Inventory the Organization I Want to Study

Inventory

The organization I want to study is Wal-Mart, the world's largest retailer. Wal-Mart is a retailer that sells a wide range of goods, including food, and does so in many countries around the world. They are the biggest retailer in the world, and one of the biggest companies.

I chose Wal-Mart because its supply chain management is famous. They are a good case study for inventory management. The basic business model for Wal-Mart is cost leadership. This business model relies on selling high volumes of goods on slim margins, so there is considerable emphasis on the part of the company to have a highly efficient supply chain. Wal-Mart has nearly $45 billion in inventory, but turns it over 10.6 times per year, or once per month, roughly.

Wal-Mart is known to use a number of intriguing technologies to help with its inventory management. The company uses RFID to keep track of inventory as it moves through its system -- so once Wal-Mart has taken the inventory it knows where to direct it. There are dozens of warehouses around the country, each serving a number of different stores, and the company must know how much each store needs, because when the goods arrive at the warehouse, the objective is to move them out to the stores as soon as possible, using cross-docking if possible.

Wal-Mart managers also receive up to the minute reports on sales. This helps them to do their ordering, because they not only know the rate of sales and the existing inventory level, but they also know the standard deviation of the sales as well. This helps in ordering. The fact that the warehouses serve a number of different stores in the region helps to smooth out store-level demand volatility. This also allows the warehouse level to manage some of the inventory, for example if a region has a run on certain things due to weather events, it can pull inventory from elsewhere in the system to meet shortages, rather than change the amount ordered from the supplier. The benefit of this is clear -- that run on snowblowers after the October storm is an outlier event, not a new normal, and the outlier event part of that has to be communicated effectively to the vendor.

Wal-Mart does not use a vendor managed inventory (VMI) system. A lot of the things that VMI does, Wal-Mart also does. There is a high level of communication with the vendor, for example, and Wal-Mart generates a tremendous amount of data to support purchasing decisions. But the vendors do not determine inventory levels. The reason is simple -- maintaining a highly efficient inventory system is a critical part of Wal-Mart's business model. The company believes that it can run its own inventory better than anybody else, so it makes the decisions. This is the case even when it deals with massive companies that usually work with VMI systems -- Pepsi, Coke, Anheuser-Busch and those types of companies. Wal-Mart still runs its own inventory when dealing with those companies.

This is not a knock on VMI at all. Wal-Mart simply believes that its own inventory management system is better. It also recognizes that it has a high amount of bargaining power, such that the risks associated with inventory problems should be on the supplier, not on Wal-Mart. It has the luxury of offloading risk on the vendors, something more retailers cannot do, and this is one of the reasons why Wal-Mart has a competitive advantage on cost.

I think that Wal-Mart technically could use VMI. This is because it has the technology in place and it already engages in a high level of communication with its suppliers. So on that level, Wal-Mart could use VMI. But I do not think that it would, because to do so would put too much control on the vendors to manage its inventory. That is a non-starter from a business perspective for Wal-Mart, and I would expect that it prefers to control its inventory levels and seek its out solutions.

The key to Wal-Mart maintain the right inventory levels and costs are data and volume. The costs are closely associated with the very high level of bargaining power that Wal-Mart has, wherein it basically dictates to its customers the price, and the customers either make that price or they do not get the deal. Ultimately, Wal-Mart offers phenomenal volume so it dictates on things like price and delivery. In terms of managing inventory levels, that is why Wal-Mart gathers such a high level of data. Its managers have access to real time sales, and their systems have built-in ordering triggers.