How Walmart became a force for low prices through operations management and the supply chain challenges it faces post-pandemic
July 11, 2021
How Walmart turned operational discipline — logistics, supplier power, technology — into a durable low-price engine.
The quest for higher operational efficiency and lower cost within retail will continue on indefinitely, however what is less clear, is how long Walmart will be able to sustain its current leadership position.
During the 1980’s Walmart became the retailer of the decade, it had effectively lowered distribution costs to 1.7% of sales. Competitors such as Sears and Kmart had costs that were more than double that of Walmart. It is interesting to note that competitors like Kmart, Sears and JC Penny have all either gone out of business or are on the verge of bankruptcy (Unglesbee 2021). The next 10 years will determine who will come out on top, Walmart or Amazon. The Covid-19 pandemic has provided Amazon with a substantial advantage in ecommerce, but both Walmart and Target have reached new heights in their own operational advancements.
To evaluate the threat Amazon poses, it’s important to understand the origins of Walmart and how it became an operations powerhouse. Walmart was founded by Sam Walton. Walton previously owned a chain of variety stores that he had franchised. While operating as a franchisee, Walton had a realization about the customer landscape trending towards discount retail in outlets. In order to keep up with this trend, Walton opened his own warehouse-style store named Walmart Discount City. Walton placed high volume orders that far exceeded standard retail. His bulk approach afforded a greater cost discount to end customers.
At the time, Sam Walton was pioneering a new form of retail and this meant that he had to dramatically advance his sourcing and procurement capabilities. Due to the fact that the original Walmart stores were based in Bentonville, Arkansas, distributors were unwilling to deliver products to this rural location. Walton had to erect his own distribution capability and he began trucking operations to procure bulk supplies. Throughout the years, Walmart was not hesitant to build its own operational capabilities to cut costs and stay ahead of the competition.
During the early years, Walmart’s procurement strategy was having executives travel to New York to meet directly with suppliers, cutting out the distributors, wholesalers, and other middleman. Walmart would work intimately with suppliers to ensure the right mix of product would reach customers. This meant Walmart shelves would feature a variety of staple products along with novel items. Early on, Walmart was able to involve suppliers in the process of fulfilling customer demand. Later as Walmart gained prominence, it’s main suppliers all had offices in Bentonville.
Walmart did not limit it’s mindset to rural Arkansas, in the mid-1980’s it began sourcing its products globally and opening offices in China where it was able to deal directly with manufacturers there. Walmart began sourcing private label merchandise from China which was another advantage that propelled profits. Customers were drawn to the low prices of Walmart private label merchandise. These products afforded Walmart a greater profit margin than name-brand products. In 2005, private label merchandise accounted for 20% of Walmart sales.
Seeking continual refinement and advancement, Walmart established a prototype store that was fully merchandised and frequented by customers. Buyers could gain field-intelligence by touring the store regularly and working with associates to stock and sell new merchandise. This afforded Walmart with critical data that could inform national sales efforts.
One of the hallmarks of Wal-Mart’s supply chain strategy is offering EDLP to consumers. In consideration of the data points provided within the case, which long-term supply chain effects (advantageous and disadvantageous) might offering EDLP have on the relationship between Wal-Mart and its suppliers?
Walmart’s humble roots trace back to its first store in Rogers, Arkansas in 1962. At the time, other retailers were focused on urban centers with high density, Walmart chose to open up in emerging suburbs and rural areas where customers where underserved by large chain retailers. (O’Connell 2019) Part of Walmart’s success was that it understood that customers valued price savings and this strategy has remained in place throughout the company’s history. In 2007 the company introduced a new slogan, “Save Money Live Better” which was based on the insights that American customers were able to save as much as $2500 annually per household or $957 per individual. Walmart was able to drive savings of $287 billion for customers in 2006 (Lazarus 2007).
With regards to Everyday Low Price (EDLP), Walmart had pursued a rigorous strategy to drive down cost and keep prices steady for customers. With this approach, Walmart was aggressive in engaging with suppliers, leveraging significant power to dictate terms with them. Walmart controlled payment terms, provided input on product design, raw material sourcing, manufacturing and distribution. In many ways Walmart governed supplier product development. There were 200 global suppliers whose business was so closely tied to Walmart, that they had entire teams working directly to support Walmart. EDLP created consistency for Walmart, enabling them to advertise less frequently. This was not the case for other retailers who would have to raise awareness of sale prices. With Walmart’s rigorous approach, customer could expect prices to be 8-27% lower than the competition.
Operationally, with EDLP, Walmart was able to limit the “bullwhip effect” by generating consistent demand. Distribution centers were able to track store in-stock levels and then fulfill demand automatically. Walmart associates were able to manually override orders to respond to changes in demand. To further refine and advance sales efforts, Walmart worked to harness the knowledge of its supplier partners. In the late 1980’s Walmart introduced the concept of a “category captain” which was a role that a supplier would play to provide input on shelf space allocation. This process drove a unique phenomenon in retail that had not occurred before. Competing suppliers would work together to find a mix of products that would allow Walmart to earn the most It can from its shelf space.
In 2001, Walmart was the largest employer in the world and in 2002 became the wealthiest company in the world. This was the first time a company of its kind had a achieved this feat. (The Editors of Encyclopedia Britannica 2021) This milestone further advanced Walmart’s control over suppliers. With Walmart in a strong position, “category captains” were able to benefit from reliable sales growth and economies of scale.
Through the years, Walmart has continually refined its ability to measure and monitor demand. Ultimately, through continual investments in innovation, every point of the supply chain has been examined, engineered and optimized to drive sales growth.
In the early days Sam Walton was able to fly to each Walmart location and future Walmart site to track operations and store viability. Walton would observe how full the parking lots were to determine how much customer traffic each store had. This approach of store management was not sustainable and Walmart invested heavily in inventory management in the mid 80’s. These investments included a central database, point of sale solutions at the store level, a satellite network and chain-wide UPC codes, which was a first in the retail industry. These inventory management innovations enabled Walmart to collect sales data instantly from each store. Walmart analyzed internal sales data with external data factors such as weather patterns to improve the accuracy of purchasing forecasts.
In the early 90’s Walmart made further investments in its inventory management technology and built the world’s largest civilian database of every sale made at the company during a two decade period. This database was called Retail Link. Walmart provided suppliers with access to the data on the products they supplied to Walmart, in real-time with details of individual stock keeping at each store. Walmart’s expectation in providing them with this data, was that suppliers would monitor and replenish stock continually to keep up with customer demand.
Collaborative planning, forecasting and replenishment (CPRF) and integrated approach to planning and forecasting. Critical supply chain information such as data on promotions, inventory levels, and daily sales. Walmart’s vendor managed inventor (VMI) system required suppliers to manage inventory levels at the company’s distribution centers according to agreed upon service levels. The VMI program began in the late 1980’s with managing a single P&G product, and later grew beyond P&G to include many other SKU’s and suppliers. In 2006 the VMI program had become firmly established. This system was run with great efficiency and in some situations, suppliers owned the inventory up unto the point that the sale was scanned at checkout.
To achieve great efficiency, suppliers would send analysts to work collaboratively with Walmart supply chain personnel to coordinate the distribution of products from supplier’s factories. This teamwork would ensure successful pickups by incoming Walmart trucks, as well as resolving any supply chain issues such as the return of defective products. This collaboration managed routine supply chain issues and the occasional last-minute issue of managing sudden surges in demand for popular items. When Walmart buyers would meet with supplier sales team members, two important topics would be discussed, the out of stock rate and inventory levels. These datapoints would indicate how well a supplier was performing in the VMI system. Suppliers would be issued targets to improve their stock replenishment levels. In addition to short term inventory management issues, Walmart worked with suppliers on strategic planning of medium and long-term supply chain programming. The goal of these meetings was to optimize long term production volume forecasting. Walmart would weigh in on supplier factory locations and how to best coordinate with raw material providers downstream.
In 2006, Competitors had been working to compete with Walmart’s Retail Link technology. One of Walmart’s supply chain innovation responses was a program to incorporate RFID technology within the merchandise its top 100 suppliers. RFID technology (radio frequency identification tags) would allow Walmart to increase stock visibility across the supply chain, from trucks to distribution centers to stores. RFID readers were placed within several locations within each store, from the deck where merchandise arrived, to the stock room, to the sales floor and finally in the box crushing area where empty cartons ended up. With this technology in place, store managers were informed of what inventory was on the sales floor as well as elsewhere within the store.
Based on research, 25% of inventory in United States retailers that was believed to be out of stock, was just misplaced within a Walmart store. A study done by the university of Arkansas revealed that Walmart Stores equipped with RFID lead to an improvement of 16% fewer out of stocks on RFID tagged products. In the US, an average of 8% of merchandise was out of stock at a given moment.
In order for a retailer to keep track of demand at the point of sale, it is important for them to maintain continuous stock on shelves. If retailers do not have a product available for a customer, it is difficult to track demand when transactions aren’t happening. The introduction of RFID was another tool to improve the continuity of stock on shelves. Walmart could harness this technology and ensure that they would never miss a sale of product that was located within their stores. The added visibility that RFID provided was not only an enabler for individual stores, but a safeguard to ensure Walmart had high quality, continuous sales data to monitor demand.
Through the years, the competition has copied elements of the Walmart supply chain. In the late 90’s and early 2000’s competitors were focused on competing with Walmart’s “Retail Link” technology. Walmart has built so many capabilities internally. Some may be easier for competitors to emulate, such as private label merchandise, but Walmart’s financial services arm may pose a greater challenge to copy directly. From a supply chain standpoint, competitors have pursued similar a hub and spoke approach to distribution. They have also pursued similar innovations at the point of sale to manage inventory.
What competitors may find more difficult is being able to match core elements built into the DNA of Walmart’s supply chain. Walmart was able to identify a core customer who was loyal to the brand. Walmart’s decision to pursue rural areas and emerging suburbs was another departure from traditional retailers based in urban centers and dense suburbs.
Due to its scale, Walmart had also become so deeply influential and entrenched within its supplier organizations which swayed the landscape of retail. It would be very difficult for a competitor to recreate these relationships and have the same type of influence as Walmart.
Similarly, when Walmart has attempted to blatantly copy rivals, it was unsuccessful. The Metro7 fashion brand that Walmart launched was an example of a failed attempt to copy Target.
Competitors may be able to license the same technologies and deploy similar management approaches in an attempt to achieve greater operational efficiency, however it is far more difficult to obtain the same strategic principles and instincts that drive success. Walmart has built a fortress of a company and supply chain with a degree of robustness that will never be fully duplicated by a competitor. Economies of scale make it nearly impossible for any competitor to clone or copy Walmart’s operational model.
The pandemic forced retailers like Walmart and Target to accelerate their digital transformation efforts to accommodate delivery and curbside pickup. Prior to the pandemic, just 6% of retailers offered curbside pickup and now 50% are offering this feature. In 2020, Target saw it’s best quarterly sales in history, Walmart was able to double its ecommerce offering amounting to 6% of ecommerce market share (Falcon 2021). Online shopping now has achieved 48% penetration. However, ecommerce still remains a fraction of retail sales with 16% of total sales happening online (Thomas 2020).
Walmart can certainly make modifications to its supply chain, it made significant changes during the pandemic and has been testing a “last mile” delivery program that is similar to Amazon (Baertlein 2021). Curbside pickup and Buy online pickup in store (BOPIS) programs have been tremendously successful and forecasts suggest these programs are here to stay. Through these programs and other supply chain innovations, Walmart can provide value to its customers. What remains unknown is what form the relationship between online and physical retail shopping will take in the future. The ways that Walmart can understand emerging behaviors and new customer needs will position the company to compete with amazon and others.
Ultimately, Walmart has a lot of work to do, considering that Amazon has 38% of the ecommerce market compared to Walmart’s 6%. At this point, it’s too late for Walmart to play catchup. Walmart must truly innovate to stay competitive. Throughout Walmart’s history it has been focused on customer behavior within its stores and how that impacts sales. Amazon has a great advantage in its access to a larger vault of customer data. Amazon has the ability to understand customer needs when they are at home and what is top of mind when customers are not shopping in a store.
Another advantage that Amazon has over Walmart is its customer base. Amazon’s offering appeals to an almost universal audience. Amazon has elevated its brand With its acquisition of Whole Foods, as well as its branded private label consumer electronics such as the Amazon Echo. Walmart on the other hand has consistently marketed to customers who are concerned about low prices. Walmart’s customer segmentation presents a barrier for continued growth that Amazon doesn’t have to deal with. If Walmart customers become convinced that Amazon offers them price savings and greater convenience, it could pose a serious threat to Walmart.
The Covid-19 pandemic has forced changes to retail, but it has also affirmed our humanity and the importance of social interaction of any kind. As we look ahead, our society will continue to be enriched through our contact with one another. Our patterns that have been formed for centuries will be reconfigured and reaffirmed. In thinking about operations, retailers may seek to augment the human experiences that make our communities so much stronger.
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Sources
O’Connell, Brian. 2019. “History of Walmart: Timeline and Facts.” TheStreet. September 17, 2019.