How Walmart and Costco Manage Inventory

Walmart sells a wide variety of groceries, everyday household items, and more!

How does a company as large as Walmart, with so many items to sell, practice inventory management? In the third installment of our "Learning inventory management from retail brands" series, we look at the inventory management strategies of American retail giants Walmart and Costco.

More from the inventory management series

1️⃣ Zara's zero-inventory system built on a fast fashion strategy
2️⃣ Amazon Go explores the possibilities of inventory innovation with retail tech

We can't talk inventory management at Walmart without talking about its close collaboration with suppliers. The suppliers have access to the inventory management system of Walmart. They see Walmart's real-time inventory levels, and they make their own decisions about what products they need to deliver and when. Instead of having Walmart take control of all inventory management, they practice decentralized inventory management.

Out-of-stock inventory can lead to lost sales, and customers who can't get what they need in a timely manner are more likely to go to a competitor. But Walmart doesn't have to worry about periodic inventory checks or delays in delivering what they order. Instead, Walmart relies on its suppliers to keep inventory levels in check and keep the big box stores running smoothly.

Walmart also strives for inventory optimization through cross-docking, a type of just-in-time (JIT) system for sourcing products from suppliers. Cross-docking involves moving goods directly from a supplier's truck to a retailer's truck, rather than storing them in a warehouse. This not only minimizes the time it takes to transport goods but also reduces the cost of unnecessary inventory storage. Maintaining the right level of inventory at all times is crucial to achieving cross-docking, and this is made possible by organic collaboration with suppliers who help optimize inventory.

Managing inventory using different inventory types

In addition to working with suppliers, Walmart also improves operational performance through proper inventory management based on inventory types.

There are several inventory types, and let's take a closer look at how Walmart utilizes in-transit inventory, safety stock, and reserve inventory!

In-transit inventory is inventory that's in transit from somewhere in the supply chain to the store. As a big box store that sources goods from all over the world, the time it takes to source products varies, sometimes as short as a day or two, sometimes as long as two to three weeks. Walmart manages in-transit inventory and ready-to-sell finished goods inventory separately, with in-transit inventory being used to replenish finished goods inventory and keep accurate track of quantities.

A large retailer like Walmart, or any business that needs to stock inventory, will often use demand forecasts to determine the right amount of inventory to stock before placing an order with a supplier. But forecasts are just that: forecasts. The reality is that sometimes things don't work out the way we expect them to, and reserve inventory provides a buffer to ensure that we don't run out of stock during these sudden spikes in demand.

It's an inventory that's never used in day-to-day operations. It's only kept for special occasions like Black Friday and Christmas, when customers tend to rush in and buy in bulk. If you don't have that inventory on hand, you can lose valuable sales opportunities. That's why Walmart forecasts seasonal spikes in demand and keeps a reserve of inventory on hand to ensure sales don't suffer.

High inventory turnover with fewer SKUs

Costco's strategy is similar to Walmart's, but with a twist: as a warehouse-style store, Costco emphasizes "big" and "cheap." In order to sell large quantities of cheap goods, Costco's inventory management approach is to stick to fewer SKUs.

A stock keeping unit (SKU) is the smallest unit for managing inventory. It varies from company to company, but is typically based on the type, condition, size, color, and expiration date of the product. Costco has about 780 warehouses in countries around the world, including the U.S. The company limits the number of SKUs in each warehouse to no more than 3,800, which is significantly less than other large U.S. retailers.

Costco's limited SKU strategy is designed to free up space for high-volume sales by not carrying products that don't sell, and to increase inventory turnover by focusing on what sells on the shelves and restocking them with what sells when they run out quickly. The distinctive Costco look of pallets of inventory on top of shelves is also a result of the low number of SKUs, which allows for lower labor costs for inventory management.

Walmart practices efficient inventory management by actively collaborating with suppliers and utilizing a cross-docking system, and using a variety of inventory types to flexibly respond to changes in supply chain conditions and demand. Costco maintains a high inventory turnover rate by limiting the number of SKUs. If you run a retail business that manages multiple types of products like a big box store, take a cue from Walmart and Costco's inventory management strategies!