supply chain management

Supply Chain Management – Case Analysis

Ivey Case Study

Supply Chain Management at Wal-

Mart

For: Dr. Chirag Surti BUSI 2604U

Prepared By:

Jeremy Abbaterusso 100217118


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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 Conclusion……………………………………………………………………………………17


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Introduction and SummaryIntroduction and SummaryIntroduction and SummaryIntroduction 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, “Wal-

Mart 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 World’s Biggest Corporation in the Global Economy,” 2006, pp. 27.


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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-Mart’s 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-Mart’s 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 ChainSupply ChainSupply ChainSupply Chain

As mentioned above the initial competitive advantage for Wal-Mart was its supply chain

management. This would only improve during the 1960’s to 1980’s 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. Walton’s idea of “discount retailing.” It was with this idea and the lack of transportation to

2 Discount Store News, “Low distribution costs buttress chain’s profits”, 18 December 1989.


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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

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


“back-hauling”. This concept allows

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.

The figure below shows how many days of supply W

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

precise its inventory levels are a

in warehousing and storage fees

Purchasing and Retailing Operations

When purchasing products any business will look for one thing

successfully developed a discount retailing system which not only cuts out the middle man, but

increases the supply chain management

efforts with suppliers in the many key attributes to SCM. These efforts include increased

information, communication, cooperation, and trust

Case Analysis

This concept allows transportation of unsold merchandise back on trucks that


Mart trucks leaving and coming back to the distribution center are never empty.

The figure below shows how many days of supply Wal-Mart in comparison with its top


insurance against supply chain uncertainty. As seen in this chart Wal-Mart’s supply chain is so

lot lower then there competitors. This subsequently

for the end consumer increasing Wal-Mart’s net income

and Retailing Operations

When purchasing products any business will look for one thing – low costs. Wal


supply chain management of their company. This is done through sufficient

the many key attributes to SCM. These efforts include increased

information, communication, cooperation, and trust amongst Wal-Mart and it’s over 9

Company

1. 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

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back on trucks that


Mart trucks leaving and coming back to the distribution center are never empty.

Mart in comparison with its top


Mart’s supply chain is so

competitors. This subsequently lowers cost

Mart’s net income.

low costs. Wal-Mart has


ugh sufficient

the many key attributes to SCM. These efforts include increased

Mart and it’s over 90,000

Company

1. Wal-Mart Stores

2. Kroger Co.

3. Costco Wholesale Corp.

4. Target Corp.

5. Sears Holdings Corp.

Figure 1

* Information was collected using

excel sheet can find raw data at

the end of the case analysis


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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-Mart’s revenue, the retailer may name a new captain in its stead.

Other attributes which contribute to Wal-Mart’s 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 Walton’s empire to increase its company’s 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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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 Wal-

Mart’s low prices, which are an average of eight per cent to 27 percent lower than the

competition.”4

Information TechnologyInformation TechnologyInformation TechnologyInformation Technology

Information technology to Mr. Walton’s 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-Mart’s information technology is:

- Mr. Walton’s use of a personal airplane to visit store locations in the early years - In the mid 1980’s 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

- 1990’s introduction of Retail Link 4 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-Mart’s 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-Mart’s 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 Wal-


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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-Mart’s 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

PerformancePerformancePerformancePerformance

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

Wal-Mart Key Financial Figures -

Increases and GPROI

2000 2001 2002 2003 2004 2005 2006 % Increase in Sales N/A 15.70% 30.57% 46.96% 64.05% 82.54% 99.95%

% Increase in

Inventory N/A 8.76% 14.29% 26.46% 37.91% 54.24% 66.83%

GP $ (in millions)

34,424

40,067

44,914

51,317

57,582

65,429

72,036

GPROI % 178.40 190.91 203.66 210.31 216.38 219.84 223.78

Percentage of

Increase from 2000 N/A 7.01% 14.16% 17.89% 21.29% 23.23% 25.44%

Comments:

The increase in sales and inventory on Wal-Mart’s 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-Mart’s 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.

Figure 3


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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-Mart’s 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 Segment

COGS %

SG&

A %

Net

Income %

Inventori

es %

Asset

s %

Albertsons Inc. Grocery

71.95 24.98 1.11 7.52 44.28

Costco Wholesale

Corp. Wholesale

87.55 9.53 2.01 7.58 31.20

Federated

Department Stores Department

59.28 31.17 6.28 24.38

148.1

Gap Inc. Clothing

63.37 25.74 6.95 10.58 55.05

Kroger Co.

Grocery

75.25

18.21

1.58

8.07

33.82

Sears Holdings Corp. General Merchandise

72.28 21.90 1.75 18.46 62.24

Safeway Inc. Grocery

71.07 28.93 1.46 7.20 41.02

Target Corp.

General Merchandise

and Grocery

66.38 21.26 4.58 11.09 66.51

Wal-Mart Stores

General Merchandise

and Grocery

76.94 18.16 3.59 10.30 44.23

Figure 4


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Comments:

The above calculations show Wal-Mart and its competitor’s 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-Mart’s 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-Mart’s 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 company’s inventories and assets it would depend on what kind of system and supply chain

the company has in place. For example in Wal-Mart’s 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-Mart’s 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 Segment

GP $ GPROI % Albertsons Inc. Grocery

11,320 372.86

Costco Wholesale Corp. Wholesale

6,588 164.08

Federated Department Stores Department

9,118 167.03

Gap Inc. Clothing

5,869 346.05

Kroger Co. Grocery

14,988 306.75

Sears Holdings Corp. General Merchandise

13,619 150.19

Safeway Inc. Grocery

11,113 401.77

Target Corp. General Merchandise and Grocery

17,693 303.07

Wal-Mart Stores General Merchandise and Grocery

72,036 223.78

* In millions

Figure 5


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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 I’m 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 InformationOther InformationOther InformationOther Information

Recent Failures

Although some would have you believe Wal-Mart’s 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

6 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 world’s largest corporation but it’s also “the world’s 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 country’s 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-Mart’s retail

concept and limits their ability to prosper in these specific foreign markets.




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ConclusionConclusionConclusionConclusion

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 1Raw data for Figure 1Raw data for Figure 1Raw data for Figure 1

Days Of Supply For

Top Five

Competitors

Company Segment Sales COGS SG&A

Net

Inco

me

Inven

torie

s

Wal-Mart Stores

General

Merchandise and

Grocery 312,427 240,391 56,733 11,231 32,191

Kroger Co. Grocery 60,553 45,565 11,027 958 4,886

Costco Wholesale Corp. Wholesale 52,935 46,347 5,044 1,063 4,015

Target Corp.

General

Merchandise and

Grocery 52,620 34,927 11,185 2,408 5,838

Sears Holdings Corp.

General

Merchandise 49,124 35,505 10,759 858 9,068

AAV of

Invento

ry

COGS

per

day

Days

of

Supply

9.71 658.61 1.47363

12.39 124.84 9.92759

13.18 126.98 10.3831

9.01 95.69 9.41929

5.42 97.27 5.56911

supply chain management - wal-mart case

Documents

everyday low prices

gross profit return

high velocity items

worlds biggest corporation

costco wholesale corp

sears holdings corp

marts supply chain