Wal-Mart Increases its Supplier's Inventory Levels

With all the Just-In-Time talk and knowledge regarding better management and understanding of
inventory, you'd think that average levels would be decreasing.  Well, I still think that at a well-
managed company, they should be, but Susan K. Lacefield, accociate editor of Logistics
Management, wrote a pretty interesting article that found otherwise.

In a poll of her magazine's internet readers, she found that over 60% of companies expect to see
inventory levels rising over the next year.  The specifics regarding why are some pretty
interesting reasons.

Most notably, Wal-Mart's JIT efforts are leaving their suppliers with more inventory.  If you
think about this, it makes a lot of sense.  Wal-Mart does not want to hold inventory.  At the same
time, they do not want backorders.  The only way to do this is to be able to replenish their stock
at a moment's notice.  So what does this do to their suppliers?  According to Logistics
Management, it shoots supplier's inventories straight up.

The demands that Wal-Mart places on its suppliers are incredible because of the power Wal-Mart
places on its suppliers.  Personally, I'm waiting for the day when Wal-Mart's suppliers form a
massive supplier's union (sounds like collusion to me), but until then, good for Wal-Mart for
leveraging what it can out of its suppliers.  Also in the mean time, suppliers are forced to hold
incredible safety stocks to make sure they can satisfy Wal- Mart's demands.

Basically, the suppliers don't have a choice in the matter.  Wal-Mart's business, even with the
demands on service, is too good to pass up.  But, Wal-Mart is not about to have a stockout due to
some supplier's inability to provide a 99% service level.  Wal-Mart, like many huge companies,
will not wait.  Many companies are:

requiring shorter lead times even as more companies implement 'zero tolerance' policies for late
shipments.

Zero tolerance is a hell of a statement from a company that knows service level.  To provide
even a 97% service level compared to a 95% service can result in a huge increase in inventory. 
Zero-tolerance is wild.  In fact it is actually impossible.  No matter what a company holds in
inventory, there is always the possibility that Wal-Mart could order one more than that.  Couple
this with a shorter lead time to Wal-Mart and inventories are stagerring.

Not only does Wal-Mart demand what they want when they want it, but also, as one Logtistics
Management survey respondant said regarding why he has to hold more inventory:

Wal-Mart is ordering fewer cases more frequently

For a company, this means that they can either produce smaller batches, or hold onto more
inventory.  Because if a company cannot produce less and faster, than they have to produce a
large amount and then, instead of producing a large amount and getting rid of it all at once, they
have to get rid of it slowly over time, which increases average inventory.
While Wal-Mart may be getting the good end of the deal, one thing is for sure, there's a reason
suppiers put up with these demands, and it's not because the business with Wal-Mart is bad.

If you would like more informatin regarding this article, Shippers are seeing inventory rising,  it
can found in the October 2005 Logistics Management Vol. 44, No. 10 issue.  Additionally, feel
free to leave comments with a question and your email address.

Study in Software Implementation

I recently had the pleasure of attending a guest lecture delivered by Optiant director of research,
Ph.D. John Neale on the topic of multi-echelon inventory management software
implementation.  Optiant is a supply chain software solutions provider for companies including
Gillette and HP.  His discussion described how the implementation of Optiant's PowerChain®
software suite helped to dramatically decrease inventory and increase service for a well-known
manufacturer of consumer adhesives.  This post will give a history of the adhesive
manufacturer's supply chain problems and the solution they chose.  The results of that solution
will be explained with a brief lesson on multi-echelon inventory.

Supply Chain
The manufacturer being discussed operates primarily in North America.  Their supply chain has
the following characteristics:

Raw Materials
First, they procure over 3000 raw materials from multiple sources and hold the raw materials at
one of their two manufacturing sites until they are processed.  This is the first stage (echelon)
where inventory is held.  After the raw materials are turned into finished goods, they are
immediately shipped to a distribution center (DC).
Finished Goods
The firm has two DCs and over 1800 SKUs (stock keeping units.  This is basically how many
different products and package variations they have on those products).  The DCs are the final
stop for finished goods inventory before they are shipped to a myriad of retailers.  Of those
retailers, Wal-Mart, Staples, Home Depot, and other mass market stores constituted one third of
their overall volume.  The DCs also receive some finished goods which come from other
manufacturers in the form of finished goods.  The DCs are the second stage (second echelon,
thus making more than one echelon, hence the name, multi-echelon) where safety stock is held.

Old Inventory Policy

Prior to Optiant's consulting work and software implementation, the manufacturer had no real
method for determining their safety stock. Essentially, they used a trial and error method where
they would set a level and if they were stocking out too often, they would increase inventory. 
When they stopped stocking out, they would scale back inventory.  Their inventory was also
high because of expansion in their product line and high service levels demanded by stores like
Wal-Mart.

The manufacturer lacked the expertise regarding how to set a safety stock level that optimized
each local inventory stage, and additionally, they were without the experience necessary
regarding how to optimize the overall system.  As John Neale put it, this is a problem because
while safety stock formulas can be useful for local optimization, one point he made was,

"Don't just optimize things in isolation."

Upon realizing that there were better ways of doing things, they contacted Optiant.

Optiant
What Optiant did for them was more than just selling them a software package. Optiant spent
many weeks learning about their supply chain constraints and gathering data, and then used
PowerChain®  to optimize the safety stocks for each of the 1500 SKUs and each of their 3000
raw materials.

Data Requirements
Much of this data is demand data. In order to get a feel for demand, Optiant uses historical
demand projections.  In order to figure out what kind of deviation there is on these projections,
they look at historical projections and compare them with historical demand realizations.  As you
can imagine, a lot of companies don't keep accurate records regarding this data.  The less a
company has in the way of records, the less effective software initially is.  Keep this in mind
before you bring in any consultants: start collecting data before they get there, so you're ready to
roll once they're on the clock.

Optiant also required supplier data, including lead times, costs, and a bill of materials (list of
parts required for each SKU).

Software
Once they have the data, they can start to use their software model.  I'm not clear on the math
that runs the program other than that it uses algorithms to minimize holding costs while
maintaining service level requirements.  I didn't bother asking for more detail, because what I
understand is this: the software they have works and is based on the kind of framework that you
would expect to come from someone with a Ph.D. from MIT, which is precisely what Optiant
co-founder, Sean Willems, has.  The point is, the program is complex, but it is not baseless, and
it is not a hoax.  It is exactly the kind of complex software I was referring to when I wrote about
the kind of advantage that professional software can offer that Excel can't even come close to
providing.

Results
Before you refuse to believe the software works without understanding every detail behind it,
consider that Optiant's solution allowed this adhesive manufacturer to raise their service level
while lowering safety stock value by over 20%.  First of all, 20% is a very large reduction in
safety stock value on its own.  In addition to this, they were able to raise their service level while
lowering safety stock.  At first glance, this seems too good to be true.  Normally, the way to raise
a service level is by raising safety stock, not by lowering it.  Why is this case any different?

Multi-Echelon Inventory Management

This case is different because it is a multi-echelon inventory model.  What this means in this case
is that they had the opportunity to hold inventory at two stages: the raw materials stage and the
finished goods stages.

Balancing Raw Materials and Finished Goods

Remember, holding costs are a function that involves the value of the inventory and at the raw
materials stage the value is considerably less expensive.  This means that if the adhesive
manufacturer has short production lead times from raw materials to finished goods, which they
do, then they can afford to hold large amounts of raw materials, small amounts of finished goods,
and still be in a position to meet demand.  Thus, by reducing finished goods inventory and
increasing raw materials inventory, they can increase service level because of their ability to
quickly turn raw materials into finished goods, and they can reduce inventory costs because they
are holding less finished goods.

Risk Pooling
The other reason they are able to reduce safety stock value while increasing service is because
they have so many SKUs that all use the same basic raw materials.  The importance here is the
inherent flexibility that raw materials when they can become a variety of different finished
goods.  This allows them to keep materials raw for as long as possible, which reduces their
vulnerability to fluctuations in demand.  The vulnerability to these fluctuations is limited because
many of their glue product SKUs are essentially pooled as one product with an overall demand
that is less likely to fluctuate as long as products are kept as raw materials that can be turned into
any product once demand projections are closer to demand realizations.  To further illustrate this
is an example from the MITSloan Management Review about apparel manufacturer Bennetton
Group SpA and how they delay final goods production by keeping raw materials in a position
ready to be turned into finished goods:
An inventory of undyed sweaters gets stockpiled in one location; coloring takes place only after
specific orders have been received. This pooling of demand across geographical areas, and
across colors, helps Benneton greatly reduce inventory risk while more effectively meeting
customer demand.1

Another example cited in the article is how the house paint industry holds only base paints which
colors are added into instead of holding onto hundreds of different colors at each retail location.

The effects of this are incredible because for the adhesive manufacturer, paint companies, and
Benneton, the risk of each individual product in the product line can be vastly reduced by simply
keeping finished goods as raw materials for as long as possible.

Paint companies no longer have to worry about having too much blue paint and not enough red
paint.  Statistically, the variations in each type of paint will even out.  So if yellow doesn't sell as
much as expected and green sells twice as much as expected, paint companies are still ok as long
as they have the right amount of base paint.  Unfortunately for the consumer this makes it
difficult to return paint.

Luckily for the adhesive manufacturer, risk pooling works.  So does the software Optiant creates.

Final Notes on PowerChain®

Originally, the adhesive manufacturer only hired Optiant so that Optiant could use to use their
software to tell provide a report detailing how to optimize each of their 1800 SKUs and 3000 raw
materials.  The CFO of the adhesive firm was so impressed with the forecasting abilities of the
software that he eventually invested in a license of the software.  I'm not sure whether or not they
worked with Optiant to adapt the PowerChain®  software to their other computer programs for
automated entry of optimal safety stock into their other systems, although this is something
Optiant does.

I'm not trying to suggest that you dive right into the investment of such software, although I can't
imagine Optiant would mind, but hopefully this post has given you a better understanding of
what inventory management software packages can do for you and what the implementation
process entails.

1 Sunil Chopra & ManMohan Sodhi, "Avoiding Supply Chain Breakdown", MITSloan Management Review, Fall 2004,
Vol. 46, No. 1

Wal-Mart
Instead of having particularly large holding costs, Wal-Mart recognized that they were in a
position to make ordering costs very small.  Because of their importance to their suppliers, along
with their software made affordable through economies of scale, Wal-Mart has made ordering a
very small percent of their overall costs.  By lowering ordering costs, Wal-Mart has made
ordering small batches with greater frequency a profitable reality.
High holding costs and low ordering costs are the factors that drive JIT.  Generally, it's the
ability to lower ordering costs that make it a feasible solution.  McDonald's and Dell were both
slaves to the high holding costs.  It was just the nature of their industry.  The solution for them
was that while they couldn't lower holding costs, they could lower ordering costs.  Wal-Mart
didn't even have particularly high holding costs, but they realized it would be profitable to lower
ordering costs which led to high holding costs as a ratio of holding costs to ordering costs.

What McDonald's, Wal-Mart, and Dell have in common is very high holding costs in
comparison to their ordering costs.  Ultimately, this, coupled with the ability to lower safety
stock, is when JIT is effective.  EOQ determines how much you should order and there are two
factors that drive economic order quantities down: low ordering costs and high holding costs. 
Depending on the product and the industry, one or both of these qualities may exist in your
operations.  If they do, JIT may be right for you.  Without the ability to make ordering costs low
as a percentage of holding costs then there is no need for JIT.  In fact, the increased frequency in
ordering will result in cost increases.

Safety Stock Reductions

The other aspect of JIT is the drastic reduction in safety stock.  My previous article on safety
stock discussed the two reasons safety stock exists:  variability in demand and variability in lead
times from suppliers (in McDonald's case, the supplier is the internal production process).

It is because of this variability that safety stock exists in the first place.  What JIT does is tries to
reduce the lead times and variation in lead times in order to help reduce safety stock.  Let's
revisit the safety stock formula to figure out why this is:

Safety Stock:  {Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg.

Demand*Standard Deviation of Lead Time^2}

The first term is Lead Time*Standard Deviation of Demand^2.  This is the inventory needed to
account for fluctuations in demand during the lead time.  If lead time is shorter, which JIT tries
to accomplish, then this part of the safety stock is smaller, this lowering safety stock inventory.

Wal-Mart and Dell accomplished this by using better software and communication with their
suppliers.  McDonald's accomplished this by creating a system that allowed a faster burger
production (remember, McDonald's lead times are internal).

The second term is Avg. Demand*Standard Deviation of Lead Time^2.  This is the inventory
needed to fill demand because of lead time variance.  If lead time has no variance or is reduced
then this term can be eliminated or at least reduced.  Again, this is what JIT try to accomplish.

Wal-Mart accomplishes this by demanding it, Dell by working with suppliers, and McDonald's
by standardizing production.

In order to accomplish the tasks of shortening lead times and reducing their variances, a
considerable amount of work needs to be done with suppliers/internal operations.  For some
firms this is worth the trouble, for others, it is not.
Conclusively, there are two major parts to JIT inventory operations: lowering the ratio between
ordering costs and holding costs and shortening lead times.  What results is a firm with such high
holding costs that ordering very small batches very frequently is the most profitable solution. 
This eliminates average inventory above the safety stock level.  Then, if lead times and lead time
variability can be decreased, safety stock can be decreased.  The result is inventory coming in as
it needs to come in.  In other words, it comes in just-in-time.

November 08, 2005 in Case Studies, Just-in-Time | Permalink | Comments (1)

September 26, 2005

Dell Computers: A Case Study in Low Inventory

When managers discuss low inventory levels, Dell is invariably discussed. Hell, even I've mentioned Dell
on this site. So why all the commotion? Has their low inventory REALLY helped out that much? In short,
yes. This article is primarily going to discuss how much it helped. This article will not discuss how they
achieved such high inventory turns using a state of the art just in time inventory system.

Reasoning behind need for lower inventory

The first thing that needs to be discussed is why low inventory has such a great effect on Dell's overall
performance. The reason is quite simple: computers depreciate at a very high rate. Sitting in inventory, a
computer loses a ton of value. 

As Dell's CEO, Kevin Rollins, put it in an interview with Fast Company: 

"The longer you keep it the faster it deteriorates -- you can literally see the stuff rot," he says. "Because
of their short product lifecycles, computer components depreciate anywhere from a half to a full point a
week. Cutting inventory is not just a nice thing to do. It's a financial imperative." 

We're going to assume that the depreciation is a full point per week (1%/week) and use that to
determine how much money high inventory turns can save Dell. 

This means that for every 7 days a computer sits in Dell's warehouses, the computer loses 1% of its
value. Ok, now that we know how much Dell loses for each day, let's take a look at some of Dell's data
over the past 10 years that I pulled from www.themanufacturer.com 

What I got from this was the inventory turns. An inventory turn, as this website successfully describes it,
is "cost of goods sold from the income statement divided by value of inventory from the balance sheet".
Typically, this is turned into a value showing how many days worth of inventory a firm has by dividing
inventory turnover by 365. I divided the inventory turnover by 52 in order to show how many weeks
worth of inventory Dell holds. 
Here are the results:

Dell’s Inventory Turnover Data 

Year      Inventory Turnover         Week's Inventory

1992      4.79                                10.856

1993      5.16                                10.078
1994      9.4                                  5.532
1995      9.8                                  5.306
1996      24.2                                2.149
1997      41.7                                1.247
1998      52.40                               0.992
1999      52.40                               0.992
2000      51.4                                1.012
2001      63.50                              .819 

Key point to notice here is that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001,
Dell was carrying less than 1 week's worth of inventory. This essentially means that inventory used to sit
around for 11 weeks and now it sits around for less than 1 week.

So what does this mean for Dell?

Remember, computers lose 1 percent of their value per week. This isn't like the canned food industry
where managers can let their supplies sit around for months before anyone bats an eye. Computers
aren’t canned goods, and as Kevin Rollins of Dell put it, computers “rot”. The longer a computer sits
around, the less it is worth. 

That said, due to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowing
computers to sit around before they were sold. In 2001, Dell was losing less than a percent. Based on
holding costs alone, Dell reduced costs by nearly 9%. 

Since 2001, Dell has continueed to lower inventory. Looking at their latest annual reports, day's
inventory has dropped by approximately a day. 

Hopefully this article provided you with a practical example that demonstrates the positive effects lower
inventory can have on a firm's overall costs. For more information regarding lawyers in the Texas area,
check out Dallas Fort Worth trucking accident attorney. For more basic information regarding holding
costs, please read A Simplified Look at the Pros and Cons of Inventory.

September 26, 2005 in Case Studies, Just-in-Time | Permalink | Comments (4)

August 15, 2005

Notes From an Inventory Management Consulting Job: Part IV of IV

This is the final post of a series detailing a consulting job I recently completed.  This post discusses the
pros and cons of employing Excel as the decision support system.

The spreadsheets built for this job are a very good example of an automated inventory tracking system
that can be built for much less than the price of purchasing a “real” inventory management software
package.  There are however some definite pros and cons to look at when building your own software
package using excel.

The main pro is the price. Excel is a software package that just about every office already owns and with
a little bit of know how, you can build whatever you want. In some cases you might now even need to
have any clue in terms of writing code to use excel to get it to do what you want it to do. It’s also a nice
package to use because everyone in the office should already know how to use it. 

The downside of using excel is that it might not be able to do everything you want it to do, nor may it do
everything it should do. For example, in this project I encountered a problem with the inventory
counting. The counts should really be updated every 6-8 weeks just to be safe. But when they are, the
used materials that are subtracted out of them need to be cleared. Unfortunately this involves the
inventory manager at the mailing room to update the values in excel. Really this isn’t a huge deal but
ultimately it cuts down on the automation of the system. (As it turns out, I found a way to get around
this about 2 weeks after I wrote this, but I can assure you, it was a serious hassle).

Another serious hassle is getting these spreadsheets onto the internet. After completing this consulting
job, I was recommended by the firm I consulted to do a job almost identical to this job. The only notable
difference is that I had to put the spreadsheets onto a webpage that gets updated daily. Although
possible with excel, the interface is not as friendly as I have seen with other software packages. 

Another problem with excel for this project is that I ended up using it as a daily and weekly demand
database when really, Excel is a terrible database system. What makes it so terrible is that it does close
to nothing to verify that the data is complete. Ensuring the integrity of the demand data is very using
Excel. 

Overall, considering I’m not a information system specialist and yet I did manage to build this system
using excel, I would have to say that for low level jobs such as this one, excel is an excellent tool that is
already at hand and ready to be utilized by those who know what they are doing with it. As for the
integrity of the data, had I teamed up Access with Excel, I could have ensured the data’s integrity to a
better degree. In the end, the company got a software package that meets their needs for a sliver of the
price that it would cost to buy a “real” inventory management system. 
If you would like to see the spreadsheets I have made for the firm discussed in this series of articles, you
can now download them.  Please leave a comment letting me know your thoughts.  I haven't received
any from any users yet (thanks a lot guys), so don't be a jerk.  I'll be posting user instructions very soon. 
I promise.  Sorry to all who left comments any haven't received them yet.

If you're standing in the middle of a big retailer such as Wal-Mart, and you
look around, you're witnessing one of history's greatest logistical triumphs.
Retailers such as Target, Lowe's and Best Buy stock tens of thousands of
items from all over the world. Wal-Mart alone stocks items made in more
than 70 countries, according to its corporate Web site. At any given time,
the Arkansas-based retailer manages an average of $32 billion in
inventory, reports Supply Chain Digest.
 Photo courtesy Dreamstime
Inventory management systems ensure that stores are stocked.

With those kinds of numbers, having an effective, efficient inventory control

system, or inventory management system, is imperative. Wal-Mart's system
helps it maintain its signature "everyday low prices" by telling store
managers which products are selling and which are taking up shelf and
warehouse space.
Inventory management systems are the rule for such enterprises, but
smaller businesses and vendors use them, too. The systems ensure
customers always have enough of what they want and balance that goal
against a retailer's financial need to maintain as little stock as possible.
Mismanaged inventory means disappointed customers, too much cash tied
up in warehouses and slower sales. Factors such as quicker production
cycles, a proliferation of products, multi-national production contracts and
the nature of the big-box store make them a necessity.
Modern inventory management systems must have the ability to track sales
and available inventory, communicate with suppliers in near real-time and
receive and incorporate other data, such as seasonal demand. They also
must be flexible, allowing for a merchant's intuition. And, they must tell a
storeowner when it's time to reorder and how much to purchase.
To achieve this, inventory management systems pull together several
technologies into one cohesive approach. Read on to learn about the
history of inventory management systems and how modern systems work.

Inventory Management History

The constant "beep, beep, beep" of bar codes being scanned at a check-
out lane represents a pillar of modern inventory management systems:
stock tracking.
In the earliest days of shop keeping, merchants wrote down purchases, or
they looked at how many units were gone at the day's end and then did
their best to forecast future needs. Experience and intuition were key skills,
but it remained an inexact method, even when applied to operations that
were quite small by today's standards.
After the Industrial Revolution, efficiency and mass production became the
main goals of businesses, along with an improved customer experience at
the point of sale. A team at Harvard University designed the first modern
check-out system in the early 1930s. It used punch cards that
corresponded with catalog items. A computer would read the punch cards
and pass the information to the storeroom, which would then bring the item
up front to the waiting customer. Because of the automated system, the
machines could also generate billing records and manage inventory. The
system proved to be too expensive to use, but a version of it is in use today
in some stores, where merchants place cards with product information on
the aisle for customers to select and bring to the checkout line. This usually
applies to items that are expensive or large and to controlled items, such as
medicines.
Merchants knew they needed a better system, and researchers created the
forerunner of the modern bar-coding system in the late 1940s and early
1950s. It used ultraviolet light-sensitive ink and a reader to mark items for
sale. Again, the system was too cumbersome and lacked the computing
power needed to make it work. Technology had yet to catch up with their
ideas.

The development of affordable laser technology in the 1960s revived the

concept. Lasers allowed smaller, faster and cheaper readers or scanners.
The modern bar code, or the Universal Product Code (UPC), was born and
caught on just before the 1970s. As computing power became better, the
power of UPC codes to help track and manage inventory improved
exponentially.

Photo courtesy Dreamstime

Bar codes help retailers and
vendors track inventory.

During the mid to late 1990s, retailers began implementing modern

inventory management systems, made possible in large part by advances
in computer and software technology. The systems work in a circular
process, from purchase tracking to inventory monitoring to re-ordering and
back around again.
In recent years, another promising technology for tracking inventory has
also has made its way into stores, warehouses and factories. Radio
frequency identification, or RFID, uses a microchip to transmit product
information -- such as type, manufacturer and serial number -- to a scanner
or other data collection device. It's superior to bar codes in several ways.
For instance, a scanner reads the information from an RFID from several
yards away, making it ideal for tracking items stacked on high shelves in
warehouses. It also can encode more data than a bar code and in some
systems tell merchants if an item is out of place in the store, providing
excellent anti-theft characteristics.
Another popular means of automated inventory control is vendor-managed
inventory. In this arrangement, the vendor is responsible for keeping its
products stocked on a store's shelf. The vendor and retailer work closely
together and share proprietary information.
This system also has many advantages for vendors. It allows them to
ensure their products are properly displayed and available, and it also puts
them in close contact with the retailer and its sales data. The feedback the
vendor receives can play an important role in its marketing, research and
development.

Do Inventory Management Systems Really Work?

Essentially, the systems work like this. First, bar codes or RFIDs tell
scanners which items consumers are buying. The scanners transmit the
information to computers by reading the bar codes and sending that
information to the software. The software then interprets the numbers from
the bar code and matches those numbers to the type of merchandise they
represent. This allows the merchant to track sales and inventory -- either at
the checkout counter or with a hand-held scanner -- keeping the store
abreast of which items are selling.
Specialized software keeps track of how much stock is going out the door
via purchases and how much remains on shelves and in the warehouse,
giving managers a real-time picture of what's happening. The software also
analyzes the data and makes recommendations for re-ordering strategies.
Sometimes, they're programmed to automatically order at a certain point.
It's important to note, however, that good systems leave room for human
decision-making. The systems provide good information to support
decisions but leave the final call up to managers.
Once managers make a re-order decision, the system uses electronic
data interchange to communicate its needs for additional merchandise to
a vendor. Electronic data interchange is the process of sending and
receiving data between two parties -- a retailer and a vendor, for example --
using data transmission lines, such as the Internet. The data is stored in a
computer's memory bank and read by managers at both ends of the line.

Photo courtesy Dreamstime

With automated inventory management,
vendors can ship merchandise directly.

While inventory management systems offer retailers and vendors many

advantages, there are some pitfalls. Because the system aims to keep a
bare minimum of stock in store, retailers can be caught short if an item
unexpectedly becomes a big seller. Retailers traditionally kept additional
stock on hand -- known as buffer or safety stock -- to prevent that
occurrence, but many have discontinued the practice. And, as with all
technology, these types of systems are subject to the effects of a
widespread computer crash or software failure.

Some consumer groups have objected to RFID technology, too, claiming it

invades their privacy by providing additional information about their buying
habits and personal data. They argue the information could be used to
push other products on individual consumers, or be sold to other
businesses for similar purchases.
The RFID signals can also "step on" or "collide" with each other, making
accurate readings difficult.
Most retailers, however, have bought into the vast advantages offered by
such systems. They include the high efficiency, the need for less
warehouse space, less cash tied up in inventories and better sales. The
systems also promote better information sharing between the retailer and
the vendor, which helps drive down cost for both, as well as for the
consumer.
The benefits of modern inventory management systems aren't just for the
retail and manufacturing sectors. They also offer great advantages for any
organization that manages a supply chain for consumable items, such as
the military and medical facilities.
And it may not be long before such systems penetrate the household. In
2001, the U.S. Patent and Trademark Office issued a patent for a
household "consumable item automated replenishment system including an
intelligent refrigerator," according to Patent Storm. The refrigerator uses an
array of sensors to tell its owner when a consumable item -- such as milk --
is running low.
Everywhere you look inventory management systems are making sure the
products are there when we need them.
For more information on inventory management systems and related
topics, check out the links on the next page.

Wal-Mart to throw its weight behind RFID

By Richard Shim
Staff Writer, CNET News

 1 comment
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Related Stories
 Major retailers to test 'smart shelves'
January 8, 2003

Inventory management technology that uses wireless signals to track products from the factory to
store shelves is set to win a major new ally next week: Wal-Mart.

The retail giant is expected to throw its weight behind RFID

(radio frequency identification) technology at the Retail Systems
2003 industry conference in Chicago on Tuesday. Sources
familiar with the company's plans said executives will make a
Reader Resources presentation encouraging its top 100 suppliers to start using
RFID technology wireless inventory tracking equipment--chips affixed to products,
CNET White Papers
and scanners in warehouses--by 2005.

Wal-Mart's endorsement of RFID gives an important boost to

efforts to overhaul the world's supply chains, a makeover that
could provide a shot in the arm for technology companies
struggling to find buyers for the latest products and services.
RFID is expensive, but backers say it offers long-term benefits
that could dwarf the impact of the bar code on inventory control
and distribution.

RFID spending will be "bigger than...Y2K," predicted AMR Research analyst Pete Abell. "I
imagine there will be a rush on investing in RFID."

Suppliers are already exploring the use of RFID technology in tracking goods from the factory to
warehouses. But backing from retailers is considered important because it could ultimately allow
products to be tracked on store shelves.

Executives from Bentonville, Ark.-based Wal-Mart are expected to aggressively push for the
adoption of RFID technology during a presentation at an upcoming event for retailers, suppliers
and distributors, sources said. Part of the discussion will involve the significance of standards
development and its effect on the widespread adoption throughout the supply chain.

Wal-Mart representatives did not return calls for comment.

RFID tags have the potential to streamline and improve inventory management by allowing
manufacturers to more efficiently enter and track the flow of goods. For example, RFID could let
a company add a boxful of goods to its inventory systems all at once, without having to unpack
the carton and scan each piece separately. An RFID scanner can pick up signals from all the
chips in the sealed box, something bar code systems can't do.
The cost savings could be substantial for Wal-Mart, the world's biggest retailer with sales of
$217.8 billion in 2002. AMR's Abell estimates that Wal-Mart's costs associated with supply
chain--including storing, transporting and keeping track of goods--are about 10 percent of overall
sales. RFID, Abell said, could save 6 percent to 7 percent of those costs annually. Using the 2002
figures as a model, that would amount to about $1.3 billion to $1.5 billion saved.

Such savings are an attractive brass ring, but installing the technology is no small task. Wal-Mart
suppliers "may find it difficult to meet the early 2005 time frame," Abell said.

Problems aside, chip and equipment makers are already gearing up for expected demand.

"In 2004, we are going to see a broad range of serious (RFID) pilots," said Vinny Luciano, vice
president of product management, mobile computing systems, at Symbol Technologies. "We'll
see full-scale rollouts of RFID systems in 2005. It's not too soon to start looking at the impact of
RFID on business and what the opportunities will be."

In the past, Wal-Mart has helped to promote other technologies that have helped to streamline
inventory and supply-chain management. Teaming with K-Mart and other retailers in the 1980s,
Wal-Mart helped to promote the use of bar code scanning.

A bar code standard was approved in 1973, but by 1984 only 15,000 suppliers were using codes
on their products. Wal-Mart threw its weight behind bar codes in 1984, and by 1987 there were
75,000 suppliers using bar codes, according to AMR Research.

As it looks to cut costs, Wal-Mart has been quicker with its support of RFID technology than
with bar codes. And others are following, such as CVS, Target, Lowe's and Home Depot.

RFID-related technologies such as EPC (Electronic Product Codes) are gradually gaining
industry support, which should help penetration.

"While still being developed, EPC will be a common method of tracking inventories and objects
using RFID technology," said Ian McPherson, analyst with Wireless Data Research Group. "The
two are related in the same way that bar codes and scanners are related."

EPC is being developed by the Auto-ID Center and the Uniform Code Council, and many see it
becoming commonplace in pallets and cases over the next five years, according to Paul Fox, a
Gillette representative.

Although cartons and pallets are the focus of RFID now, the technology isn't expected to truly
take off until RFID tags are used on store shelves to give more up-to-date information on sales
and in-store inventory. Trials are ongoing, but cost is the major hitch with such tags.

Currently tags cost 50 cents to 60 cents apiece. To be practical for manufacturers to use, they'll
have to drop to around 5 cents, according to Dave Krebs, an analyst with research firm VDC.
"As volumes increase, prices will come down, but suppliers don't really have an incentive at this
point," Krebs said. "They are footing the majority of the tag cost, and retailers are reaping a
majority of the benefit."

Krebs added that for the benefits of supply chain, products have to be tagged at the source:
suppliers.

A large retail company issuing favorable terms or promotions for suppliers could certainly
encourage the adoption of the technology.

"Right now, everyone involved in RFID technology is examining the cost

ramifications, but we're optimistic that the price hurdles will be overcome," said
Fox, who said the tags can be had already for as low as 10 cents each. "The cost of
tags and readers will decrease over time."

News.com's Alorie Gilbert contributed

Read more: http://news.cnet.com/2100-1022_3-1013767.html#ixzz15LrHoObO

UPC codes were first used in grocery stores.

If you go look in your refrigerator or pantry right now, you will find that just
about every package you see has a UPC bar code printed on it. In fact,
nearly every item that you purchase from a grocery store, department store
and mass merchandiser has a UPC bar code on it somewhere.

Have you ever wondered where these codes come from and what they
 mean? In this article, we will solve this mystery so that you can decode any
UPC code you come across.

"UPC" stands for Universal Product Code. UPC bar codes were originally
created to help grocery stores speed up the checkout process and keep
better track of inventory, but the system quickly spread to all other retail
products because it was so successful.

UPCs originate with a company called the Uniform Code Council (UCC). A
manufacturer applies to the UCC for permission to enter the UPC system.
The manufacturer pays an annual fee for the privilege. In return, the UCC
issues the manufacturer a six-digit manufacturer identification number
and provides guidelines on how to use it. You can see the manufacturer
identification number in any standard 12-digit UPC code. The UPC symbol
has two parts:

 The machine-readable bar code

 The human-readable 12-digit UPC number
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The manufacturer identification number is the first six digits of the UPC
number -- 639382 in the image above. The next five digits -- 00039 -- are
the item number. A person employed by the manufacturer, called the UPC
coordinator, is responsible for assigning item numbers to products,
making sure the same code is not used on more than one product, retiring
codes as products are removed from the product line, etc.

In general, every item the manufacturer sells, as well as every size

package and every repackaging of the item, needs a different item code.
So a 12-ounce can of Coke needs a different item number than a 16-ounce
bottle of Coke, as does a 6-pack of 12-ounce cans, a 12-pack, a 24-can
case, and so on. It is the job of the UPC coordinator to keep all of these
numbers straight!

The last digit of the UPC code is called a check digit. This digit lets the
scanner determine if it scanned the number correctly or not. Here is how
the check digit is calculated for the other 11 digits, using the code
63938200039 from "The Teenager's Guide to the Real World" example
shown above:

1. Add together the value of all of the digits in odd positions (digits 1, 3,
5, 7, 9 and 11).
6 + 9 + 8 + 0 + 0 + 9 = 32
2. Multiply that number by 3.
32 * 3 = 96
3. Add together the value of all of the digits in even positions (digits 2, 4,
6, 8 and 10).
3 + 3 + 2 + 0 + 3 = 11
4. Add this sum to the value in step 2.
96 + 11 = 107
5. Take the number in Step 4. To create the check digit, determine the
number that, when added to the number in step 4, is a multiple of 10.
107 + 3 = 110

The check digit is therefore 3.

Each time the scanner scans an item, it performs this calculation. If the
check digit it calculates is different from the check digit it reads, the scanner
knows that something went wrong and the item needs to be rescanned.

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Wal-Mart lays down the law on RFID

August 17, 2010

in Sales/Marketing Management

Although radio frequency identification (RFID) has been around for decades, it mostly sat on the
technological bench until retail giant Wal-Mart Stores Inc, began to mandate that its key
suppliers would adopt and implement these chips on every pallet shipped to Wal-Mart’s Dallas,
Texas based distribution centers (DCs) with the eventual goal of having RFID deployed in every
Wal-Mart DC and retail store. While many suppliers have complied to date with Wal-Mart’s
dictates that compliance has been half hearted at best leading the retailer to take forceful
approach to its arm twisting. Beginning with a Sam’s Club DC in the Dallas area, every supplier
who fails to tag their shipments with RFID devices will be fined $2 per pallet beginning October
2008.

The tags basically are designed to help locate stuff, with the obvious benefits being improved
visibility into available backroom stock. Reducing out of stocks and keeping the shelves
replenished is the be all and end all of retail theoretically there should be a trickle down effect
that results in increased sales of the manufacturers as well, but those sales are somewhat muted
by the significant costs of purchasing as well as affixing the tags on every shipment to Wal-Mart
or any of the other large retail chains with an RFID mandate.

In a bid to demonstrate the tangible worth of RFID, Wal-Mart is sponsoring a research effort at
the University of Arkansas to demonstrate the positive effects the technology has no improving
inventory accuracy. Preliminary analysis at the university’s RFID Research Center indicates that
an automated RFID enabled inventory systems in test stores improved accuracy by 13%.

With RFID technology in place at its distribution centers Wal-Mart believes it can significantly
reduce unnecessary inventory its backrooms. The test stores were equipped with RFID readers
and antennas the key backroom locations, such as receiving doors, sales floor doors and box
crushers. A perpetual inventory adjustment system automatically adjusted understand inventory.
The test stores were compared to an equal number of control stores with similar demographics
which were not equipped with RFID technology.
Emphasizing the importance of more accurate inventory management techniques Hardgrave
points out that the net result of inventory inaccuracy is an estimated 10% reduction in profit

To date, Wal-Mart’s suppliers have been required to apply RFID tags to cases and pallets but
that could change in the future early results fm the RFID Research center’s efforts indicate that
tagging individual items could potentially eliminate some of the root causes of inventory
inaccuracy. One recent study from RNCOS predicts that the market for item tagging will grow
by 55% over the next 10 years. The costs for suppliers to tag every item shipped to a Wal-Mart
DC would of course increase significantly.

The Wal-Mart Way

Wal-Mart’s Bentonville warehouse is the entry of most retailers worldwide. The building covers
1.2 m sq ft the area of 24 football fields. It’s 19 conveyor belts and ship 360 cartons a minute;
264 dock doors take in goods from suppliers trucks, 116 shipping lanes send them out to the
store. This center distributes general merchandise goods to 125 Wal-Mart superstores. The
seasonal merchandise once received is unloaded and a bar code is stuck ion each case. This bar
code helps in identifying the destination store. The merchandise moves on a roof level conveyor
system for as little as 10 minutes before passing to the shipping area. Here, there are scanned and
computer controlled pushers which guide them on the appropriate off ramp. This leads to a door
assigned to an individual store, from which trucks leave often 24 hours a day.

For the staple stock merchandise the computer generates an order based on the previous day’s
sale. The distribution center receives them in the morning and ships them later that day or on the
subsequent day. Thus, stores are replenished within 48 hours allowing them to hold very little
stock.

A large central database analyses years of past data to see how factors like weather and holidays
affect sales in every outlet. The weather forecast is fed into the system; if a heat wave is expected
more soft drinks are supplied to the appropriate store.

More importantly for its supply chain Wal-Mart shares information with its suppliers Through
the process called CPFR, it sends them data electronically each day, enabling them to see how
much of their goods have sold and how much it expects to sell

more at http://www.citeman.com/10105-wal-mart-lays-down-the-law-on-rfid/#ixzz15Ls9ktVH
 Inventory Management
SATURDAY, JULY 14, 2007
Wal-Mart and produce vendors
By Tom Karst(Tom Karst)
And better inventory management adds immediate benefit by reducing the number of
distribution centers needed to maintain inventories. "We used to plan on one (distribution
center) for every 50 stores. Now, with better inventory ...

From the various times I have interviewed shippers about being a vendor/partner for Wal-
Mart, the discussion inevitably runs to this theme; Wal-Mart makes you take a look at your
own operation and makes you better.

In the long term, is there more good than bad in being a Wal-Mart vendor? One article
published in December 2003 that looked at that issue in the general sense is "The Wal-Mart
You Don't Know," published here by Fast Company.com and written by Charles Fishman.

The subhead read: The giant retailer's low prices often come with a high cost. Wal-Mart's
relentless pressure can crush the companies it does business with and force them to send jobs
overseas. Are we shopping our way straight to the unemployment line?"

Of course, not a lot of current suppliers wanted to be quoted, but here are some pithy sum-
up statements from the article.

For many suppliers, though, the only thing worse than doing business with Wal-Mart may be
not doing business with Wal-Mart.

Many companies and their executives frankly admit that supplying Wal-Mart is like getting
into the company version of basic training with an implacable Army drill sergeant. The
process may be unpleasant. But there can be some positive results.

Here is more of the substance offered by Fishman...

 There is no question that Wal-Mart's relentless drive to squeeze out costs has benefited
consumers. The giant retailer is at least partly responsible for the low rate of U.S. inflation,
and a McKinsey & Co. study concluded that about 12% of the economy's productivity gains in
the second half of the 1990s could be traced to Wal-Mart alone.

By now, it is accepted wisdom that Wal-Mart makes the companies it does business with more
efficient and focused, leaner and faster. Wal-Mart itself is known for continuous improvement
in its ability to handle, move, and track merchandise. It expects the same of its suppliers. But
the ability to operate at peak efficiency only gets you in the door at Wal-Mart. Then the real
demands start. The public image Wal-Mart projects may be as cheery as its yellow smiley-face
mascot, but there is nothing genial about the process by which Wal-Mart gets its suppliers to
provide tires and contact lenses, guns and underarm deodorant at every day low prices. Wal-
Mart is legendary for forcing its suppliers to redesign everything from their packaging to their
computer systems. It is also legendary for quite straightforwardly telling them what it will pay
for their goods.

What does Wal-Mart care about? Here is coverage from The Packer from November 2004:

Describing Wal-Mart's produce operations as "young" and "having a lot of room to grow," Scott
Clubine, soft fruit buyer for Wal-Mart Stores Inc, Bentonville, Ark., spoke to the Houston
Fresh Fruit & Vegetable Association at its November meeting.
Clubine emphasized the culture at Wal-Mart remains firmly focused on serving the customer
and less on trying to work the art of the deal.
"We try to spend less time haggling over prices or packaging and a lot more time worrying
whether we're satisfying the customer," he said.
In the end, Clubine said, if the price is great but the customer doesn't want the product, Wal-
Mart loses.
Software tools: Clubine reviewed three Wal-Mart software tools that measure customer
behavior and offered them to anyone who becomes a vendor.
The effort, Clubine said, is to help vendors understand where their product is selling and
where it is not.
"At Wal-Mart, it's all about turns, and we're constantly measuring how well our inventory turns
on each customer's visit," he said.
Clubine described the tools as the following: M-CAPS, which reports sales density by
commodity; Market Basket, a system that tracks what customers combine in their shopping
 cart; and Customer Insights, a demographic profiling system for Wal-Mart sales areas.
The software supports Wal-Mart's cluster store concept for managing inventory levels, Clubine
said.
And better inventory management adds immediate benefit by reducing the number of
distribution centers needed to maintain inventories.
"We used to plan on one (distribution center) for every 50 stores. Now, with better inventory
management, we see the ratio growing to 100 stores for every DC."
"But if you want to do business with us, you have to come to us with a marketing plan that
speaks to our customers," he said. "As a buyer, I spend more time working on succeeding at
produce sales, and at Wal-Mart, it's all about turns."

In the issue of May 28, The Packer's David Mitchell has reported on changes to Wal-Mart's
procurement policies.

Wal-Mart Stores Inc. has altered its procurement procedures during the past two years, but
recent criticisms that the Bentonville, Ark.-based retailer has violated terms of its supplier
agreements are unwarranted, the company's vice president and divisional merchandise
manager for produce and floral said.
"Wal-Mart honors (its) contracts and offers the suppliers the right to talk to Lee Scott, our
CEO, or Rob Walton, our chairman, through the open-door process if we do not," said Ron
McCormick, vice president and divisional merchandise manager for produce and floral.

Later in the story:

McCormick said a number of factors led to the demise of distribution center assignments,
including the growth of the company's consolidation facilities that allow the company to send
full truckloads to its 38 food distribution centers.
"Our local purchase program also means that we have many more small growers we are doing
direct business with, often combining them to meet the demand of a single (distribution
center)," he said. "That single supplier per DC consistency no longer adds value, and actually
impedes better customer service."

TK: Wal-Mart's utilization of consolidation facilities, opportunity buys and its growing business
with local suppliers may explain changes in procurement policy. But why are more suppliers
apparently more apprehensive about their vendor relationship with Wal-Mart? With 17% of the
 perishables market (Business Week stat) and growing, Wal-Mart's influence won't wane
anytime soon. Again I ask, is being a Wal-Mart supplier good for a produce shipper, or, as
Fishman so smartly wrote about Vlasic pickles, is the experience "a devastating success?"