Network efficiency sets pace for growth - Distribution & Logistics - Wal-Mart - Brief Article

DSN Retailing Today, June 10, 2002 by Molly Prior

By all accounts, Wal-Mart has done a stellar job of aggressively driving out inefficiencies in the supply chain. With a well-oiled distribution and logistics system at its disposal, it has effectively found the formula for widening margins and passing on the savings to the consumer. But as the world's largest retailer continues to set up shop in countries across the globe, it faces a new challenge: how to extend those systems across far-reaching regions.

"Execution has always been the key to Wal-Mart's success," said John Champion, vp of Kurt Salmon Associates, a retail consulting firm. "You'll see Wal-Mart do the same things internationally that it's done domestically--continue to drive costs out of the system."

But foreign markets bring a new set of peculiarities, adding a level of complexity to global sourcing, Champion added. Wal-Mart defines global sourcing as improving the quality of its goods--as well as its supply logistics and retail prices--by acquiring certain products for all of its stores around the world from a single source. The retailer uses the concept for items that are global in scope, such as light bulbs, fabric and hangers.

Effective global sourcing also requires retailers to integrate local flare, such as food, into the assortment, while still maintaining some degree of centralization, said Kevin Boyanowski of KPMG Consulting. "It's definitely not easy," he added. In fact, Champion believes the ability to buy from different parts of the world to source different parts of the chain is what will separate the big players from the small ones.

Following the products becomes much more difficult for the retailer. It used to be retailers would import all products to the United States to supply their stores. Now, retailers need to get products to their stores in Europe and Asia--at times backtracking the merchandise to the original source, explained Boyanowski.

To complicate matters, these days there's no real blueprint for global sourcing. Appropriately, Wal-Mart is taking slow and innovative steps in the area, rolling out a backroom program on a worldwide basis. Wal-Mart's major strength is using its global scale to its local advantage," John Menzer, ceo of Wal-Mart International, told a room of investors during a Merrill Lynch retail conference in March.

Wal-Mart relies on a mix of global and regional sourcing to get the best products at the best price. But turning a profit requires more than just a one-or two-store scenario. "You have to build it and they will come," said Boyanowski. Which may explain why Wal-Mart barrels full steam ahead in terms of foreign expansion. "Our means would be to go in mass, not flag plant with test stores," said Menzer, speaking of Wal-Mart's international expansion strategy.

This strategy requires suppliers to keep scale with Wal-Mart growth. "It's interesting, but many of the global vendors aren't global," said Menzer. To help their supplier partners ramp up production, Wal-Mart meets regularly with its top 50 global vendors to map Out three- to five-year plans.

"Wal-Mart makes everyone more efficient," said Champion. He added that the mere threat of the 800-pound gorilla entering a country will have retailers and vendors scrambling to build a more efficient marketplace.

Despite its leadership position, Wal-Mart continues to invest in its supply chain. last year, the company spent nearly $8.3 billion to build stores, distribution centers and make other capital investments to continue the growth of its business. At home, approximately 84% of Wal-Mart's inventory was shipped from its 72 U.S. distribution centers, 34 being general merchandise DCs, 20 grocery, eight clothing and nine specialty. The balance of merchandise purchased was shipped directly from the suppliers to the stores.

The international segment operates three, export consolidation facilities in Los Angeles, Jacksonville, Fla., and Laredo, Texas, to support the flow of goods to its Mexican, Asian and Latin American markets. A total of 35 DCs outside the United States process and distribute both imported and domestic product to the operating facilities. As stated in its annual report during fiscal 2002, approximately 71% of the international merchandise purchases flowed through these facilities.

Out of the handful of global players in the United States and Europe, each retailer has taken a lead in their particular core competency, said Boyanowski. For Wal-Mart, that core competency is execution. "Wal-Mart is just very consistent about eliminating wasteful parts of its business, it's almost religious about it. Other companies get distracted," said Champion.

When a company goes global, the best ideas come from the home country, but over time international best practices will be incorporated companywide, said Menzer.