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Traditionally, most people believe that Wal-Mart has a significant cost advantage over its competitors by using aggressive bargaining tactics to force its suppliers to provide low price, by developing its own private brand, by recruiting workers from low-wage countries, and by banning establishing trade union. Actually, cost leadership of Wal-Mart has been largely dependent on its deployment of advanced information technology and excellent supply chain management system. As more and more retailers has been aware of the danger of out of stock, applying sophisticated information technologies and supply chain management system in reducing out of stock and responding to consumers’ needs quickly has been the common and ultimate objective of any retailer. The presentation will prove that Wal-Mart has always led the way in the deployment of information technology and reduced out of stock successfully by exploring and studying the out of stock business case for Radio Frequency Identification (RFID) at Wal-Mart. Firstly, the presentation will start with the introduction of RFID technology as well as its unique advantages relative to traditional barcodes. After explaining the dangers and causes of out of stock, the presentation will make a brief review of the role of RFID in supply chain management of Wal-Mart. Finally, the presentation will design a study to evaluate the impact of RFID technology on out of stock. For 29 weeks in 2005, out of stocks were examined daily in 24 Wal-Mart stores (12 RFID-enabled stores, 12 control stores) representing all store formats and 4554 products. The results of that study are presented in this presentation. They show that RFID makes a significant difference: within the test stores, out of stocks were reduced by 21% more than in the control stores, and in the test stores RFID-tagged items experienced fewer stock outs than non-tagged items.
1.0 RFID & Wal-Mart
Radio-frequency identification (RFID) is a technology that uses radio waves to transfer data from an electronic tag, called RFID tag or label, attached to an object, through a reader for the purpose of identifying and tracking the object.
In January 2005, Wal-Mart’s top 100 suppliers began using RFID tags on pallets and cases shipped to stores in the Dallas and Texas region. Since then, the RFID industry blossomed. The department of defense followed Wal-Mart’s lead and mandated that its suppliers use RFID. Target, Albertson’s, and Best Buy also followed suit. Initial efforts focused on the largest suppliers in the retail supply chain but have now spread to include small retail suppliers as Wal-Mart and other retailers who continue to deploy RFID technology.
2.0 The advantages of RFID relative to barcodes
RFID can be used in many applications. A tag can be affixed to any object and used to track and manage inventory, assets, people, etc. For example, it can be affixed to cars, computer equipment, books, mobile phones, etc.
RFID is a superior and more efficient way of identifying objects than manual system or use of bar code systems that have been in use since the 1970s. Furthermore, passive RFID tags (those without a battery) can be read from several meters away if passed within close enough proximity to an RFID reader. It is not necessary to “show” the tag to the reader device, as with a bar code. In other words it does not require line of sight to “see” an RFID tag, the tag can be read inside a case, carton, box or other container, and unlike barcodes RFID tags can be read hundreds at a time. Bar codes can only be read one at a time. In addition, RFID tags can store more data. What’s more important, RFID tags have the potential to benefit retailers, consumers, and suppliers by reducing out of stock.
3.0 The negative effects of out of stock
Empty shelves are the disaster of retailers’ lives and its result is lost sales and unhappy consumers. The estimated potential lost sales are about 3.4% for retailers and 2.6% for suppliers. Specifically, a $1 billion supplier may lose as much as $26 million in annual sales and $ 100 billion retailers may lose $3.4 billion in annual sales respectively because of out of stock.
When a product is out of stock, a consumer generally
- Decides the product is not needed (does not purchase)
- Decides the product is not needed directly (delays the purchase)
- Buy the same brand, but a different size, style, flavor, color, etc. ( same brand substitute)
- Buy the same product but a different brand (different brand substitute)
- Goes to another store to buy desired products
Obviously, it is the most probably for consumers to buy at another store when facing out of stock.
4.0 The causes of out of stock
In general, the causes of out of stocks fall into six categories: (1) store forecasting, (2) store ordering, (3) shelf replenishment (item in the store but not on the shelf), (4) distribution center issues, (5) retail headquarters or manufacturer issues, (6) other. Wal-Mart’s current use of RFID addresses one of the root causes of out of stocks: shelf replenishment issues and store ordering issues.
5.0 Applying RFID in the retail supply chain
When suppliers pack a batch of goods for shipment, a RFID tag which is connected with database of suppliers is attached to the goods. Suppliers can link their own database with that of Wal-Mart through Electronic Data Interchange (EDI) system and share basic information of the goods such as order quantities, prices, shipping, timing and place of origin with Wal-Mart. As RFID-tagged cases moves from suppliers to distribution centers of Wal-Mart and then on to Wal-Mart stores, they pass through several RFID read fields. The RFID readers capture and record the cases’ tag data. On the one hand, as RFID-tagged cases are delivered to the distribution center, the cases firstly must move through the receiving door which contains RFID readers. After that, RFID-tagged cases are put on the conveyor system, the cases are sorted and shipped out of the shipping door which contains RFID readers similar to the receiving door.
In retail stores themselves, RFID readers are confined to the backroom area, no readers are presently on the sales floor. The receiving doors have RFID readers similar to those at the distribution center and capture data from the RFID-tagged cases as they are unloaded from truck. Eventually, all products which are contained in the RFID-tagged cases are moved to the sales floor and the cases are placed into the box crusher for disposal.
As a result, Wal-Mart has a comprehensive understanding of what cases are delivered to a store, stocked in the backroom, or taken to the sales floor. Combined with point of sale in the sales floor, RFID enables Wal-Mart to keep track of inventory level—both on the shelf and in the backroom. For example, when a RFID reader in the sales floor scans a bottle of beer with a RFID chip which is bought by a shopper, not only does the price add to the consumers’ bills, the stock record for beer is reduced by one. Consequently, when particular goods are out of stock and are not available on the shelf, computers of Wal-Mart stores which are linked to database of suppliers through EDI system will place an order with suppliers automatically. After an order which specifies what products Wal-Mart wants, when the products are expected to be delivered to distribution centers and how the payment are made is confirmed by suppliers, suppliers will organize production right, and then, supplies will forward the products to Wal-Mart distribution centers which is closed to the stores which are out of stock. In this way, RFID helps Wal-Mart to address one of the main causes of out of stock—store ordering and shelf replenishment.
To determine the effect of RFID in the test stores, weekly out-of-stock averages were calculated for treatment 1 (no RFID), treatment 2 (partial RFID), and treatment 3 (full RFID). Test stores (across all store formats) had an average of 474 out of stocks per week in the eight weeks before the RFID test began, 399 for the partial RFID period, and 352 for the full RFID period. Thus out of stocks reduced by 16% from no RFID to partial RFID, by 12% from partial to full RFID, and by 26% from no RFID to full RFID.
Another way to analyze the data is by each week during the study, to identify trends. The average out of stocks for the 4,554 products within 29 weeks during the study for both the test and control stores is shown in Figure. As shown by the trend lines, out of stocks in both the test and control stores consistently decreased during the study period.15 However, the rate of decrease for the test stores was five times more than that for the control stores (5.7 items per week, compared to 1.1 items per week).
Another way of assessing the impact of RFID is to examine out of stocks in tagged and non-tagged items in the test stores. As Figure shows, out of stocks for the tagged items fell by about 5.1 units per week (which is consistent with the reduction shown in Figure) whereas the non-tagged items declined by only 1.2% units per week.
In all, RFID has played a leading role in reducing out of stock at Wal-Mart. Wal-Mart can replenish the stock twice a week compared with other competitors who replenish the stock once in a fortnight. RFID also provide another significant benefit. The amount of time saved in reducing the manual scanning of empty shelves can be used to bring more products from the backroom to the sales floor or to spend more time on helping consumers in the sales floor. Meanwhile, RFID has helped Wal-Mart employees to locate products. In essence, along with the deployment of RFID, Wal-Mart will modify manual, reactive operation model in the supply chain to make it proactive and automatic. In addition, RFID made a positive effect on reducing inventory holding costs and responding to consumers’ needs quickly.