Wal-Mart – The OM Blog by Heizer, Render, & Munson

OM in the News: Delivery Drones are Arriving, at Last

“After nearly a decade of largely unfulfilled hype about flying robots dropping orders at your doorstep,” writes The Wall Street Journal (April 2-3, 2022), “several companies have started commercial operations in the U.S. involving dozens or hundreds of deliveries a day at each location.” The companies are vying to be Americans’ choice when they want a bottle of Advil, a takeout meal, or the next iPhone delivered in under 30 minutes—once federal regulators enable broader rollouts.

With a capacity of up to 6 pounds, Flytrex’s drones can ferry 33 chicken wings, plus sauce and fries

Zipline recently started working on deliveries with Walmart at an Arkansas location. Flytrex, an Israeli startup focused on food delivery in the U.S. suburbs, just announced a new delivery station in Texas after 2 years of testing. Wing, a unit of Google, has rapidly increased its deliveries in Virginia as a result of the pandemic. While still small-scale, the operations mean that in a handful of locations, regular people now can try these services for themselves.

Advocates for drone delivery say the technology could reduce emissions, the cost per trip, and traffic on roads, while also making sub-half-hour delivery—some companies are claiming in as little as 5 minutes—the new norm in the race toward e-commerce instant gratification.

Zipline has logged 20 million miles of flights across 275,000 commercial deliveries, mostly of blood, vaccines and medical products in Rwanda and Ghana. Last year, it built a launch platform attached to the back of a Walmart in Arkansas, near the firm’s HQ. That facility can serve any home in a 50-mile radius. Zipline operates 11-foot wide, fixed-wing drones that launch from a steel rail by an electric motor that accelerates the 44-pound aircraft to 60 miles an hour in one second. Flying autonomously, the drones drop orders at their assigned addresses in cardboard boxes suspended beneath paper parachutes. Upon return to the launch station, they maneuver so that a hook on their tails catches a suspended line. Zipline’s drones can hit a target as small as two parking spaces, with a package up to 4 pounds.

Flytrex has been making deliveries from a Walmart store in North Carolina, where it has delivered more than 18,000 items and can serve up to 10,000 homes. Its new delivery station near Fort Worth offers delivery for the Chili’s and Maggiano’s Little Italy restaurant chains.

Classroom discussion questions:

Why has it taken so long for drones to be adopted?
Why are drones an important tool for logistics managers?

OM in the News: Retailers , Artificial Intelligence, and No Cashiers

Sam’s Club’s AI-powered cashierless shopping.

U.S. retailers large and small are pressing ahead with testing the use of AI to track what products shoppers pick up and to automatically bill their accounts when they walk out the door, eliminating the need for checkout lines. The concept got a push from Amazon Go stores, which Amazon launched in early 2018; there are now 15 stores, A new study found that 28% of retailers are testing cashierless systems

Sam’s Club is offering AI-powered cashierless shopping this month at a 32,000-square-foot store in Dallas, reports The Wall Street Journal (Aug. 13, 2019). Currently, customers shop at the store by scanning barcodes on the products, an older cashierless-checkout technology. With the AI system is in place, customers use their smartphone cameras to scan the product itself. The cloud-based system, which uses computer vision and machine learning, recognizes products by matching them to a database of stored images. This is different from Amazon Go, where cameras installed in the stores do the work of scanning the products.

Not every type of store is suited for cashierless technology. Walmart tried out a cashierless system based on scanning barcodes for about six months in more than 100 stores but discontinued it in 2018. The technology proved impractical for pricing produce and other items that had to be taken to a cashier to be weighed, causing delays. Theft is also a concern. Manual scanning operates on an honor system and some customers don’t scan every item, often requiring stores to validate purchases.

Still, the potential benefits include speed and convenience. Even small companies are testing the waters.

Classroom discussion questions:

Why is this an important OM issue?
How does this AI approach differ from self-checkout?

OM in the News: Amazon’s Package Streamlining

Eight years ago, we reviewed an excellent book called Force of Nature: The Unlikely Story of Wal-Mart’s Green Revolution. At that time Wal-Mart, which was long the target of environmentalists, created nothing less than a green revolution. One of its changes was forcing suppliers to reduce packaging sizes, which ended up saving $3.4 billion a year while reducing trash.

Now, in a similar vein, the new giant on the block, Amazon, is pressuring brands to make their packaging more efficient, prompting vendors to make costly changes to their businesses or face fines. Amazon has told companies they must make packaging for thousands of larger products more compact and easier to open. Eventually, Amazon wants every product it ships to meet similar standards. The firm said the requirements will make packages more environmentally friendly.

The new packaging requirements are the latest example of Amazon’s power to get vendors to change the way they do business, writes The Wall Street Journal (July 30, 2019) . Manufacturers of items from soup to garden rakes say they have to sell through Amazon to reach more customers. Philips Norelco OneBlade said it cut the components in its razor packaging to 9 from 13 and reduced the volume of packaging by 80% to meet the new standard. Hill’s Pet Nutrition said it decreased the packaging volume of its Science Diet premium dog food by 34% and the amount of wasted space, or air shipped, by 82%. The maker of Rubbermaid FreshWorks said it cut the components used to ship its containers to 2 from 7.

Amazon’s expanding e-commerce footprint has been consuming more cardboard and plastic packaging. Now, it is trying to address consumer calls to cut back on waste while reducing excess weight and volume to generate savings on shipping as well.

Classroom discussion questions:

What are the similarities between Wal-Mart and Amazon in this regard? The differences?
Why is this an important OM issue?

OM in the News: Wal-Mart Cracks the Code for Online Groceries in China

An employee fills electronic orders for the 1-hour delivery platform at a Wal-Mart store in Shanghai

Amazon may have sent a chill through the U.S. supermarket business with its purchase of Whole Foods. But grocers also had better keep an eye on the world’s largest brick-and-mortar retailer—Wal-Mart Stores—for some lessons on the future of online grocery shopping. Wal-Mart has already developed a big online grocery delivery business in China, capable of transporting fresh produce from its shelves to homes within an hour.

To accomplish that feat, it’s created a network of chilled mini-warehouses, used A.I. to tailor inventories, and employed an army of crowdsourced deliverymen to rush meat, fruits, and vegetables to customers’ doorsteps. That could provide it with insight and experience to keep tech upstarts from disrupting it out of one of its core U.S. businesses.

Fresh food is considered the last frontier of Chinese e-commerce. “Wal-Mart’s efforts in China revolve around trying to tap into a smartphone, convenience-craving, population,” writes Businessweek (Dec. 4, 2017).

At the heart of its operation are what it calls “dark stores” that stock 1,500 different products such as bananas, pork ribs, dumplings, and chicken feet. Workers grab printouts of the online orders, zip through the aisles placing items in a bag, and exit the other side, where they hit a button summoning a delivery driver. The drivers are independent contractors with cellphones and scooters. The time from picking up the order printout to hitting that button can’t exceed 10 minutes, or else the 1-hour delivery is in peril.

Shelves are stocked with products based on order patterns for the surrounding area—meaning a store in northern China may have more soup ingredients as winter comes. The company adjusts each store’s online inventory every 4 weeks, and the added information about fresh grocery demand from web orders helps boost the accuracy of Wal-Mart’s product forecasting for offline stores.

Classroom discussion questions:

Is this online operation transferable to the U.S.?
How does this approach differ from typical supermarket shopping?

OM in the News: Grocers Want Inventory to Arrive On-Time

“The country’s biggest grocers are increasingly demanding their suppliers deliver on time, imposing fines for late shipments as they try to keep customers satisfied and better compete with online retailers like Amazon,” reports The Wall Street Journal (Nov.28, 2017). Kroger is fining suppliers $500 for every order that is more than 2 days late to any of its 42 warehouses, and Wal-Mart is charging suppliers monthly fines of 3% for deliveries that don’t arrive exactly on time.

Retailers used to give suppliers more leeway, since any number of factors—bad weather, a surge in demand, technology malfunctions—can foil deliveries. But sales of some $75 billion a year are lost because products are out of stock or unsalable for other reasons.

Wal-Mart has signaled it could do more than levy fines if problems persist. Wal-Mart told suppliers they could also lose shelf space if they don’t solve their delivery issues. Most large suppliers average around 75% of orders on time and complete. An out-of-stock on an important product can lead to thousands of lost consumers in a given day. Packaged-goods companies are straining to keep up with the demands and remain in the good graces of retailers. They need GPS trackers and software to adjust routes in real time. Filling full orders fast is also challenging, since many manufacturers house items all over the country.

Wal-Mart says a more-precise delivery window keeps shelves stocked and the flow of products more predictable, while reducing inventory—all of which are increasingly important to the retailer as it invests heavily to compete online. The change, says Wal-Mart, could create $1 billion in additional sales. Meanwhile, P&G, Wal-Mart’s largest supplier, has spent billions of dollars in recent years overhauling its supply chain, in part to meet retailers’ more-precise shipping windows and boost its ability to ship online orders directly to shoppers.

Classroom discussion questions:

Why is it important for orders to arrive full and on-time?
Is better supply chain management software the solution?

Video Tip: Walmart Robots Stroll Down the Aisles Taking Inventory

A robot made by Bossa Nova Robotics checks inventory in a Wal-Mart aisle.

Robots aren’t just for sale in the toy aisle, they’re gliding down them. “Bossa Nova Robotics is sending its shelf-scanning robots out to 50 Walmart stores in a real-world use of technology to help one of the planet’s largest retailers keep its aisles stocked and ready for customers,” writes the Pittsburgh Post-Gazette (Nov. 9, 2017).

The Bossa Nova uses sensors similar to those on self-driving cars to navigate — taking photos of shelves, as well as recording data about products’ prices, locations and if they’re out of stock. The 2 foot tall white robot simply scans, passes information to the cloud, communicates that data to Walmart’s back-end system and relays that knowledge to store associates.

With e-commerce sales growing exponentially each year, brick-and-mortar chains need to operate near-perfectly to retain customers. A lost sale in a physical retail store has always been an inefficiency, but now the stakes are higher. “The information the robot is capturing is whether there’s an out-of-stock, because that is the biggest frustration of shoppers,” said a Bossa Nova exec. “If they don’t have it, you’re going home without it — or maybe you go to a different store.”

The Bossa Nova Robot employs a number of sensors, including light detection and ranging (lidar) technology, a critical element in self-driving cars. Gliding slowly down a store aisle — at about 0.4 meters per second, or a rather lax walking pace — the robot scans its environment with depth sensors to avoid collisions with shelves, or more importantly, people. As soon as a customer gets close, the robot moves out of the way and shuts off its high beams.

Embedded in the article is a short (1.5 minute video) you may wish to show in class when discussing inventory management in Chapter 12.

OM in the New: Wal-Mart Introduces OTIF Inventory

Packages move along a conveyor belt inside a Wal-Mart fulfillment center.

“Long known for squeezing its vast network of suppliers, Wal-Mart is about to step up the pressure,” reports Businessweek (July 24, 2017). The focus this time is delivery scheduling, and the company’s not messing around. Two days late? That’ll earn you a fine. One day early? That’s a fine, too. Right on-time but goods aren’t packed properly? You guessed it–fined.

The program, labeled On-Time, In-Full, or OTIF, aims to add $1 billion to revenue by improving product availability at stores. It underscores the urgency Wal-Mart feels as it raises wages, cuts prices and confronts a powerhouse rival in Amazon that’s poised to grow with its planned purchase of Whole Foods. Says a retail expert, “They’re trying to squeeze and squeeze and squeeze.’’

The initiative builds on progress Wal-Mart has made in reducing inventory and tidying its 4,700 U.S. stores after the back rooms became so cluttered it often stored surplus products in cargo trailers parked out back. The new rules begin this August, and the company said they will require full-truckload suppliers of fast-turning items — groceries, paper towels — to “deliver what we ordered 100% in full, on the must-arrive-by date 75% of the time.” Items that are late or missing during a one-month period will incur a fine of 3% of their value. Early shipments get dinged, too, because they create overstocks.

By February, 2018, Wal-Mart wants these deliveries to be “OTIF” 95% of the time. Its previous target was 90% hitting a more lenient 4-day window. “Variability is the No. 1 killer of the supply chain,’’ says a senior Wal-Mart exec. While big suppliers should be able to invest in fancy inventory-management systems to get up to speed with the new rules, smaller businesses will feel more pain. Some don’t even know what “OTIF’’ stands for.

Classroom discussion questions:

What are the implications of OTIF to suppliers?
Why is Wal-Mart introducing this inventory strategy?

OM in the News: Retailers Check Out Automation

The Cash360 machine now in the back rooms of most of Wal-Mart’s 4,700 U.S. stores.

Shopping is moving online, hourly wages are rising and retail profits are shrinking—a formula that pressures retailers, ranging from Wal-Mart to Tiffany, to find technology that can do the rote labor of retail workers or replace them altogether. “Many U.S. retail jobs are ripe for automation, with 2/3 at high risk of disappearing by 2030,” reports The Wall Street Journal (July 20, 2017).

Self-checkout lanes can replace cashiers. Autonomous vehicles could handle package delivery or warehouse inventory. Even more complex tasks like suggesting what toy or shirt a shopper might want could be handled by a computer with access to a shopper’s buying history, similar to what already happens online today. “The primary predictor for automation is how routine a task is,” says a Citi researcher. “A big issue is that retail is a sizable percentage of the workforce.”

Nearly 16 million people, or 11% of nonfarm U.S. jobs, are in retail. Now, as stores close, these jobs are disappearing. Since January, the U.S. economy has lost about 71,000 retail jobs. Automation is filtering through many parts of retail. Tiffany is using machines to polish jewelry. Home Depot has self-checkouts in most stores and is testing scanner guns for shoppers buying bulky products like lumber.

Wal-Mart has long squeezed efficiency out of its business. Although it employs 1.5 million people in the U.S., it has around 15% fewer workers per sq. ft. of store than a decade ago. Its U.S. stores now have a Cash360 machine, making thousands of positions obsolete. Employees whose task was to count cash and track the accuracy of the store’s books have been replaced by the hulking gray machine that counts 8 bills per second and 3,000 coins a minute–then digitally deposits the money at the bank.

Classroom discussion questions:
1. What other jobs are likely to be replaced by automation in the coming decade?

2. Why is this an OM issue?

OM in the News: Wal-Mart Decides to Challenge Amazon

Wal-Mart is building a regional delivery network and will also tap carriers to deliver more of its packages.

Wal-Mart is testing a 2-day shipping subscription service and building a regional delivery network, in the boldest attempt yet by a major traditional retailer to compete head-on with Amazon Prime. As part of the project, Wal-Mart will shift more inventory to 8 massive e-commerce warehouses around the U.S., the last of which will be built by year’s end. It is part of a $2 billion investment the company is making in technology and logistics to boost e-commerce sales, reports The Wall Street Journal (May 13, 2016).

The company will also put its major transportation fleet and logistics know-how up against Amazon as it makes a play to meet Amazon on its own turf. Wal-Mart will tap regional carriers to deliver more of its packages. But it will also use its 6,000 tractor-trailers, one of the 5 largest private trucking fleets in the country, along with its 4,600 U.S. stores, to take on what has become one of its biggest rivals.That could make Wal-Mart less reliant on FedEx, which handles the bulk of Wal-Mart’s parcels.Trucking more of its own packages closer to the shipping destinations for what’s known as last-mile delivery would allow the company to save on one of the higher-cost elements of shipping a package across the country.

A large part of Wal-Mart’s success is its ability to move all those products cheaply and efficiently around the country. Since 2014, Wal-Mart’s online sales increased 12% to $13.7 billion. But Amazon still sends out about 7 times the number of packages Wal-Mart does in North America.

Classroom discussion questions:

What OM advantages does Amazon have over Wal-Mart in this battle for e-commerce sales?
What advantages does Wal-Mart have?

OM in the News: When Wal-Mart Closes Shop

Wal-Mart’s presence in Winnsboro, S.C., a town of about 3,500 people, influenced almost every wrinkle of local business since opening in 1998. — Wal-Mart’s presence in Winnsboro, S.C., a town of about 3,500 people, influenced almost every wrinkle of local business since opening.

The arrival of a Wal-Mart Supercenter in small towns throughout the U.S. often drove out smaller stores that couldn’t compete with its selection and pricing, reports The Wall Street Journal (Jan.27, 2016). And it was no different when the giant chain opened in Winnsboro, S.C. in 1998. It was the town’s biggest employer and 2/3 of the town’s sales tax came from Wal-Mart purchases, which allowed residents to avoid paying property tax.

The Winnsboro location is one of 154 U.S. outlets Wal-Mart shut this week, the first time it has closed more than a handful of domestic stores at once. It is also one of 12 Supercenters, the roughly 180,000 square-foot discount outlets that fueled Wal-Mart’s growth for decades, being closed. But when Wal-Mart opened the store in that town, it fell in line with the company’s longtime real estate strategy of opening in rural, often overlooked areas outside of city centers. Winnsboro sits about 30 miles north of Columbia, S.C., the largest city in the state.

“We never planned on actually going into the cities. What we did instead was build our stores in a ring around a city—pretty far out—and wait for the growth to come to us. That strategy worked practically everywhere,” wrote Wal-Mart founder Sam Walton in his 1992 autobiography. But population growth flowed east and west of Columbia, not north to Winnsboro. Locals say they hope Wal-Mart’s exit will leave room for smaller businesses to thrive again. Town officials are already soliciting grocery store companies and encouraging the few remaining downtown businesses to stock a wider variety of products.

Classroom discussion questions:

Evaluate Wal-Mart’s location strategy under Sam Walton.
What were the advantages and disadvantages of a Wal-Mart entering a small town?

OM in the News: Wal-Mart’s Green Revolution

“For a company that has been lambasted for a range of corporate sins, from low wages and deplorable working conditions to accusations of predatory pricing and monopolistic behavior, Wal-Mart’s energy initiative sometimes smells a little like greenwashing,” writes Forbes (Nov. 23, 2015). But Wal-Mart has installed 105 megawatts of solar panels–enough to power about 20,000 houses–on the roofs of 327 stores and distribution centers (about 6% of all its locations). That’s enough to make Wal-Mart the single biggest commercial solar generator in the country. And it intends to double its number of arrays by 2020. It’s all part of a goal that former CEO Lee Scott set in 2005 for Wal-Mart to be powered entirely with renewable energy. (See our 2011 blog regarding the excellent book about Scott: Force of Nature).

Wal-Mart uses an incredible amount of electricity–29,000 gigawatt-hours per year, and its U.S. electric bill is around $1 billion per year. The firm now gets 26% of its worldwide power from green sources, including wind, solar, fuel cells and hydropower. “To make it harder on ourselves,” says Wal-Mart’s energy chief, “everything we do has to make business sense.” If Wal-Mart were worried about making the business case for green energy, it could just follow the lead of other retailers like Kohl and Starbucks, which brag of running their operations 70%-plus carbon-free. But they do so by buying carbon credits or “offsets” to balance out their greenhouse-gas emissions. Instead, Wal-Mart has reduced its energy costs per square foot of retail floor space by 9%.

Wal-Mart gives access to its roof space to SolarCity or other installers, which pay to put up the panels (at a cost of about $1.2 million for the average array). SolarCity then sells the power generated to Wal-Mart under a long-term deal–at a price often cheaper than what the local electric utility would charge. The bad news for Wal-Mart and the entire green energy industry is that the federal green energy tax credit is set to expire in 2017.

Classroom discussion questions:

What is the genesis of Wal-Mart’s green revolution?
Why is sustainability an important operations issue?

OM in the News: Wal-Mart Shrinks Its Inventory

Wal-Mart's CEO states: "We are trying to fit 4 pounds of sugar into a 2 pound bag" — Wal-Mart’s CEO states: “We are trying to fit 4 pounds of sugar into a 2 pound bag”

“The average Wal-Mart supercenter—home to 120,000 products—has about 2,500 fewer items than a year ago,” writes The Wall Street Journal (Oct. 26, 2015). Some of the changes have put Wal-Mart at loggerheads with vendors who worry they will result in tens of millions of dollars in lost sales. The moves are part of a high-stakes pivot to tame the company’s sprawling empire, organize unruly systems for managing inventory and keep stores neat and better stocked—retail basics that Wal-Mart fumbled recently. Wal-Mart is using more and better data to decide which products stay on shelves and where to remove clutter.

Part of the retread involves culling inventory from backrooms, and dropping some products altogether. In a key move that will change the look of the chain’s stores, Wal-Mart is more than doubling the width of aisles—to 10 feet from 4 feet, making it more navigable for multiple carts. The company is making significant changes to how inventory flows through its stores. Employees are starting to restock during the day, when customers are most likely to complain about missing items, rather than late at night.

“It’s the objective of every retailer to grow their inventory slower than sales,” says CEO Greg Foran. “We just carry too much inventory. And so we do have lots of work under way to get that sorted.” Wal-Mart is also experimenting with lowering shelves by about a foot to make it easier for shoppers to see around the store. The subtle change would wipe out hundreds of millions of dollars in annual sales of gum, candy and magazines. Behind the scenes, Wal-Mart is also aggressively pressuring suppliers to spend more money to earn a spot on shelves. Contract renegotiation letters to suppliers are asking many to pay additional fees to store their products in warehouses, as well as give the retailer more time to pay for the goods.

Classroom discussion questions:

What are the changes inventory policies Wal-Mart is pursuing? Why?
What are the layout changes involved?

OM in the News: Wal-Mart Tries to Skill Up

Until recently, very few retailers bothered to train entry-level service workers

Wal-Mart, famous for keeping costs down (including employee-related costs), is testing a new approach: investing in workers through higher wages and training, on the theory that this will pay off all around—for customers, the company and employees. The firm plans to roll out the new training program to all of its 4,500 U.S. stores by early 2016. And by then, Wal-Mart hires will earn at least $10 an hour.

Wal-Mart isn’t alone in its new focus on training front-line workers, reports The Wall Street Journal (Sept.5-6, 2015). The trend, known as “upskilling,” is rippling across the retail and service industries. McDonald’s, Starbucks, Gap, CVS Health, Kaiser Permanente, and UPS are moving in the same direction. It’s a big change, even for companies with a reputation for taking care of employees. Many firms train college-educated workers and managers, but few focus on front-line workers.

Employee turnover costs money— $5,000 per front-line worker, or 20-30% of an entry-level salary. Standard turnover in retail is 50% in the first 6 months. If Wal-Mart can reduce this churn, persuading people to stay at least 12-18 months, it will save tens of millions of dollars a year. Wal-Mart also hopes that the new training will result in better customer service and happier shoppers.

Front-line employees—cashiers, cart pushers and sales associates—will now spend their first months in a supervised on-the-job training program. In the past, they sat through a few days of orientation and safety drills. The only real job training happened in the store—knowledge passed on by more experienced employees. The new program, called “Pathways,” delivers instruction in gamelike computer modules—each just 2-3-minutes long. New employees spend their first six months practicing what they’ve learned from the games and drills, watched over closely by managers and preparing for a “gateway” assessment that can earn them a dollar-an-hour raise and sometimes more.

Classroom discussion questions:

What are the advantages of these training programs?
Why has it taken so long to see such changes?

Good OM Reading: The Myth of the Ethical Supply Chain

Inside the Tazreen garment factory after the fire

The anti-sweatshop mania burst into the mainstream in the mid-90’s. Naked people chanted outside the opening of an Old Navy, Jennifer Love Hewitt led an anti-sweatshop protest, Kathie Lee Gifford cried in front of Congress. Nearly every major apparel brand was the target of a boycott campaign. In response, the companies adopted codes of conduct, banning workers under 16 and forced overtime—then expanding to health, safety, and environmental protection. Since 1998, Nike has followed U.S. clean air standards in all of its factories worldwide, while Levi’s gives financial literacy classes to some of its seamstresses. An entire ecosystem of independent inspectors sprung up.

However, it’s not the largest companies that are the issue. In the last 25 years, as the big brands were getting better at monitoring their supply chains, the entire global apparatus of manufacturing shifted. In the fast-fashion era, Western brands couldn’t afford the luxury of working with the same suppliers and ensuring that they meet the company’s standards. Most of them outsourced this coordination to megasuppliers: huge conglomerates that can take a design sketch, split the production between 1,000’s of factories, box up the goods and ship them to stores.

Recall that in 2012, as the fire alarm went off in a Tazreen garment factory in Bangladesh, over 1,200 workers were scrambling to complete orders for Western brands: Dickies, Wal-Mart, Disney. After 100 workers died, NGOs focused on how Wal-Mart was responsible for 60% of the clothing being produced there. But Wal-Mart never actually placed an order with Tazreen. A year before the fire, Wal-Mart inspected the factory and discovered that it was unsafe. By the time of the fire, it had banned its suppliers from using it. So how did its products end up at Tazreen anyway? Wal-Mart had hired a megasupplier called Success Apparel to fill an order. Success hired another company, Simco, to carry out the work. Simco—without telling Success, much less Wal-Mart—sub-contracted the order to Tazreen’s parent company, the Tuba Group, which then assigned it to Tazreen. Two other 4th and 5th tier contractors also placed Wal-Mart orders at Tazreen, again without telling the company.

This lengthy, but highly readable, article in The Huffington Post, is a perfect supplement to your discussion of SCM in Chapter 11.

OM in the News: Wal-Mart Squeezes Its Suppliers (Again)

A Wal-Mart Stores company distribution center in Bentonville

Wal-Mart Stores will begin charging fees to almost all vendors for stocking their items in new stores and for warehousing inventory, raising pressure on suppliers as the world’s largest retailer battles higher costs from wage hikes, reports msn.money (June 24, 2015). The company just started informing suppliers about the fees and other changes to supplier agreements. The changes will affect 10,000 suppliers to its U.S. stores.

The changes are aimed at bringing “consistency to the collection of allowances related to the growth of our business and suppliers’ use of the Wal-Mart supply network,” it said in a letter to suppliers. The new agreements mean a larger number of vendors will likely start paying fees, passing some of the retailer’s costs onto suppliers. For instance, Wal-Mart is seeking to charge a food supplier 10% of the value of inventory shipped to new stores and to new warehouses, both one-time charges, and 1% to hold inventory in existing warehouses. Currently, the supplier is not charged anything.

The move marks a shift by Wal-Mart, which unlike other retailers has sought to limit such fees in return for demanding suppliers give it the lowest price. This approach suggests that it is seeking areas to offset its increased investment in wages. Charges like the new-store and warehouse fees are common in the retail industry, but their broad application across all suppliers is a new step for Wal-Mart. The fees for new stores and for warehousing goods are a way of sharing the costs of growth and keeping prices low, a Wal-Mart spokeswoman said: “The changes we have outlined will help us ensure that we are operating at everyday low costs that yield everyday low prices.”

Classroom discussion questions:

1. Why is Wal-Mart changing its supplier agreements?

2. How does this impact the supply chain?