SOME SUCCESS STORIES IN SUPPLY CHAIN MANAGEMENT Adriano O. Solis, Ph.D. Academic Advisor, NAPM El Paso

Wal-Mart Stores

Perhaps one of the most commonly cited success stories in supply chain management (SCM) is that of Wal-Mart Stores, Inc., which reported total sales of $191.329 billion and a net income of $6.295 billion during the fiscal year ended January 31, 2001 (see www.walmartstores.com). These figures represent a 15.9% growth in total sales and a 17.1% increase in net income over the immediately preceding fiscal year. International sales accounted for $32 billion of the total sales figure, increasing 41% over the previous year. Wal-Mart, which opened its first store in Arkansas in 1962, has retail stores in all 50 states of the United States and in the U.S. territory of Puerto Rico, as well as in Mexico, Canada, the United Kingdom, Germany, Brazil, Argentina, China, and South Korea. As of March 16, 2001, the company reported having 3,128 operating units (1,724 Wal-Mart discount stores, 910 Supercenters, 475 Sam’s Clubs, and 19 “neighborhood markets”) in the U.S. and 1,075 Wal-Mart international units—with more than 962,000 employees (“associates”) in the United States and 282,000 internationally.

Wal-Mart has been an innovator in SCM, which has allowed it to provide low-cost merchandise to its customers and undercut its competitors. Stalk et al. (1992) reported:

“In 1979 Kmart was one of the leading companies in the retail industry… At that time, Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half those of Kmart stores… Today Wal-Mart is the largest and highest profit retailer in the world. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs; Wal-Mart’s goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross-docking. In this strategy, goods are continuously delivered to Wal-Mart’s warehouses from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.”

The traditional distribution strategy in U.S. retail chains involved keeping inventory at warehouses. An alternative strategy would be for goods to be shipped from suppliers directly to the retail stores. Cross-docking has resulted in lower unit transportation and inventory costs, relative to cost of goods sold, through the supply chain. It relies upon a well-developed computer information system—utilizing point-of-sale bar-code readers and electronic data interchange (EDI)—which links Wal-Mart stores, distribution centers, and a large number of major vendors. Moreover, Wal-Mart maintains its own fleet of truck- tractors that deliver multi-item shipments of goods to any store from one of its distribution centers in the U.S. within 48 hours from the time a consolidated replenishment order is placed (David, 1999). [As of March 16, 2001, Wal-Mart reported having 62 locations for its distribution centers.] Wal-Mart further cuts costs by using its own trucks to pick up

Article in The Criterion, May 2001 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management] merchandise from manufacturers, after having delivered goods to the stores, with an average back-haul rate of over 60% (David, 1999).

Procter & Gamble

Procter & Gamble (P&G), founded in Cincinnati in 1837, manufactures and markets worldwide more than 300 brands of packaged consumer goods in the following product segments: baby care, beauty care, fabric and home care, feminine care, food and beverage, health care, and tissues and towel. P&G, which employs some 110,000 people worldwide, had net sales of $39.951 billion and net earnings of $3.542 billion during the fiscal year ended June 30, 2000 (see www.pg.com).

P&G began, as early as 1985, a retailer-supplier partnership with Wal-Mart involving a vendor managed inventory (VMI) system. Under such a system, the vendor—subject to bounds previously agreed upon with the retailer—decides on the appropriate levels of inventory to carry at the retail stores, as well as the corresponding inventory policies to maintain such levels. In the P&G and Wal-Mart partnership, P&G committed to the development of a dedicated team to handle the Wal-Mart account. A primary objective of this team is to facilitate information-sharing between the two firms and address logistics, supply, management information systems, accounting, finance, and other issues (Handfield and Nichols, 1999). Under this arrangement, Wal-Mart shares point-of-sale information from retail outlets directly with P&G, giving the latter easy access to information on consumer transactions and buying patterns. P&G’s dedicated Wal-Mart account team effectively takes responsibility for the marketing and sales of P&G products within Wal-Mart stores. Similar VMI partnerships with other giant retailers have been established by P&G. These partnerships have dramatically improved P&G’s on-time deliveries to Wal-Mart and the other retailers while increasing inventory turnovers (Simchi-Levi, et al, 2000; Handfield and Nichols, 1999). At the same time, they save the retailer a significant amount of managerial and other resources, and demonstrate how information sharing leads to mutual advantage for both parties in such partnerships.

Dell Computer Corporation

Founded in 1984, Dell Computer Corporation is the world’s leading direct computer systems company and is number 2 worldwide in market share in the global computer systems industry (see www.dell.com), rising from number 25 a decade earlier (Dell Fiscal 2000 Annual Report). Dell ranks number 1 in the United States, where it is the leading supplier of personal computers to business organizations, government agencies, and educational institutions, as well as consumers. It reported net revenues of $31.888 billion for the fiscal year ended February 2, 2001—representing a hefty 26.2% increase over the immediately preceding fiscal year—and a net income of $2.177 billion. Net revenues and net income were $5.296 billion and $272 million, respectively, only five years earlier (for the fiscal year ended January 28, 1996). Dell currently has approximately 40,000 employees around the globe.

Article in The Criterion, May 2001 2 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management] Dell sells its computer systems directly to end users, bypassing distributors and retailers. Its supply chain, therefore, involves only three stages—suppliers, the manufacturer (Dell), and customers—excluding transporters. Dell’s direct contact with customers allows it to properly identify market segments, analyze the requirements and profitability of each segment, and develop more accurate demand forecasts. Over the phone or via the Internet, Dell steers its customers toward computer configurations that may be built up from components that are available, thereby allowing Dell to match supply and demand.

Dell’s is an assemble-to-order manufacturing strategy, and there is no finished product in inventory. Computers are manufactured “one at a time, as ordered” at manufacturing facilities in the United States (Austin, Texas and Nashville, Tennessee), Brazil, Ireland, Malaysia, and China. Dell attributes a significant part of its success to how it handles product and information flows along its supply chain. A recent account reports (Chopra and Meindl, 2001):

“… Dell carries only about 10 days’ worth of inventory; in contrast, the competition, selling through retailers, has been carrying in the vicinity of 80 to 100 days. If Intel introduces a new chip, the low level of inventory allows Dell to go to market with a PC containing the chip faster than the competition. If prices suddenly drop, as they did in the early part of 1998, Dell has less inventory that loses value relative to its competitors. For some products, such as monitors manufactured by Sony, Dell maintains no inventory. The transportation company simply picks up the appropriate number of computers from Dell’s Austin plant and monitors from Sony’s factory in Mexico, matches them by customer order, and delivers them to the customers. This procedure allows Dell to save time and money associated with the extra handling of monitors… The success of the Dell supply chain is facilitated by sophisticated information exchange. Dell provides real-time data to suppliers on the current state of demand. Suppliers are able to access their components’ inventory levels at the factories along with daily production requirements. Dell has created customized Web pages so that its major suppliers can view demand forecasts and other customer-sensitive information, thus helping suppliers to get a better idea of customer demand and better match their production schedules to that of Dell.”

References Chopra, S. and Meindl, P. (2001). Supply Chain Management: Strategy, Planning, and Operation, Prentice- Hall, Upper Saddle River, N.J. David, F.R. (1999). Strategic Management: Concepts and Cases, Prentice-Hall, Upper Saddle River, N.J. Handfield, R.B. and E.L. Nichols, E.L., Jr. (1999). Introduction to Supply Chain Management, Prentice-Hall, Upper Saddle River, N.J. Simchi-Levi, D., Kaminsky, P. and E. Simchi-Levi, E. (2000). Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies, McGraw-Hill, New York. Stalk, G., Evans, P., and Shulman, L.E. (1992). Competing on Capabilities: The New Rule of Corporate Strategy. Harvard Business Review, March-April, 1992, 57-69.

Notes:

1. This is the second in a series of short, expository articles on supply chain management. These have been incorporated as sections in an article—forthcoming in the Encyclopedia of Information Systems—on supply chain management and information technology prepared by Professors Mo Adam Mahmood, Leopoldo A. Gemoets, and Adriano O. Solis, all of the Department of Information and Decision Sciences, The University of Texas at El Paso.

Article in The Criterion, May 2001 3 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management] 2. From March 5 through April 11, 2001, members of the National Association of Purchasing Management (NAPM) voted on the proposed renaming of NAPM to the Institute for Supply Management (ISM). The current District II of NAPM, with which NAPM-El Paso is affiliated, will be referred to as the Southwest Supply Chain Forum.

Article in The Criterion, May 2001 4 [Newsletter of the El Paso affiliate of the National Association of Purchasing Management]