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Supply Chain Management Case Analysis

Ivey Case Study

Supply Chain Management at WalMart

For: Dr. Chirag Surti BUSI 2604U Prepared By: Jeremy Abbaterusso 100217118

Supply Chain Management Case Analysis

TABLE OF CONTENTS

Introduction and Summary. . 3 Supply Chain.. .4 Logistics.. .4 Purchasing and Operations...6 CPFR and the Bullwhip Effect.7 Information Technology. .8 Future Initiatives. .9 REMIX.9 RFID.....9 Performance..... 11 Other Information Recent Failures.15 Conclusion17

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Supply Chain Management Case Analysis

Introduction and Summary


Research opens many windows into the thinking of various types of business throughout the world. In researching Wal-Mart and analyzing this case it has opened the window to the ability of a small town business man of Bentonville, Arkansas. This man is the legendary Sam Walton. Who, in 1962, created his Wal-Mart Discount City, however before coming to the opportunity of Wal-Mart; Sam Walton owned a number of Ben Franklin Store Chains. In having this prior experience of owning smaller variety stores and dealing with its franchised supply chain, this allowed Mr. Walton to learn various business concepts and also was able to selectively purchase merchandise in bulk from new suppliers and then transport these goods to his stores directly. This is when the realization and opportunity of discount retailing first evolved and was set to become a major influence in future business. This is, in my opinion, the spark of the Everyday Low Price (EDLP) strategy developed for the Wal-Mart chain. A quote which best shows and illustrates this evolved prediction talks about the overall sales achievement by Wal-Mart, it is as follows, Wal-Mart does not like to get it wrong, not that in retailing terms it often has. After all, Wal-Mart reached the landmark of $1 billion annual sales in 1979, then achieved $1 billion sales in a week in 1993 before making $1 billion in sales in a day in 2001.1

Other then the initial concept of EDLP Wal-Mart owes a lot of its success to its strategies and efforts in purchasing, distribution, retail, and information systems. In the early years the companies competitive advantage was its supply chain. In fact, as taken from the case, WalMart was voted Retailer of the Decade in 1989; its distribution costs were estimated at 1.7 per
1

Brun, S.D., Wal-Mart World: The Worlds Biggest Corporation in the Global Economy, 2006, pp. 27.

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Supply Chain Management Case Analysis

cent of its cost of sales, comparing favorably with competitors such as Kmart (3.5 percent of total sales) and Sears (five percent of total sales).2 Current issues facing Wal-Marts supply chain is duplicating its success in the United States into foreign markets. As of now they have largely developed in Canada and Mexico, however when it comes to international markets something is holding back the success found on North American soil. Other constraints currently effecting Wal-Marts supply chain is having the competition borrowing ideas that have worked so well for them, making the gap smaller and smaller each year in overall market share.

Supply Chain
As mentioned above the initial competitive advantage for Wal-Mart was its supply chain management. This would only improve during the 1960s to 1980s from improved road infrastructure and the inability of its competitors to keep up to changes in legislation. The main change would be the removal of resale price maintenance, which had prevented retailers from discounting merchandise. A strong and efficient supply chain is the key to distribution and keeping their customers satisfied with the promise of Everyday Low Prices. Things within the supply chain in which Wal-Mart excelled at would include logistics, purchasing, retail decisions, and limiting the overall bullwhip effect of the supply chain. Logistics Logistics involves the integration of information, transportation, inventory, warehousing, material-handling, and packaging within an organization. With Wal-Mart this was stemmed from Mr. Waltons idea of discount retailing. It was with this idea and the lack of transportation to
2

Discount Store News, Low distribution costs buttress chains profits, 18 December 1989.

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Supply Chain Management Case Analysis

the small area of Bentonville, Arkansas that Walton invested early in a distribution center in which he would fleet his own trucks. This expansion came with the furthered benefits of bringing down his cost per unit. The companies stores were located in low-rent, suburban areas, close to major highways. This was for easy transportation and to also make the distribution of products more efficient and cost effective. The key attributes to Wal-Marts hugely developed logistics department is: Cross docking or direct transfers from inbound or outbound trailers without extra storage Working with suppliers to standardize case sizes and labeling The 7,800 drivers at Wal-Marts finger tips Non-unionized and in-house Delivered majority of merchandise across the U.S. Average distribution centre to store was approximately 130 miles back-haul revenue transportation of unsold merchandise on trucks that would be otherwise empty

The cross docking system was originated by Wal-Mart this innovation allows a distribution center to direct incoming shipments straight to a cross-docking system, products are delivered to a warehouse on a continual basis, where they are stored, repackaged, and distributed to stores without sitting in inventory. Goods cross from one loading dock to another, usually in 24 hours or less.3 While working with suppliers on labeling will increase efficiency in transporting goods from distribution centers to retail stores. Another vital implementation of Wal-Marts supply chain is its in-house non-unionized truck drivers. Using trucks as a mode as transportation will provide flexible point-to-point service, delivering small quantities with less risk. Also since the distribution centers are on average 130 miles away from retail stores its relatively inexpensive especially with the ingenious idea of

Russel, Taylor, Operations Management: Creating Value Along the Supply Chain, 2009, pp. 440.

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back-hauling. This concept allows transportation of unsold merchandise back on trucks that have just dropped off inventory to the retail store from the distribution center. This means that the Wal-Mart trucks leaving and coming back to the distribution center are never empty. Mart The figure below shows how many days of supply W Mart in comparison with its top Wal-Mart competitors has in its stores. Keep in mind inventory is held in stock as a way to provide insurance against supply chain uncertainty. As seen in this chart Wal Marts supply chain is so Wal-Marts precise its inventory levels are a lot lower then there competitors. This subsequently lowers cost in warehousing and storage fees for the end consumer increasing Wal-Marts net income. Marts income

Figure 1

Company 1. Wal-Mart Stores Wal 2. Kroger Co. 3. Costco Wholesale Corp. 4. Target Corp. 5. Sears Holdings Corp.

* Information was collected using excel sheet can find raw data at the end of the case analysis

Purchasing and Retailing Operations When purchasing products any business will look for one thing low costs. Wal-Mart has Wal successfully developed a discount retailing system which not only cuts out the middle man, but increases the supply chain management of their company. This is done through sufficient ugh efforts with suppliers in the many key attributes to SCM. These efforts include increased information, communication, cooperation, and trust amongst Wal-Mart and its over 90,000 Mart 9
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suppliers worldwide. This contributes to collaborative planning, forecasting, and replenishment (CPFR) which is the process of two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer needs. In fact Wal-Mart to better allocate shelving needs and harness the knowledge of its suppliers elects key category suppliers called category captains. These captains provide input on shelf space allocation. Captains need to work with its competition, for example, a paper supplier such as Hilroy, if chosen to be a category captain, would be in charge of creating a mix of products between themselves and their competitors to make sure Wal-Mart is making the best use of its shelf space. If there is a scenario where the captain is promoting its own products at the expense of Wal-Marts revenue, the retailer may name a new captain in its stead. Other attributes which contribute to Wal-Marts success in terms of purchasing and retail strategy are: The display of merchandise by a storewide template Customizing store products which correspondence with the community it is located in Distribution centers had close to real time information of each stores stock levels The ability to negotiate with suppliers for a single invoice price and did not pay for operate advertising, discounting, or distribution Having suppliers accept payment entirely on Wal-Marts terms, while sharing information all the way back to the purchasing of raw materials

CPFR and the Bullwhip Effect All these steps have allowed Sam Waltons empire to increase its companys relationship with suppliers by using a collaboration planning, forecasting, and replenishment model. This will coincidently, along with the income smoothing of having everyday low costs, reduce the bullwhip effect, lower costs, increase capacity utilization, and improve customer service levels. The income smoothing concept is since Wal-Mart uses resourceful use of CPFR it will sufficiently lower the bullwhip effect. This effect is caused by slight demand variables which are
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Supply Chain Management Case Analysis

magnified as information moves back upstream from consumer back the raw materials in the supply chain. Another benefit of reducing the bullwhip effect and successful CPFR in its supply chain management techniques is reducing the uncertainty and lowering the amount of inventory needed in house. Uncertainty will have the negative effects of lateness and incomplete orders between Wal-Marts distribution centers. However in having a sufficient supply chain management system in place it will lower the amount of inventory needed in house and insure against supply chain uncertainty. The efficiency can be proven by a researcher who marked, Consumers certainly love WalMarts low prices, which are an average of eight per cent to 27 percent lower than the competition.4

Information Technology
Information technology to Mr. Waltons company will link all aspects of the supply chain. He always knew that information technology would play a vital role in the rise of his company. In fact when he had 20 stores under his name he attended an IBM school in upstate New York with the intent of hiring the smartest person in the class to computerize his operations. The key attributes to Wal-Marts information technology is: Mr. Waltons use of a personal airplane to visit store locations in the early years In the mid 1980s the investment in central database, store-level point-of-sale systems, and a satellite network First chain wide implementation of UPC bar codes (store level information was now collected instantaneously and analyzed) Allowed senior management to broadcast video messages to stores 1990s introduction of Retail Link

William Beaver, Battling Wal-Mart: How Communities Can Respond, Business and Society Review, New York: Summer 2005. Vol. 110, Issue 2; pg. 159.

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Vendor-managed inventory programs

Retail Link was a huge step in the right direction for Wal-Marts information system. This system was, estimated at 570 terabytes which Wal-Mart claimed was bigger then all the fixed pages on the internet. This database, located in Bentonville, AR, is connected to Wal-Marts internal analysts who forecast demand with suppliers, also it is connected to the supplier network which displays sales data in real time, and is directly connected to Wal-Marts distribution centers. The order in which the data is collected is from the store network, then the sales data is collected at the cash registers, in which the information is simultaneously sent to the retail link database via a global satellite transmission. This global satellite system and database has given Wal-Mart a large competitive advantage to other retailers who are just catching up now. Future Initiatives REMIX The global satellite system, discussed above, was one of the first company owned satellite systems in place. This technology has extremely benefited Wal-Mart in its recent years especially in the introduction to high velocity items, such as lettuce, bread and other grocery products. However, the integration of a remix strategy has changed the distribution methods for high velocity items which are now cross docked in smaller warehouses and have lower automation processes from the farmer to the retail store. The change in distribution strategy of one distribution center serving a cluster of stores to adding food distribution centers to handle these high velocity items is a future initiative by Wal-Mart. RFID Now that Wal-Mart has taken over the U.S., as seen below in figure 2, can it still advance and improve its supply chain to continually out due the competition. Two future objectives for Wal9|Page

Supply Chain Management Case Analysis

Mart are the initiatives of Remix (discussed above) and RFID (radio frequency identification tags). The RFID tag initiative is something Wal-Mart has been instilling into their supply chain to increase the ability of tracking inventory. The goal here is to increase in-stock rates at store level. This will be achieved by mandating RFID tags on merchandise shipped by Wal-Marts top 100 suppliers. The one major downfall with this system is that it will cost about 17 cents per tag increasing prices on a per unit basis. However, the main advantage to counter act this price is being able to find inventory that may be lost or mislabeled out of stock and also replenish items on store shelves at a faster rate. Also, Wal-Mart retail stores would have the ability to put RFID tag readers in several parts of the store: at the dock where merchandise came in, throughout the backroom, at the door from the sales floor, and in the box crushing area. With these readers in place it allows managers to keep track of the location of their stores inventory. Although the costs benefit trade off is a concern with this technology Wal-Mart is adapting it, but hoping for suppliers to accelerate the RFID development.

Figure 2

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The map above shows the concentration of Wal-Mart stores (all formats) in the U.S. as of 2004. Many more stores have been built over the last three years, especially in the Western and Midwestern U.S., where Wal-Mart has less store concentration.5

Performance
Using exhibit 1 on page 12, calculate the % increase in sales, inventory, and GPROI for WalMart using 2000 as the base year.

Wal-Mart Key Financial Figures Increases and GPROI


2000
% Increase in Sales % Increase in Inventory GP $ (in millions) GPROI % Percentage of Increase from 2000 N/A N/A 34,424 178.40 N/A

Figure 3

2001
15.70% 8.76% 40,067 190.91 7.01%

2002
30.57% 14.29% 44,914 203.66 14.16%

2003
46.96% 26.46% 51,317 210.31 17.89%

2004
64.05% 37.91% 57,582 216.38 21.29%

2005
82.54% 54.24% 65,429 219.84 23.23%

2006
99.95% 66.83% 72,036 223.78 25.44%

Comments: The increase in sales and inventory on Wal-Marts key financial figures are steadily growing. In using the year 2000 as the base year this gives a well constructed growth comparison for both sales and inventory as well as a percentage increase of GPROI. For example from the year 2000 to 2006 sales have increased 99.95%, this comparison is more effective then looking at just a increase from 2005 to 2006. Improvements in Wal-Marts supply chain can also be noticed in the data this is taken from the lowering of inventory being held on a year to year basis in correspondence with sales. In analyzing this data I would want to look further into reasoning
5

http://naturalspecialtyfoodsmemo.blogspot.com/2007_10_01_archive.html, accessed 1 February 2010.

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why in 2001 to 2002 inventories levels grew at only 5.53% and then more than doubled to an increase of 12.17 percent in-between 2002 and 2003. Overall efficiency has definitely attributed to the success on Wal-Marts key financial figures one area of concern would be the leveling off of GPROI from 2003. One way to correct this problem would be finding ways to lower inventory costs or the installation of RFID tags discussed previously to make sure where inventory is at all times subsequently bringing down the amount of out-of-stock inventory which was not properly accounted for. Using exhibit 3 on page 14, calculate the COGS, SG&A, net income, inventory, and assets as a % of sales for each retailer.

Percentage of Sales for Each Retailer


Company
Albertsons Inc. Costco Wholesale Corp. Federated Department Stores Gap Inc. Kroger Co. Sears Holdings Corp. Safeway Inc. Target Corp. Wal-Mart Stores

Figure 4

Segment
Grocery Wholesale Department Clothing Grocery General Merchandise Grocery General Merchandise and Grocery General Merchandise and Grocery

COGS % 71.95 87.55 59.28 63.37 75.25 72.28 71.07 66.38 76.94

SG& A% 24.98 9.53 31.17 25.74 18.21 21.90 28.93 21.26 18.16

Net Income % 1.11 2.01 6.28 6.95 1.58 1.75 1.46 4.58 3.59

Inventori es % 7.52 7.58 24.38 10.58 8.07 18.46 7.20 11.09 10.30

Asset s% 44.28 31.20 148.1 55.05 33.82 62.24 41.02 66.51 44.23

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Comments: The above calculations show Wal-Mart and its competitors percentage of sales for various areas. The first area is the cost of goods sold in which Wal-Mart is in the middle of its competitors at 76.94%. Your cost of goods sold reflects the amount of money it has taken to the production of the goods sold by a company. Indirect costs would not be reflected in this data collection. Since this data has been collected from sales it gives a good comparison of how the company is doing in contrast with its competitors. Wal-Mart would obviously want this number to drop and in doing so would raise their gross profit return on investment. The selling, general and administration costs would include many costs for the company. For example Wal-Marts selling costs would include salaries, advertising expenses, etc. While general costs would include operating expenses and taxes that are directly related to the operation of the company. The overall administration costs would be associated with the cost of executive salaries and other taxes not dealt with in the operation of the company itself. On the list above Wal-Mart is placed number two at 18.16%. However, I believe Wal-Mart should get more credit in being general merchandise and a grocery retailer and just not a wholesaler, such as Costco. This is because with more items and supplies in stock this creates more jobs which raise the cost of expense on the company. This would be the same for the Kroger Company which is a grocery chain and SG & A costs would be substantially lower. Net income is the income a firm would have after subtracting all its cost. This is an area I think Wal-Mart would need to improve in as it is settled in the middle of all its competitors. Something to keep in mind is with expensive initiatives such as remix and inserting RFID tags and readers, and also the attempts to go global these costs would be reflected in Wal-Marts net

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income. Therefore the actually amount of NI may be higher in comparison to its competitors, but is being weighed down from future beneficial streams of revenue. For a companys inventories and assets it would depend on what kind of system and supply chain the company has in place. For example in Wal-Marts supply chain we discussed its cross docking system which would limit the amount of inventory. Also with Wal-Mart being able to share and work so closely with its suppliers it brings down the amount of inventory needed as insurance against variable demands. In being in the middle of the group for inventory and assets it shows that Wal-Marts supply chain is running efficiently especially when comparing the size of each firm and the amount of stores under each retail chain. As for assets this number would be lower, but you have to remember Wal-Mart puts most its retail stores in suburban areas, close to highways. The one benefit of doing this is the cost of starting up is a lot lower and the opportunity of real estate market values rising, otherwise assets, going up are very promising. Using exhibit 3 on page 14, calculate the GPROI for its competitors

Gross Profit Return on Investment of Competitors


Company
Albertsons Inc. Costco Wholesale Corp. Federated Department Stores Gap Inc. Kroger Co. Sears Holdings Corp. Safeway Inc. Target Corp. Wal-Mart Stores
* In millions

Figure 5

Segment
Grocery Wholesale Department Clothing Grocery General Merchandise Grocery General Merchandise and Grocery General Merchandise and Grocery

GP $
11,320 6,588 9,118 5,869 14,988 13,619 11,113 17,693 72,036

GPROI %
372.86 164.08 167.03 346.05 306.75 150.19 401.77 303.07 223.78

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Comments: As you can see above when it comes to gross profit Wal-Mart is four times the amount of its closest competitor Target. The astonishing 72, 036 million Wal-Mart generates in gross profit is the amount of revenue Wal-Mart has after deducting overhead, payroll, taxes, and other costs of doing business. Obviously Wal-Mart is far superior to its competitors in this category. In discussing the gross profit return on inventory the numbers here are extremely low as to what I expected and Im sure Wal-Mart would like to see on its financial figures. Your GPROI would analyze a firm's ability to turn inventory into cash above the cost of the inventory. Gross profit return on inventory (GPROI) is a "turn and earn" metric that measures inventory performance based on both margin and inventory turnover. In essence, GPROI answers the question, "For every dollar carried in inventory, how much is earned in gross profit.6 Therefore, work should be done in assuring Wal-Mart is taking full advantage of its inventory. Hopefully in installing RFID tags and readers in the retail stores it will allow for quicker and more proficient means of finding inventory, this could subsequently alleviate the issue.

Other Information
Recent Failures Although some would have you believe Wal-Marts success has been a continuous rise to the top they have had to overcome many obstacles along the way. Some of these obstacles would include bad press from environmental effects of large business, the negative aspects to globalization, and overcoming obstacles in breaking into foreign markets. Another thing to keep

http://www.investopedia.com/terms/g/gmroi.asp, accessed 2 February 2010.

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in mind is Wal-Mart is not only the worlds largest corporation but its also the worlds most sued corporation.7 In the past few years with continuing to seek improvements in its supply chain they projected that its internal goal was to cut its inventory growth rate to half of its sales growth rate. Unfortunately at the end of 2006 this internal goal has yet to be reached. Wal-Mart has also taken on an aggressive plan to go global. With much success in expanding into Canada and Mexico, Wal-Mart also tried adopting its success strategies in markets such as South Korea and Germany. Unfortunately for the company they were forced to pull out of Korea in 2006 selling its 16 stores to countrys biggest discount chain and exited the German market with a loss of about $1 billion. A reason for its failures in these global markets is Wal-Marts success has stemmed from effective strategies in its early stages by experimenting and adopting ways in which to lower costs. However, in Germany especially, these experimenting tactics are discouraged by the German governance restricting the overall effectiveness to beat out the competition. Wal-Mart is a retail phenomenon because of a set of characteristics that define its retail concept. The most important of these is everyday low prices, which are achieved by economies of scale, purchasing power over suppliers, and a highly efficient sales forecasting and replenishment system that incorporates state-of-the-art information processing and supply chain logistics systems.8 With restrictions being imposed by international governing bodies this limits Wal-Marts retail concept and limits their ability to prosper in these specific foreign markets.

Brun, S.D., Wal-Mart World: The Worlds Biggest Corporation in the Global Economy, 2006, pp. 96. Brun, S.D., Wal-Mart World: The Worlds Biggest Corporation in the Global Economy, 2006, pp. 262.

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Conclusion
Sam Walton is a perfect example of how a company can prosper with the right business strategy and an integration of an innovative and proficiently managed supply chain. From little Bentonville, Arkansas, to the United States, to North America, and future objectives of complete globalization Wal-Mart will continue to be a template for similar business.

I thoroughly enjoyed this case and learning from a supply chain management standpoint how it can not only benefit a company, but be used as a competitive advantage for negotiation with suppliers.

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Raw data for Figure 1

Days Of Supply For Top Five Competitors


Net Inco me
11,231 958 1,063

Company
Wal-Mart Stores Kroger Co. Costco Wholesale Corp.

Segment
General Merchandise and Grocery Grocery Wholesale General Merchandise and Grocery General Merchandise

Sales
312,427 60,553 52,935

COGS
240,391 45,565 46,347

SG&A
56,733 11,027 5,044

Inven torie s
32,191 4,886 4,015

Target Corp. Sears Holdings Corp.

52,620 49,124

34,927 35,505

11,185 10,759

2,408 858

5,838 9,068

AAV of Invento ry
9.71 12.39 13.18 9.01 5.42

COGS per day


658.61 124.84 126.98 95.69 97.27

Days of Supply
1.47363 9.92759 10.3831 9.41929 5.56911

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