch “Across the organization, we’re focused on the supply chain all the way down to the customer,” said Dobbs. “Improvements in our DCs [distribution centres] and our transportation operations generate savings, but if you improve processes at the store level, you have a significant multiplier, when you think about the 3,800 plus stores out there (in the United States).” He continued: So we’ve been working with our store operations team and our innovations teams to develop what we call Project One Touch. We aligned the merchandise flow, our delivery schedules, and the store labor schedules together. Then, we reorganized our high velocity distribution centers to deliver category group pallets that allow our associates to easily transfer product from our trailers to the sales floor. Then, we added aisle and modular locations to the general merchandise case labels to make it easy for our store associates to get these types of products onto the shelf. And finally, this past year, we installed a systems-driven process that dramatically improves the less than case back processing in our back rooms.40 In the 10 months from January to October 2011, Wal-Mart’s on-shelf availability increased by 5.7 per cent to over 90 per cent. On key items, it had 93 per cent availability. In addition, as a result of reorganizing its logistics, Wal-Mart was able to 8/19 08/10/2019 Print canvas reinvest the US$2 billion in cost reductions into reducing prices at store level.41 The Multi-Channel strategy Wal-Mart aimed to build a “continuous channel approach” to leverage both its physical store and distribution centre infrastructure and its growing presence online. Wal-Mart.com aimed to carry a broader selection of items not available in stores. In addition, the firm looked to find ways to use the stores to drive online business. Joel Anderson, EVP and president of Wal-Mart.com, stated: Our store teams next year (in 2012) will get sales credit for both store sales and .com sales. This is like unleashing a sales force of over 1 million people. That is a differentiation that will be hard to replicate. Secondly, I want to focus on access. Several pilots are currently in place to leverage our ship food storage capabilities. We will offer next day delivery at a very economical price. We will use these capabilities to reach customers in urban areas that we have not yet penetrated. And finally, our online marketing efforts will over index in these areas we haven’t penetrated so that we can continue to provide access to the Wal-Mart brand. The third area is fulfillment. We already have unlimited assets in place. Nearly 4,000 stores, over 150 DCs, this will give us the flexibility to offer our customers best in class delivery options. For example, last week, we transitioned several disparaged shipping offers into one comprehensive fulfillment program. We are now offering three compelling free shipping programs. This is an excellent example of multi channel strategy beginning to come to life. Let’s look at this one a little bit closer. We call it fast, faster, fastest. You have our site to store offer. And this offers our broadest merchandise assortment beyond the stores. Site to store allows a customer to pick it up in our store or hundreds of urban FedEx locations for free. Home free in the middle is our new faster program. This launched just last week. Home free allows our customers to bundle their items into one order and have it delivered to home for free. And there are no membership fees like some other online retailers currently charge. Pickup today ... is our third program. It is our fastest option, and it provides the convenience of same day pickup in our stores for free. Pickup today is available in every one of our stores on the hottest assortment we have to offer.42 DECISION — HOLD, BUY OR SELL? Neuhausen put his notes down and walked into the conference room where his analyst team was assembled. He switched on the projector and clicked through the Wal-Mart stock presentation to the comparative information slides that included financial information (see Exhibit 3) and a description of each competitor (see Exhibit 4). Neuhausen hit “enter” and brought up Wal-Mart’s stock performance over the past 10 years (see Exhibit 5). He concluded: We’ve owned Wal-Mart stock for the past decade, and it’s been basically flat over that period. During the same time, we’d have made more money had we been invested in the S&P 500 index of the largest 500 U.S. stocks. Should we continue to hold Wal-Mart stock? I’d like to find out your views on Wal-Mart’s key competitive advantages, especially its supply chain strategy, and whether these advantages are sustainable. The data suggest that new competitors, especially the Dollar Stores, Amazon.com and Tesco,43 are gaining in popularity in the United States. Is Wal-Mart’s high volume “buy it low, stack it high, sell it cheap” model still valid today? 9/19 08/10/2019 Print canvas Exhibit 1 U.S. RETAIL CATEGORIES (PARTIAL LIST) Category General merchandise stores 2011 (US$ billions) 630.9 Food and beverage 615.4 Food services and drinking places Gasoline 494.2 533.6 Building materials and gardening equipment and supplies 300.2 Furniture, home furnishings, electronics and appliances 190.9 Health and personal care Clothing and clothing accessories 274.9 226.5 Sporting goods, hobby, books, music 88.9 Source: http://www.census.gov/retail/index.html#arts, accessed January 20, 2012. 10/19 08/10/2019 Print canvas Exhibit 2 WAL-MART’S RETAIL LINK DATABASE Source: Case writers. 11/19 08/10/2019 Print canvas Exhibit 3 WAL-MART AND COMPETITORS — FINANCIAL RESULTS, 2002-2011 12/19 08/10/2019 Print canvas Sources: Mergent, various company annual reports. Note that Tesco plc’s calculation of COGS (which Includes some operating expenses) may not be directly comparable to other firms’ COGS figures. Tesco’s SG&A for 2002-04 have been estimated using figures from 2005-11. Kmart Holdings Corporation purchased Sears, Roebuck and Co. on November 17, 2004, and the new firm was renamed “Sears Holding Corp.” 13/19 08/10/2019 Print canvas Exhibit 4 COMPETITORS — DESCRIPTION Target Corporation Target operates as two reportable segments. Its Retail Segment includes its merchandising operations, including its online business. Its Credit Card Segment provides the Target Visa and the Target Card credit cards, as well as the Target Debit Card. Target’s Canadian segment consists of its leasehold interests in Canada. It operates Target general merchandise stores and SuperTarget® stores, providing a range of general merchandise and food. The company’s merchandise includes household products, hardlines, apparel and accessories, food and pet supplies and home furnishings and decor. As of January 28, 2012, Target had 1,763 stores in 49 states and the District of Columbia. Kroger Co. Kroger operates retail food and drug stores, multi-department stores, jewelry stores and convenience stores. It also manufactures and processes some of the food for sale in its supermarkets. As of January 29, 2011, Kroger operated, either directly or through its subsidiaries, 2,460 supermarkets and multi-department stores, 1,014 of which had fuel centres. In addition, as of January 29, 2011, it operated through subsidiaries 784 convenience stores and 361 fine jewelry stores. Additionally, 87 convenience stores were operated through franchise agreements. These convenience stores offer an assortment of staple food items and general merchandise and, in most cases, sell gasoline. Costco Wholesale Corp. Costco Wholesale operates membership warehouses. Its products include sundries, such as candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and institutional supplies; hardlines, such as appliances, electronics, health and beauty aids, hardware, office supplies, cameras, garden and patio, sporting goods, toys, seasonal items and automotive supplies; food, such as dry and packaged foods; softlines, such as apparel, domestics, jewelry, housewares, media, home furnishings and small appliances; fresh food, such as meat, bakery, deli and produce; and ancillary and other, such as gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travel. Safeway Inc. Safeway is a food and drug retailer in North America, with 1,678 stores at December 31, 2011. Its U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. Its Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. Its stores provide an array of grocery items tailored to local preferences. Most stores provide food and general merchandise and include specialty departments such as bakery, delicatessen, floral, seafood and pharmacy. The majority of stores provide Starbucks coffee shops and adjacent fuel centres. Amazon.com Amazon.com serves consumers through its retail websites. It provides merchandise and content purchased for resale from vendors and those provided by third-party sellers; it also manufactures and sells the Kindle e-reader. It provides services such as Amazon Web Services; fulfillment; miscellaneous marketing and promotional agreements, such as online advertising; and co-branded credit cards. It has two principal segments: North America, which consists of retail sales of consumer products and subscriptions through North America-focused websites; and International, which consists of retail sales of consumer products and subscriptions through internationally focused locations. Dollar General Dollar General is a discount retailer. As of February 25, 2011, it operated 9,414 retail stores located in 35 states in the southern, southwestern, midwestern and eastern United States. It provides a selection of merchandise, including consumables, seasonal home products and apparel. Its products portfolio includes home cleaning supplies, food, beverages and snacks, personal care products, pet supplies, decorations, toys, batteries, small electronics, greeting cards, stationery, prepaid cell phones and accessories, gardening supplies, hardware, and automotive and home office supplies, as well as a selection of home products and apparel products. 14/19 08/10/2019 Print canvas Dollar Tree, Inc. Dollar Tree is an operator of discount variety stores providing merchandise at the fixed price of $1.00. Its merchandise mix consists of consumable merchandise, which includes candy and food and health and beauty care, and household consumables such as paper, plastics, house chemicals and frozen food; variety merchandise, which includes toys, housewares, gifts, party goods, greeting cards, softlines and other items; and seasonal goods, which include Easter, Halloween and Christmas merchandise. At January 28, 2012, it operated 4,252 stores in 48 states and the District of Columbia, as well as 99 stores in Canada under the Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills names. Big Lots, Inc. Big Lots is a broadline close-out retailer. Its merchandising categories consist of Consumables, which include food, health and beauty, plastics, paper, chemical and pet departments; Furniture, which includes the upholstery, mattresses, ready-toassemble and case goods departments; Home, which includes domestics, stationery and home decorative departments; Hardlines, which include electronics, appliances, tools and home maintenance departments; Seasonal, which includes lawn and garden, Christmas, summer and other holiday departments; and Other, which includes toy, jewelry, infant accessories and apparel departments. At January 29, 2011, it operated a total of 1,398 stores in 48 states. Fred’s Inc. Fred’s operates discount general merchandise stores and pharmacies. Its stores generally serve low, middle and fixed income families located in small- to medium-sized towns. It also markets goods and services to its 24 franchised stores. Its stores stock over 12,000 purchased items that address the needs of its customers, including brand name products, its label products and off-brand products. Its FRED’S brand products include household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products and a variety of food and beverage products. As of January 29, 2011, it had 653 retail stores and 313 pharmacies in 15 states primarily in the southeastern United States. Sears Holding Corp. Sears Holdings is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears). It is a broadline retailer with 2,172 full-line and 1,338 specialty retail stores in the United States operating through Kmart and Sears and 500 full-line and specialty retail stores in Canada operating through Sears Canada Inc., a 95%-owned subsidiary. As of January 28, 2012, it operated three reportable segments: Kmart, Sears Domestic and Sears Canada. Walgreen Co. Walgreen, together with its subsidiaries, operates a retail drugstore chain. It sells prescription and non-prescription drugs as well as general merchandise, including household products, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Its pharmacy, health and wellness services include retail, specialty, infusion and respiratory services, mail service, convenient care clinics and worksite clinics. In addition, its Take Care Health Systems, Inc. subsidiary is a manager of worksite health centres and in-store convenient care clinics. As of August 31, 2011, it operated 8,210 locations in 50 states, the District of Columbia, Puerto Rico and Guam. CVS Caremark Corporation CVS Caremark, together with its subsidiaries, is a pharmacy health care provider in the United States. Its segments include Pharmacy Services, which provides a range of pharmacy benefit management services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing; and Retail Pharmacy, which sells prescription drugs and a range of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods. As of December 31, 2011, it had 7,300 CVS/pharmacy® retail stores. Carrefour S.A. Carrefour is a distribution group based in France. It engages in retailing business primarily in Europe, Asia, and Latin America. It operates under four main grocery store formats: hypermarkets (offers food and non-food product lines); supermarkets; hard discount (offers a reduced range at discount prices); and convenience stores, which included Cash & Carry stores (which are conveniences stores for professionals) and E-commerce. Some of its trade names are Carrefour, Carrefour Market, GB, GS, Dia, Ed, Shopi, Marche Plus, 8 a Huit, Proxi, Promocash and Docks Markets. As of December 31, 2010, it operated 15,937 stores worldwide. 15/19 08/10/2019 Print canvas Tesco plc. Tesco is engaged in retailing and associated activities. Its core U.K. segment consists of four different store formats: Express, Metro, Superstore and Extra, as well as one trial format called Homeplus. Its Non-Food segment includes merchandise such as electricals, home entertainment, clothing, health and beauty, stationery, cookshop and soft furnishings, and seasonal goods such as barbecues and garden furniture in the summer. Its Retailing Services segment consists of several operations, including Tesco Personal Finance, Tesco.com and Tesco Telecoms. Its International segment operates in 13 markets outside the United Kingdom in Europe, Asia (including India) and North America. Source: Mergent. 16/19 08/10/2019 Print canvas Exhibit 5 WAL-MART STOCK PRICE Source: Yahoo! Finance. ________________________ 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Wal-Mart or any of it employees. 2 http://operationsroom.wordpress.com/2011/03/07/is-wal-mart-losing-focus/, accessed January 4, 2012. 3 http://mashable.com/2011/02/28/forrester-e-commerce/, accessed January 15, 2012. 4 http://www.uneptie.org/pc/sustain/reports/Retail/Nov4Mtg2002/Retail_Stats.pdf, accessed May 10, 2006. 5 “WMT — 17th Annual Meeting for the Investment Community.” Thomson StreetEvents, October 13, 2010, accessed January 5, 2012. 6 “Low Distribution Costs Buttress Chain’s Profits,” Discount Store News, December 18, 1989. 7 Inventory turns calculated from respective firms’ 10-K filings. 8 http://www.ft.com/intl/cms/s/0/762b1f80-1259-11de-b816-0000779fd2ac.html#axzz1lv8XtooH, accessed January 15, 2012. 9 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8ErNwolNpAw, accessed January 15, 2012. 10 http://www.newyorker.com/talk/content/?050214ta_talk_surowiecki, February 7 2005, accessed January 15, 2012. 11 Larry Dignan, “Procter & Gamble, Gillette Merger Could Challenge Wal-Mart RFID Adoption,” Extremetech.com, January 31, 2005. http://www.extremetech.com/article2/0,1558,1758152,00.asp, accessed January 15, 2012. 12 Mark Roberti, “P&G-Gillette Merger Could Benefit RFID”, RFID Journal, February 4, 2005. 13 Barry C. Lynn, “Breaking the Chain,” Harper’s Magazine, July 2006, p. 34. 14 http://walmartprivatefleet.com/AboutUs/LeadershipProfiles.aspx, accessed January 2, 2012. 17/19 08/10/2019 Print canvas 15 http://www.dcvelocity.com/articles/july2004/inbound.cfm, accessed August 19, 2006. 16 http://www.businessweek.com/magazine/content/10_23/b4181017589330.htm, accessed March 3, 2012. 17 “WMT — 18th Annual Meeting for the Investment Community,” Thomson StreetEvents, October 12, 2011, Investext, accessed January 12, 2012. 18 William Beaver, “Battling Wal-Mart: How Communities Can Respond,” Business and Society Review 110.2, Summer 2005, p. 159. 19 http://www.time.com/time/time100/builder/profile/walton2.html, accessed August 23, 2006. 20 http://www.informationweek.com/news/software/info_management/228800661, accessed March 3, 2012. 21 Barry C. Lynn, “Breaking the Chain,” 33. 22 A.H. Johnson, “35 Years of IT Leadership: A New Supply Chain Forged,” Computerworld, September 30, 2002, pp. 38-39. 23 T. Andel, “Partnerships With Pull,” Transportation and Distribution, July 1995, pp. 65-74; http://www.industrlalsupplymagazine.com/pages/Print-editinMayJune10lsVMIForYou.php, accessed April 10, 2012. 24 http://findarticles.com/p/articles/mi_m0FNP/is_17_44/ai_n15624797, accessed January 15, 2012. 25 http://knowwpcarey.com/article.cfm?aid=803, accessed April 10, 2012. 26 http://knowledge.wpcarey.asu.edu/index.cfm?fa=viewfeature&id=1205, accessed March 3, 2012. 27 http://www.rfidprivacy.org/wal-marts-supply-chain-management-and-rfid.htm, accessed March 3, 2012. 28 Kris Hudson, “Wal-Mart’s Need for Speed,” The Wall Street Journal, September 26, 2005. 29 http://knowwpcarey.com/article.cfm?aid=803, accessed April 10, 2012. 30 http://cincom.typepad.com/simplicity/2005/09/index.html, accessed August 23, 2006. 31 Kris Hudson, “Wal-Mart Aims To Sharply Cut Its Inventory Costs,” The Wall Street Journal. April 20, 2005. 32 Patrick McKeever, “Wal-Mart Stores,” MKM Partners, May 28, 2010. 33 Charles Grom, Paul Trussell, Shane Higgins, and Matt Siler, “Broadline Retail Initiation,” Deutsche Bank, September 14, 2011, page 106. 34 Charles Grom, Paul Trussell, Shane Higgins, Matt Siler, “Broadline Retail Initiation,”page 106; Wal-Mart press releases. 35 http://www.chainstoreage.com/article/wal-mart-reorganization-designed-increase-efficiency, accessed January 15, 2012. 36 http://www.massmarketretailers.com/inside-this-issue/news/09-20-2010/changes-at-walmart, accessed January 15, 2012. 37 http://www.storebrandsdecisions.com/news/2010/02/02/wal-mart-creates-global-merchandising-centers-to-streamline-sourcing, accessed March 15, 2012. 38 http://www.chainstoreage.com/article/wal-mart-reorganization-designed-increase-efficiency accessed January 215, 012. 39 Charles Grom, Paul Trussell, Shane Higgins, Matt Siler, “Broadline Retail Initiation,” p. 118. 40 “WMT — 18th Annual Meeting for the Investment Community.” 41 Ibid. 42 Ibid. 43 Tesco opened four “Fresh & Easy” food markets in California, Arizona and Nevada. http://www.freshandeasy.com/whereweare.aspx, accessed January 15, 2012. 18/19 08/10/2019 Print canvas Half a Century of Supply Chain Management at Wal-Mart Master Notes Enter notes here 19/19 
Purchase answer to see full attachment