Having a strong supply chain is important for any retail outlet, but the retail giant, Walmart, has mastered the game and hasn’t turned back.

When you think about any major retail outlet, having a superior supply chain system is what makes the world go round for them. Think about it, if you don’t have products available, customers will just stop coming to your store.

If you are able to keep the most popular products in stock and have the best available product, customers will flock to your store and even be willing to wait in line for a product. Some companies have fully mastered an integrated supply chain system, while others still struggle and are constantly grinding to keep products in stock.

One company that has completely figured out the game is Walmart. It should be no surprise as they are the world’s largest retailer. Even with the emergence of the global online giant, Amazon, Walmart is still double in size.

Walmart was founded in 1950 when Sam Walton purchased his first store in Bentonville, Arkansas. The store was known as “Walton’s 5 & 10” and was the first of now over 11,000 Walmart locations in 27 different countries. One of the more interesting facts about Walmart is that it saw most of its growth through new construction, and not through acquisitions.

The company did expand again in 1983 when the Sam’s Club brand was created, which is a warehouse club similar to Costco and BJ’s Wholesale. Walmart has become one of the biggest household names around and has become famous for its implementation of vendor management inventory (VMI), a supply chain strategy that provides them the best available pricing, and keeps its shelves stocked for customers.

What is Vendor Management Inventory?

While some retail outlets have entire departments to manage the buying of products in their locations, VMI is a process that puts that inventory control in charge of the supplier. The business owner provides an inventory count to each of their suppliers, and it’s then in their hands to make sure the shelves are stocked with goods.

This supply chain strategy can often be coupled with a logistics partner to make sure a store can go through seasonality without product runouts. A VMI system limited the risk of a retail outlet running out of stock unintentionally.

This type of strategy requires a high amount of technology that is able to feed suppliers, but with reduced costs at the store and inventory level, it is a cost you can quickly hurdle. Walmart (and others) have completely mastered the VMI system and continue to build an empire off lower purchase prices, and low inventory.

Benefits of Vendor Management Inventory for Walmart

When studying how Walmart utilizes a VMI supply chain, the benefits jump off the charts. Keep reading for a few of the big ones.

Lower Inventory Levels: By utilizing VMI, Walmart can significantly reduce its inventory levels at each of its stores. If you think about it, that is typically a retail outlet’s biggest expense, keeping plenty in stock.

By cutting out distributors and working directly with the suppliers, Walmart has put itself in the driver’s seat. Not only do they cut out a middleman from the pricing perspective, but they have also put the full burden of keeping the shelves stocked on the supplier.

Think about it this way: if Walmart runs out of Kraft Mozzarella cheese, a customer isn’t going to go to another store to get the brand they want, Kraft is just going to miss out on that sale at Walmart. And while Walmart is going to hold suppliers accountable for keeping their shelves stocked, they know they are missing out on sales because they are such a retail giant.

The Pepsi guy that runs a Walmart out of product on the fourth of July is getting in way more trouble from his boss for lost sales than the Walmart manager is getting yelled at by customers for being out of Pepsi. Customers will just buy Coke. That example may be a bit extreme as there are some extremely loyal pop drinkers, but I think you get what I’m trying to say.

But, by sending inventory levels to all their suppliers and giving them details on any type of sale or rebate that may be coming up, not only is Walmart able to limit their inventory, but suppliers are also able to have a good feel for a demand spike to make sure the retail outlet still has plenty available to consumers.

Reduced Costs: If you ask any business owner what their number one goal is, I can just about guarantee you their answer will involve finding a way to reduce costs. It’s simple math; if you can keep retail prices at the same level and reduce your costs, your margin goes up. At the end of the day, the margin is king for any type of retail outlet.

So how does VMI allow Walmart to reduce its costs? It’s simple, fewer people (Walmart employees) to manage inventory, and less product sitting on shelves equals less cost and more profit per sale.

It’s pretty obvious how having fewer people is a huge cost advantage. Less salary, benefits, and any other additional expense that comes with an employee are reduced. It is worth mentioning that Walmart uses a significant amount of technology that isn’t cheap to be so efficient. One could argue that a company of their size would need that type of sophistication no matter what type of supply management system they utilized.

And while it may sound strange that “less inventory” can save so much money, just think of it this way… Each store has at least $5 million of inventory (kind of a shot in the dark number, but the store has over 100,000 items). If you reduce all 11,000 stores by 10 percent, that is a savings of $5.5 billion. The interest alone on that money could be huge.

Ratable Supply: Perhaps the biggest perk of using VMI for Walmart (in the eyes of the consumer) is their strong supply status. I’ll be the first to admit that I don’t do a ton of grocery shopping at Walmart, but recently I have done more and more. Do you know why? It seems like they typically have everything I need.

Right now, with the supply chain crisis that is slowly getting better, stores are continuing to have issues getting products in stock for sale. But who do you think a direct supplier is going to take care of first? Someone who is reselling to an end-user with a low margin? Or a retail giant like Walmart who is undoubtedly everyone’s biggest customer when it comes to everyday items?

So not only does Walmart take advantage of its size and buying power for pricing, but they also continue to utilize state-of-the-art technology to give its suppliers the best chance of being successful. One system integration they utilize better than anyone in the world is a term Walmart calls “Cross-Docking Inventory”.

It will come as no surprise that most retail outlets can’t store all their inventory at their store locations. So, they have distribution centers where suppliers will deliver products. Then, Walmart trucks will take those specific products to the store level based on what each store needs.

As we know, Walmart doesn’t handle what products go on to a certain truck destined for a particular store; the supplier manages that inventory. In order to reduce inventory space and costs, Walmart uses cross-docking, which is when a supplier unloads their truck directly into a Walmart truck to be delivered.

Eliminating the need for in-between storage location not only eliminates a huge chunk of costs but also removes a lot of risk for damage. This holds even more true for perishable goods that have an expiration date.

The Downside of Vendor Management Inventory for Walmart

While Walmart has built a dynasty utilizing VMI, there are also some downsides to it. There are certainly some kinks for everyone to work through, and it hasn’t always been butterflies and rainbows for the company.

Sharing of Data: Some companies won’t mind this but giving so much access to all of your data is a risk. You are basically giving all of your sales data to another company.

I work at a large company and I don’t even have access to every single file that exists. Can you imagine giving out sales data to a third party? Walmart has been doing this long enough and is big enough not to care (as much). Being a publicly traded company, they have to share sales data anyway, but I’m sure there are situations where this supply chain strategy has backfired.

Lack of Control: On one side, we made the argument that by Walmart using VMI, they had less manpower and that was a positive when it came to cutting costs. But at the same time, it can also be a negative. You are giving all control of your inventory to a third party. If things do ever get out of whack, you don’t necessarily have any control to get things corrected.

Saying that Walmart has never had an issue with a supplier would be false, but I would imagine they face fewer issues than what a smaller company would. Remember, if you run out of a certain product, you’re just costing yourself sales. Walmart will certainly keep you in line to meet your contractual duties, but people aren’t going to stop shopping at their stores.

Struggle to Change: Perhaps the biggest hurdle in a VMI supply chain system is the inability to change. While that is great for the supplier, it can be difficult to manage for the buyer. It’s so easy to get used to how one company performs, that finding someone new can be difficult. It’s never bad to keep doing business with the same people, but someone like Walmart is also giving up leverage if a supplier knows they can’t leave them.

Walmart is certainly big and powerful enough to somewhat hurdle this con, but it is something they must be mindful of. Operating a VMI system of this scale requires a large amount of technology and trust. Without both items, the plan just doesn’t work.

The fact that Walmart is on the cutting edge when it comes to supply chains shouldn’t be shocking as they always appear to be the leader in technology. In fact, Walmart was the first retail outlet to utilize computers in the mid-1970s, they were one of the first to begin using barcodes in the early 80s, and before 1990, they had their own satellite for data communication for inventory purposes.

Then in the early 1990s, the full switch to vendor management inventory was in effect. They deployed their first supply chain software known as Retail Link and began monitoring inventory and sales electronically with suppliers in charge of making sure the inventory is available when needed.

Not only was Walmart saving money with smaller inventory levels and less staffing, but it also reported sales growth of more than $8 million in the first six months of its new program. Now every single Walmart is on the program and RFID technology has replaced the barcode.

Summary

For Walmart, the VMI system is perfect for them. They are large enough to hold the suppliers accountable and can pass their savings directly back to their customer base. So not only are they able to save on the back-office side, but they are also able to negotiate the most competitive prices in the industry by cutting out the middleman.

However, we must not forget about the constant funding that Walmart continues to drop on their point-of-sale technology. They have more than proven that their technology cost hurdles the profits gained from VMI, but they continue to lead the industry with continuous upgrades to their systems.

VMI is not for everyone. Small businesses with limited buying power and the desire to change out products would struggle. But someone with the buying power and retail size of Walmart can thrive if utilized properly.