Walmart: Inventory Management

UPDATED MAR 25, 2017 ROBERTA GREENSPAN

Walmart’s inventory management is one of the biggest contributors to the success of the
company. Considering the mammoth size of the firm, effective and efficient inventory
management is of critical importance. Walmart is known for cutting-edge technological
applications for its inventory management aspect. The company has perfected the art of
innovating its inventory management methods and strategies. Thus, Walmart is an example of the
benefits of advanced technology and innovation in optimizing inventory management
performance. While there are a variety of other factors contributing to the success of this
business, advanced inventory management is at the core of Walmart’s leadership in the retail
industry.

Walmart’s inventory management is a key success factor in the firm’s ability to grow to its
current position as the leading retailer in the world.

Walmart’s Vendor-Managed Inventory Model

Walmart’s success in managing its inventory is partly due to the effective implementation of the
vendor-managed inventory model. In this model, suppliers access data from Walmart’s
information system, such as data on current inventory levels and the rate at which certain goods
are sold. Suppliers decide when to send additional goods to Walmart, while the company
monitors and control the actual transit of goods from warehouses to the stores.

Walmart’s vendor-managed inventory has the benefit of minimizing delays in the movement of
inventory across the supply chain. This benefit is achieved because suppliers can directly access
data about the inventory of their goods at Walmart stores. Another beneficial effect of using the
vendor-managed inventory model is the minimization of costs in inventory management activity.
Walmart does not need to spend for extra personnel to manage each supplier’s goods. Instead,
this financial and human resource expense is directly passed on to the suppliers.

Types and Roles of Inventory at Walmart

Walmart uses many types of inventory. Each type fulfills a certain role in the firm’s inventory
and supply chain. However, the following types of inventory are the most notable in Walmart’s
practices:

1. Finished Goods Inventory

2. Transit Inventory
3. Buffer Inventory
4. Anticipation Inventory
Finished goods inventory. The finished goods inventory type is the most significant in
Walmart’s business. Finished goods arrive at the company’s stores. These goods are stored and
the inventory is replenished regularly. Thus, the role of this type of inventory is to support
Walmart store operations, where the finished goods are sold from the inventory to the customers.
Transit inventory. Walmart uses the transit inventory type as the second most significant in
supporting the company’s business. This type of inventory refers to the goods that are held while
in transit. The global extent of Walmart’s supply chain means that some goods are in transit for
days or months. The role of this inventory type is to support the replenishment of the finished
goods inventory in Walmart stores.
Buffer inventory. Walmart uses the buffer inventory type in its stores by keeping a small margin
of extra goods in case demand suddenly fluctuates. There will always be an extra stock of goods
at Walmart stores. The role of this type of inventory is to ensure the capacity of the firm to satisfy
sudden increases in demand.
Anticipation inventory. Walmart also uses the anticipation inventory type. This type is similar
to the buffer inventory because the company maintains extra stocks of goods to address an
increase in demand. However, the anticipation inventory type is based on seasonal changes. For
example, Walmart dramatically increases its inventory size right before and during Black Friday
to satisfy the massive increase in demand during this special shopping day. The company also
uses anticipation inventory for the Christmas season and some long holiday weekends. Walmart
does not use the anticipation inventory type during regular shopping days, which are basically the
rest of the year. The role of this inventory type is to enable the company to satisfy expected
seasonal increases in demand.

Just-in-Time Cross-Docking in Walmart’s Inventory

Management
Walmart uses different methods to manage its inventory. Just-in-time inventory is the application
of the just-in-time method to inventory management. This method involves minimizing storage.
In Walmart, the just-in-time inventory method is applied in the form of cross-docking. In cross-
docking, suppliers’ trucks and Walmart’s trucks meet at the company’s warehouses. Goods are
transferred from the suppliers’ trucks directly to Walmart’s trucks, which deliver the goods to the
stores.

The main benefit of cross-docking at Walmart’s warehouses is the reduced inventory size. Fewer
goods are stored at the warehouses. A smaller inventory is less costly to maintain. Also, cross-
docking enables Walmart to quickly deliver goods to the stores. This condition enables the firm
to rapidly respond to fluctuations in demand and related changes in the market. Thus, this method
of inventory management supports Walmart’s business resilience.

Walmart’s Measures of Inventory Performance

Walmart uses numerous variables as measures of inventory performance. However, the following
measures are the most significant:

1. Inventory turnover
2. Stock-out rate
3. Inventory size
Inventory turnover is the rate at which Walmart’s inventory is sold out and replenished. It is a
measure of the cost of keeping each item in stock. A higher inventory turnover rate is more
desirable for Walmart. The stock-out rate is the frequency at which Walmart’s inventory becomes
inadequate in satisfying demand. A lower stock-out rate is desirable. The company uses inventory
size as a gauge of cost. As noted, Walmart spends less for a smaller inventory.

Managing Inventory across the Supply Chain

ABC Analysis. The Category A items in Walmart’s inventory include the goods sold at its stores
and operations equipment, such as information systems for supply chain management and
inventory management. Items in this category are regularly monitored and recorded.
The Category B items in Walmart’s inventory are the other supplies or materials used for
operations, such as maintenance equipment and office furniture. These items have moderate
monitoring, and recording accuracy is moderate. Category Cinvolves the least monitored and
recorded inventory items, such as janitorial supplies and office supplies like paper. This category
has the least impact on Walmart’s daily operations.
Inventory Information Systems. Walmart is known for its advanced information systems. These
information systems cover every area of the business. In inventory management, Walmart uses an
inventory system that allows suppliers to access data on the inventory levels of their products.
This system supports the company’s vendor-managed inventory model.
Bullwhip Effect in Walmart’s Supply Chain. The bullwhip effect is the propagation of error in
the form of inadequacy or excesses in the supply chain. A small error in one part of Walmart’s
supply chain could lead to bigger errors across the supply chain. The company minimizes the
bullwhip effect in its supply chain through the vendor-managed inventory model. Vendor-
managed inventory allows suppliers to directly access Walmart’s inventory data. In this way,
Walmart’s personnel have minimal contribution to possible errors in managing the movement of
goods from the suppliers to the company’s stores.

Financial Impact of Walmart’s Inventory Management

Walmart’s vendor-managed inventory model minimizes the cost of managing the firm’s
inventory because the cost is transferred to the suppliers. The combination of the finished goods
inventory, transit inventory, buffer inventory and anticipation inventory supports the company’s
cost leadership generic strategy through cost minimization. Walmart’s cross-docking as a form of
the just-in-time inventory method also helps reduce inventory costs by minimizing inventory size.