Walmart: Inventory Management

UPDATED AUG 16, 2015 ROBERTA GREENSPAN

Cases of beer at a Walmart store in Kissimmee, Florida. Walmart’s inventory

management involves different types and roles of inventory to support the company’s
financial performance and address the bullwhip effect by using inventory
performance measures. (Photo: Public Domain)
Walmart’s inventory management is one of the biggest contributors to the success
of the company. Considering the mammoth size of the firm, effective and efficient
inventory management is of critical importance. Walmart is known for cutting-edge
technological applications for its inventory management aspect. The company has
perfected the art of innovating its inventory management methods and strategies.
Thus, Walmart is an example of the benefits of advanced technology and innovation
in optimizing inventory management performance. While there are a variety of other
factors contributing to the success of this business, advanced inventory
management is at the core of Walmart’s leadership in the retail industry.

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

Walmart’s Vendor-Managed Inventory Model

Walmart’s success in managing its inventory is partly due to the effective

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

Walmart’s vendor-managed inventory has the benefit of minimizing delays in the

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

Types and Roles of Inventory at Walmart

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

1. Finished Goods Inventory

2. Transit Inventory
3. Buffer Inventory
4. Anticipation Inventory

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

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

Walmart uses different methods to manage its inventory. Just-in-time inventory is

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

The main benefit of cross-docking at Walmart’s warehouses is the reduced inventory

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

Walmart’s Measures of Inventory Performance

Walmart uses numerous variables as measures of inventory performance. However,

the following measures are the most significant:

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

Managing Inventory across the Supply Chain

ABC Analysis. The Category A items in Walmart’s inventory include the goods sold
at its stores and operations equipment, such as information systems for supply chain
management and inventory management. Items in this category are regularly
monitored and recorded. The Category B items in Walmart’s inventory are the other
supplies or materials used for operations, such as maintenance equipment and office
furniture. These items have moderate monitoring, and recording accuracy is
moderate. Category Cinvolves the least monitored and recorded inventory items,
such as janitorial supplies and office supplies like paper. This category has the least
impact on Walmart’s daily operations.

Inventory Information Systems. Walmart is known for its advanced information

systems. These information systems cover every area of the business. In inventory
management, Walmart uses an inventory system that allows suppliers to access
data on the inventory levels of their products. This system supports the company’s
vendor-managed inventory model.

Bullwhip Effect in Walmart’s Supply Chain. The bullwhip effect is the propagation
of error in the form of inadequacy or excesses in the supply chain. A small error in
one part of Walmart’s supply chain could lead to bigger errors across the supply
chain. The company minimizes the bullwhip effect in its supply chain through the
vendor-managed inventory model. Vendor-managed inventory allows suppliers to
directly access Walmart’s inventory data. In this way, Walmart’s personnel have
minimal contribution to possible errors in managing the movement of goods from the
suppliers to the company’s stores.

Financial Impact of Walmart’s Inventory Management

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

References

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 Brea-Solis, H., Casadesus-Masanell, R., & Grifell-Tatje, E. (2012). Business
Model Evaluation: Quantifying Walmart’s Sources of Advantage. Harvard
Business School.
 Dedeke, A., & Watson, N. (2008). Exploring Inventory Trends in Six U.S. Retail
Segments. Harvard Business School.
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 Wal-Mart Stores, Inc. (2015). Walmart’s Official E-commerce Website.