Instructions / Notes for playing the Beer Distribution Game
The Beer Distribution Game was devised at MIT for understanding the dynamics in the supply / distribution side of the supply chain.
Objective : After playing for ten to fifteen cycles, control your ordering, holding and shortages, to keep the total costs low. If multiple teams / supply chains are playing, the team with the lowest overall supply chain costs is the winner.
Structure : The game is played by dividing the students / members to many groups, each group representing the retailer, wholesaler, the distributor and manufacturer. Usually, we play with two or three groups of retailers, being supplied by each wholesaler ( also two or three in number). The wholesalers are supplied by a Distributor who in turn is supplied by a manufacturer.
The different entities take different times to replenish orders placed on the upstream entity. We call this as lead time. The lead time is more at manufacturing stage than at the distribution side. If the distances involved are more, higher lead times result. Additionally, there are costs incurred for keeping additional units with oneself, called holding costs and costs incurred for not holding items in-stock, called shortage costs. The value of the item changes as we move from the manufacturer to the final customer, so does the holding costs and shortage costs. Holding and shortage costs are higher as we move from the manufacturer to the final customer.
There are many reasons for experiencing the dynamics in the supply side. One is the physical dimension of the multiplicity of players and the local sub-optimal goals of each of them. The next is the time dimension of being able to satisfy the orders. Replenishments are never instantaneous and usually takes time to receive the supply and distribute. We call this as the lead time for supply. The third reason for the dynamics is the willingness of the customers to wait for the supply ( or the ability of the SC players to convince the customers of supply at the next earliest date ), called back-ordering.
The supply side (Distribution side) of the supply chain has many players like the Distributors, Wholesalers and Retailers. All of these players are independent entities who work for the local (their own) optimisation, leading to sub-optimal optimisation of the whole supply chain. The presence of multiple players and the allocation issues between them lead to distribution issues and complexities in the supply chain.
Items when ordered can be supplied off-the-shelf, if items are present at the premises of the SC player (we call this initial inventory) . Mostly the initial inventory levels are low and new items are ordered from the upstream entity, ie, the retailer orders from the wholesaler, the wholesaler from the distributor and so on. The items when ordered are not supplied immediately as they have to be either manufactured by the manufacturer or it must be transported from a higher level to the lower level and so on. This is called the lead time , ie, manufacturing, transportation.
The lead time of supply of items is often not considered or overlooked while orders are placed. The items are being processed and are in the pipeline of the distribution channel. But since physically items are not present, the supply chin player ( ie. Wholesaler, distributor or retailer) will tend to order more and hence there will be more orders placed for items than what is actually needed. Ie, wrong signals of increased demand are propagated upstream while the actual demand has not altered much.
Back-ordering, leads to complexity as it is forgotten and the SC players tend to order for more items, magnifying the demand when actually it is not there. If unmet orders/demand are not back-ordered, they are lost for ever (lost sales).
How to play :
Each team is given a printed sheet where you have to record the stock of items and many slips of paper.. Every team is given an initial inventory of items. (represented by pieces of cardboard). Depending on the orders placed by the downstream entity, it will have to place orders with the upstream entity.
Every order you place with the upstream entity will be entered on the slip of paper and passed to the upstream entity. At the end of each ordering cycle, enter the details of the demand from the downstream entity, excess stock ( or shortages) with you and the orders you have placed with the upstream entity.
Once the game is declared over, calculate the costs by multiplying the items by the respective costs. Compute the total costs.
Each entity can also calculate the (sample) variance of the orders placed (x) with the upstream entity. Calculate the average value of the orders (x bar) and find the square of the deviation ( x minus x bar)squared. Add it up and divide by n – 1, where n is the number of cycles you have played. There are called variances of the orders placed.
Questions to be answered...
1. What do you observe of the supply chain costs of retailers, wholesalers, distributors and manufacturers ?
2. What do you observe of the (sample) variances of the orders placed by
1.the retailers on the wholesalers
2.the wholesalers on the distributors and
3.the distributors on the manufacturer.
3. How could you have reduced your costs ?
NOTES/GENERAL OBSERVATION :: Date of playing the game : Role :
Thursday, April 2, 2009
Thursday, August 16, 2007
Greening of Walmart Supply Chain - leading innovations..
Another Walmart initiative...
The Greening of Wal-Mart's Supply Chain -
Erica Plambeck, Faculty, Graduate School of Business, Stanford University.
-------------
In October 2005, Wal-Mart CEO Lee Scott committed the company to three ambitious goals: To be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain Wal-Mart's resources and the environment. This is the story of Wal-Mart's progress toward those goals and the array of innovative practices that Wal-Mart is implementing to “green” its supply chain.
-------------
Three Traps to Avoid
Some of Wal-Mart's "Greening" Decisions
In October 2005, in an auditorium filled to capacity, Wal-Mart President and CEO Lee Scott made the company's first speech to be broadcast to 1.6 million employees in all 6,000-plus stores worldwide—and shared with its 60,000-plus suppliers. Scott announced that Wal-Mart was launching a sweeping business sustainability strategy to dramatically reduce the company's impact on the global environment and thus become "the most competitive and innovative company in the world." He argued that "being a good steward of the environment and being profitable are not mutually exclusive. They are one and the same." Scott also committed Wal-Mart to three aspirational goals:
"To be supplied 100 percent by renewable energy;
to create zero waste; and
to sell products that sustain our resources and the environment."
To meet those goals, Wal-Mart would seek to transform its supply chain, in cooperation with suppliers and environmental nonprofit organizations. Gwen Rutta, Director of Corporate Partnerships at Environmental Defense, was excited about working with Wal-Mart: "We've come to believe through experience that you really can create environmental progress by leveraging corporate purchasing power," she said. "And who's got more purchasing power than Wal-Mart?"
Indeed, Lee Scott's cooperative business sustainability strategy would go much farther than the retail giant's earlier green initiatives. In the past, Wal-Mart had dealt with environmental issues defensively, rather than cooperatively, proactively, and as profit opportunities. In 1989, in response to letters from customers about environmental concerns, the company had launched a campaign to convince its suppliers to provide environmentally safe products in recyclable or biodegradable packaging. The large-scale effort met with some skepticism from commentators who believed that it was intended to generate benefits for Wal-Mart at its suppliers' expense.
Nevertheless, the company did earn some "goodwill among environmentalists [as] the first major retailer to speak out in favor of the environment in 1989."When vendors claimed they had made environmental improvements to products, Wal-Mart began promoting the products with green-colored shelf tags (without measuring or monitoring the improvements themselves). At one point, the company sold as many as 300 products with green tags. But not all the headlines were positive. One large supplier was exposed for stretching its claim to offer environmentally friendly paper towels, and Wal-Mart and the supplier were heavily criticized. By the early 1990s, the green tag program disappeared altogether, and environmental issues seemed to slip off the company's list of strategic priorities.
Lee Scott, along with Andrew Ruben and Tyler Elm, vice president and senior director of corporate strategy and business sustainability, respectively, recognized that in contrast to those early campaigns, their new sustainability strategy would need to be deeply embedded in Wal-Mart's operations and supply chain management to meet the ambitious goals set in 2005. Elm put it this way: "We recognized early on that we had to look at the entire value chain. If we had focused on just our own operations, we would have limited ourselves to 10 percent of our effect on the environment and eliminated 90 percent of the opportunity that's out there."
Looking Outside the "Bentonville Bubble"
In 2005, with that recognition in mind, Ruben hired Blu Skye Sustainability Consulting to help identify the categories of Wal-Mart's products and processes that had the greatest environmental impact. The Wal-Mart/Blu Skye team multiplied sales data with environmental impact factors from the Union of Concerned Scientists, and identified 14 focal areas, bundled into three broad categories: renewable energy; zero waste; and sustainable products. For each focal area, an executive sponsor (primarily at the executive vice president level) and a network captain (typically a senior vice president) took charge of building a sustainable value network of Wal-Mart employees and representatives from government, academia, environmental nonprofits, suppliers, and other stakeholders. The goal was to reduce environmental impacts and derive profit from that positive change. Network captains were typically senior managers from Sam's Club or Wal-Mart who were considered to be among the company's top performers. Whereas Wal-Mart had previously been notorious for being internally and operationally focused, the network captains were charged to look outside "the Bentonville Bubble" for strategic input and asked to start "pulling ideas from everywhere," even from critics.
Environmental groups joined the networks with some trepidation. As a Financial Times article put it, "For membership-based environmental groups, such as the Sierra Club, and others that seek to work in coalition with student and labor campaigners, engaging with the biggest villain on the block presents risks of losing support and funds." However, many such organizations decided that the advantages of being able to help influence Wal-Mart's environmental performance outweighed any negative repercussions from the association. Seeking the opportunity to drive positive environmental change on a massive scale, nonprofits and nongovernmental organizations (NGOs) such as Environmental Defense stationed employees in the company's Bentonville, Ark. headquarters to work within the networks. However, Wal-Mart strategically decided not to hire associates—employees—to work on sustainability on a full-time basis, but instead to embed sustainability in their daily work. Elm explained the approach: "Business sustainability isn't something you're doing in addition to your job. It is a new way of approaching your job." To help make that lean model viable and because Wal-Mart lacked internal expertise in environmental sustainability, the company hired one or more external advisors from Blu Skye or Rocky Mountain Institute (RMI) for each network.
To capitalize on the incoming ferment of creative ideas, many of the 14 networks implemented new supply chain management practices. Across all 14 networks, the leaders intensified the company's efforts to move toward stronger relationships with a relatively small number of suppliers. With assistance from its network partners—the environmental nonprofits and consultants—Wal-Mart set a goal of motivating suppliers to "race to the top" in improving the environmental sustainability of products and processes. The new supply chain management practices associated with this initiative are summarized here, and described in greater detail below, with examples drawn from the company's global logistics, China, seafood, electronics, and textiles networks. Wal-Mart is engaging its array of network partners to:
1. Identify Goals, Metrics, and New Technologies
Speaking to the task of identifying efficient new technologies and goal-setting, sustainability director Elm said: "The value of the network approach is that the goals grew as the spirit of the possible grew. [For example,] the involvement of groups like Rocky Mountain Institute in our logistics program had a tremendous impact on how much and how quickly Wal-Mart recognized it could drive change. Initially, the logistics network was going after incremental gains—for example, improving the efficiency of Wal-Mart's trucking fleet by a few percent over several years. But now they plan to double its efficiency in 10 years." With guidance from RMI, Wal-Mart started to procure hybrid diesel-electric trucks and refrigerated trucks that featured a small power unit for cooling so the engine could be turned off when the truck was stopped. In the first year of the program following Lee Scott's announcement, the logistics network achieved roughly a 25 percent improvement in fuel efficiency, meaning almost $75 million in annual savings and 400,000 tons of CO2 per year that did not enter the atmosphere.
For its part, the packaging network implemented a Web-based scorecard that would evaluate each product's packaging against nine sustainability metrics, including cube utilization, recycled content, CO2 per ton of production, and recovery value. The scorecard was developed with input from the 200-plus members of the packaging network, including nonprofits, the U.S. Environmental Protection Agency, Wal-Mart's direct suppliers, packaging suppliers, and other stakeholders. Wal-Mart's more than 60,000 suppliers were asked to use the scorecard throughout calendar 2007 to see how their packaging innovations, environmental standards, energy efficiencies, and use of materials rated relative to their peers. Beginning in 2008, Wal-Mart formally planned to use the system to "measure and recognize its entire supply chain based upon each company's ability to use less packaging, utilize more effective materials in packaging, and source these materials more efficiently relative to other suppliers." The scorecard is an important enabler for Wal-Mart to achieve its public goal of reducing the packaging used by all of its suppliers by 5 percent between 2008 and 2013. If achieved, this five-year program is expected to generate $3.4 billion in savings. In the first month, 2,268 vendors have logged onto the packaging scorecard site and 117 products have been entered into the system.
2. Certifying Environmentally Sustainable Products
According to an international study released in 2006, all species of wild seafood are greatly depleted and predicted to collapse within 50 years. Within this ominous business environment, Wal-Mart sourced approximately $750 million in seafood in 2006, and the company's volume of seafood business is growing at roughly 25 percent a year. "I am already having a hard time getting supply," said Peter Redmond, vice president for seafood and deli, and captain of the Wal-Mart seafood network. "If we add 250 stores a year, imagine how hard it will be in five years." Redmond believes that continuity of supply is the greatest challenge for Wal-Mart's seafood network, and sees the Marine Stewardship Council's certification program for wild-caught fish as the best means for addressing this challenge.
The Marine Stewardship Council (MSC), established by Unilever and the World Wildlife Fund (WWF) in 1997, has defined standards for certification as a sustainable fishery, based on the United Nations' Code of Conduct for Responsible Fishing and on input from fishermen, retailers, government, nonprofits, and other stakeholders. The MSC certifies third parties to audit and certify fishery and processor compliance throughout the supply chain, from "boat to plate." An MSC eco-label on the finished product signals to consumers that the fish has been harvested and processed in a sustainable manner. By raising consumer awareness, the MSC hopes to drive demand and thus motivate the industry to shift to more sustainable fishing practices.
In its textiles network, Wal-Mart is partnering with environmental nonprofits to select standards for organic cotton farming and manufacturing processes and relying on those partners to oversee the chain of custody. Kim Brandner, senior brand manager of sustainable textiles for Wal-Mart, described Wal-Mart's approach:
We've worked with the Organic Trade Association and the Organic Exchange (OE) to make sure that we are upholding the most stringent guidelines and standards. For the growth of cotton, we have chosen the U.S. Department of Agriculture (USDA) standards. So, regardless of where the cotton is grown around the world, the farmers have to follow USDA guidelines for organic growth. For processing, we're following the Global Organic Textile Standard.
Third-party organizations certify practices at each link in the supply chain as the cotton moves from farm to factory. "There are about 150 certification agencies, but we recognize only the seven that we think are the most strict… Since we're not doing that paperwork, our reputation is resting on who is certifying for us, which is why we picked the toughest certification companies," said Brandner. Certification paperwork is completed at each step in the process and finally reviewed by Consumer Testing Laboratories (CTL) in conjunction with final product testing. Currently, the cost and labor requirements of certification are largely absorbed by Wal-Mart's suppliers.
3. Providing Network Partner Assistance to Suppliers
Wal-Mart is able to provide suppliers with valuable knowledge and process assistance through its strong relationships with the environmental nonprofits in its networks. For example, when the Chinese government threatened to shut down a number of textile dye houses, including one of Wal-Mart's suppliers, in order to reduce pollution in Beijing ahead of the 2008 Olympics, Wal-Mart immediately took action. Brandner explains, "[We] put the dye house in touch with one of the NGOs in our network, which helped it formulate a more environmentally friendly process that reduced its toxic output very quickly. Although other retailers were negatively affected by the shutdown of their Chinese dye suppliers, we did not have any of our production capacity cut with this vendor."
In the seafood network, Wal-Mart is relying on the WWF to increase the number of fisheries and processing plants in the MSC certification program. Specifically, WWF helps boat operators and processors prepare to enter the certification process by doing a preliminary evaluation and identifying specific problems that need to be fixed (e.g. strengthening management practices, rebuilding stocks, and reducing environmental impacts before they will qualify for certification by the MSC).
Similarly, with the support of nonprofits such as OE, Wal-Mart is engaging more deeply in its textile supply chain than ever before. "It used to be that if Wal-Mart was buying Champion t-shirts, they wouldn't look past Sara Lee [which held the license for Champion products]. They didn't think about the spinner, or the dyer, the ginner, or the farmer," said Diana Rothschild, former Wal-Mart employee and Blu Skye consultant to the textiles network. Under the new strategy, Wal-Mart employees now interact directly with organic cotton farmers to understand their needs as OE helps them to improve farming practices.
Assistance from Wal-Mart's network partners is invaluable to suppliers and makes doing business with Wal-Mart more attractive. Suppliers have a strong incentive to innovate in order to keep Wal-Mart's business.
Wal-Mart also is implementing the following cooperative supply chain management practices to motivate suppliers to reduce the environmental impacts of their products and processes:
4. Committing to Larger Volumes of Environmentally Sustainable Products
By making a commitment to buy a specified quantity of each product certified as environmentally friendly, Wal-Mart gives its suppliers an incentive to develop and produce that product.
For instance, in its textiles network, the retailer learned that, along with the cost of certification, farmers faced a near-term reduction in yields with organic cotton farming, as well as the need to diversify crops. "Organic farmers can't grow cotton in the same field for an extended time because it depletes the soil of nutrients," said Rothschild. This forced farmers to alternate the planting of cotton with legumes, vegetables, or other cover crops to rejuvenate the soil. "Those alternate crops often cannot be sold as organic and are not as lucrative as organic cotton. This creates the temptation for farmers to turn to non-organic farming," she explained. However, to meet organic standards, a farm needed to remain free of non-organic pesticides or similar materials for a period of three years prior to the harvest of any organic crop. To increase and secure its supply of organic cotton, Wal-Mart made a five-year verbal commitment to buy organic cotton from farmers. "It gives them confidence and stability," said Lucy Cindric, captain of the textile network. In addition, to help reduce uncertainty in the market, Wal-Mart (which became the world's largest purchaser of organic cotton in 2006) also agreed to purchase the organic cotton farmers' alternate crops.
In 2006, Wal-Mart also publicly announced a highly ambitious seafood goal to carry 100 percent MSC-certified wild-caught fish in its stores within three to five years. As the supply of MSC-certified fish is currently far from adequate to meet Wal-Mart's demand, this public announcement is effectively a commitment to buy from all fisheries that become MSC-certified.
In its sourcing of consumer electronics, Wal-Mart typically avoids long-term purchasing commitments and maintains low inventory levels because of the industry's high uncertainty of demand and significant risks of inventory obsolescence. However, to acquire personal computers that were compliant with the EU Restrictions on Hazardous Substances (RoHS) Directive as part of its efforts to carry more environmentally friendly electronics, Wal-Mart made a commitment to Toshiba to buy 12 weeks' worth of inventory as opposed to its more typical four-week commitment. "We'll take that risk," said Alex Cook, electronics buyer for Wal-Mart. "We want to be the first one in the U.S. to sell RoHS-compliant PCs."
5. Cutting out the Middleman
An immediate but unanticipated benefit of MSC certification in the seafood network—and of organic cotton certification in the textile network—was full visibility of the chain of custody, and hence the opportunity to eliminate intermediaries. Said network captain Redmond:
One of the problems we had was how much of our fish was coming to us third-, fourth-, or even fifth-hand. Sometimes our supplier turned out to be nothing more than a packer that was going out to a market saying, 'I need 50,000 pounds of salmon no matter where it comes from.' Through the chain of custody, we started to see when fish was being handled four or five times, and we knew it couldn't be good for the fish [since texture and flavor fish degrades over time, especially through freezing and refreezing]. And it's certainly not good for traceability. It brought us a lot more awareness about our supplier base, so now things come to us a lot more directly.
By simplifying its supply chain, Wal-Mart reduced the frequency of seafood stock-outs, improved the quality of the fish it was receiving, reduced paperwork and transaction costs, and reduced the costs and environmental impacts of transportation.
In the textiles network, Brandner noted: "We used to buy cotton from Turkey, ship it to China for spinning and knitting, and then ship it again to Guatemala to be cut and sewn. Now, by looking more deeply at the supply chain, we're finding opportunities to do things like eliminate the shipment to China and have all processing done in Guatemala." Going direct to Guatemala saved time and money for Wal-Mart.
Despite the benefits demonstrated in the examples above, Wal-Mart is unlikely to completely eliminate its intermediaries. For example, the former CEO of a major coffee supplier to Wal-Mart sees excessive risk in eliminating coffee brokers and contracting directly with coffee farmers. His concern is that if a well-known company, such as the one he led, contracted directly with a farmer, and then the spot price for coffee went above the contract price, his company could not hold the farmer to the contract price. If it did, then NGOs would criticize the company for harming poor farmers and its reputation would suffer. Therefore, contracts with coffee farmers could effectively only place a floor on the price that his company would have to pay. In contrast, anonymous coffee brokers could hold farmers accountable to the contracted price. Contracts are important for providing incentives for investment and securing a supply of coffee, particularly when prices are low but likely to rise sharply in the near future.
6. Consolidating Direct Suppliers
Over the short term, Wal-Mart has had many diverse relationships with many factories, often working with a supplier one purchase order at a time or one season at a time. Year to year, the company may easily switch from one supplier to another. The result: it has been tough to obtain improvements on issues such as environmental compliance because the retailer's relevance to those suppliers has been low. Says sustainability vice president Ruben: "Right now we account for two percent of a lot of people's business, especially overseas. We know that needs to be a lot larger—maybe 50 or 60 percent."
So Wal-Mart is now starting to consolidate its business with select groups of direct suppliers. "We're trying to stimulate a race for the top," explained Laura Phillips, president and divisional merchandise manager of entertainment/wireless for Wal-Mart and co-captain of the electronics network, The race-for-the-top concept means that suppliers would be motivated to innovate in environmental performance in order to maintain or expand the amount of business they received from Wal-Mart.
For example, Manish Kumar, CEO of the Fishin' Company, Wal-Mart's top supplier of frozen fish fillets in the U.S. since 2005, was working with the WWF to draw more fisheries and processors into the MSC certification program even though this added significantly more complexity, time, and effort to the job without increasing near-term profits. "I had no idea what the MSC was in January [2006]," said Kumar. "Today, I spend half my day, every day, working on something related to the MSC." Kumar felt that his efforts were helping to secure and expand his business with Wal-Mart in the long-term. "It's definitely brought us closer. I think there's a lot more trust now in our relationship," he said. "They're willing to let us talk on their behalf, defend their points, and explain to the businesses we work with how important this effort is. And, because we have the muscle of their business behind us, we can go to a plant or a fishery and persuade them to become certified."
7. Restructuring the Buyer Role
To better manage relationships with suppliers, the textiles network implemented a major organizational change: It redesigned the role of its buyers. In the past, textiles buyers had been generalists, handling a wide variety of responsibilities (as buyers did in other product categories). The textiles network divided this function into four different job categories:
• Merchandising (buyer)—Focused on the customer and understanding what the product assortment should be to best meet the customer's needs.
• Product Development—Focused on product design and trend execution—marrying what the buyer says the customer wants with what the trends are in the marketplace in order to drive development of the product.
• Technical Services and Sourcing—Focused on creating the technical specifications for each product, deciding how to package it, and determining the best sourcing strategy, including supplier negotiations, pricing and quality.
• Planning and Execution—Focused on financial planning, ordering and inventory management, and store layout.
In the new model, representatives from each of these four "centers of excellence" were co-located as members of a tightly integrated product team. Each was given the chance to become a specialist and to take a more strategic approach to their role. In particular, sourcing specialists were meant to develop and nurture the longer-term relationships with suppliers that were necessary to support activities such as the organic cotton project and other sustainability initiatives. Sourcing specialists were encouraged to hold the position for many years. According to Brandner, this organizational change, backed by the company's focus on the environment, is leading her team to "become smarter merchants," she says.
Sustainability leader Elm saw this type of change as essential to the long-term viability of Wal-Mart's sustainability strategy because in Wal-Mart's traditional business model, the buyers rotated positions every 12 to 18 months. Only by increasing the longevity and depth of personal relationships in sourcing, he believed, would Wal-Mart truly be able to develop and maintain the future-looking, trust-based relationships with suppliers needed to drive ongoing environmental innovation.
8. Licensing Environmental Innovations
In Wal-Mart's electronics network, suppliers' sensitivity about intellectual property is a barrier to improving environmental performance. Said Blu Skye's Scot Case, who worked with the electronics network: "There are all sorts of concerns about confidential business information and suppliers being reluctant to supply information to Wal-Mart because it might somehow end up in the hands of their competitors. For example, if one factory is significantly more energy-efficient than others, it's got an advantage. If it shares that information, the competition might gain a much better understanding of its production costs and therefore its profit margins." Some suppliers fear that this type of information potentially could be used by Wal-Mart in price negotiations. On the other hand, "With anything that can be easily tested, most suppliers are more comfortable providing," explained Case. "Information about how much energy a product consumes is not particularly sensitive."
This hesitancy to disclose is challenging to Wal-Mart, and not just from a performance management perspective. As Seong Ohm, vice president and divisional merchandising manager of electronics for Sam's Club and co-captain of the electronics network put it: "If someone comes up with a better, more sustainable way to do something, we want to encourage them to share that with other suppliers to increase the impact." As a result, the electronics network was encouraging suppliers to license their environmental innovations. The opportunity to derive additional revenue from an environmental innovation would increase the suppliers' incentives to invest in innovation, while licensing the innovation also would lead to improved environmental performance across the industry and more widespread benefits for Wal-Mart.
Three Traps to Avoid
In collaboration with its suppliers and with environmental nonprofits, Wal-Mart is dramatically reducing the environmental impacts of a portion of its products and production processes while increasing its own profits. At the end of 2006, Ruben and Elm found that the tangible profits generated by Wal-Mart's sustainability strategy in the first year of implementation were roughly equivalent to the profits from several Wal-Mart SuperCenters. Intangible benefits, such as public goodwill and improved assurance of supply, are likely to be worth much more to the retailer. Ruben and Elm envision a huge array of untapped opportunities, and they are committing to scale up Wal-Mart's efforts to green its supply chain.
It won't all be plain sailing. Wal-Mart faces three possible obstacles as it scales up its network approach: (1) increased costs, (2) a sub-optimal product assortment, and (3) criticism of factory labor conditions. Wal-Mart's public reputation is on the line as it makes ambitious public promises—for example, to sell only MSC-certified wild-caught fish within three to five years. Becoming more dependent on fewer selected suppliers, the retailer may face price rises from that narrower supply base, particularly in times of scarcity and for limited resources like MSC-certified seafood.
Additionally, with fewer suppliers and a focus on sourcing environmentally-friendly products, Wal-Mart may miss opportunities to source innovative products that customers might want but which are not necessarily environmentally friendly. Wal-Mart's environmental nonprofit network partners will continue to push for environmental attributes in choosing product assortments. Although Wal-Mart might in the future be rewarded with offset credits for reducing CO2 emissions—through its heavy and successful promotions of "green" light bulbs, for instance—it is unlikely that the company can recapture all of the environmental value created by promoting green products, and might end up with a product assortment that is suboptimal for the purposes of maximizing the company's own profits.
Wal-Mart has also long been criticized for poor labor conditions in its suppliers' factories. In response, in his October 2005 speech, Lee Scott said: "We are committed to increasing our engagement concerning supplier factory conditions… We are separating factory certification from the buying organization." This will avert potential conflicts of interest that arise when buyers can obtain less expensive products from noncompliant factories, but it might exacerbate the worst labor-related problems that tend to occur when buyers under-forecast and then demand overtime production—as was discovered in Nike's supply chain.Separation of factory certification from the buying organization may cause a loss of information and coordination, which runs counter to Wal-Mart's strategy of embedding responsibility for reducing environmental impacts within the buying organization.
Going forward, Wal-Mart must be vigilant if it is to avoid these three possible pitfalls and continue to manage its supply chain in a manner that reduces environmental impacts and increases its profits. Indeed, Wal-Mart's sustainability strategy must be profitable if it is to be sustainable in the long run and achieve Lee Scott's aspirational environmental goals.
Some of Wal-Mart's "Greening" Decisions
• Buying diesel-electric and refrigerated trucks with a power unit that could keep cargo cold without the engine running, saving nearly $75 million in fuel costs and eliminating an estimated 400,000 tons of CO2 pollution in one year alone.
• Making a five-year verbal commitment to buy only organically grown cotton from farmers, and to buy alternate crops those farmers need to grow between cotton harvests. Last year, the company became the world's largest buyer of organic cotton.
• Promising by 2011 to only carry seafood certified wild by the Marine Stewardship Council, a group dedicated to preventing the depletion of ocean life from overfishing.
• Buying (and selling) 12 weeks' worth of Restrictions on Hazardous Substances (RoHS)-compliant computers from Toshiba.
----------------
Author Information
Erica Plambeck (plambeck_erica@gsb.stanford.edu) is Associate Professor of Operations, Information and Technology in the Graduate School of Business and Senior Fellow in the Woods Institute for Environment at Stanford University.
© 2007, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
The Greening of Wal-Mart's Supply Chain -
Erica Plambeck, Faculty, Graduate School of Business, Stanford University.
-------------
In October 2005, Wal-Mart CEO Lee Scott committed the company to three ambitious goals: To be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain Wal-Mart's resources and the environment. This is the story of Wal-Mart's progress toward those goals and the array of innovative practices that Wal-Mart is implementing to “green” its supply chain.
-------------
Three Traps to Avoid
Some of Wal-Mart's "Greening" Decisions
In October 2005, in an auditorium filled to capacity, Wal-Mart President and CEO Lee Scott made the company's first speech to be broadcast to 1.6 million employees in all 6,000-plus stores worldwide—and shared with its 60,000-plus suppliers. Scott announced that Wal-Mart was launching a sweeping business sustainability strategy to dramatically reduce the company's impact on the global environment and thus become "the most competitive and innovative company in the world." He argued that "being a good steward of the environment and being profitable are not mutually exclusive. They are one and the same." Scott also committed Wal-Mart to three aspirational goals:
"To be supplied 100 percent by renewable energy;
to create zero waste; and
to sell products that sustain our resources and the environment."
To meet those goals, Wal-Mart would seek to transform its supply chain, in cooperation with suppliers and environmental nonprofit organizations. Gwen Rutta, Director of Corporate Partnerships at Environmental Defense, was excited about working with Wal-Mart: "We've come to believe through experience that you really can create environmental progress by leveraging corporate purchasing power," she said. "And who's got more purchasing power than Wal-Mart?"
Indeed, Lee Scott's cooperative business sustainability strategy would go much farther than the retail giant's earlier green initiatives. In the past, Wal-Mart had dealt with environmental issues defensively, rather than cooperatively, proactively, and as profit opportunities. In 1989, in response to letters from customers about environmental concerns, the company had launched a campaign to convince its suppliers to provide environmentally safe products in recyclable or biodegradable packaging. The large-scale effort met with some skepticism from commentators who believed that it was intended to generate benefits for Wal-Mart at its suppliers' expense.
Nevertheless, the company did earn some "goodwill among environmentalists [as] the first major retailer to speak out in favor of the environment in 1989."When vendors claimed they had made environmental improvements to products, Wal-Mart began promoting the products with green-colored shelf tags (without measuring or monitoring the improvements themselves). At one point, the company sold as many as 300 products with green tags. But not all the headlines were positive. One large supplier was exposed for stretching its claim to offer environmentally friendly paper towels, and Wal-Mart and the supplier were heavily criticized. By the early 1990s, the green tag program disappeared altogether, and environmental issues seemed to slip off the company's list of strategic priorities.
Lee Scott, along with Andrew Ruben and Tyler Elm, vice president and senior director of corporate strategy and business sustainability, respectively, recognized that in contrast to those early campaigns, their new sustainability strategy would need to be deeply embedded in Wal-Mart's operations and supply chain management to meet the ambitious goals set in 2005. Elm put it this way: "We recognized early on that we had to look at the entire value chain. If we had focused on just our own operations, we would have limited ourselves to 10 percent of our effect on the environment and eliminated 90 percent of the opportunity that's out there."
Looking Outside the "Bentonville Bubble"
In 2005, with that recognition in mind, Ruben hired Blu Skye Sustainability Consulting to help identify the categories of Wal-Mart's products and processes that had the greatest environmental impact. The Wal-Mart/Blu Skye team multiplied sales data with environmental impact factors from the Union of Concerned Scientists, and identified 14 focal areas, bundled into three broad categories: renewable energy; zero waste; and sustainable products. For each focal area, an executive sponsor (primarily at the executive vice president level) and a network captain (typically a senior vice president) took charge of building a sustainable value network of Wal-Mart employees and representatives from government, academia, environmental nonprofits, suppliers, and other stakeholders. The goal was to reduce environmental impacts and derive profit from that positive change. Network captains were typically senior managers from Sam's Club or Wal-Mart who were considered to be among the company's top performers. Whereas Wal-Mart had previously been notorious for being internally and operationally focused, the network captains were charged to look outside "the Bentonville Bubble" for strategic input and asked to start "pulling ideas from everywhere," even from critics.
Environmental groups joined the networks with some trepidation. As a Financial Times article put it, "For membership-based environmental groups, such as the Sierra Club, and others that seek to work in coalition with student and labor campaigners, engaging with the biggest villain on the block presents risks of losing support and funds." However, many such organizations decided that the advantages of being able to help influence Wal-Mart's environmental performance outweighed any negative repercussions from the association. Seeking the opportunity to drive positive environmental change on a massive scale, nonprofits and nongovernmental organizations (NGOs) such as Environmental Defense stationed employees in the company's Bentonville, Ark. headquarters to work within the networks. However, Wal-Mart strategically decided not to hire associates—employees—to work on sustainability on a full-time basis, but instead to embed sustainability in their daily work. Elm explained the approach: "Business sustainability isn't something you're doing in addition to your job. It is a new way of approaching your job." To help make that lean model viable and because Wal-Mart lacked internal expertise in environmental sustainability, the company hired one or more external advisors from Blu Skye or Rocky Mountain Institute (RMI) for each network.
To capitalize on the incoming ferment of creative ideas, many of the 14 networks implemented new supply chain management practices. Across all 14 networks, the leaders intensified the company's efforts to move toward stronger relationships with a relatively small number of suppliers. With assistance from its network partners—the environmental nonprofits and consultants—Wal-Mart set a goal of motivating suppliers to "race to the top" in improving the environmental sustainability of products and processes. The new supply chain management practices associated with this initiative are summarized here, and described in greater detail below, with examples drawn from the company's global logistics, China, seafood, electronics, and textiles networks. Wal-Mart is engaging its array of network partners to:
1. Identify Goals, Metrics, and New Technologies
Speaking to the task of identifying efficient new technologies and goal-setting, sustainability director Elm said: "The value of the network approach is that the goals grew as the spirit of the possible grew. [For example,] the involvement of groups like Rocky Mountain Institute in our logistics program had a tremendous impact on how much and how quickly Wal-Mart recognized it could drive change. Initially, the logistics network was going after incremental gains—for example, improving the efficiency of Wal-Mart's trucking fleet by a few percent over several years. But now they plan to double its efficiency in 10 years." With guidance from RMI, Wal-Mart started to procure hybrid diesel-electric trucks and refrigerated trucks that featured a small power unit for cooling so the engine could be turned off when the truck was stopped. In the first year of the program following Lee Scott's announcement, the logistics network achieved roughly a 25 percent improvement in fuel efficiency, meaning almost $75 million in annual savings and 400,000 tons of CO2 per year that did not enter the atmosphere.
For its part, the packaging network implemented a Web-based scorecard that would evaluate each product's packaging against nine sustainability metrics, including cube utilization, recycled content, CO2 per ton of production, and recovery value. The scorecard was developed with input from the 200-plus members of the packaging network, including nonprofits, the U.S. Environmental Protection Agency, Wal-Mart's direct suppliers, packaging suppliers, and other stakeholders. Wal-Mart's more than 60,000 suppliers were asked to use the scorecard throughout calendar 2007 to see how their packaging innovations, environmental standards, energy efficiencies, and use of materials rated relative to their peers. Beginning in 2008, Wal-Mart formally planned to use the system to "measure and recognize its entire supply chain based upon each company's ability to use less packaging, utilize more effective materials in packaging, and source these materials more efficiently relative to other suppliers." The scorecard is an important enabler for Wal-Mart to achieve its public goal of reducing the packaging used by all of its suppliers by 5 percent between 2008 and 2013. If achieved, this five-year program is expected to generate $3.4 billion in savings. In the first month, 2,268 vendors have logged onto the packaging scorecard site and 117 products have been entered into the system.
2. Certifying Environmentally Sustainable Products
According to an international study released in 2006, all species of wild seafood are greatly depleted and predicted to collapse within 50 years. Within this ominous business environment, Wal-Mart sourced approximately $750 million in seafood in 2006, and the company's volume of seafood business is growing at roughly 25 percent a year. "I am already having a hard time getting supply," said Peter Redmond, vice president for seafood and deli, and captain of the Wal-Mart seafood network. "If we add 250 stores a year, imagine how hard it will be in five years." Redmond believes that continuity of supply is the greatest challenge for Wal-Mart's seafood network, and sees the Marine Stewardship Council's certification program for wild-caught fish as the best means for addressing this challenge.
The Marine Stewardship Council (MSC), established by Unilever and the World Wildlife Fund (WWF) in 1997, has defined standards for certification as a sustainable fishery, based on the United Nations' Code of Conduct for Responsible Fishing and on input from fishermen, retailers, government, nonprofits, and other stakeholders. The MSC certifies third parties to audit and certify fishery and processor compliance throughout the supply chain, from "boat to plate." An MSC eco-label on the finished product signals to consumers that the fish has been harvested and processed in a sustainable manner. By raising consumer awareness, the MSC hopes to drive demand and thus motivate the industry to shift to more sustainable fishing practices.
In its textiles network, Wal-Mart is partnering with environmental nonprofits to select standards for organic cotton farming and manufacturing processes and relying on those partners to oversee the chain of custody. Kim Brandner, senior brand manager of sustainable textiles for Wal-Mart, described Wal-Mart's approach:
We've worked with the Organic Trade Association and the Organic Exchange (OE) to make sure that we are upholding the most stringent guidelines and standards. For the growth of cotton, we have chosen the U.S. Department of Agriculture (USDA) standards. So, regardless of where the cotton is grown around the world, the farmers have to follow USDA guidelines for organic growth. For processing, we're following the Global Organic Textile Standard.
Third-party organizations certify practices at each link in the supply chain as the cotton moves from farm to factory. "There are about 150 certification agencies, but we recognize only the seven that we think are the most strict… Since we're not doing that paperwork, our reputation is resting on who is certifying for us, which is why we picked the toughest certification companies," said Brandner. Certification paperwork is completed at each step in the process and finally reviewed by Consumer Testing Laboratories (CTL) in conjunction with final product testing. Currently, the cost and labor requirements of certification are largely absorbed by Wal-Mart's suppliers.
3. Providing Network Partner Assistance to Suppliers
Wal-Mart is able to provide suppliers with valuable knowledge and process assistance through its strong relationships with the environmental nonprofits in its networks. For example, when the Chinese government threatened to shut down a number of textile dye houses, including one of Wal-Mart's suppliers, in order to reduce pollution in Beijing ahead of the 2008 Olympics, Wal-Mart immediately took action. Brandner explains, "[We] put the dye house in touch with one of the NGOs in our network, which helped it formulate a more environmentally friendly process that reduced its toxic output very quickly. Although other retailers were negatively affected by the shutdown of their Chinese dye suppliers, we did not have any of our production capacity cut with this vendor."
In the seafood network, Wal-Mart is relying on the WWF to increase the number of fisheries and processing plants in the MSC certification program. Specifically, WWF helps boat operators and processors prepare to enter the certification process by doing a preliminary evaluation and identifying specific problems that need to be fixed (e.g. strengthening management practices, rebuilding stocks, and reducing environmental impacts before they will qualify for certification by the MSC).
Similarly, with the support of nonprofits such as OE, Wal-Mart is engaging more deeply in its textile supply chain than ever before. "It used to be that if Wal-Mart was buying Champion t-shirts, they wouldn't look past Sara Lee [which held the license for Champion products]. They didn't think about the spinner, or the dyer, the ginner, or the farmer," said Diana Rothschild, former Wal-Mart employee and Blu Skye consultant to the textiles network. Under the new strategy, Wal-Mart employees now interact directly with organic cotton farmers to understand their needs as OE helps them to improve farming practices.
Assistance from Wal-Mart's network partners is invaluable to suppliers and makes doing business with Wal-Mart more attractive. Suppliers have a strong incentive to innovate in order to keep Wal-Mart's business.
Wal-Mart also is implementing the following cooperative supply chain management practices to motivate suppliers to reduce the environmental impacts of their products and processes:
4. Committing to Larger Volumes of Environmentally Sustainable Products
By making a commitment to buy a specified quantity of each product certified as environmentally friendly, Wal-Mart gives its suppliers an incentive to develop and produce that product.
For instance, in its textiles network, the retailer learned that, along with the cost of certification, farmers faced a near-term reduction in yields with organic cotton farming, as well as the need to diversify crops. "Organic farmers can't grow cotton in the same field for an extended time because it depletes the soil of nutrients," said Rothschild. This forced farmers to alternate the planting of cotton with legumes, vegetables, or other cover crops to rejuvenate the soil. "Those alternate crops often cannot be sold as organic and are not as lucrative as organic cotton. This creates the temptation for farmers to turn to non-organic farming," she explained. However, to meet organic standards, a farm needed to remain free of non-organic pesticides or similar materials for a period of three years prior to the harvest of any organic crop. To increase and secure its supply of organic cotton, Wal-Mart made a five-year verbal commitment to buy organic cotton from farmers. "It gives them confidence and stability," said Lucy Cindric, captain of the textile network. In addition, to help reduce uncertainty in the market, Wal-Mart (which became the world's largest purchaser of organic cotton in 2006) also agreed to purchase the organic cotton farmers' alternate crops.
In 2006, Wal-Mart also publicly announced a highly ambitious seafood goal to carry 100 percent MSC-certified wild-caught fish in its stores within three to five years. As the supply of MSC-certified fish is currently far from adequate to meet Wal-Mart's demand, this public announcement is effectively a commitment to buy from all fisheries that become MSC-certified.
In its sourcing of consumer electronics, Wal-Mart typically avoids long-term purchasing commitments and maintains low inventory levels because of the industry's high uncertainty of demand and significant risks of inventory obsolescence. However, to acquire personal computers that were compliant with the EU Restrictions on Hazardous Substances (RoHS) Directive as part of its efforts to carry more environmentally friendly electronics, Wal-Mart made a commitment to Toshiba to buy 12 weeks' worth of inventory as opposed to its more typical four-week commitment. "We'll take that risk," said Alex Cook, electronics buyer for Wal-Mart. "We want to be the first one in the U.S. to sell RoHS-compliant PCs."
5. Cutting out the Middleman
An immediate but unanticipated benefit of MSC certification in the seafood network—and of organic cotton certification in the textile network—was full visibility of the chain of custody, and hence the opportunity to eliminate intermediaries. Said network captain Redmond:
One of the problems we had was how much of our fish was coming to us third-, fourth-, or even fifth-hand. Sometimes our supplier turned out to be nothing more than a packer that was going out to a market saying, 'I need 50,000 pounds of salmon no matter where it comes from.' Through the chain of custody, we started to see when fish was being handled four or five times, and we knew it couldn't be good for the fish [since texture and flavor fish degrades over time, especially through freezing and refreezing]. And it's certainly not good for traceability. It brought us a lot more awareness about our supplier base, so now things come to us a lot more directly.
By simplifying its supply chain, Wal-Mart reduced the frequency of seafood stock-outs, improved the quality of the fish it was receiving, reduced paperwork and transaction costs, and reduced the costs and environmental impacts of transportation.
In the textiles network, Brandner noted: "We used to buy cotton from Turkey, ship it to China for spinning and knitting, and then ship it again to Guatemala to be cut and sewn. Now, by looking more deeply at the supply chain, we're finding opportunities to do things like eliminate the shipment to China and have all processing done in Guatemala." Going direct to Guatemala saved time and money for Wal-Mart.
Despite the benefits demonstrated in the examples above, Wal-Mart is unlikely to completely eliminate its intermediaries. For example, the former CEO of a major coffee supplier to Wal-Mart sees excessive risk in eliminating coffee brokers and contracting directly with coffee farmers. His concern is that if a well-known company, such as the one he led, contracted directly with a farmer, and then the spot price for coffee went above the contract price, his company could not hold the farmer to the contract price. If it did, then NGOs would criticize the company for harming poor farmers and its reputation would suffer. Therefore, contracts with coffee farmers could effectively only place a floor on the price that his company would have to pay. In contrast, anonymous coffee brokers could hold farmers accountable to the contracted price. Contracts are important for providing incentives for investment and securing a supply of coffee, particularly when prices are low but likely to rise sharply in the near future.
6. Consolidating Direct Suppliers
Over the short term, Wal-Mart has had many diverse relationships with many factories, often working with a supplier one purchase order at a time or one season at a time. Year to year, the company may easily switch from one supplier to another. The result: it has been tough to obtain improvements on issues such as environmental compliance because the retailer's relevance to those suppliers has been low. Says sustainability vice president Ruben: "Right now we account for two percent of a lot of people's business, especially overseas. We know that needs to be a lot larger—maybe 50 or 60 percent."
So Wal-Mart is now starting to consolidate its business with select groups of direct suppliers. "We're trying to stimulate a race for the top," explained Laura Phillips, president and divisional merchandise manager of entertainment/wireless for Wal-Mart and co-captain of the electronics network, The race-for-the-top concept means that suppliers would be motivated to innovate in environmental performance in order to maintain or expand the amount of business they received from Wal-Mart.
For example, Manish Kumar, CEO of the Fishin' Company, Wal-Mart's top supplier of frozen fish fillets in the U.S. since 2005, was working with the WWF to draw more fisheries and processors into the MSC certification program even though this added significantly more complexity, time, and effort to the job without increasing near-term profits. "I had no idea what the MSC was in January [2006]," said Kumar. "Today, I spend half my day, every day, working on something related to the MSC." Kumar felt that his efforts were helping to secure and expand his business with Wal-Mart in the long-term. "It's definitely brought us closer. I think there's a lot more trust now in our relationship," he said. "They're willing to let us talk on their behalf, defend their points, and explain to the businesses we work with how important this effort is. And, because we have the muscle of their business behind us, we can go to a plant or a fishery and persuade them to become certified."
7. Restructuring the Buyer Role
To better manage relationships with suppliers, the textiles network implemented a major organizational change: It redesigned the role of its buyers. In the past, textiles buyers had been generalists, handling a wide variety of responsibilities (as buyers did in other product categories). The textiles network divided this function into four different job categories:
• Merchandising (buyer)—Focused on the customer and understanding what the product assortment should be to best meet the customer's needs.
• Product Development—Focused on product design and trend execution—marrying what the buyer says the customer wants with what the trends are in the marketplace in order to drive development of the product.
• Technical Services and Sourcing—Focused on creating the technical specifications for each product, deciding how to package it, and determining the best sourcing strategy, including supplier negotiations, pricing and quality.
• Planning and Execution—Focused on financial planning, ordering and inventory management, and store layout.
In the new model, representatives from each of these four "centers of excellence" were co-located as members of a tightly integrated product team. Each was given the chance to become a specialist and to take a more strategic approach to their role. In particular, sourcing specialists were meant to develop and nurture the longer-term relationships with suppliers that were necessary to support activities such as the organic cotton project and other sustainability initiatives. Sourcing specialists were encouraged to hold the position for many years. According to Brandner, this organizational change, backed by the company's focus on the environment, is leading her team to "become smarter merchants," she says.
Sustainability leader Elm saw this type of change as essential to the long-term viability of Wal-Mart's sustainability strategy because in Wal-Mart's traditional business model, the buyers rotated positions every 12 to 18 months. Only by increasing the longevity and depth of personal relationships in sourcing, he believed, would Wal-Mart truly be able to develop and maintain the future-looking, trust-based relationships with suppliers needed to drive ongoing environmental innovation.
8. Licensing Environmental Innovations
In Wal-Mart's electronics network, suppliers' sensitivity about intellectual property is a barrier to improving environmental performance. Said Blu Skye's Scot Case, who worked with the electronics network: "There are all sorts of concerns about confidential business information and suppliers being reluctant to supply information to Wal-Mart because it might somehow end up in the hands of their competitors. For example, if one factory is significantly more energy-efficient than others, it's got an advantage. If it shares that information, the competition might gain a much better understanding of its production costs and therefore its profit margins." Some suppliers fear that this type of information potentially could be used by Wal-Mart in price negotiations. On the other hand, "With anything that can be easily tested, most suppliers are more comfortable providing," explained Case. "Information about how much energy a product consumes is not particularly sensitive."
This hesitancy to disclose is challenging to Wal-Mart, and not just from a performance management perspective. As Seong Ohm, vice president and divisional merchandising manager of electronics for Sam's Club and co-captain of the electronics network put it: "If someone comes up with a better, more sustainable way to do something, we want to encourage them to share that with other suppliers to increase the impact." As a result, the electronics network was encouraging suppliers to license their environmental innovations. The opportunity to derive additional revenue from an environmental innovation would increase the suppliers' incentives to invest in innovation, while licensing the innovation also would lead to improved environmental performance across the industry and more widespread benefits for Wal-Mart.
Three Traps to Avoid
In collaboration with its suppliers and with environmental nonprofits, Wal-Mart is dramatically reducing the environmental impacts of a portion of its products and production processes while increasing its own profits. At the end of 2006, Ruben and Elm found that the tangible profits generated by Wal-Mart's sustainability strategy in the first year of implementation were roughly equivalent to the profits from several Wal-Mart SuperCenters. Intangible benefits, such as public goodwill and improved assurance of supply, are likely to be worth much more to the retailer. Ruben and Elm envision a huge array of untapped opportunities, and they are committing to scale up Wal-Mart's efforts to green its supply chain.
It won't all be plain sailing. Wal-Mart faces three possible obstacles as it scales up its network approach: (1) increased costs, (2) a sub-optimal product assortment, and (3) criticism of factory labor conditions. Wal-Mart's public reputation is on the line as it makes ambitious public promises—for example, to sell only MSC-certified wild-caught fish within three to five years. Becoming more dependent on fewer selected suppliers, the retailer may face price rises from that narrower supply base, particularly in times of scarcity and for limited resources like MSC-certified seafood.
Additionally, with fewer suppliers and a focus on sourcing environmentally-friendly products, Wal-Mart may miss opportunities to source innovative products that customers might want but which are not necessarily environmentally friendly. Wal-Mart's environmental nonprofit network partners will continue to push for environmental attributes in choosing product assortments. Although Wal-Mart might in the future be rewarded with offset credits for reducing CO2 emissions—through its heavy and successful promotions of "green" light bulbs, for instance—it is unlikely that the company can recapture all of the environmental value created by promoting green products, and might end up with a product assortment that is suboptimal for the purposes of maximizing the company's own profits.
Wal-Mart has also long been criticized for poor labor conditions in its suppliers' factories. In response, in his October 2005 speech, Lee Scott said: "We are committed to increasing our engagement concerning supplier factory conditions… We are separating factory certification from the buying organization." This will avert potential conflicts of interest that arise when buyers can obtain less expensive products from noncompliant factories, but it might exacerbate the worst labor-related problems that tend to occur when buyers under-forecast and then demand overtime production—as was discovered in Nike's supply chain.Separation of factory certification from the buying organization may cause a loss of information and coordination, which runs counter to Wal-Mart's strategy of embedding responsibility for reducing environmental impacts within the buying organization.
Going forward, Wal-Mart must be vigilant if it is to avoid these three possible pitfalls and continue to manage its supply chain in a manner that reduces environmental impacts and increases its profits. Indeed, Wal-Mart's sustainability strategy must be profitable if it is to be sustainable in the long run and achieve Lee Scott's aspirational environmental goals.
Some of Wal-Mart's "Greening" Decisions
• Buying diesel-electric and refrigerated trucks with a power unit that could keep cargo cold without the engine running, saving nearly $75 million in fuel costs and eliminating an estimated 400,000 tons of CO2 pollution in one year alone.
• Making a five-year verbal commitment to buy only organically grown cotton from farmers, and to buy alternate crops those farmers need to grow between cotton harvests. Last year, the company became the world's largest buyer of organic cotton.
• Promising by 2011 to only carry seafood certified wild by the Marine Stewardship Council, a group dedicated to preventing the depletion of ocean life from overfishing.
• Buying (and selling) 12 weeks' worth of Restrictions on Hazardous Substances (RoHS)-compliant computers from Toshiba.
----------------
Author Information
Erica Plambeck (plambeck_erica@gsb.stanford.edu) is Associate Professor of Operations, Information and Technology in the Graduate School of Business and Senior Fellow in the Woods Institute for Environment at Stanford University.
© 2007, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
Thursday, August 9, 2007
Benefits of big time Retailing ....
Walmart entry into the retailing business is scaring small time traders
and retailers in India. The trading community is worried that their
present role of acting as middlemen in the supply chain (aggregators) will become inconsequential in the coming years with the entry of Walmart or Reliance. Is this fear misplaced ?
Drawbacks of the present system :
The
present agricultural and commodity supply chain in the country is
working at sub-optimal levels. Particularly the fruits, grains, pulses
and vegetables supply chain is incurring heavy costs at unscientific
storage and transportation of perishable goods and the subsequent
losses due to improper storage and handling,transportation.
The
lookout for the government is to increase the efficiency of these
operations and thus bring more edible fruits/grains/pulses in the
market at lower prices. There are enough stocks of food grains in Food
Corporation of Indiagodowns to complete a trip to the moon, one way, still we have thousands of families going to bed daily across the country without a square meal a day.
It is in this context that that the government needs to seriously
consider ways and means to increase the efficiency of it's existing
warehousing, transport and storage operations. It is here that
retailing giants likeMittal-Walmart, Reliance etc are set to enter the Indian market.
Best Practices :
Big
retailers have some of the best practices in the market, be it
purchase, storage or transportation. They are known to give better
remuneration to the farmers for their produce, resulting in prosperous
farmers. They also encourage small farmers to get together and farm in
larger areas, resulting in better productivity of land. Exceptions are
emerging from different parts of the country where big business houses
are known to purchase large tracts of land, often inthousands of acres, displacing the existing farmers and their livelihood, by givinjg them meagre compensation. Such anomalies can be corrected by sincere governments.
Purchasing in large quantities, facilitates transportation and storage in large quantities. Cheap, safe and multimodal transportation, proper storage environments , often conditioned and refrigerated, ensure that the product lives are extended to facilitate aggregation and transportation over long distances.
Another benefit of big retail;ing is the ease with which new technologies become industry standards. Walmart
being a big player gives leadership in introducing new technologies. It
directs it's vendors, in a positive sense, enabling absorption of high
technology, making it industry standard. The examples of introduction
of bar codes and more recently the Radio frequencyidentification Devices (RFID
) for identification, tracking and keeping count of inventory helps in
efficient inventory management. This results in less wastage and
efficient retrieval of items from store and cost effective purchase
policies. As a whole this results in very cost effective operations.
Big retailers are thus able to offer items at low costs to the customer.
( to be continued..)
George easaw
and retailers in India. The trading community is worried that their
present role of acting as middlemen in the supply chain (aggregators) will become inconsequential in the coming years with the entry of Walmart or Reliance. Is this fear misplaced ?
Drawbacks of the present system :
The
present agricultural and commodity supply chain in the country is
working at sub-optimal levels. Particularly the fruits, grains, pulses
and vegetables supply chain is incurring heavy costs at unscientific
storage and transportation of perishable goods and the subsequent
losses due to improper storage and handling,transportation.
The
lookout for the government is to increase the efficiency of these
operations and thus bring more edible fruits/grains/pulses in the
market at lower prices. There are enough stocks of food grains in Food
Corporation of Indiagodowns to complete a trip to the moon, one way, still we have thousands of families going to bed daily across the country without a square meal a day.
It is in this context that that the government needs to seriously
consider ways and means to increase the efficiency of it's existing
warehousing, transport and storage operations. It is here that
retailing giants likeMittal-Walmart, Reliance etc are set to enter the Indian market.
Best Practices :
Big
retailers have some of the best practices in the market, be it
purchase, storage or transportation. They are known to give better
remuneration to the farmers for their produce, resulting in prosperous
farmers. They also encourage small farmers to get together and farm in
larger areas, resulting in better productivity of land. Exceptions are
emerging from different parts of the country where big business houses
are known to purchase large tracts of land, often inthousands of acres, displacing the existing farmers and their livelihood, by givinjg them meagre compensation. Such anomalies can be corrected by sincere governments.
Purchasing in large quantities, facilitates transportation and storage in large quantities. Cheap, safe and multimodal transportation, proper storage environments , often conditioned and refrigerated, ensure that the product lives are extended to facilitate aggregation and transportation over long distances.
Another benefit of big retail;ing is the ease with which new technologies become industry standards. Walmart
being a big player gives leadership in introducing new technologies. It
directs it's vendors, in a positive sense, enabling absorption of high
technology, making it industry standard. The examples of introduction
of bar codes and more recently the Radio frequencyidentification Devices (RFID
) for identification, tracking and keeping count of inventory helps in
efficient inventory management. This results in less wastage and
efficient retrieval of items from store and cost effective purchase
policies. As a whole this results in very cost effective operations.
Big retailers are thus able to offer items at low costs to the customer.
( to be continued..)
George easaw
Monday, August 6, 2007
Notes on delayed product differentiation in the supply chain
Delayed Product Differentiation in the supply chain
Tackling or forecasting demand accurately has alwys been a problem in effective supply chain functioning. Inaccurate forecasts lead to holding excess inventory or running short of inventory. Excess inventory leads to wastage, obsolescence, downward pricing and loss of profits. Shortage of inventory leads to loss of profit and loss of goodwill.
When a product is assembled, the moment the differentiation of the assembly happens into a different product is important. This is the instant when the product has a specific value to a specific end user. The further assembly of this product depends on the final demand for this product. If this demand changes, it is likely to result in the product remaining on the shelf unsold or being sold earlier than when it is actually to be sold. If the product is sold earlier than when it is actually to be sold, it is beneficial for the organization as it realises the monetary value of the product earlier. But if the product remains unsold and remains on the shelf, it leads to deterioration of the product and subsequent loss.
The duration the product remains on the shelf is inversely proportional to the value that can be realised from the product. i.e. the more time the product remains differentiated and remains on the shelf, the less it's value and vice versa. Let the time the product remains differentiated (t1) and on the shelf (t2) be given by T (=t1 + t2) and value V1 at beginning of T and V2 at the end of t1 and V3 at the end of t2. ie. T = k/(V1 -V3), ie T.V = k, (t1 + t2).(V1-V3)= k.
V1 - V2 is the loss of value on the asembly line and V2 - V3 is the loss of value on the shelf. (V1 - V2) > (V2 - V3)
If the time the product remains on the shelf (t2) is greater than the time it remains being differentiated on the assembly line (t1), the loss in value (V1 - V2) is less than (V2 - V3).
Tackling or forecasting demand accurately has alwys been a problem in effective supply chain functioning. Inaccurate forecasts lead to holding excess inventory or running short of inventory. Excess inventory leads to wastage, obsolescence, downward pricing and loss of profits. Shortage of inventory leads to loss of profit and loss of goodwill.
When a product is assembled, the moment the differentiation of the assembly happens into a different product is important. This is the instant when the product has a specific value to a specific end user. The further assembly of this product depends on the final demand for this product. If this demand changes, it is likely to result in the product remaining on the shelf unsold or being sold earlier than when it is actually to be sold. If the product is sold earlier than when it is actually to be sold, it is beneficial for the organization as it realises the monetary value of the product earlier. But if the product remains unsold and remains on the shelf, it leads to deterioration of the product and subsequent loss.
The duration the product remains on the shelf is inversely proportional to the value that can be realised from the product. i.e. the more time the product remains differentiated and remains on the shelf, the less it's value and vice versa. Let the time the product remains differentiated (t1) and on the shelf (t2) be given by T (=t1 + t2) and value V1 at beginning of T and V2 at the end of t1 and V3 at the end of t2. ie. T = k/(V1 -V3), ie T.V = k, (t1 + t2).(V1-V3)= k.
V1 - V2 is the loss of value on the asembly line and V2 - V3 is the loss of value on the shelf. (V1 - V2) > (V2 - V3)
If the time the product remains on the shelf (t2) is greater than the time it remains being differentiated on the assembly line (t1), the loss in value (V1 - V2) is less than (V2 - V3).
Sunday, July 29, 2007
Globalization and Retailing..
Managing Globalization - in retailing ....
Globalization is a major issue being talked about everywhere..
I have always had a positive feeling about globalization. It is sure to bring benefits to the country and it's billion plus population. See how the new software companies have grown. Were it not for globalization, would Infosys, Wipro, TCS and Satyam have become the global names and brands they are today ? Would so many Indians be working on site in foreign lands and earning hefty salaries and sending an equal amount of money homeward, home remittances. Would so many of our youngsters have got jobs with hefty salaries just stepping out of their educational institutes ?
Would the infrastructure field have grown this big ? Would the railways have been able to give so much of profits ? Would the big names in Industry, Tata Steel, Bajaj, Mahindra etc been able to realise their potential but for the competition which was available in the domestic market because of the arrival of the foreign brands into India ? Would Indian banks have become so customer friendly and profitable had it not been for the competition by foreign banks ? Our insurance industry, educational system, health care and what not ?
One area which still baffles me is the area of retailing which is a cause for serious concern. Big names like Walmart, Tesco, Metro are entering India and how will their entry affect the small store owner, the dookanwala round the corner ?
In major cities we are seeing the booming of not only superstores, but hyper stores and malls. A customer who enters this place can have a complete shopping experience, right from buying vegetables, sweets, bakery items, the weekly grocery and fish and meat to a complete haircut, visit to the beauty saloon, shopping for clothes and paying the monthly electricity, telephone bills etc...
How will the small retailer survive in the onslaught of the major players who have very effective networks and supply chains delivering terrific value through their networks. Are these vendors to perish or join hands with the big players or turn to some other professions ?? (If you can't beat 'em, join 'em.)
The future is very dim for these people.
george..
Globalization is a major issue being talked about everywhere..
I have always had a positive feeling about globalization. It is sure to bring benefits to the country and it's billion plus population. See how the new software companies have grown. Were it not for globalization, would Infosys, Wipro, TCS and Satyam have become the global names and brands they are today ? Would so many Indians be working on site in foreign lands and earning hefty salaries and sending an equal amount of money homeward, home remittances. Would so many of our youngsters have got jobs with hefty salaries just stepping out of their educational institutes ?
Would the infrastructure field have grown this big ? Would the railways have been able to give so much of profits ? Would the big names in Industry, Tata Steel, Bajaj, Mahindra etc been able to realise their potential but for the competition which was available in the domestic market because of the arrival of the foreign brands into India ? Would Indian banks have become so customer friendly and profitable had it not been for the competition by foreign banks ? Our insurance industry, educational system, health care and what not ?
One area which still baffles me is the area of retailing which is a cause for serious concern. Big names like Walmart, Tesco, Metro are entering India and how will their entry affect the small store owner, the dookanwala round the corner ?
In major cities we are seeing the booming of not only superstores, but hyper stores and malls. A customer who enters this place can have a complete shopping experience, right from buying vegetables, sweets, bakery items, the weekly grocery and fish and meat to a complete haircut, visit to the beauty saloon, shopping for clothes and paying the monthly electricity, telephone bills etc...
How will the small retailer survive in the onslaught of the major players who have very effective networks and supply chains delivering terrific value through their networks. Are these vendors to perish or join hands with the big players or turn to some other professions ?? (If you can't beat 'em, join 'em.)
The future is very dim for these people.
george..
Big Retailing - Opportunities and threats .
Big Retailing - opportunities and threats ?? Indian context.
Retailing is a great business opportunity. For centuries we have had small businessmen selling their wares and provisions in villages, towns and cities and making a living. There are millions of them across the country. The breadwinner of these million households work on sub optimal efficiencies to manage the expenses of households and lead a moderately decent life. This disaggregation often necessitated by distances and times is blessing factor for majority of Indians.
The big time retailers like Walmart, Tesco and so on, work on aggregating the geographically dispersed entities and provide economies of scale in purchase, transportation, storage and sale. Here is now they work.
Procurement : The big retailers are able to procure from cheap vendors in different parts of the country or for global sourcing vendors, from different countries leveraging on the cheap labour and availability of natural resources.
Transportation : They transport in containers and use multi-modal transport, plan for the most efficient mode of transport and thus leverage on the availability of cheap bulk transportation modes.
Storage : Planning for centralized storage at critical and central locations, can help save costs of spreaded warehousing, security, inventory in these warehouses, though finally in case of damage, the extent of damages is more.
Sale : Having limited number of outlets offering good quality goods, at lower prices offsets the problems related to the geographic spread of the stores and the related travel. The retailer shelf is the final point of access for the end customer, the performance metric of fill rate is paramount over the geographical distance travelled to reach this retail outlet.
Being big players, Walmart can arm twist their small time vendors into agreeing to lower prices for products. On the vendor's part, he is assured of volumes and less marketing effort and may eventually give in to the big retailer, even if it means lower margins. Vendors with excess capacity usually agree to this setup easier as it also assures them of optimal utilization of their capacities. Vendors planning to hit it big, will accept these conditions as they are assured of steady markets and growth of the industry, even though it means less returns over some extended period of time.
The opportunities big retailing holds in the country is terrific. We are a country of 1.2 billion people and about half of them are in the major villages, towns and cities. The logistics advantages associated with these big retailers serving these urban customers translates into quick and large returns by way of profits and lower costs.
When the highly efficient big retailers establish themselves in the market, the conventional less efficient small players are wiped out of the market. These marginalised, dispossessed sections of the populations have to go through tough times, individually and for their families. But the flip side of this dispossession is the opening up of opportunities to set up service centres / providing small logistics supporting facilities etc to the major players and thus helping in the overall efficient management of the retailing sector.
The threats associated with the big retailers is the wiping out of conventional and ancestral occupations and acceptance of novel and often unheard methods of livelihood. Like a farmer moving out from farming to providing logistics support by way of transporting goods, food grains etc, to helping the vertical integration of the big retailer by going back to the farm and growing the produce and be assured of greater returns than what was being earlier offered to farmers by the middle men. Eventhough this may not be a great threat altogether, the fear of change, for whomever it is, either the big retailer or the small vendor, is painful.
After our study here, we arrive at the conclusion that opportunities are greater than the threats associated with the entry of big retailers into the Indian markets. It can otherwise be summarised as the benefits of aggregation over disaggregation, the benefits of centralised operations over decentralised operations, the benefits of centralised logistics over decentralised logistics.
Under the watchful eye of the customers and the government regulating these players in issues of labour employment, remuneration, fair prices to the producers and fairness in dealings, the entry of big retailers can be made beneficial for the whole economy.
george..
Retailing is a great business opportunity. For centuries we have had small businessmen selling their wares and provisions in villages, towns and cities and making a living. There are millions of them across the country. The breadwinner of these million households work on sub optimal efficiencies to manage the expenses of households and lead a moderately decent life. This disaggregation often necessitated by distances and times is blessing factor for majority of Indians.
The big time retailers like Walmart, Tesco and so on, work on aggregating the geographically dispersed entities and provide economies of scale in purchase, transportation, storage and sale. Here is now they work.
Procurement : The big retailers are able to procure from cheap vendors in different parts of the country or for global sourcing vendors, from different countries leveraging on the cheap labour and availability of natural resources.
Transportation : They transport in containers and use multi-modal transport, plan for the most efficient mode of transport and thus leverage on the availability of cheap bulk transportation modes.
Storage : Planning for centralized storage at critical and central locations, can help save costs of spreaded warehousing, security, inventory in these warehouses, though finally in case of damage, the extent of damages is more.
Sale : Having limited number of outlets offering good quality goods, at lower prices offsets the problems related to the geographic spread of the stores and the related travel. The retailer shelf is the final point of access for the end customer, the performance metric of fill rate is paramount over the geographical distance travelled to reach this retail outlet.
Being big players, Walmart can arm twist their small time vendors into agreeing to lower prices for products. On the vendor's part, he is assured of volumes and less marketing effort and may eventually give in to the big retailer, even if it means lower margins. Vendors with excess capacity usually agree to this setup easier as it also assures them of optimal utilization of their capacities. Vendors planning to hit it big, will accept these conditions as they are assured of steady markets and growth of the industry, even though it means less returns over some extended period of time.
The opportunities big retailing holds in the country is terrific. We are a country of 1.2 billion people and about half of them are in the major villages, towns and cities. The logistics advantages associated with these big retailers serving these urban customers translates into quick and large returns by way of profits and lower costs.
When the highly efficient big retailers establish themselves in the market, the conventional less efficient small players are wiped out of the market. These marginalised, dispossessed sections of the populations have to go through tough times, individually and for their families. But the flip side of this dispossession is the opening up of opportunities to set up service centres / providing small logistics supporting facilities etc to the major players and thus helping in the overall efficient management of the retailing sector.
The threats associated with the big retailers is the wiping out of conventional and ancestral occupations and acceptance of novel and often unheard methods of livelihood. Like a farmer moving out from farming to providing logistics support by way of transporting goods, food grains etc, to helping the vertical integration of the big retailer by going back to the farm and growing the produce and be assured of greater returns than what was being earlier offered to farmers by the middle men. Eventhough this may not be a great threat altogether, the fear of change, for whomever it is, either the big retailer or the small vendor, is painful.
After our study here, we arrive at the conclusion that opportunities are greater than the threats associated with the entry of big retailers into the Indian markets. It can otherwise be summarised as the benefits of aggregation over disaggregation, the benefits of centralised operations over decentralised operations, the benefits of centralised logistics over decentralised logistics.
Under the watchful eye of the customers and the government regulating these players in issues of labour employment, remuneration, fair prices to the producers and fairness in dealings, the entry of big retailers can be made beneficial for the whole economy.
george..
Subscribe to:
Posts (Atom)