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BIJ 15,2

Adding value to service providers: benchmarking Wal-Mart

Cherie Blanchard and Clare L. Comm
University of Massachusetts Lowell, Lowell, Massachusetts, USA, and

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Dennis F.X. Mathaisel

Babson College, Babson Park, Massachusetts, USA
Abstract
Purpose Wal-Mart is the largest retailer in the world, and one of its drivers of nancial success is its focus on efcient and effective supply chain management (SCM). The purpose of this paper is to demonstrate what service providers could learn from these SCM best practices. Design/methodology/approach Wal-Marts best practices in SCM were investigated through a literature review of secondary data. Findings Wal-Marts best practices in SCM were categorized into four segments: strategic concepts, logistics and distribution, information technology, and supplier collaboration. These practices were then applied to the healthcare industry. Research limitations/implications Wal-Marts best practices were only applied to one service industry (the healthcare industry). Future research could apply these practices to other service industries such as higher education and the airline industry. Practical implications Most service providers can add value to their services by learning from some, if not all, of Wal-Marts best practices in SCM. Originality/value Very little past research has focused on applying the best practices in SCM of a traditional retailer or product provider to service providers. Insight into Wal-Marts best practices can add value to many service providers. Keywords Best practice, Supply chain management, Health services sector Paper type Conceptual paper

Introduction Benchmarking is dened as:

[. . .] an improvement process in which a company measures its performance against that of best-in-class companies, determines how those companies achieved their performance levels, and uses the information to improve its own performance (Bemowski, 1992).

Benchmarking: An International Journal Vol. 15 No. 2, 2008 pp. 166-177 q Emerald Group Publishing Limited 1463-5771 DOI 10.1108/14635770810864875

Wal-Mart is considered a best-in-class company for its supply chain management (SCM) practices. These best practices have enabled it to achieve leadership in the retail industry through increased efciency in operations and better customer service. Past research indicates that benchmarking has become an intrinsic part of most developed healthcare systems (Wait and Nolte, 2005). Some research concludes that there are limits to the rapid or broad implementation of benchmarking principles in healthcare services because patients and their expectations are not considered (Pinar, 2005). Overall, most benchmarking activity in the healthcare industry has been conned to the healthcare industry. Thus, this paper demonstrates that service

providers, like the healthcare industry, can learn not just from other healthcare providers but also from Wal-Marts best practices. Wal-Mart background Since its inception in 1962 by Sam Walton, Wal-Mart has been a highly successful supply chain enterprise. New stores opened at a fairly steady rate of a few stores a year, all initially centralized around the Bentonville, Arkansas area. A second supply distribution center opened in 1975 as the store counts passed the 100 mark. By 1979, the company had switched to an inventory system that tracked items at the individual level, and net sales grew from $975,000 in its rst year of business (Slater, 2003) to passing the $1 billion level. Rapid growth continued into the 1980s. In order to fuel even further growth, Wal-Mart became a publicly traded company (NYSE:WMT). The Initial Public Offering was held in October 1970. In 1984, the rst three Sams Club warehouse stores were opened and full Universal Product Code implementation followed in 1985. By 1987, a satellite network was completed to the point that sales data sent to headquarters could be updated on a real time basis, and the store totals reached the 1,000 mark (Figure 1). In 1988, Sam Walton ofcially handed over the CEO spot to his chosen successor, David Glass. That same year the rst Wal-Mart Supercenter opened, and net sales continued to steadily increase (Figure 2). Founder Sam Walton died in 1992, the same year Wal-Mart started its international supply chain expansion efforts. The Wal-Mart.com web site was launched in 1996; and in 2000, when Lee Scott was named CEO, Wal-Mart focused on implementing radio frequency identication (RFID) tags in order to increase the visibility of its supply chain to reduce further inefciencies and costs. The fundamental principle behind Wal-Marts strategy is to sell high volumes of discounted products. One of the strongest drivers of Wal-Marts nancial success is its focus on efcient and effective SCM. This paper analyzes Wal-Marts SCM best practices in SCM. The benets of an efcient SCM system include reduction in lead

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Figure 1. Total number of stores (Wal-Mart, Supercenters, Sams Clubs, and International)

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Figure 2. Wal-Mart net sales in thousands

time, faster inventory turnover, accurate forecasting of inventory levels, increased warehouse space, reduction in safety stock and better working capital utilization (Mohan, 2003). These practices are categorized into four segments: strategic concepts, logistics and distribution, information technology, and supplier collaboration. The objective of the paper is to demonstrate what other industries might learn from Wal-Marts strategy, and how others could apply Wal-Marts concepts to add value to their own businesses. Wal-Marts supply chain management best practices Strategic alignment. Wal-Mart recognized the importance of controlling and containing supply chain costs as much as possible, in order to maintain prices low enough to maximize sales and revenue. Minimizing costs is imperative in providing discount prices. These concepts are embodied in the rst two of the ve cultural imperatives developed in 1995 to help management best focus their efforts: stock it, price it right, show the value, take the money, and teach them (Slater, 2003). This strategy is in line with the goal of SCM, as succinctly stated in The Goal, which is to increase throughput while simultaneously reducing both inventory and operating expense (Goldratt, 1984). This kind of strategic alignment, or strategic t as some call it, is seen throughout the Wal-Mart business model and history. When Sam Walton started the business, he decided to focus on just one area, discount merchandising, and to do it the best that he could. Walton examined every area of the business and evaluated all decisions based on the end result for the customer and the bottom line. His goal was to serve a mass market and compete on low prices. When making business decisions, he would consider every option from the perspective of how the action would affect his end goal. For instance, is this an action that is going to increase the value to the customer? Putting the customer at the forefront of the supply chain was a radical change in the retail industry at the time, and this focus on the customer led to a total shift in the direction of the existing supply chain dynamics. Over the past decade, Wal-Mart has

managed to change the ow of their supply chain to a pull-or demand-based production method (Figure 3), instead of the traditional push or supply driven system (Figure 4). In the previous push structure (Figure 4), manufacturers were the primary controllers in the supply chain. The manufacturers decided what products to make and in what quantities to produce and sell them. The production runs were optimized around equipment and capacities. There are a lot of inefciencies in a traditional retail product push supply chain system. Since the quantity of items produced was determined based on optimal production quantities from the manufacturers perspective, the volume produced did not always correspond to the actual customer demand. This resulted in an imbalance between supply and demand. In order to compensate for this imbalance, manufacturers would rely on overhead functions such as sales and marketing to sell, or push the products to the distributors and retailers in the supply chain. Unsold products remained in inventory or had to be heavily discounted in order to sell them. If demand outstripped production, sales were lost. In the demand-based supply chain ow, production quantities are determined by accurate short-term forecasts of customer demand. Manufacturers produce a quantity of items based on what will actually be sold and when. This reduces the need for marketing and sales expenses to compensate for over or underproduction. This also allows for signicant inventory reductions, since every participant in the supply chain has less need for carrying large amounts of safety stock to prevent against uctuations in supply and demand. One of the major strategies responsible for shaping this supply chain ow shift was Every Day Low Prices or EDLP. Sales and promotions cause drastic uctuations in inventory and demand. The goal of EDLP is to smooth these uctuations in order to

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Figure 3. Pull or demand supply chain

Figure 4. Traditional push supply chain

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enable better forecasting of sales and synchronize production to real customer usage (Schonberger, 2003). Once the concept of EDLP was understood by customers, the need to wait for sales in order to purchase items at a discount was eliminated and customers could buy items as needed instead of stocking up on items when they were discounted. Another successful strategy that worked well in conjunction with EDLP was the move from the original Wal-Mart discount store format to Wal-Mart Supercenters. The Supercenters are much larger than the regular Wal-Mart stores and sell the regular merchandise with the addition of grocery items. The driving purpose behind the Supercenter concept was to fuel even further growth by increasing the rate of customer visits, since consumers purchase groceries more frequently than other types of general merchandise, such as clothing or furniture. Combining grocery items with the regular retail fare would lead to one stop shopping and higher levels of overall customer purchases. The concept was extremely successful, and many Wal-Mart discount stores were converted to Supercenters. Logistics and distribution. Logistics and distribution are at the very heart of Wal-Marts expertise in SCM. The very foundation of the growth strategy of the company is based around the system of distribution centers (Figure 5). When deciding to enter a new area, it is rst determined if the location will be able to contain enough stores to support a distribution center. Once the distribution center is built, stores will be planned and opened around it to gradually saturate the area. Each center serves approximately 150 stores (Wal-Mart Stores, Inc., 1982). Through the practice of Reoptimization, the distribution network is realigned to maximize efciencies every time another center is added to the system (Troy, 2003). The distribution centers combined with Wal-Marts own private truck eet allow the company to retain signicant control over deliveries. The system allows the company to have economies of scale when purchasing from manufacturers, and yet

Figure 5. Distribution Centers

still provide frequent smaller shipments to stores (Schrage, 2002). The suppliers send the bulk orders to the centralized distributions centers. Upon arrival they are processed through a practice Wal-Mart pioneered called Cross-docking. The items are processed as they are received and then loaded onto trucks to be shipped directly and immediately to stores. The distribution centers do not operate as warehouses; no product inventory is stored at these facilities. Inventory at the store level is kept to a minimum through these just in time activities. The distribution centers are able to make small frequent deliveries to each store, so that less safety stock is needed on hand to avoid stock outs. The stores are able to operate on a Continuous Replenishment basis, also called efcient replenishment, with short lead times for orders and accurate short-term forecasts (Schonberger, 2003). When items are received at the stores, they are stocked directly to shelves, not to backroom storage areas. Inventory levels as a percentage of sales have signicantly decreased over the years, as shown in Figure 6. These supply chain improvements are a result of the Wal-Mart strategy of pioneering business standards, which has been referred to as Revolution, not Evolution (McClenahen, 2005). The company looks ahead to set new standards for the industry. It takes a market leaders position and is not afraid to venture into new arenas. There are a few newer initiatives in the distribution eld at the current time. The company is implementing a Direct Import network plan for overseas imports. Upon entering the USA the imports will go directly to company gateways and then move on to the distribution centers, instead of passing through the usual coastal import channels. The goal of this new initiative is to make the importing process more efcient and dependable, and lessen the risk of interruption to the supply chain that can arise from problems at existing import gateways (Hoffman, 2005). The rst center is being

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Figure 6. Inventory as a percentage of sales

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developed in Texas in order to lessen Wal-Marts dependence on the west coast ports. Another newer initiative is called Remix. This is a new distribution process of mixing products based on factors such as speed of movement for more frequent delivery (Power, 2005). Also, with recent rising fuel costs, Wal-Mart is investigating how to increase fuel efciency to lessen supply chain costs (Associated Press and Reuters, 2005). Information systems and technology. The success of the SCM of Wal-Mart is largely because of its expertise in information systems and supporting technology. As early as 1974, Wal-Mart began using computers for inventory control. By the 1980s, Wal-Mart had installed checkout scanners in all stores and started sending all point-of-sale information to a centralized IT department at headquarters in Bentonville to aggregate sales and inventory data. Technology provides a way to track information throughout the supply chain and share the information with suppliers and stores. Data mining is also used for insight into customer behavior to assist in product decisions and forecasting. Wal-Mart uses electronic data interchange (EDI), in order to share real time information with suppliers for better ordering accuracy, and transparency throughout the supply chain, particularly inventory visibility and for invoicing and payments. The company is also changing from value-added network EDI to internet EDI Applicability Statement 2 standards (Bednarz, 2004). This will allow for the sharing of data through the internet instead of through specialty software service providers. Wal-Mart was one of the rst retailers to share point of sales information with suppliers. They introduced a software program called retail link to their suppliers and trained them to implement and use it (Schaffner, 1996). Retail link is a decision support system which provides historic sales data to use in forecasting and analysis. It can provide SKU information and performance data by store, by product, by region or any other number of useful methods. Wal-Mart also developed a Business-at-a-glance tool for their supply chain partners senior executives (Troy, 2005). This tool was an easy to use, simplied version of retail link designed to help executives make quick decisions. The data for these systems are gathered from point of sales information and from Texlons. Texlons are handheld mobile devices used to track inventory in the stores. There are about 15-30 units per store, and they are integrated into the store computer systems (Gerber, 1998). If the implementation of RFID, RFID, is successful, they may no longer be needed. RFID tags would be able to track items within and outside of stores. The rst stages of implementation have faced a few setbacks, but the problems are being resolved. The RFID tags will have additional benets from the traditional Texlon method. They can limit counterfeiting and theft as well as increase visibility throughout the supply chain. It will become easier to track the location of items in stores and to assist with more accurate replenishment and item picking. They will also be very useful in product recalls and reduce the number of manual steps necessary through supply chain channels (Scheraga, 2005). RFID can be used in sweet spots in the supply chain to gather information (Troy, 2005, 2002). Wal-Mart is a member and advocate for UCCnet. UCCnet manages a global registry of product data called GLOBALregistry. This registry combines a Global Trade Item Number with a Global Location Number, which identies shipping and receiving points (Fontana, 2003). This is part of the companys efforts towards global

data synchronization. They are pressing for uniform product descriptions and industry standards in order to reduce errors, allow for faster loading and delivery of products and improve product availability (Sullivan, 2005). The next step for Wal-Mart and its supply chain partners is improved inventory analysis to optimize the mix of goods on shelves based on sales patterns. This involves data mining and market-basket analysis, which is the practice of identifying the general mix of items a particular shopper will buy in an average trip to the store (Foote and Krishnamurthi, 2001). The goal is to optimize the total costs of goods, including transportation and carrying costs (Johnson, 2002). Strategic alliances and collaboration with suppliers. Wal-Marts practices regarding suppliers have been important to their SCM strategy from the very beginning. The company has a reputation for being a tough negotiator when it comes to pricing and delivery, and often uses reverse auctions and bidding when negotiating with competing suppliers. Suppliers are subject to pricing agreements and the costs of their products are expected to decrease on an annual basis. If these terms are not met then Wal-Mart most likely will not do business with a supplier. In fact, Wal-Mart recently closed 85 stores in Germany because many German suppliers could not meet their expectations. In exchange for meeting Wal-Marts expectations, suppliers can expect some benets in return, such as large order quantities, long-term contracts, access to a large market, and the fast payment of invoices (Fishman, 2003). For example, Wal-Mart normally pays suppliers within 29 days while Kmart averages 45 days to pay an invoice (Moore, 1993). Thus, Wal-Mart makes the companies it deals with more efcient and faster by implementing its own practices. Suppliers also benet from Wal-Marts participation in collaborative planning, forecasting and replenishment, called CPFR (Foote and Krishnamurthi, 2001), which was developed by Voluntary Interindustry Commerce Standards. CPFT is a business practice for SCM that over 300 companies have implemented since the guidelines were initially published in 1998. Case studies have shown it can help improve in-stock positions and reduce inventories. By providing guidelines for sharing and collaboration, this business model establishes a protocol for shared data and mutual benets for both Wal-Mart and their suppliers. This system, in combination with shared information systems, provides a basis for vendor and joint managed inventory management, so that the costs of moving inventory through the total supply chain can be reduced. By acting as partners rather than purchasers or suppliers, all companies can benet from the sharing of data. Other benets are more accurate forecasting and better replenishment of products. Overall, most consumer-goods companies want to do business with Wal-Mart to increase their growth. In fact, for some suppliers the only thing worse than doing business with Wal-Mart may not be doing business with Wal-Mart. But, Wal-Mart is known for forcing its suppliers to redesign products, packaging, and telling them what it will pay for goods (Fishman, 2003). On the other hand, suppliers say nothing negative about Wal-Mart. Is this because they are satised with their relationships or fearful of Wal-Marts power? To date, there is very little information on Wal-Marts impact on the health of its suppliers. The reason for this is the inability to get longitudinal data on Wal-Mart and its suppliers. Neither is willing to share this information.

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Adding value to the health care industry using Wal-Marts best practices Even though the health care industry relies heavily on services as well as products, it is one industry that could certainly benet from applying some of the lessons learned from Wal-Marts expertise in SCM. This particular industry involves many players, such as hospitals, patients, employers, the government, physicians, pharmaceutical manufacturers, pharmacies, schools, equipment suppliers, insurance companies and various intermediaries and special interest groups. All of the parties in this supply chain are acting in their own best interests without considering the overall efciency of the total supply chain, and this is contributing to the bloated costs of healthcare in the USA. With this type of supply chain structure, it is hard to achieve the economies of scale necessary in order to reduce costs and add value. Also, excess money is spent to push new medicines through the supply chain by pharmaceutical sales representatives and marketing campaigns, while there are shortages of needed drugs elsewhere. Health care service providers typically have a long billing cycle, primarily because of the involvement of health insurance companies. In order to receive payment, providers must submit claims to the health insurance companies to be processed and paid or rejected before any balance is billed to the customer. The insurance processors have to verify all information before determining the payment amount. There are many problems that can arise during processing to further delay payment. Information systems collaboration could reduce this outstanding payment time. There are many different numbers and codes involved for each participant party, such as a patient ID, a health insurance group number and policy number, claim numbers, and account numbers. If the data were all synchronized, much like the data synchronization of the UCCnet global registry, this could result in fewer errors in claims processing and possibly faster payments. Similar improvements in billing could come from electronic billing, like Wal-Marts EDI systems which have resulted in faster payments to suppliers. Another factor contributing to the cost of accounts receivable processing is the fragmented billing that is being practiced at hospitals. One visit to an emergency room can result in many bills for a patient. For example, a patient might receive a bill for the physicians services, another for the medications disbursed, as well as one for the anesthesiologist and one from the hospital itself. One patient visit can have multiple transaction processing costs with this practice. However, these costs could be reduced by combining the billing with information systems collaboration for more efcient and lower cost billing and payment procedures. There are many possible applications for SCM best practices for the health care industry, and the benets that are possible could affect all the parties involved. Working together for mutual benets through strategic alliances and information systems collaboration could result in higher prots and better service. An example of a hospital which is employing some SCM best practices is the Lahey Clinic in Burlington, MA. They studied systems used by Wal-Mart and Toyota. Their goal is not to just eliminate waste from the supply chain but to add value by using information technology and strategic concepts. For example, their current system gives administrators a way to analyze how the hospitals staff actually uses expensive materials to treat patients, from operating rooms to outpatient clinics (Rowland, 2006). They hope to save millions of dollars a year by using SCM best practices.

Conclusions: lessons learned for service providers By thinking beyond the standard practices of business, Sam Walton managed to establish a very successful business model, which has since revolutionized entire industries and experienced exponential growth. A key facet to this success is the strength of Wal-Marts SCM. There are lessons to be learned from each of the areas examined for many different types of businesses as previously illustrated by a services provider, the health care industry. For the strategic alignment aspect of Wal-Marts best practices, it is important for every company to examine its industry and its own business strategy in order to determine if a SCM technique will support its goals. Always Low Prices lends itself to striving for economies of scale and other practices that would not necessarily be appropriate for a high-end service company like a luxury hotel and spa. When any company is making decisions about its supply chain, the focus should be on the end goal and all actions should be examined in relation to this objective. Established practices should be challenged if they conict with the companys goal. For instance, EDLP would not work well for the travel and hospitality industry. The uctuations in demand are not due to market inuences like sales and promotions in the retail sector. The travel and hospitality industry must deal with events that they cannot control like holidays, seasons and weather. Trying to imitate Wal-Marts success with EDLP would only magnify the uctuations in demand for hotels and airline ights instead of smoothing the bumps. The airline and hotel industries have better strategic ts with their current methods of peak period pricing and off season discounting as a means of smoothing demand uctuation and maximizing prot. From the perspective of logistics and distribution, Wal-Mart has learned that exibility is important in minimizing risk, especially in light of the increased dependence on imports. Recent world events, such as natural disasters and acts of terrorism, have indicated that it can be helpful to have a back up plan for all areas of business. Also, not relying on one logistics model and exploring alternatives can result in many benets. For example, Wal-Marts practice of reoptimization of the distribution network indicates that the company is always examining its system for continuous improvement. The decision to operate its own truck eet, contrary to the normal business practices at the time, resulted in many benets like control over the distribution system. The main lesson learned from Wal-Marts use of information systems and technology is how it has applied these tools to inventory and collaboration. The increased visibility of items as they pass through the supply chain has allowed for more accurate data. And with this data, better tracking, more control over inventory levels, and incredibly accurate forecasting have resulted. The company and suppliers can spot trends and patterns in sales data and use this information to better serve customers and increase sales. It is important to note that these levels of collaboration have only been possible because of the establishing of information standards, so that all parties involved could share data based on the same assumptions. Another lesson from Wal-Marts collaboration with suppliers is that by examining the supply chain as a whole instead of only the links, efciencies can be magnied. The total system perspective can benet all players when the partnership is approached for mutual benets. This lesson is especially relevant in outsourcing agreements and is part of the reason that they frequently fail. Many companies mistakenly view business

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process outsourcing as simply a way to reduce costs. However, it is vitally important to ensure that the company providing the service is beneting as well, or the quality of the service received may deteriorate. In extreme cases, the outsourcing company can go out of business. Then, the originating company will need to nd another place to outsource the process or take it back in-house. Both are options that are time consuming and costly, and can cause disruptions to business and inconvenience customers. Overall, Wal-Mart prides itself on providing value to its customers by having superior SCM practices. These practices have resulted in increased efciency in operations and better customer service. For example, by having their own transportation system, their transportation costs are about 3 percent of total costs compared to 5 percent for their competitors and they can replenish their shelves four times faster than their competitors (Mohan, 2003). Further, bar coding and RFID technologies have enabled the correct distribution of products to stores. These are only a few of Wal-Marts examples of success in SCM. In short, Wal-Mart can attribute its success in SCM to its innovative and early applications of technology, its lower prices, and its deep partnerships with suppliers. If service providers can learn from Wal-Mart how to achieve these benchmarks then they can become more competitive and add more value for their clients.
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Schaffner, K. (1996), Pssst! Want to sell to Wal-Mart?, Apparel Industry Magazine, Vol. 57 No. 8, p. 18. Scheraga, D. (2005), The spirit of radio frequency, Chain Store Age, May, p. 20A. Schonberger, R. (2003), The right stuff, revisited, MSI, Vol. 21 No. 9, p. 26. Schrage, M. (2002), Wal-Mart trumps Moores law, Technology Review, Vol. 105 No. 2, p. 21. Slater, R. (2003), The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Waltons Legacy into the Worlds #1 Company, Penguin Group (USA) Inc., New York, NY, pp. 28-122. Sullivan, L. (2005), Wal-Mart to suppliers: clean up your data, InformationWeek, Vol. 1041, p. 24. Troy, M. (2002), Competitive advantage lies in system efciencies, DSN Retailing Today, Vol. 41 No. 11, p. 130. Troy, M. (2003), Logistics still cornerstone of competitive advantage, DSN Retailing Today, Vol. 42 No. 11, p. 109. Troy, M. (2005), Best-ever data goal of ramped up RFID program, DSN Retailing Today, Vol. 44 No. 1, p. 46. Wait, S. and Nolte, E. (2005), Benchmarking health systems: trends, conceptual issues and future perspectives, Benchmarking: An International Journal, Vol. 12 No. 5, p. 448. Wal-Mart Stores, Inc. (1975-2005), Wal-Mart Annual Reports, available at: http://walmartstores. com/Files/1975-2005AR.pdf Wal-Mart Stores, Inc. (1982), Wal-Mart Annual Report, Wal-Mart Stores, Inc., Bentonville, AK, p. 3, available at: http://walmartstores.com/Files/1982AR.pdf Corresponding author Clare L. Comm can be contacted at: Clare_Comm@uml.edu

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