International Sales & Distribution Management

Project Report

On

'Distribution Channel System followed by Wal-Mart'

Submitted to: Submitted By:

Prof. Sachin Sinha Shubham Suman

FT-IB-11-344

WAL-MART

slogan: “Low prices. Every day. On everything”

Wal-Mart Stores, Inc.(branded as Walmart) is an American public corporation that runs a chain of large, discount department stores. In 2008 it was the world’s largest public corporation by revenue, according to the Fortune Global 500 for that year. Wal-Mart is the largest majority private employer and the largest grocery retailer in the United States. It also owns and operates the Sam’s club retail warehouse in North America.

Wal-Mart’s operations are organized into three divisions: Wal-Mart Stores U.S., Sam’s Club, and Wal-Mart International. The company does business in nine different retail formats: supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants. 

Wal-Mart enjoyed a 50 percent market share position in the discount retail industry with its nearly 3,000suppliers. Though Wal-Mart may have been the top customer for consumer product manufacturers, it deliberately ensured it did not become too dependent on any one supplier; no single vendor constituted more than 4 percent of its overall purchase volume. 

The current ratio in the last 5 years is below 1, between 0,8 and 0,9 (Walmart, annual report 2009). This is typical of strong distribution companies that pay their suppliers in 1,2 or 3 months but they cash immediately from customers. They use this lag as a financial source.

Distribution channel system:

A distribution channel is the method a company uses to get its products into the marketplace for consumer use. The traditional channel goes from supplier, manufacturer, distributor, wholesaler and retailer. Two types of distribution channels exist: indirect and direct.

Indirect Channel

The indirect channel is used by companies who do not sell their goods directly to consumers. Suppliers and manufacturers typically use indirect channels because they exist early in the supply chain. Depending on the industry and product, direct distribution channels have become more prevalent because of the Internet

Direct Channel

A direct distribution channel is where a company sells its products direct to consumers. While direct channels were not popular many years ago, the Internet has greatly increased the use of direct channels. Additionally, companies needing to cut costs may use direct channels to avoid middlemen markups on their products.

The Importance of Distribution channel system

Most producers use intermediaries to bring their products to market. They try to develop a distribution channel system to do this. A distribution channel system is a set of interdependent organizations that help make a product available for use or consumption by the consumer or business user. Channel intermediaries are firms or individuals such as wholesalers, agents, brokers, or retailers who help move a product from the producer to the consumer or business user. A company’s channel decisions directly affect every other marketing decision. Place decisions, for example, affect pricing. Marketers that distribute products through mass merchandisers such as Wal-

Mart will have different pricing objectives and strategies than will those that sell to specialty stores. Distribution decisions can sometimes give a product a distinct position in the market. The choice of retailers and other intermediaries is strongly tied to the product itself. Manufacturers select mass merchandisers to sell mid-price-range products while they distribute top-of-the-line products through high-end department and specialty stores. The firm’s sales force and communications decisions depend on how much persuasion, training, motivation, and support its channel partners need. Whether a company develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members. Some companies pay too little attention to their distribution channels. Others, such as FedEx, Dell Computer, and Charles Schwab have used imaginative distribution systems to gain a competitive advantage. 

Functions of Distribution Channels

Distribution channels perform a number of functions that make possible the flow of goods from the producer to the customer. These functions must be handled by someone in the channel. Though the type of organization that performs the different functions can vary from channel to channel, the functions themselves cannot be eliminated. Channels provide time, place, and ownership utility. They make products available when, where, and in the sizes and quantities that customers want. Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer. Distribution channels create efficiencies by reducing the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers. This occurs in two ways. The first is called breaking bulk. Wholesalers and retailers purchase large quantities of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of transactions by creating assortments—providing a variety of products in one location—so that customers can conveniently buy many different items from one seller at one time. Channels are efficient. The transportation and storage of goods is another type of physical distribution function. Retailers and other channel members move the goods from the production site to other locations where they are held until they are wanted by customers. Channel intermediaries also perform a number of facilitating functions, functions that make the purchase process easier for customers and manufacturers. Intermediaries often provide customer services such as offering credit to buyers and accepting customer returns. Customer services are oftentimes more important in B2B markets in which customers purchase larger quantities of higher-priced products. Some wholesalers and retailers assist the manufacturer by providing repair and maintenance service for products they handle. Channel members also perform a risk-taking function. If a retailer buys a product from a manufacturer and it doesn’t sell, it is “stuck” with the item and will lose money. Last, channel members perform a variety of communication and transaction functions. Wholesalers buy products to make them available for retailers and sell products to other channel members. Retailers handle transactions with final consumers. Channel members can provide two-way communication for manufacturers. They may supply the sales force, advertising, and other marketing communications necessary to inform consumers and persuade them to buy. And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market. 

The Internet in the Distribution Channel

By using the Internet, even small firms with limited resources can enjoy some of the same competitive advantages as their largest competitors in making their products available to customers internationally at low cost. E-commerce can result in radical changes in distribution strategies. Today most goods are mass-produced, and in most cases end users do not obtain products directly from manufacturers. With the Internet, however, the need for intermediaries and much of what has been assumed about the need and benefits of channels will change. In the future, channel intermediaries that physically handle the product may become largely obsolete. Many traditional intermediaries are already being eliminated as companies question the value added by layers in the distribution channel. This removal of intermediaries is termed disintermediation, the elimination of some layers of the distribution channel in order to cut costs and improve the efficiency of the channel.

'Distribution Channel System followed by Wal-Mart'

About 85 percent of all the merchandise sold by Wal-Mart was shipped through its distribution system to its stores. Wal-Mart used a “saturation” strategy for store expansion. The standard was to be able to drive from a distribution center to a store within a day. A distribution center was strategically placed so that it could eventually serve 150-200 Wal-Mart stores within a day. Stores were built as far away as possible but still within a day’s drive of the distribution center; the area then was filled back (or saturated back) to the distribution center. Each distribution center operated 24 hours a day using laser-guided conveyer belts and cross-docking techniques that received goods on one side while simultaneously filling orders on the other. The company owned a fleet of more than 3,000 trucks and 12,000 trailers. (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the company’s wide network of stores, distribution centers, and suppliers. The system consolidated orders for goods, enabling the company to buy full truckload quantities without incurring the inventory costs. 

The key to Wal-Mart’s supply chain

Wal-Mart is committed to improving operations, lowering costs and improving customer service. But the key to retailer Wal-Mart’s success is its ability to drive costs out of its supply chain and manage it efficiently. Many supply chain experts refer to Wal-Mart as a supply chain-driven company that also has retail stores. Wal-Mart’s company philosophy is to be at the leading edge of logistics, distribution, transportation, and technology. The Wal-Mart business model would fail instantly without its advanced technology (Wal-Mart has the largest IT systems of any private company in the world) and supply chain(Wal-Mart has made significant investments in supply chain management).

Wal-Mart’s business model and competition

Wal-Mart’s business model is based on a low price strategy and low transportation costs allow it to sell its products at the lowest possible prices. In return for its strategy (Everyday Low Price Strategy), Wal-Mart’s suppliers – both large and small – either break even or make profit supplying at Wal-Mart’s stores. But the real winners are Wal-Mart’s customers (approximately 175 million every week) who save thousands of dollars buying at low prices. Since Wal-Mart stores began selling groceries almost three dozen regional grocery suppliers have struggled to match or simply run out of business. Last year (2007), Wal-Mart’s annual sales were $350 billion

and it had more than 7,000 stores, 120 distribution centres and operations spanning 15 countries. Nearly two million employees at Wal-Mart focus on cost, customers and continuous improvement on a daily basis.

Wal-Mart’s one-store-at-a-time, RFID and just-in-time distribution approach

Every Wal-Mart store operates like a small company. Store managers are trained to manage one store at a time, one department at a time, and one customer at a time. Decisions are made by store teams to make the individual stores operate at its best with superior in-store execution. With established vendor partnerships with top manufacturers, Wal-Mart has implemented advanced logistics solutions like RFID (radio frequency identification). RFID solutions help maintain lower costs, identify out-of-stocks and increase sales. Distribution centres instead of warehouses, automated replenishment and cross-docking technology also reduce inventory carrying costs.(“Why Wal-Mart´s supply chain is so successful?”, http://supply-chain-case-studies.blogspot.com/)

Monitoring supply chain risk

In 2008 Wal-Mart introduced Supply Risk Monitoring (SRM)service as a requirement to Wal-Mart’s supplier community. This after Wal-Mart made an agreement with Strategic Forecasting, Inc. (Stratfor) to assess and rank security risk for countries in its global supply chain.Stratfor is a leading private intelligence company and its serviceswill enable Wal-Mart to identify risks with supply chain infrastructure in countries (ranked as high, medium or low) within its supply chain using a unique analytical methodology. The countries will be assessed on risks associated with terrorism, insurrection, crime, the political and regulatory environment, natural disasters, including various other factors related to supply chain infrastructure. This will help Wal-Mart to produce a quantifiable measure of the actual risk to a nation’s supply chain and thereby determine appropriate supply chain security counter-measures. It can thus quickly warn of emerging threats and prevent disruption of deliveries of goods to major markets around the world. 

Consolidation Strategy in Wal-Mart

Remixing the Inbound Channel

Shippers are always on the lookout for ways to speed product from source through supply chains to the consumer, and Wal-Mart’s “Remix” distribution strategy is going to give its vendors a new way to reach the goal whether they’re ready for it or not.

Remix is Wal-Mart’s name for a vendor transportation consolidation program on a colossal scale .

Between 2006 and 2007, Wal-Mart plans to transform its distribution system of 120 company warehouses fed by thousands of vendors moving 2 billion cases of food and 2.7 billion packages of other merchandise to 3,700 U.S. stores annually. The Bentonville, Ark.-based chain is forging a two-track inbound logistics system that will separate high-turnover goods from slower-selling products to reduce stock-outs, especially in its fast-growing grocery stores.

To do that, Wal-Mart is leaning on its vendors to work with transportation and logistics providers to consolidate less-than-truckload deliveries into truckload freight before it reaches a store . If successful, the system will change the way vendors and supply chain partners move goods to Wal-Mart, and because of the company’s size and reach, set an example other high-volume competitors will be hard-pressed not to follow.

It will also sharply expand Wal-Mart’s distribution channels through certain gateways in ways that will ripple across strategies for handling and moving imported goods well beyond Wal-Mart’s own operations

The largest shippers have the expertise, resources and technology to move beyond a simple role as a buyer of goods. They want to dictate not only when shipments are delivered, but how and where, whether to a third-party warehouse or the company’s own, or direct to the store.

For Wal-Mart, the Remix strategy also means a realignment of supply chain relationships.

The shipper asserts more control in this case by encouraging vendors to coordinate their LTL shipping schedules with logistics providers and carriers so they arrive as full truckloads at stores. Inventory management becomes more the responsibility of the vendor and logistics provider. Investments may have to be made in technology to support a much more complex loading of trucks and other transport modes. Many of these costs will be borne by the vendor or third-party provider.

“I’ve heard the argument,” said Tyler Ellison, vice president, global client group for Schneider National. “But what I would contend is that Wal-Mart’s Remix initiative at the end of the day eliminates waste and cost from the supply chain. … Even if we have to add costs in some areas, the cost of being out of stock is higher.”

At its heart, Remix is about avoiding stock-outs of popular, fast-moving items, from paper towels and toothpaste to laundry detergent and fresh food.

Stock-outs became an issue for Wal-Mart after the mass merchandiser ramped up its in-store grocery units in the 1990s. At the same time, Wal-Mart turned from its focus on American-made goods to becoming a huge importer, particularly from Asia, lowering the cost of the goods but adding complexity and cost to a supply chain now built on inbound logistics.

The initiative aims to free distribution workers from the need to sort manually on receiving docks the higher-velocity items from slower-moving goods, thus slowing replenishment of both.

Wal-Mart wanted more and smaller deliveries faster, something of a challenge when goods are coming from overseas in bulk.

That would mean vendors sending more LTL shipments, which would push up their transportation costs. Instead, Wal-Mart suggested vendors partner with carriers and logistics providers to have their LTL freight consolidated into truckloads at third-party distribution centers. Systems were also encouraged to pack freight for optimal unloading and distribution at stores to reduce overlapping or redundant delivery stops.

The company offers its online Retail Link software for vendors to enter and review purchase orders, make carrier appointments and get data on consolidated loads. It compiles vendor scorecards to assess on-time performance and other metrics.

Remix relies heavily on technology. CaseStack has what Sanker called a consolidation engine installed into a combined transportation and warehouse management system to make truckloads easier to pack, and a transportation optimizer that reviews roughly 1,000 carriers for the best routes and price.

“You have to be able to move really fast in a consolidation program,” Sanker said. “Instead of two pallets of three products, you might have five cases, two pallets, six boxes, which means a lot more picking. The system has to be able to kick out the right information and instructions to everyone in the warehouse. … If you tried to do it manually, you’d be buried.”

Late or missed deliveries are intolerable in an environment without safety stock. As a result, he said, “We’re always one day away from a Wal-Mart distribution center. … The probability of a service failure is reduced dramatically the fewer miles you have to drive.”

To support Remix, more logistics providers and carriers are turning to barcode-enabled mobile computers to update inventory databases on the fly. Accurate, near-real time data from vendors and warehouses feeds higher-level systems Wal-Mart needs to fine-tune its new distribution system.

“Once you know what you’re selling and how fast,” McNerney said, “you can work on your demand forecast.”

For those who send the products to the shelves, the judgment is more complicated.

Although he wouldn’t name names, Conover said vendor reaction to the new program breaks down into roughly two camps. “There’s a concern because vendors see the increase in supply chain costs. Their view is that they have to bear the expense of it,” he said. “The other camp also looks at the increased costs to their supply chain, but recognizes if they do it right they will see their sales increase,” and they may enjoy an advantage over non-participating competitors.

As results accumulate, the ripple effects of Remix will spread from gateways to points deeper in supply channels, observers said.

“As Wal-Mart pushes back inventory, that’s going to force vendors to relocate distribution centers and such closer to the retailers own distribution facilities and stores,” said Barry Hibbard, vice president of real estate at Tejon Ranch, a 426-square-mile multi-use development in Southern California’s Inland Empire. Those relocations will in turn have ripple effects on the distribution networks of vendors to other retailers.

“Wal-Mart’s focus on the end customer is what makes them great,” he said. Reducing the biggest merchandiser’s cash-to-cash cycle, as Remix is expected to do, will benefit not only the retailer but eventually its partners, as new efficiencies help each move other clients’ freight on the same swift schedules. Keeping Wal-Mart’s shelves stocked keeps customers, but also focuses the company’s supply chain partners in ways that benefit their other clients.