Reprinted from THE JOURNAL OF COMMERCE, November, 2005
At Wal-Mart, less is more
The retailer's new logistics strategy relies on 3PLs to consolidate freight and control transportation cost.
The world's biggest retailer wants to receive smaller shipments from its suppliers—and a lot more of them.
In a new logistics initiative that could ripple across countless supply chains, Wal-Mart Stores is asking suppliers to send smaller, more frequent shipments and use third-party consolidators to manage and reship that freight.
The goal for what the retailer calls its "Remix" program is to eliminate out-of-stock merchandise and replenish stores more quickly, free up more floor space for sales and wring costs from its supply chain.
Shippers supplying Wal-Mart may see benefits, too. By using consolidators, shippers may be able to keep lower truckload rates while fulfilling more LTL-sized orders, logistics providers say.
That could help thousands of shippers keep transportation costs in check as Wal-Mart demands more product, more often.
"It's a pretty remarkable sea change in the industry,"
said Jeff Conover, vice president, supply chain at DSC Logistics. The Chicago-based third-party logistics provider is one of several 3PLs nationwide that is consolidating inbound shipments for Wal-Mart's suppliers, including Prime Distribution Services, Commodity Logistics and CaseStack.
"Traditionally, consolidation has benefited smaller vendors who would never have full truckloads," Conover said. "Now medium and large suppliers can benefit and have a need for consolidation."
From its RFID mandate to the launch of its sprawling import logistics program in Texas, Wal-Mart is remodeling its supply chain with new technology, new processes and new facilities in what adds up to a broad effort that underscores an upheaval in retail logistics.
As "big box" retailers expand store networks and rely more on global supply pipelines, the positioning of inventory and management of inbound logistics is changing logistics strategies and transport cost structures.
Home improvement giant Lowe's said this year it is cutting a full day from its replenishment cycle by consolidating shipments at regional distribution centers under its Rapid Replenishment Initiative.
For Wal-Mart, the Remix initiative is part of a larger strategy that includes radio-frequency identification technology and a "direct import" plan to stage goods at gateways such as Bayport, Texas, where Wal-Mart has a new 4 million-square-foot distribution center before moving them to regional DCs closer to stores. Wal-Mart officials were not immediately available for comment on the initiative.
Overall, Wal-Mart looks to be trying to line up globalizing logistics pipelines with its own expansion. Both the changes—the stretching of supply chains and the relentless addition of stores—could send costs soaring, a disaster for a business model built on offering low prices. Net sales for the company reached $76.8 billion in its fiscal second quarter, a 10.2 percent increase over the comparable period last year. The retailer reported $30.9 billion worth of inventory in the quarter, an almost 10 percent increase from a year earlier.
Its retail network has expanded alongside volume. Since July 31, 2004, Wal-Mart has opened 34 discount stores, 20 neighborhood markets and 97 "super centers." In addition, 156 super centers were expanded or converted from existing discount stores.
"Wal-Mart needs to continue to find ways to keep their prices lower at a time when costs, especially distribution costs, are going up pretty significantly." Conover said. "They're looking for innovative ways to drive costs out of the supply chain."
Wal-Mart isn't simply changing shipment size and order frequency, but also the way it sorts inbound freight, Conover said. "They're moving away from category-based distribution toward a strategy based on the velocity with which goods reach stores," he said. "Until Remix, Wal-Mart had 28 food warehouses and 39 general merchandise DCs. Now they will all be Remix centers, and only apparel and refrigerated goods facilities will be separate."
The emphasis on velocity will challenge shippers, he said, who will have to implement Wal-Mart's demands. "Traditionally, Wal-Mart would have ordered two to four weeks of product and the supplier would ship a truckload to a distribution center," Conover said. "Now Wal-Mart is only going to order five days worth of product. The pressure on supply chain is immense. If a truck breaks down you have an out-of-stock."
Without a consolidator, suppliers would have to shift from truckload to LTL carriers to meet those requirements.
Instead, shippers will ship truckloads to third-party consolidators that will maintain safety stock and create LTL-sized shipments as ordered.
Wal-Mart's Remix supply-chain initiative shifts responsibility for inventory management to the consolidators shoulders.
DSC Logistics and the other consolidators in the program will ship consolidated orders as truckloads to Wal-Mart's regional DCs. At those "Remix centers,"—shipments will be rerouted to specific stores and even specific aisles within those stores.
"When the system flows and runs well you virtually eliminate stockouts," said Jeff Conover, vice president, supply chain at DSC Logistics.
Wal-Mart reduced out-of-stock occurrences, improved store efficiency and increased sales during a test of Remix in Florida. That encouraged the retailer to roll out the program nationwide, a process Conover said will be complete next March.
DSC will consolidate shipments from vendors into truckloads at consolidation centers in Dallas, Atlanta, Chicago, Los Angeles and Allentown, Pa. It will maintain safety stock at those sites as well.
Conover said the service which it calls its "multi-vendor optimization strategy" would help Wal-Mart suppliers lower their supply-chain costs. "They'll get the benefits of truckload pricing and truckload service," he said.
© Copyright The Journal of Commerce November 2005.
William Cassidy. All rights reserved
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