Part 2: Supply chain alignment, the Wal-Mart story
Written by Vijay Mehra, Supply Chain Practice Leader for Phase 5 Group
Consider the case of Wal-Mart, oftentimes showcased in supply chain circles as the ‘gold standard’ for supply chain excellence with best-in-class paradigms for replenishment and inventory control.
The Wal-Mart ‘replenishment engine’ is an example of how companies can effectively leverage supply chain excellence to create lasting competitive advantage. And it’s important to note that despite the recent media coverage that has pointed out some stock-out/replenishment challenges, the Wal-Mart ‘replenishment engine’ remains a gold-standard for retailers across the globe. As one supply chain expert puts it, “For all of the bad you hear about Wal-Mart most people fail realize that this mass retailer is one of the most efficient retailers they can do business with. Retail Link and the supply chain system inside Retail Link review the need for potential orders on every item in every store, every day.”
Supply chain alignment is an art and a science within Wal-Mart’s supply chain eco-system, which has a high bar to entry and within which the tenets of strategic alignment and streamlined governance form important cornerstones. Additionally, real-time and near-real-time flow of information on the rate and volume of sale (for key SKUs for critical and fast-moving items) also forms an important capability that has been historically well supported by the systems and processes implemented by Wal-Mart across its key suppliers.
When one takes a closer look at the Wal-Mart replenishment model, some of the most critical elements of Supply Chain Alignment get highlighted, as is discussed in the following section.
A closer look at Wal-Mart’s ‘replenishment engine’
Large retailers face a very challenging environment in terms of keeping their shelves stocked with the right products at the right time. This is particularly true in the USA where SKU proliferation is very high – customers have come to expect a huge variety of brands in a plethora of different configurations; acceptable stockout levels are very low; retailer margins are relatively thin; demand for retailers’ goods is typically highly price sensitive – hence logistics and supply chain costs have to be minimized while supporting the highest service levels. Underlying inventory costs have to be well controlled to keep the business profitable; competition amongst retail chains is high and customer loyalty is low.
The ‘replenishment engine’ that Wal-Mart has successfully deployed since many years now (last upgraded in about 2007) has proven to be one of its competitive weapons in the retail market space.
While achieving supply chain alignment is difficult enough within and across the functional silos of any large manufacturing company with global operations, it is even more challenging in the large-scale retail environment where supply chain alignment needs to be achieved not just across functional silos within the same company, but across an eco- system of supplier, manufacturers and distributors making up the ‘supply side’ of the equation for the retailer. And this is precisely what Wal-Mart has historically achieved as outlined in Figure 3 below.
Figure 3: Key aspects of a ‘replenishment engine’ like Wal-Mart’s
To build a ‘replenishment engine' like Wal-Mart’s, retailers need to leverage supply chain alignment to establish the following supply chain eco-system:
Strategic relationships: Retailer needs to enter into long-term strategic contracts with its core suppliers. Strategic suppliers typically engage in an open book policy with the retailer and they are strategically aligned.
Information sharing: Retailer generates key point-of-sale data sets on a real-time basis and shares with strategic suppliers every few hours: SKU; rate of sale; volume of sale; available shelf space/SKU; minimal handoffs in material flow, where strategic suppliers re-stock retailer shelves themselves – there are oftentimes no inbound inspections, no goods receiving at the retailer and separation of replenishment and accounting cycles, a financial transaction between retailer and supplier typically occurs when retailer sells products
In summary, Supply Chain Alignment is the key to optimizing supply chains – without this fundamentally basic yet necessary ingredient, all the technology and process solutions and the Billions of dollars spent will amount to essentially naught. Supply chains are about ‘going horizontal’ and about velocity and about the real-time flow of products and information, and Supply Chain Alignment as defined in this article, is one of the fundamental building blocks to getting from here to there.
As some noteworthy experts have commented in the past:
“When you went into a Boston Chicken and ordered quarter-chicken, white, with mash and corn, when that was rung up, that would signal all the way along the supply chain the need for more potatoes to be put on a truck a thousand miles away.”
--Stephen Elop, Executive Vice President, Devices & Services, and former CEO, Nokia
“Supply chains cannot tolerate even 24 hours of disruption. So if you lose your place in the supply chain because of wild behavior you could lose a lot. It would be like pouring cement down one of your oil wells.”
--Thomas Friedman, Pulitzer Prize-winning Journalist, Columnist & Author