CASE STUDY ANALYSIS SUPPLY CHAIN MANAGEMENT AT WAL-MART

SUBMITTED BY: M. RAYHAN SHEIKH WAQAR MAHMOOD FAHAD MASOOD M. SAAD SHAMS

SECTION: A MBA II (2012-13)

SUBMITTED TO: MS. MAHEEN SHAFQAT ADVANCED OPERATIONS MANAGEMENT

Introduction: The worlds largest retailer, Wal-Mart was incorporated in 1962 by Sam Walton. Sam Walton was not inexperience person who started the business without any knowledge whereas Sam Walton had the experience regarding retail stores and with the help of his experience and his observations regarding the changing buying trends of the customers Sam Walton started his own business. The business was started in Bentonville, Arkansas and still the headquarters of WalMart is based in the same state. It has more than 6500 stores worldwide, which include stores in all 50 states of America and many other countries. Wal-Mart employed approx. 1.8 million employees who are mainly known as associates. It is estimated that Wal-Mart serves 138 million customers each week. The main success factor of Wal-Mart is it low cost products, as compared to other retail stores, secondly Wal-Mart is famous for its supply chain, as it logistics and especially for the technology used by the stores and in other departments of Wal-Mart.

Facts and Issues: Wal-Mart was facing a problem in the starting years that none of the suppliers were willing to provide transportation facility to Wal-Mart in Arkansas as it was a rural area, hence because of this Wal-Mart realized that they had to focus upon self distribution. By the time improved road infrastructure helped Wal-Mart to make its transportation system more efficient. One of the main factor of Wal-Mart success is the inability of it competitor to cape up with the changes in the market. Now coming towards the purchasing of Wal-Mart, then it must be appreciated as Wal-Mart has great control over its supplier. Wal-Mart started sourcing products globally. Wal-Mart international purchasing offices work directly with local factories to source Wal-Mart private label merchandise. And late on it was observed that customers liked more these private label products as they were often price at a significant discount. Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting and distribution while negotiating with its suppliers. And Globally Wal-Mart was doing business with almost 90000 suppliers.

Wal-Mart strategy was of incorporating distribution centre at such areas that it could serve the stores with a day. This design is mainly known as Hub and spoke. Stores were located in low rent, suburban areas, close to major highways. Products were picked up at the suppliers warehouse by Wal-Marts in-house trucking division and were then shipped to Wal-Marts distribution centers. For increasing efficiency Wal-Mart worked with its suppliers to standardize case sizes and labeling. Now talking about its retail stores strategies, Wal-Mart implemented an everyday low prices policy which means that products were displayed at a steady price and not discounted on regular basis. Wal-Mart did not need to advertise much which basically saves the cost for the company. Wal-Mart believes in highly integrated system hence invested a huge amount in the latest technology to get the up to date information and for increasing efficient communication in its whole supply chain. And to improve supply chain the two initiatives were REMIX and Radio Frequency Identification Tags. Another key to Wal-Marts ability to enjoy low operating cost was the fact it was non-union. However it have drawback too as its stores network encroached on the territory of unionized. The second problem faced by Wal-Mart was of increasing inventory. The growth of sales is lower as compared to the rate of increase in inventory. Anyhow Wal-Mart is making efforts to increase the rate of growth in sales and lowering the growth in rate of inventory. Thirdly competitors are now following the strategy as Wal-Mart is following and are aware of changing trends of the retail business hence Wal-Mart have to be more conscious regarding its competition.

Quantitative Analysis:
2000 Percentage increase in Sales Percentage increase in cost of sales Percentage increase in net income Percentage increase in inventory Gross Profit Percentage increase in Gross profit None 2001 15.7% 2002 30.5 2003 46.9 2004 64.1 2005 82.5 2006 99.9

None

15.5%

13.05

12.06

11.46

10.58

9.37

None

17.1

5.7

20.7

13.8

13.4

9.4

None

8.7%

14.3

26.5

37.9

54.2

66.8

178.4 None

190.9 6.7

203.6 6.8

210.3 3.4

216.3 2.8

219.8 1.4

223.7 1.8

From the above table we can see that the Percentage increase in sales is increasing from year 2000-2006. The sales are increasing in the first 3 years by approximately 15 percent and this percentage increases in the next 4 years this is a good sign for Wall Mart as the larger the sales the more revenue would be coming inside the organization. The cost of sales are showing a declining trend which is also a positive sign for Wall Mart as we can see that the cost of Sales decreased from 15.5% to 9.37 from year 2000-2006. The costs of sales are all costs necessary to incur if we have to incur the transaction. The Percentage increase in net income is an alarming situation for Wall Mart as we saw that the Sales are increasing and the cost associated with it is decreasing so eventually the net income should also have been increasing but we see that the main problem lies with the cost of excessive inventory which increases by approximately 6 percent in the initial year and than by 12 percent in the next year and more than 15percent in year2005. When the inventory cost increases there is large amount of money that is tied up in inventory the handling and the storage cost also increases. Secondly we need to pay for large storage warehouses or facility to store the inventory safely. So this is the main reason why Wall marts net income and their gross profit have been decreasing over these years.

Company

Segment

Sales

COGS

Inventories COGS as % of Sales

Inventories as % of Sales 7.52 7.58

Albertson Inc. Costco Wholesale Corp Federated Department Store Gap Inc Kroger Co. Sears Corp. Safeway inc. Target Corp.

Grocery Wholesale

40358 52935

29038 46437

3036 4015

71.95 87.72

Department

22390

13272

5459

59.27

24.38

Clothing Grocery

16023 60553 49124

10154 45565 35505

1696 4886 9068

63.37 75.24 72.27

10.5 8.06 18.45

Holding General merchandising Grocery General Merchandising

38416 52620

27303 34927

2766 5838

71.07 66.37

7.20 11.09

Wal-Mart stores

General Merchandising

312427

240391 32191

76.94

10.30

When we compare the value of Wal Mart with the other major competitors in the market we observe that the Cost of Goods as percentage of Sales is 76.94 of Wal Mart as compared to the competitors it is close to the average or the percentage that majority of the competitors are experiencing however Wal Mart can learn a lot by observing the process of Federated Department store which has very less Cost of goods sold when compared with the Sales. When we compare the Inventory as percentage of Sales of Wal Mart to the competitors we observe that it is a little more as compared to the competitors this might be due to the large volume of Sales revenue that Wal Mart has generated as compared with the others.

Inventory Turnover
10 9.5 9 8.5 8 7.5 7 2000 2001 2002 2003 2004 2005 2006 Inventory Turnover

The above figure shows the inventory turnover which is the number of times the inventory is converted into sales. We observe an increasing trend over the years from 2000-2006. This is a positive sign for Wal Mart as more inventory is being converted into sales from which we can also relate that when there is higher inventory turnover so in each of the next years we would increase the quantity of inventory kept in order to meet the demands which in turn would cause problems of storage cost, handling cost and whenever there is larger inventory there are more chances of damages which in turn increases the costs to the company. Recommendations & Conclusion: It is evident from the case that the major problem that exists in Wal-Mart is that of increasing inventory levels and despite of the fact that they have a very strong supply chain management including the whole network from the suppliers, logistics to customers but the data in exhibit 1 shows that in 2000-2001 the inventory levels grew at only 5 percent approximately but in year 2002 and 2003 the data shows that inventory grew to almost double i.e. about 10 percent. Also when compared with the sales of the respective years it can be seen that the major issue is that

the inventory levels have been growing at a much faster pace than the sales. Several methods can be used to reduce or at least control the inventory levels, in order to reduce the inventory handling costs and increase the productivity as well as profits of the company. Reduction in Order cycle time and Order lead time: One of the methods can be the increase in the number of orders generated or the frequency of the orders. As more frequently the orders will be generated, the less number of quantities would have to be ordered and hence inventory would be minimized. E.g. if the order to a particular supplier is done once a month, then may be the same order could be split in two or three orders, hence ordering two to three times per month rather than only ordering once a month. This would increase the productivity as less inventory stock would have to be handled and also would result in lowering the inventory handling costs. Subjective & Objective forecasting methods: Several forecasting techniques can be used in order to reduce the number of orders and the inventory levels of store. Subjective as well as objective techniques can be used to reduce the inventory levels by measuring nearest to the exact quantity required in certain days. To be more precise and effective, several techniques like workload method, exponential smoothing, and moving averages etc. can be used to correctly forecast the sales and inventory turnover rates, hence minimizing the inventory and utilizing the warehouses of the store more effectively. Seasonal Index: Seasonal index method can be used to increase the efficiency levels of such a business which is highly affected by the seasonal variability in demand of products. The index should be calculated and hence the index should be adjusted in the actual sales in order to measure the effect of seasons on the demand of certain products. E.g. the seasonal index of drinks would be comparatively much higher in summers as compared to winters having a very small seasonal index.

Cost-Benefit Analysis of products: Moreover the efficiency can be increased and inventory can be reduced by keeping a record of the sales of different items and analyzing the products that are becoming obsolete or are giving very low sales, in other words the cost-benefit analysis should be done and those products that are much costly in terms or their handling and inventory costs and less profitable should be eliminated so that the same space can be utilized more effectively for fast moving products. Last but not the least, in order to increase the efficiency of the company and inventory management, Wal-Mart should take steps and improve at each level of the whole supply chain system.