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SCHM 6201: Introduction to Operations and Supply Chain
Management
Professor Balachandra
Northeastern University
Spring 1 2018
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SCHM 6201: Introduction to Operations and Supply
Chain Management, Balachandra − Spring 1 2018
Northeastern University
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SCHM 6201: Introduction to Operations and Supply Chain
Management, Balachandra − Spring 1 2018
Table of Contents
“What Is the Right Supply Chain for Your Products?” by Fisher, Marshall L.
1
“Disruptive Technologies Enabling Supply Chain Evolution” by Vyas, Nick
15
“Half a Century of Supply Chain Management at Wal−Mart” by Johnson, P.
Fraser; Mark, Ken
21
“National Cranberry Cooperative, 1996” by Shapiro, Roy D.
45
XanEdu Extra
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“Managing Inventories” by Freeland, James R.
55
“Making Supply Meet Demand in an Uncertain World” by Fisher, Marshall L.;
Hammond, Janice H.; Obermeyer, Walter R.; Raman, Ananth
95
“How They Did it: Red Wing Shoes' Journey to S&OP Excellence” by Grothe,
Stephanie
109
“Sport Obermeyer Ltd.” by Hammond, Janice H.; Raman, Ananth
117
XanEdu Extra
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“The Competitive Potential of Supply Management” by Monczka, Robert M.;
Petersen, Kenneth J.
137
“What Makes a Winning Procurement Function?” by Atkinson, William
147
“Services Supply Management: The Next Frontier for Improved Organizational
Performance” by Ellram, Lisa M.; Tate, Wendy L.; Billington, Corey
151
“The Power of Supplier Collaboration & Rapid Supplier Qualification” by Noor,
JehanZeb; Satpathy, Aurobind; Shulman, Jeff; Musso, Chris
175
“From Superstorms to Factory Fires: Managing Unpredictable Supply−Chain
Disruptions” by Simchi−Levi, David; Schmidt, William; Wei, Yehua
183
“VF Brands: Global Supply Chain Strategy” by Pisano, Gary P.; Adams,
Pamela
191
i
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“Chapter 6: Logistics” by Prater, Edmund; Whitehead, Kim
207
“Freight Story 2008”
223
“How to Win in an Omnichannel World” by Bell, David R.; Gallino, Santiago;
Moreno, Antonio
267
“Warehouse and Distribution Best Practices” by Trebilcock, B
279
287
Bibliography
ii
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www.hbr.org
A simple framework can help
you figure out the answer.
What Is the Right
Supply Chain for Your
Product?
by Marshall L. Fisher
Reprint 97205
1
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A simple framework can help you figure out the answer.
What Is the Right
Supply Chain for Your
Product?
COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
by Marshall L. Fisher
Never has so much technology and brainpower been applied to improving supply
chain performance. Point-of-sale scanners
allow companies to capture the customer’s
voice. Electronic data interchange lets all
stages of the supply chain hear that voice and
react to it by using flexible manufacturing, automated warehousing, and rapid logistics. And
new concepts such as quick response, efficient
consumer response, accurate response, mass
customization, lean manufacturing, and agile
manufacturing offer models for applying the
new technology to improve performance.
Nonetheless, the performance of many supply chains has never been worse. In some
cases, costs have risen to unprecedented levels
because of adversarial relations between supply chain partners as well as dysfunctional industry practices such as an overreliance on
price promotions. One recent study of the U.S.
food industry estimated that poor coordination among supply chain partners was wasting
$30 billion annually. Supply chains in many
other industries suffer from an excess of some
harvard business review • march–april 1997
products and a shortage of others owing to an
inability to predict demand. One department
store chain that regularly had to resort to
markdowns to clear unwanted merchandise
found in exit interviews that one-quarter of its
customers had left its stores empty-handed because the specific items they had wanted to
buy were out of stock.
Why haven’t the new ideas and technologies led to improved performance? Because
managers lack a framework for deciding
which ones are best for their particular company’s situation. From my ten years of research and consulting on supply chain issues
in industries as diverse as food, fashion apparel, and automobiles, I have been able to
devise such a framework. It helps managers
understand the nature of the demand for
their products and devise the supply chain
that can best satisfy that demand.
The first step in devising an effective supplychain strategy is therefore to consider the nature of the demand for the products one’s company supplies. Many aspects are important—
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What Is the Right Supply Chain for Your Product?
for example, product life cycle, demand predictability, product variety, and market standards for lead times and service (the percentage of demand filled from in-stock goods). But
I have found that if one classifies products on
the basis of their demand patterns, they fall
into one of two categories: they are either primarily functional or primarily innovative. And
each category requires a distinctly different
kind of supply chain. The root cause of the
problems plaguing many supply chains is a
mismatch between the type of product and the
type of supply chain.
Is Your Product Functional or
Innovative?
Marshall L. Fisher is the Stephen J.
Heyman Professor of Operations and
Information Management and codirector of the Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania’s
Wharton School in Philadelphia. His
current research focuses on how to
manage the supply of products with
hard-to-predict demand.
Functional products include the staples that
people buy in a wide range of retail outlets,
such as grocery stores and gas stations. Because such products satisfy basic needs, which
don’t change much over time, they have stable, predictable demand and long life cycles.
But their stability invites competition, which
often leads to low profit margins.
To avoid low margins, many companies introduce innovations in fashion or technology
to give customers an additional reason to buy
their offerings. Fashion apparel and personal
computers are obvious examples, but we also
see successful product innovation where we
least expect it. For instance, in the traditionally
functional category of food, companies such as
Ben & Jerry’s, Mrs. Fields, and Starbucks Coffee Company have tried to gain an edge with
designer flavors and innovative concepts. Century Products, a leading manufacturer of children’s car seats, is another company that
brought innovation to a functional product.
Until the early 1990s, Century sold its seats as
functional items. Then it introduced a wide variety of brightly colored fabrics and designed a
new seat that would move in a crash to absorb
energy and protect the child sitting in it. Called
Smart Move, the design was so innovative that
the seat could not be sold until government
product-safety standards mandating that car
seats not move in a crash had been changed.
Although innovation can enable a company
to achieve higher profit margins, the very newness of innovative products makes demand for
them unpredictable. In addition, their life
cycle is short—usually just a few months—because as imitators erode the competitive advantage that innovative products enjoy, com-
harvard business review • march–april 1997
panies are forced to introduce a steady stream
of newer innovations. The short life cycles and
the great variety typical of these products further increase unpredictability.
It may seem strange to lump technology
and fashion together, but both types of innovation depend for their success on consumers
changing some aspect of their values or lifestyle. For example, the market success of the
IBM Thinkpad hinged in part on a novel cursor control in the middle of the keyboard that
required users to interact with the keyboard in
an unfamiliar way. The new design was so controversial within IBM that managers had difficulty believing the enthusiastic reaction to the
cursor control in early focus groups. As a result, the company underestimated demand—a
problem that contributed to the Thinkpad’s
being in short supply for more than a year.
With their high profit margins and volatile
demand, innovative products require a fundamentally different supply chain than stable,
low-margin functional products do. To understand the difference, one should recognize that
a supply chain performs two distinct types of
functions: a physical function and a market mediation function. A supply chain’s physical
function is readily apparent and includes converting raw materials into parts, components,
and eventually finished goods, and transporting all of them from one point in the supply
chain to the next. Less visible but equally important is market mediation, whose purpose is
ensuring that the variety of products reaching
the marketplace matches what consumers
want to buy.
Each of the two functions incurs distinct
costs. Physical costs are the costs of production,
transportation, and inventory storage. Market
mediation costs arise when supply exceeds demand and a product has to be marked down
and sold at a loss or when supply falls short of
demand, resulting in lost sales opportunities
and dissatisfied customers.
The predictable demand of functional
products makes market mediation easy because a nearly perfect match between supply
and demand can be achieved. Companies that
make such products are thus free to focus almost exclusively on minimizing physical
costs—a crucial goal, given the price sensitivity of most functional products. To that end,
companies usually create a schedule for assembling finished goods for at least the next
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Before devising a supply
chain, consider the
nature of the demand for
your products.
month and commit themselves to abide by it.
Freezing the schedule in this way allows companies to employ manufacturing-resourceplanning software, which orchestrates the ordering, production, and delivery of supplies,
thereby enabling the entire supply chain to
minimize inventory and maximize production efficiency. In this instance, the important
flow of information is the one that occurs
within the chain as suppliers, manufacturers,
and retailers coordinate their activities in
order to meet predictable demand at the lowest cost.
That approach is exactly the wrong one for
innovative products. The uncertain market reaction to innovation increases the risk of
shortages or excess supplies. High profit margins and the importance of early sales in establishing market share for new products increase the cost of shortages. And short
product life cycles increase the risk of obsolescence and the cost of excess supplies. Hence
market mediation costs predominate for
these products, and they, not physical costs,
should be managers’ primary focus.
Most important in this environment is to
read early sales numbers or other market signals and to react quickly, during the new
product’s short life cycle. In this instance, the
crucial flow of information occurs not only
within the chain but also from the marketplace to the chain. The critical decisions to be
made about inventory and capacity are not
about minimizing costs but about where in
the chain to position inventory and available
production capacity in order to hedge against
uncertain demand. And suppliers should be
chosen for their speed and flexibility, not for
their low cost.
Sport Obermeyer and Campbell Soup Company illustrate the two environments and how
the resulting goals and initiatives differ. Sport
Obermeyer is a major supplier of fashion skiwear. Each year, 95% of its products are completely new designs for which demand forecasts often err by as much as 200%. And
because the retail season is only a few months
long, the company has little time to react if it
misguesses the market.
In contrast, only 5% of Campbell’s products
are new each year. Sales of existing products,
most of which have been on the market for
years, are highly predictable, allowing Campbell to achieve a nearly perfect service level by
harvard business review • march–april 1997
satisfying more than 98% of demand immediately from stocks of finished goods. And even
the few new products are easy to manage.
They have a replenishment lead time of one
month and a minimum market life cycle of six
months. When Campbell introduces a product,
it deploys enough stock to cover the most optimistic forecast for demand in the first month.
If the product takes off, more can be supplied
before stocks run out. If it flops, the six-month,
worst-case life cycle affords plenty of time to
sell off the excess stocks.
How do goals and initiatives differ in the
two environments? Campbell’s already high
service level leaves little room for improvement in market mediation costs. Hence, when
the company launched a supply chain program
in 1991 called continuous replenishment, the
goal was physical efficiency. And it achieved
that goal: the inventory turns of participating
retailers doubled. In contrast, Sport Obermeyer’s uncertain demand leads to high marketmediation costs in the form of losses on styles
that don’t sell and missed sales opportunities
due to the “stockouts” that occur when demand for particular items outstrips inventories. The company’s supply chain efforts have
been directed at reducing those costs through
increased speed and flexibility.
Although the distinctions between functional and innovative products and between
physical efficiency and responsiveness to the
market seem obvious once stated, I have found
that many companies founder on this issue.
That is probably because products that are
physically the same can be either functional or
innovative. For example, personal computers,
cars, apparel, ice cream, coffee, cookies, and
children’s car seats all can be offered as a basic
functional product or in an innovative form.
It’s easy for a company, through its product strategy, to gravitate from the functional
to the innovative sphere without realizing
that anything has changed. Then its managers start to notice that service has mysteriously declined and inventories of unsold
products have gone up. When this happens,
they look longingly at competitors that haven’t changed their product strategy and
therefore have low inventories and high service. They even may steal away the vice president of logistics from one of those companies, reasoning, If we hire their logistics guy,
we’ll have low inventory and high service,
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too. The new vice president invariably designs an agenda for improvement based on
his or her old environment: cut inventories,
pressure marketing to be accountable for its
forecasts and to freeze them well into the future to remove uncertainty, and establish a
rigid just-in-time delivery schedule with suppliers. The worst thing that could happen is
that he or she actually succeeds in implementing that agenda, because it’s totally inappropriate for the company’s now unpredictable environment.
Devising the Ideal Supply-Chain
Strategy
For companies to be sure that they are taking
Functional Versus Innovative Products:
Differences in Demand
Functional
(Predictable
Demand)
Innovative
(Unpredictable
Demand)
Product life cycle
more than 2 years
3 months to 1 year
Contribution margin*
5% to 20%
20% to 60%
Product variety
low (10 to 20 variants per
category)
high (often millions of
variants per category)
Average margin of
error in the forecast at
the time production is
committed
10%
40% to 100%
Average stockout rate
1% to 2%
10% to 40%
Average forced end-ofseason markdown as
percentage of full price
0%
10% to 25%
Lead time required for
made-to-order products
6 months to 1 year
1 day to 2 weeks
Aspects of Demand
* The contribution margin equals price minus variable cost divided by price and is expressed as a
percentage.
harvard business review • march–april 1997
the right approach, they first must determine
whether their products are functional or innovative. Most managers I’ve encountered already have a sense of which products have
predictable and which have unpredictable
demand: the unpredictable products are the
ones generating all the supply headaches. For
managers who aren’t sure or who would like
to confirm their intuition, I offer guidelines
for classifying products based on what I have
found to be typical for each category. (See the
table “Functional Versus Innovative Products: Differences in Demand.”) The next step
is for managers to decide whether their company’s supply chain is physically efficient or
responsive to the market. (See the table
“Physically Efficient Versus Market-Responsive Supply Chains.”)
Having determined the nature of their
products and their supply chain’s priorities,
managers can employ a matrix to formulate
the ideal supply-chain strategy. The four cells
of the matrix represent the four possible combinations of products and priorities. (See the
exhibit “Matching Supply Chains with Products.”) By using the matrix to plot the nature
of the demand for each of their product families and its supply chain priorities, managers
can discover whether the process the company uses for supplying products is well
matched to the product type: an efficient process for functional products and a responsive
process for innovative products. Companies
that have either an innovative product with
an efficient supply chain (upper right-hand
cell) or a functional product with a responsive
supply chain (lower left-hand cell) tend to be
the ones with problems.
For understandable reasons, it is rare for
companies to be in the lower left-hand cell.
Most companies that introduce functional
products realize that they need efficient chains
to supply them. If the products remain functional over time, the companies typically have
the good sense to stick with efficient chains.
But, for reasons I will explore shortly, companies often find themselves in the upper righthand cell. The reason a position in this cell
doesn’t make sense is simple: for any company
with innovative products, the rewards from investments in improving supply chain responsiveness are usually much greater than the rewards from investments in improving the
chain’s efficiency. For every dollar such a com-
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pany invests in increasing its supply chain’s responsiveness, it usually will reap a decrease of
more than a dollar in the cost of stockouts and
forced markdowns on excess inventory that result from mismatches between supply and demand. Consider a typical innovative product
with a contribution margin of 40% and an average stockout rate of 25%.1 The lost contribution to profit and overhead resulting from
stockouts alone is huge: 40% x 25% = 10% of
sales—an amount that usually exceeds profits
before taxes.
Consequently, the economic gain from reducing stockouts and excess inventory is so
great that intelligent investments in supply
chain responsiveness will always pay for themselves—a fact that progressive companies have
discovered. Compaq, for example, decided to
continue producing certain high-variety, short-
life-cycle circuits in-house rather than outsource them to a low-cost Asian country, because local production gave the company increased flexibility and shorter lead times.
World Company, a leading Japanese apparel
manufacturer, produces its basic styles in lowcost Chinese plants but keeps production of
high-fashion styles in Japan, where the advantage of being able to respond quickly to emerging fashion trends more than offsets the disadvantage of high labor costs.
That logic doesn’t apply to functional products. A contribution margin of 10% and an average stockout rate of 1% mean lost contribution to profit and overhead of only .1% of
sales—a negligible cost that doesn’t warrant
the significant investments required to improve responsiveness.
Getting Out of the Upper RightHand Cell
Physically Efficient Versus
Market-Responsive Supply Chains
Physically Efficient
Process
Market-Responsive
Process
Primary purpose
supply predictable
demand efficiently at the
lowest possible cost
respond quickly to
unpredictable demand
in order to minimize
stockouts, forced
markdowns, and
obsolete inventory
Manufacturing focus
maintain high average
utilization rate
deploy excess buffer
capacity
Inventory strategy
generate high turns and
minimize inventory
throughout the chain
deploy significant
buffer stocks of parts
or finished goods
Lead-time focus
shorten lead time as long
as it doesn’t
increase cost
invest aggressively
in ways to reduce
lead time
Approach to choosing
suppliers
select primarily for cost
and quality
select primarily for
speed, flexibility, and
quality
Product-design strategy
maximize performance
and minimize cost
use modular design in
order to postpone
product differentiation
for as long as possible
harvard business review • march–april 1997
The rate of new-product introductions has skyrocketed in many industries, fueled both by an
increase in the number of competitors and by
the efforts of existing competitors to protect
or increase profit margins. As a result, many
companies have turned or tried to turn traditionally functional products into innovative
products. But they have continued to focus on
physical efficiency in the processes for supplying those products. This phenomenon explains why one finds so many broken supply
chains—or unresponsive chains trying to supply innovative products—in industries such as
automobiles, personal computers, and consumer packaged goods.
The automobile industry is one classic example. Several years ago, I was involved in a
study to measure the impact that the variety of
options available to consumers had on productivity at a Big Three auto plant. As the study
began, I tried to understand variety from the
customer’s perspective by visiting a dealer near
my home in the Philadelphia area and “shopping” for the car model produced in the plant
we were to study. From sales literature provided by the dealer, I determined that when
one took into account all the choices for color,
interior features, drivetrain configurations, and
other options, the company was actually offering 20 million versions of the car. But because
ordering a car with the desired options entailed an eight-week wait for delivery, more
than 90% of customers bought their cars off
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the lot.
The dealer told me that he had 2 versions of
the car model on his lot and that if neither
matched my ideal specifications, he might be
able to get my choice from another dealer in
the Philadelphia area. When I got home, I
checked the phone book and found ten dealers
in the area. Assuming each of them also had 2
versions of the car in stock, I was choosing
from a selection of at most 20 versions of a car
that could be made in 20 million. In other
words, the auto distribution channel is a kind
of hourglass with the dealer at the neck. At the
top of the glass, plants, which introduce innovations in color and technology every year, can
provide an almost infinite variety of options.
At the bottom, a multitude of customers with
diverse tastes could benefit from that variety
but are unable to because of dealers’ practices
at the neck of the glass.
The computer industry of 20 years ago
shows that a company can supply an innovative product with an unresponsive process if
the market allows it a long lead time for delivery. In my first job after college, I worked
in an IBM sales office helping to market the
System/360 mainframe. I was shocked to
learn that IBM was then quoting a 14-month
lead time for this hot new product. I asked
how I could possibly tell a customer to wait
that long. The answer was that if a customer
really wanted a 360, it would wait, and that
if I couldn’t persuade it to wait, there must
Matching Supply Chains with Products
Efficient
Supply Chain
Innovative Products
match
mismatch
Responsive
Supply Chain
Functional Products
mismatch
match
harvard business review • march–april 1997
be something seriously lacking in my sales
skills. That answer was actually correct: lead
times of one to two years were then the
norm. This meant that computer manufacturers had plenty of time to organize their
supplies around physical efficiency.
Now PCs and workstations have replaced
mainframes as the dominant technology, and
the acceptable lead time has dropped to days.
Yet because the industry has largely retained
its emphasis on a physically efficient supply
chain, most computer companies find themselves firmly positioned in the upper righthand cell of the matrix.
That mismatch has engendered a kind of
schizophrenia in the way computer companies view their supply chains. They cling to
measures of physical efficiency such as plant
capacity utilization and inventory turns because those measures are familiar from their
mainframe days. Yet the marketplace keeps
pulling them toward measures of responsiveness such as product availability.
How does a company in the upper righthand cell overcome its schizophrenia? Either
by moving to the left on the matrix and making its products functional or by moving down
the matrix and making its supply chain responsive. The correct direction depends on whether
the product is sufficiently innovative to generate enough additional profit to cover the cost
of making the supply chain responsive.
A sure sign that a company needs to move
to the left is if it has a product line characterized by frequent introductions of new offerings, great variety, and low profit margins.
Toothpaste is a good example. A few years ago,
I was to give a presentation to a food industry
group. I decided that a good way to demonstrate the dysfunctional level of variety that exists in many grocery categories would be to
buy one of each type of toothpaste made by a
particular manufacturer and present the collection to my audience. When I went to my
local supermarket to buy my samples, I found
that 28 varieties were available. A few months
later, when I mentioned this discovery to a senior vice president of a competing manufacturer, he acknowledged that his company also
had 28 types of toothpaste—one to match
each of the rival’s offerings.
Does the world need 28 kinds of toothpaste
from each manufacturer? Procter & Gamble,
which has been simplifying many of its prod-
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uct lines and pricing, is coming to the conclusion that the answer is no. Toothpaste is a
product category in which a move to the left—
from innovative to functional—makes sense.
In other cases when a company has an unresponsive supply chain for innovative products, the right solution is to make some of the
products functional and to create a responsive supply chain for the remaining innovative products. The automobile industry is a
good example.
Many suggestions have been made for fixing the problems with the auto distribution
channel I have described here, but they all miss
the mark because they propose applying just
one solution. This approach overlooks the fact
that some cars, such as the Ford Fairmont, are
inherently functional, while others, such as the
BMW Z3 roadster (driven in the James Bond
movie Golden Eye), are innovative. A lean, efficient distribution channel is exactly right for
functional cars but totally inappropriate for innovative cars, which require inventory buffers
How Campbell’s Price Promotions
Disrupted Its Supply System
800,000
shipments
Cases of Chicken Noodle Soup
600,000
400,000
consumption
200,000
0
0
10
20
30
40
July 1
50
June 30
to absorb uncertainty in demand. The most efficient place to put buffers is in parts, but
doing so directly contradicts the just-in-time
system that automakers have so vigorously
adopted in the last decade. The just-in-time system has slashed parts inventories in plants
(where holding inventory is relatively cheap)
to a few hours, while stocks of cars at dealers
(where holding inventory is expensive) have
grown to around 90 days.
Efficient Supply of Functional
Products
Cost reduction is familiar territory, and most
companies have been at it for years. Nevertheless, there are some new twists to this old game.
As companies have aggressively pursued cost
cutting over the years, they have begun to
reach the point of diminishing returns within
their organization’s own boundaries and now
believe that better coordination across corporate boundaries—with suppliers and distributors—presents the greatest opportunities. Happily, the growing acceptance of this view has
coincided with the emergence of electronic networks that facilitate closer coordination.
Campbell Soup has shown how this new
game should be played. In 1991, the company
launched the continuous-replenishment program with its most progressive retailers. The
program works as follows: Campbell establishes electronic data interchange (EDI) links
with retailers. Every morning, retailers electronically inform the company of their demand for all Campbell products and of the
level of inventories in their distribution centers. Campbell uses that information to forecast future demand and to determine which
products require replenishment based on
upper and lower inventory limits previously established with each retailer. Trucks leave the
Campbell shipping plant that afternoon and
arrive at the retailers’ distribution centers with
the required replenishments the same day. The
program cut the inventories of four participating retailers from about four to two weeks of
supply. The company achieved this improvement because it slashed the delivery lead time
and because it knows the inventories of all retailers and hence can deploy supplies of each
product where they are needed the most.
Pursuing continuous replenishment made
Campbell aware of the negative impact that
the overuse of price promotions can have on
Weeks
harvard business review • march–april 1997
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Functional products
require an efficient
process; innovative
products, a responsive
process.
physical efficiency. Every January, for example,
there was a big spike in shipments of Chicken
Noodle Soup because of deep discounts that
Campbell was offering. Retailers responded to
the price cut by stocking up, in some cases buying a year’s supply—a practice the industry
calls forward buying. Nobody won on the deal.
Retailers had to pay to carry the year’s supply,
and the shipment bulge added cost throughout
the Campbell system. For example, chickenboning plants had to go on overtime starting
in October to meet the bulge. (See the graph
“How Campbell’s Price Promotions Disrupted
Its Supply System.”) Recognizing the problem,
Campbell required its retail customers on the
continuous-replenishment program to waive
the option of forward buying at a discounted
price. A retailer that promotes Campbell products in its stores by offering a discounted price
to consumers has two options: it can pay
Campbell an “everyday low price” equal to the
average price that a retailer receiving the promotional deals would pay or it can receive a
discount on orders resulting from genuine increases in sales to consumers.
The Campbell example offers some valuable
lessons. Because soup is a functional product
with price-sensitive demand, Campbell was
correct to pursue physical efficiency. Service—
or the in-stock availability of Campbell products at a retailer’s distribution center—did increase marginally, from 98.5% to 99.2%. But
the big gain for the supply chain was in increased operating efficiency, through the reduction in retailers’ inventories. Most retailers
figure that the cost of carrying the inventory of
a given product for a year equals at least 25%
of what they paid for the product. A two-week
inventory reduction represents a cost savings
equal to nearly 1% of sales. Since the average
retailer’s profits equal about 2% of sales, this
savings is enough to increase profits by 50%.
Because the retailer makes more money on
Campbell products delivered through continuous replenishment, it has an incentive to
carry a broader line of them and to give them
more shelf space. For that reason, Campbell
found that after it had introduced the program, sales of its products grew twice as fast
through participating retailers as they did
through other retailers. Understandably, supermarket chains love programs such as
Campbell’s. Wegmans Food Markets, with
stores in upstate New York, has even aug-
harvard business review • march–april 1997
mented its accounting system so that it can
measure and reward suppliers whose products cost the least to stock and sell.
There is also an important principle about
the supply of functional products lurking in
the “everyday low price” feature of Campbell’s
program. Consumers of functional products
offer companies predictable demand in exchange for a good product and a reasonable
price. The challenge is to avoid actions that
would destroy the inherent simplicity of this
relationship. Many companies go astray because they get hooked on overusing price promotions. They start by using price incentives to
pull demand forward in time to meet a quarterly revenue target. But pulling demand forward helps only once. The next quarter, a company has to pull demand forward again just to
fill the hole created by the first incentive. The
result is an addiction to incentives that turns
simple, predictable demand into a chaotic series of spikes that only add to cost.
Finally, the Campbell story illustrates a different way for supply chain partners to interact in the pursuit of higher profits. Functional
products such as groceries are usually highly
price-sensitive, and negotiations along the supply chain can be fierce. If a company can get its
supplier to cut its price by a penny and its customer to accept a one-cent price increase,
those concessions can have a huge impact on
the company’s profits. In this competitive
model of supply chain relations, costs in the
chain are assumed to be fixed, and the manufacturer and the retailer compete through
price negotiations for a bigger share of the
fixed profit pie. In contrast, Campbell’s continuous-replenishment program embodies a
model in which the manufacturer and the retailer cooperate to cut costs throughout the
chain, thereby increasing the size of the pie.
The cooperative model can be powerful,
but it does have pitfalls. Too often, companies
reason that there never can be too many ways
to make money, and they decide to play the cooperative and competitive games at the same
time. But that tactic doesn’t work, because the
two approaches require diametrically different behavior. For example, consider information sharing. If you are my supplier and we are
negotiating over price, the last thing you want
to do is fully share with me information about
your costs. But that is what we both must do if
we want to reduce supply chain costs by assign-
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What Is the Right Supply Chain for Your Product?
ing each task to whichever of us can perform it
most cheaply.
Responsive Supply of Innovative
Products
There is a kind of
schizophrenia in the way
computer companies
view their supply chains.
Uncertainty about demand is intrinsic to innovative products. As a result, figuring out how
to cope with it is the primary challenge in creating a responsive supply process for such
products. I have seen companies use four tools
to cope with uncertainty in demand. To fashion a responsive supply process, managers
need to understand each of them and then
blend them in a recipe that’s right for their
company’s particular situation.
Although it may sound obvious, the first
step for many companies is simply to accept
that uncertainty is inherent in innovative products. Companies that grew up in an oligopoly
with less competition, more docile customers,
and weaker retailers find it difficult to accept
the high levels of demand uncertainty that
exist today in many markets. They have a tendency to declare a high level of forecast errors
unacceptable, and they virtually command
their people to think hard enough and long
enough to achieve accuracy in their forecasts.
But these companies can’t remove uncertainty
by decree. When it comes to innovative products, uncertainty must be accepted as good. If
the demand for a product were predictable,
that product probably would not be sufficiently innovative to command high profit
margins. The fact is that risk and return are
linked, and the highest profit margins usually
go with the highest risk in demand.
Once a company has accepted the uncertainty of demand, it can employ three coordinated strategies to manage that uncertainty. It
can continue to strive to reduce uncertainty—
for example, by finding sources of new data
that can serve as leading indicators or by having different products share common components as much as possible so that the demand
for components becomes more predictable. It
can avoid uncertainty by cutting lead times
and increasing the supply chain’s flexibility so
that it can produce to order or at least manufacture the product at a time closer to when
demand materializes and can be accurately
forecast. Finally, once uncertainty has been reduced or avoided as much as possible, it can
hedge against the remaining residual uncertainty with buffers of inventory or excess ca-
harvard business review • march–april 1997
pacity. The experiences of National Bicycle, a
subsidiary of Matsushita Electric, and of Sport
Obermeyer illustrate the different ways in
which these three strategies can be blended to
create a responsive supply chain.
National Bicycle prospered for decades as a
small but successful division. But by the mid1980s, it was in trouble. Bicycles in Japan were
functional products bought mainly as an inexpensive means of transportation, and sales
were flat. Bicycles had become a commodity
sold on the basis of low price, and Japan’s high
labor costs left National Bicycle unable to compete with inexpensive bikes from Taiwan and
Korea.
In 1986, in an attempt to salvage the situation, Matsushita appointed as president of National an executive from another division who
had no experience in bicycles. The new president, Makoto Komoto, saw that the division
had many strengths: technical expertise in
manufacturing and computers, a highly skilled
workforce, a strong brand name (Panasonic),
and a network of 9,000 dealers. Komoto also
noticed that National Bicycle had an innovative product segment that enjoyed high profit
margins: sports bicycles that affluent customers bought purely for recreation. He concluded
that National’s only hope was to focus on that
segment and use the division’s strengths to develop a responsive chain that could supply
sports bikes while avoiding the high risk of
overproduction that resulted from their short
life cycle and uncertain demand.
According to Komoto’s vision, a customer
would visit a Panasonic dealership and choose
a bike from a selection of 2 million options for
combining size, color, and components, using a
special measuring stand to find the exact size
of the frame that he or she needed. The order
would be faxed to the factory, where computer-controlled welding equipment and
skilled workers would make the bike and deliver it to the customer within two weeks.
Komoto’s radical vision became a reality in
1987. By 1991, fueled by this innovation, National Bicycle had increased its share of the
sports bicycle market in Japan from 5% to 29%.
It was meeting the two-week lead time 99.99%
of the time and was in the black.
National Bicycle’s success is a good example
of a responsive supply chain achieved through
avoiding uncertainty. National has little idea
what customers will order when they walk into
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What Is the Right Supply Chain for Your Product?
Campbell Soup has
shown how
manufacturers and
retailers can cooperate to
cut costs throughout the
system.
a retail shop, but that doesn’t matter: its produce-to-order system allows it to match supply
with demand as it happens. By radically increasing the number of choices from a few
types of bikes to 2 million, it can induce the
customer to sacrifice immediate availability
and wait two weeks for a bicycle.
National’s program is part of a new movement called mass customization: building the
ability to customize a large volume of products and deliver them at close to mass-production prices. Many other companies have
found that they, too, can benefit from this
strategy. For example, Lutron Electronics of
Coopersburg, Pennsylvania, became the
world leader in dimmer switches and other
lighting controls by giving customers an essentially unlimited choice of technical and
fashion features. Says Michael W. Pessina,
Lutron’s vice president of manufacturing operations, “With our diverse product line, customer demand can be impossible to predict.
Yet by configuring products at the time of order, we can offer customers tremendous variety and fill orders very quickly without having
to stock a huge amount of inventory.”
Mass customization is not without its challenges. For example, what does National Bicycle do with its plant during the winter, when
no one is buying bikes? It builds an inventory
of high-end sports bicycles. In addition, mass
customization is not necessarily cheap. National’s custom production requires three
times more labor than assembly-line mass
production of bikes. Interestingly, one of the
main reasons why Henry Ford in the early
1900s moved in the opposite direction—from
craft to mass production—was to slash labor
costs, which he succeeded in doing by a factor
of three. So what has changed to make custom production viable now? Affluent consumers are willing to pay for high-margin, innovative products; and those products require
a different, more expensive, but more responsive production process than the functional
Model T did.
Sport Obermeyer, which is based in Aspen,
Colorado, designs and manufactures fashion
skiwear and distributes it through 800 specialty retailers located throughout the United
States. Because 95% of its products are new
each year, it constantly faces the challenges
and risks of demand uncertainty: stockouts of
hot styles during the selling season and left-
harvard business review • march–april 1997
over inventory of “dogs” at the end of the season. In 1991, the company’s vice president,
Walter R. Obermeyer, launched a project to attack those problems by blending the three
strategies of reducing, avoiding, and hedging
against uncertainty. To reduce uncertainty,
Sport Obermeyer solicited early orders from
important customers: the company invited its
25 largest retailers to Aspen each February to
evaluate its new line. Sport Obermeyer found
that the early orders from this handful of retailers permitted it to forecast national demand for all its products with a margin of error
of just 10%.
Although it was helpful to get this information several months before Sport Obermeyer
was required to ship its products in September,
it didn’t solve the company’s problem, because
long lead times forced it to commit itself to
products well before February. Obermeyer
concluded that each day shaved off the lead
time would save the company $25,000 because
that was the amount it spent each day at the
end of September shipping products by air
from plants in Asia to have them in stores by
early October—the start of the retail season.
Once that figure was announced to employees,
they found all kinds of ways to shorten the
lead time. For example, the person who had
dutifully used standard mail service to get design information to the production manager in
Hong Kong realized that the $25 express-mail
charge was a bargain compared with the
$25,000 per day in added costs resulting from
longer lead times caused by mail delays.
Through such efforts, Sport Obermeyer was
able to avoid uncertainty on half of its production by committing that production after early
orders had been received in February.
Nevertheless, the company still had to
commit half of the production early in the
season, when demand was uncertain. Which
styles should it make then? It would stand to
reason that they should be the styles for
which Sport Obermeyer had the most confidence in its forecasts. But how could it tell
which those were? Then the company noticed
something interesting. Obermeyer had asked
each of the six members of a committee responsible for forecasting to construct a forecast for all products, and he used the average
of the six forecasts as the company’s forecast.
After one year of trying this method, the company found that when the six individual fore-
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What Is the Right Supply Chain for Your Product?
National Bicycle’s success
is a good example of a
responsive supply chain
achieved through
avoiding uncertainty.
casts agreed, the average was accurate, and
when they disagreed, the average was inaccurate. This discovery gave Sport Obermeyer a
means of selecting the styles to make early.
Using this information as well as data on the
cost of overproduction and underproduction,
it developed a model for hedging against the
risk of both problems. The model tells the
company exactly how much of each style to
make early in the production season (which
begins nearly a year before the retail season)
and how much to make in February, after
early orders are received.
Sport Obermeyer’s approach, which has
been called accurate response, has cut the cost
of both overproduction and underproduction
in half—enough to increase profits by 60%.
And retailers love the fact that the system results in more than 99% product availability:
they have ranked Sport Obermeyer number
one in the industry for service. (See “Making
Supply Meet Demand in an Uncertain World,”
by Marshall L. Fisher, Janice H. Hammond,
Walter R. Obermeyer, and Ananth Raman,
HBR May-June 1994.)
harvard business review • march–april 1997
Companies such as Sport Obermeyer, National Bicycle, and Campbell Soup, however,
are still the exceptions. Managers at many
companies continue to lament that although
they know their supply chains are riddled with
waste and generate great dissatisfaction
among customers, they don’t know what to do
about the problem. The root cause could very
well be a misalignment of their supply and
product strategies. Realigning the two is hardly
easy. But the reward—a remarkable competitive advantage that generates high growth in
sales and profits—makes the effort worth it.
1. The contribution margin equals price minus variable cost
divided by price and is expressed as a percentage. This type
of profit margin measures increases in profits produced by
the incremental sales that result from fewer stockouts. Consequently, it is a good way to track improvements in inventory management.
Reprint 97205
Harvard Business Review OnPoint 8509
To order, see the next page
or call 800-988-0886 or 617-783-7500
or go to www.hbr.org
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Further Reading
Harvard Business Review OnPoint
articles enhance the full-text article
with a summary of its key points and
a selection of its company examples
to help you quickly absorb and apply
the concepts. Harvard Business
Review OnPoint collections include
three OnPoint articles and an
overview comparing the various
perspectives on a specific topic.
What Is the Right Supply Chain for Your
Product? is also part of the Harvard Business
Review OnPoint collection Smarter Supply
Chains, Product no. 8487, which includes these
additional articles:
Aligning Incentives in Supply Chains
V.G. Narayanan and Ananth Raman
Harvard Business Review
November 2004
Product no. 8363
The Triple-A Supply Chain
Hau L. Lee
Harvard Business Review
October 2004
Product no. 8096
To Order
For reprints, Harvard Business Review
OnPoint orders, and subscriptions
to Harvard Business Review:
Call 800-988-0886 or 617-783-7500.
Go to www.hbr.org
For customized and quantity orders
of reprints and Harvard Business
Review OnPoint products:
Call Frank Tamoshunas at
617-783-7626,
or e-mail him at
ftamoshunas@hbsp.harvard.edu
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14
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MYTHS
S&OP
PROCUREMENT
MANUFACTURING
TECHNOLOGY
Disruptive
Technologies
Enabling
Supply Chain
Evolution
“The world is moving so fast now-a-days that
the man who says it cannot be done is generally
interrupted by someone else doing it.”
Those lines are as true today as when they were first published in
the early 1900s. And it’s not just our every day worlds that appear
to be evolving before our very eyes. Global supply chains are evolving at a faster rate than at any point in history. In the September
2015 issue of Supply Chain Management Review, I wrote about
emerging markets, mega cities, millennial consumers, and e-commerce—the four global trends that supply chain executives must
consider when designing their processes and networks (Four
Compass Points for Global Supply Chain Management). Together,
they form four interconnected points on the supply chain compass
in response to the shifting demographics, markets, and economies
that will impact where and how we manufacture and deliver goods
to our customers.
As if those trends aren’t disruptive enough, the tools we rely on
to manage distribution, manufacturing, networks, and data are also
in the midst of a radical evolution. While distribution models formerly evolved slowly over decades or even centuries—as was the
case in the move from horse-drawn carriages to trains to commercial trucks—these new technologies threaten to disrupt our field in
By Nick Vyas
Nick Vyas is the Director of
the USC Marshall Center
for Global Supply Chain
Management, where he is
also an Assistant Professor of
Clinical Data Sciences and
Operations. He can be reached
at Nikhilvy@marshall.usc.edu.
For more information, visit
marshall.usc.edu.
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compact time frames, ranging from years to mere months.
In this fast-paced field, I believe supply chain managers
must keep an eye on:
• three new tools and emerging technologies—
drones, 3D printing, and cognitive calculation;
• how these technologies can disrupt current
models in positive ways, and;
• how we must re-imagine our supply chains to
harness new technologies to continue the evolution.
These will not be easy tasks. Let’s take a look at each
of these emerging technologies through those lenses.
www.scmr.com
Drones: Laws, Human Employment,
and Increased Efficiency
For years—and in some instances centuries—products
have moved across the water, land, and air by ships
and barges, trains and trucks, and airplanes. In some
respects, very little has fundamentally changed in those
technologies over time, with the exception of gradually
increasing fuel efficiency, incremental improvements in
speed, and the addition of digital and computer tracking technologies. Today’s semi-tractors and trailers don’t
look all that different from the tractors and trailers that
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Disruptive Technologies
were on the road 30 years ago; indeed,
many of today’s cargo planes were put
into service 30 years ago.
Enter drones, which are emerging
as a potentially game-changing alternative to traditional modes of delivery for
some processes. Like so many disruptive
technologies, drones have their roots in
the military, where they are used to limit
the loss of life while accomplishing their
assigned tasks with fewer mistakes, in
shorter periods of time, and with less risk to the safety of
the operators.
In the last few years, drones have caught the attention
of the private sector. In the supply chain, drones could
positively affect industries as varied as agriculture, medicine, and retail by reducing the number of steps in the
chain and speeding up delivery. The potential benefits
are astounding, and, according to author Peter Sachs,
the technology and associated laws around the usage of
drones are evolving almost weekly.
Corporations such as Google and Amazon were
quick to realize that autonomous delivery could rapidly
change how products make their way through the supply
about the potential for drones to increase
surveillance and violate individual privacy rights. Already, we have seen news
reports of a man in Kentucky who shot his
neighbor’s drone out of the sky for hovering too near his property; meanwhile, in
California drones operated by hobbyists
have allegedly interfered with the work of
firefighters and rescue workers following
a massive highway pileup. For those reasons, Google and its competitors would do
well to remind the public of the many beneficial technological advances that were developed first for military
purposes, including microwaves and the World Wide
Web. Just as those technologies caused suspicion before
they became part of the fabric of our lives, so too can
we accept drones. In fact, as reported by the BBC, the
FAA has already granted permission to six television and
film firms to use drones for their cameras; and they have
developed restrictions and policies for such usage. Laws
will eventually catch up to the technology in ways that
make drones acceptable in our daily experience.
Drones may improve the supply chain in several ways.
For one, drones could be used in ports and in the air to
make deliveries that require fewer
individuals to handle materials. As an
example, PINC Solutions, a provider
of yard management systems, has
that
deployed a solution that utilizes drones
autonomous delivery could rapidly change how
to identify the location of trailers, shipproducts make their way through the supply chain. ping containers, and other assets in
hard to reach areas. Equipped to carry
chain and on to the end customer. Jeff Bezos famously GPS, RFID, OCR, and barcode readers, the drones can
interjected drones into the public conversation on “60 fly overhead to quickly locate and identify assets that have
Minutes” in December of 2013. Eight months later, in been tagged in a yard or port. While drones will replace
August 2014, Google announced “Project Wing,” an ini- some traditional jobs, including some that are currently
tiative designed to develop an efficient and reliable glob- hard to fill like truck and delivery drivers, the operation
al supply chain system where autonomous drones can of drones will create new jobs for employees with techreduce the time to deliver products to consumers. As nical training and logistical knowledge. “Although drones
Astro Teller, Captain of Moonshots at Google X, noted are unmanned, they are not unpiloted,” the BBC has
at the time, there has always been a level of friction in reported. “Trained crew at base steer the craft, analyze
the transportation of goods, and drone delivery such as the images which the cameras send back, and act on
Google imagines “aspires to take another big chunk out what they see.” Moreover, the BBC predicts that human
of the friction of moving things around.” Indeed, Gartner employment will come from loading, programming, and
estimates that by 2017, 20 percent of logistics organi- maintaining drone technology.
zations will exploit drones as part of their monitoring,
Drones will undoubtedly alter how consumers order
searching, and event management.
products, given that the lag time between ordering and
There are hurdles that will have to be overcome arrival can be drastically reduced in some circumstances.
before drones become a mainstream tool and not just They will also alter how retailers function, from how, where,
a fancy of Jeff Bezos’ imagination. Drones’ military lin- and whether they warehouse their products to whether
eage has led the public to voice concerns—and more— they opt to maintain or move away from brick-and-mortar
Corporations such as Google and
Amazon were quick to realize
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and omni-channel in favor of e-retail.
up a drone with a defibrillator and a webcam that can be
Since Bezos’ “60 Minutes” announcement, Amazon delivered to patients with cardiac arrest faster than an
gives every indication that it is pushing for the use of ambulance can drive to the scene. According to the unidisruptive drone technology. As recently as the start of versity, the webcam connects local bystanders to emerthe 2015 holiday shopping period, it released a video gency medical personnel who can direct them on how to
touting the latest iteration of an Amazon Prime Air use the defibrillator, delivering life-saving treatments in a
drone designed for the home delivery market. Amazon fraction of the usual time.
certainly faces technical limitations today—at present
Similarly, drones were used to deliver small aid packbatteries are only good for 25 minutes on a charge— ages to remote disaster areas after the Haitian earthbut “at a certain speed, the home-court
advantage of local merchants dissipates,”
Evan Schumann reported in Computer
By producing
World. “That happens when an Amazon
delivery takes no more time than the products at the point of demand, supply chains
shopper would need to drive to a local
retailer, complete the purchase and become shorter, leaner, and less complex.
return home.” Drones, for instance, could
increase the sales of an online retailer like Amazon dur- quake in 2012; and in Papua New Guinea, Doctors
ing the last days of the holiday season, when online Without Borders used drones to transport dummy TB
sales typically dip because it’s too late to make deliver- test samples from a remote village to the large coastal
ies with conventional parcel delivery services and shop- city of Kerema.
pers turn instead to stores.
While drones still face technical limitations and
The health care industry is also experimenting with legal hurdles, the technology will find its niche in supply
high speed drones, especially for the delivery of crucial chain management.
items. The efficiency and speed at which organ donations, key medications, and vaccines will be able to travel 3D: Cut Out the Middleman and Speed
could make healthcare more accessible in urban spaces, Product to the Consumer
bypassing road and rail traffic congestions, as well as to Manufacturing processes and their supply chains are
rural and third world locations where insufficient infra- complex and slow to respond. As manufacturing supply
structure might typically cause detrimental delays.
chains add even more suppliers, warehouses, and shipThe Mayo Clinic, for instance, has already begun ping components, they risk further delays in delivery as
studies about the possible benefits of utilizing drones in well as increased costs for storage and shipping.
the medical supply chain. Cornelius A. Thiels, a general
Meanwhile, the promise of 3D printing is simplicity and
surgery resident at the Mayo Clinic, notes in a Clinical speed: By producing products at the point of demand, supUpdate that blood is the perfect testing ground for drone ply chains become shorter, leaner, and less complex. While
delivery “because it’s expensive and expires—platelets the technology is still emerging—and like drones, still faces
and thawed plasma last just five days—and the supply technical shortcomings and cost hurdles—a broad range of
is very limited. In our region, the smallest critical access fields, from fashion to automotive to aeronautics to medihospitals stock just two to six units of red cells and no cine, are utilizing advanced printing technology to create
fresh frozen plasma or platelets.” Currently, these sup- products on demand. For example, Sinclair Interplanetary
ply lines are supported by helicopter and
has begun using 3D printing to produce
ambulance transport teams, which are
satellite reaction wheels. Industries that
incredibly expensive in comparison to the
produce heavy equipment, such as comcost of flying a drone, according to Thiels.
mercial aviation, jet engines, and conEven emergency treatment, which curstruction equipment, are utilizing 3D
rently requires an ambulance to arrive on
printing to produce parts that are critical
the scene before technicians can treat
to the production process but with limpatients and transport them to hospital
ited demand. Manufacturers like Boeing
emergency rooms, could undergo beneficial
find that they can manufacture a single
changes. Students at the Delft University of
part on demand on the factory floor more
Technology in the Netherlands have rigged
economically than they can purchase and
Meanwhile, the promise of 3D
printing is simplicity:
www.scmr.com
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Disruptive Technologies
warehouse a minimum order quantity that might not be
consumed for months. As the technology is honed, it will
produce a wider range of products, with improved endurance.
By locating local production centers closer to strategic markets, 3D printing will have a positive impact on:
• reducing carbon footprints by cutting back on
delivery transportation, improving an organization’s
sustainability efforts;
• cutting back on warehousing costs by allowing
quick made-to-order production;
• speeding up turnaround by quickly and cheaply
producing replacement parts; and
• meeting consumer demands for the swift delivery
of personalized products.
High-speed networks will aid the entire supply chain in
downloading, printing, and distributing products with fewer
steps in the supply chain and significantly
less waste.
Take, for example, car racing, a
sport that is incredibly fast paced and
demands pit crews that can quickly
make a repair and get the driver and car
back on the track. In the past, pit crews
have kept an inventory of “just in case”
supplies on hand, leading to a surplus
of material on the track side. In addition, there is the chance that a car will
need repairs for which no equipment or
parts are available on hand. 3D printing solves many of
these problems by allowing crews to produce parts on
demand and only when needed.
To see the potential effects of using 3D printing to cut
back supply chain components in manufacturing, take a look
at California-based SpaceX, where three years of research
and development led to the use of 3D printing to build
the emergency escape rockets on its new manned Dragon
spacecraft. SpaceX developed materials that can withstand
the demands of space travel even while being produced
quickly; writing for Space.com, Elizabeth Howell reports
that SpaceX has shown that “Printing the chamber resulted
in an order of magnitude reduction in lead time compared
with traditional machining—the path from the initial concept to the first hotfire was just over three months.” That
kind of lead-time reduction has reduced costs and enabled
SpaceX to outstrip NASA in developing and maintaining
emerging contracts for space station supply chain.
It will come as no surprise that NASA is joining the
3D printing revolution, with plans to ensure that space
station crews can, if necessary, produce parts on demand
without having to wait for few and far between delivery
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Supply Chain Management Review
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missions: “NASA plans to send a 3D printer produced by
California-based company Made in Space to the space
station this year,” Howell continues, “and the European
Space Agency has mused about using 3D parts to build
lunar bases.” Doing this might allow NASA to reenter
the game, which SpaceX had been threatening to claim
in full. Meanwhile space station crews will be better
equipped to maintain the station safely and on demand.
Cognitive Calculation: Surpassing Human
Adaptability and Accuracy
For most of us, early PCs seem like tools from the Stone
Age. While the Apple 1, comprised of a single circuit
board connected to a keyboard and a television, was
considered a marvel in 1976, the computer technology now available to any sixth grader can generate 3D
designs, create high quality music, and store up to 6.0
terabytes of data. Meanwhile, super computers, such as the Tianhe-2 created by
China’s National University of Defense
Technology, are reported to have a wide
range of capabilities including simulation,
analysis, and government security applications. Performing 33.86 quadrillion calculations in one second, or nearly twice the
speed of the U.S. Energy Department’s
Titan, according to some analysts, such
heightened computational capacity radically outstrips the human ability for calculation and efficient use of data. Super computers can perform tasks that formerly required large staffs of employees
working at slower speeds and with less accuracy.
All of that computing power is made possible through
smart chips and super computing technology that generate speed, information storage, as well as adaptable cognition that imitates human learning. Supply chain management may not need the power of the Tianhe-2 or the Titan
just yet, but as super computing technology has expanded
in the past decade, computer scientists have adapted
these tools to create more practical solutions, such as
robots that are not only programmable, but can perform
complex functions within microseconds and develop new
abilities through learning. These new developments in
cognitive calculation and smart computing can reduce the
need for human contributions that are at times erroneous
and cause slow downs and disruptions in manufacturing,
order fulfillment, and transportation. And, just as technology developed for the military, like drones, is finding a
home in the private sector, so too are technologies developed in the computer world.
Baxter, a robot developed by Rethink Robotics for
J a n u a r y / Fe b 19
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www.scmr.com
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collaborative industrial applications, is a
good example of the potential for applying these advances in cognitive calculation and artificial intelligence (AI) in the
but they
supply chain. Using some of the most
advanced AI on the current market, also expect the companies they do business with
Baxter requires no traditional programming. Instead, the robot is “manually to harness these technologies for their benefit.
trainable by in-house staff, reducing the
time and cost of third party programmers [and is] flexible
Take, for example, the rise of millennial consumers,
for a range of applications and re-trainable across lines and who have come of age during this time of rapid change.
tasks,” according to its manufacturer. That means Baxter is Millennials are not only comfortable and conversant in
capable of being taught to perform a multitude of tasks in the use of emerging supply chain models, but they also
the plant and distribution center, unlike its human counter- expect the companies they do business with to harness
parts who typically specialize in a single field. One robot, these technologies for their benefit. For example, they
for instance, can be trained to handle line loading, machine demand selection; visibility into their orders; and speedy,
tending, packaging, and materials handling. What’s more, accurate, reliable, and economical delivery.
when it finishes a task at one station, it can be easily moved
More importantly, millennial consumers have made it
to another station and taught the next task.
clear that sustainability is an important factor in who they
There is one other significant difference: Most indus- choose to do business with. Recent regulations, and pertrial robots are not only designed to replace workers, they haps the Paris accord on climate change, may also push
are typically in their own distinct work areas for the pro- sustainability to the forefront. Each of these new technoltection of workers. Baxter, on the other hand, is designed ogies not only improves efficiency, they allow global supto collaborate with human employees. In one warehousing ply chains to address major sustainability concerns of the
application, a Baxter robot loads products into a machine future, including:
that wraps and seals them for shipment while an associate
• energy consumption;
at the same workstation unloads and visually inspects the
• CO2 emissions;
products before putting them on a conveyor. Rather than
• traffic congestion; and
replacing associates, the robot requires contact and moni• water consumption.
toring of human behaviors in order to efficiently learn to
Those are just some of the reasons I believe that the
process and replicate tasks.
new technologies will gain traction and become acceptable
Collaborating with these technologies within supply more quickly than past disruptive technologies. The tranchains means that robots can perform monotonous tasks sition process will require supply chain managers, stakeand free up skilled labor for higher level, value-added holders, and consumers to focus on the future rather than
tasks. Beyond taking on monotonous tasks, cognitive tech- the past. New training, new methods of collaborations,
nologies can also tackle potentially dangerous tasks in the and entirely new supply chain career paths will open. To
fields of manufacturing and military operations, reducing advance within the field, supply chain managers must coninjury or loss of life and allowing employees to put their tinue to educate themselves and their teams, and encourskills to work more safely.
age new approaches to lean thinking and innovation.
Navigating the complex world of modern supply chains
Following the Compass
requires managers who have an eye to the major compass
Early on, I referenced the four global trends that sup- points of the field—with the likely North being millennial
ply chain executives must consider when designing their consumers who drive organizations toward new technolprocesses and networks. They are what I refer to as the ogy, into emerging markets, and toward developing mega
four interconnected points on the supply chain compass. cities. Employing the evolving and disruptive technoloFollow them, and they will aid supply chain managers as gies including drones, 3D printing, rapid networks, and
they respond to shifting demographics, economies, and smart chips will be critical for us to meet the demands
global markets. Each of the three technologies I have of these consumers. But effective thought leaders will see
just discussed will be important tools for supply chain the possibilities of harnessing these technologies to meet
managers as they follow the compass to address these demands, expand into desirable markets, and do so with
heightened lean efficiency. 嘷嘷嘷
new and rapidly evolving issues in our networks.
Millennials are not only comfortable
and conversant in the use of
emerging supply chain models,
www.scmr.com
S u p p l y 20
Chain Management Review
•
J a n u a r y / Fe b r u a r y 2 0 1 6
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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.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission.
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, Richard Ivey School of Business Foundation, c/o Richard Ivey School of
Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; email cases@ivey.uwo.ca.
Copyright © 2012, Richard Ivey School of Business Foundation
Version: 2012-05-07
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 WalMart’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 Wal-Mart’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?
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.
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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 owner-operated 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 “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
3
http://mashable.com/2011/02/28/forrester-e-commerce/, accessed January 15, 2012.
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.
4
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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 warehousestyle 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 itemlevel 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 of total sales) and Sears (5 per cent of total sales).6
Its successes were widely publicized, and competitors had adopted many of Wal-Mart’s management
techniques. Yet Wal-Mart 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
6
7
“Low Distribution Costs Buttress Chain’s Profits,” Discount Store News, December 18, 1989.
Inventory turns calculated from respective firms’ 10-K filings.
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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. Wal-Mart’s international purchasing offices worked directly with local factories to source WalMart’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 Wal-Mart 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
13
what materials and ingredients to use in those products.
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.
8
http://www.ft.com/intl/cms/s/0/762b1f80-1259-11de-b816-0000779fd2ac.html#axzz1lv8XtooH, accessed January 15, 2012.
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.
9
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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-andspoke” 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.
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 for-hire carrier when it was not busy transporting merchandise from
15
distribution centres to stores — were more than US$1 billion per year. 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, WalMart 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
14
http://walmartprivatefleet.com/AboutUs/LeadershipProfiles.aspx, accessed January 2, 2012.
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.
15
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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 increased the number — 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
on to 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.
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.
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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 twodecade 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 formerl...
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