WALMART SUPPLY CHAIN MANAGEMENT

Lahore School of Economics Advanced Operations Management

Supply Chain Management at Walmart Written Analysis of the Case

Submitted by: Ateeb Ejaz Faiza Jamil Sami Suhail Sarah Ahmad Submitted to: Ms. Maheen Shafqat Dated: 6th March 2013

WALMART SUPPLY CHAIN MANAGEMENT

Supply Chain Management at Walmart

CASE BACKGROUND
Wal-Mart Stores, Inc. was the world largest retailers in 2006, with sales of US $312.4 billion. As the case indicates, Wal-Marts supply chain management was the key component of its success, with its distribution costs estimated at 1.7% of its costs of sales. With the differentiated management techniques, self distribution, computerized point of sale systems that collected item level data, in real time and continuous cost saving. In an effort to cost reduction, Wal-Mart set the inventory target as half of its sales; however, this target is not being achieved by the company, recently. Sam Walton initiated Wal-Mart stores in 1962. Based on the concept of discount retailing, Walton offered warehouse style store with the name of Wal-Mart Discount City. This differentiated way of retailing along with self distribution, enabled the company to response to altering external environment. As the store grew, with respect to sales and profit, its number of employees also grew reaching to 1.3 million in US. The employees were also known as associates, inducing them as part of the organization. To achieve this competitive position, Wal-Mart opted for cost reduction and integration strategies at each level of the supply chain, i.e. purchasing, distribution and retail. Along with these strategic decisions, the company made use of information technology and RFID to track inventory and in store retail management. Specifically, networking systems like Retail linking enabled the company to ensure that manufacturers or suppliers are meeting the requirements of Wal-Mart. However, over the last few years, companys self imposed strategy is not being implemented fully, as its inventories are greater than half of its sales.

WALMART SUPPLY CHAIN MANAGEMENT

Core Problem
Rising inventory levels is hampering the growth of the company despite of broad scaled physical expansion and growing sales. Qualitative Analysis Supply Chain

Considering the supply chain of the company, which is the major advantage for Wal-Mart, cluster distribution system enabled them to reduce costs. Their retail outlets were in sub urban regions enabling them to reach not only products at low costs but also to avail human resource at low rates. Wal-Mart was focusing on cost reduction at each decision stages, as purchasing decisions, where they were buying from local factories and rural areas for the private label merchandises. Moreover, frequent meetings with suppliers and accounting for the communication of demands and requirements of Wal-Mart, which included standardized case sizes and labeling. Secondly, regarding the distribution centers, Wal-Mart required store friendly, distribution centers to avoid any ambiguity. Moreover, the labor and truck drivers involved in distribution were not unionized and in house, which enable the company to operate in the way they desire. Wal-Mart implemented on Everyday low prices (EDLP), where the products were displayed at steady price and not discounted on regular basis. In fact, discounts were rotated from product to product. The company increases 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 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.

WALMART SUPPLY CHAIN MANAGEMENT

RFID system has enabled the company to track in store inventory. Major drawback with this system is that it will cost about 17 cents per tag increasing prices on a per unit basis. Nonetheless, 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.

Quantitative Analysis and recommendations Ratio Analysis

(Exhibit 1)

2000 Net Profit Margin 3.4%

2001 3.5% 22.2% 0.89

2002 3.23% 22.02% 0.99

2003 3.46% 22.35% 0.92

2004 3.53% 22.5% 0.91

2005 3.6% 22.94% 0.9

2006 3.6% 23.06% 0.9

Gross Profit Margin 22.04% Current Ratio 0.93

The table shows that Current ratios of the company The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).The ratios are slightly below 1 suggesting that the company is able to pay off its liabilities and has remained constant over the years. Gross profit and net profit margin shows that company has a control on its operations and that is the reason why both ratios are stable over the years.

2000 ROA ROE 7.7% 20.6%

2001 8.2% 19.8%

2002 8.08% 18.7%

2003 8.59% 20.2%

2004 8.59% 20.9%

2005 8.51% 20.79%

2006 8.13% 21.05%

ROA and ROE shows that the company is efficiently utilizing its assets and shareholders equity in order to generate revenues.

WALMART SUPPLY CHAIN MANAGEMENT

%age Change
2000-2001 Sales Inventory Op. Exp. 15.7 8.7 18.43 2001-2002 12.8 5.07 14.03 2002-2003 12.5 10.6 13.7 2003-2004 11.6 9.06 12.31 2004-2005 11.3 11.8 14.11 2005-2006 9.5 8.16 10.7

Sales of Wall Mart has a decreasing trend. The decrease in sales could be due to the closure of a few of the international stores. Wall Mart had inventory decreases over the period because of the supply chain process that they take into account in their service i.e. RFID tags etc. And in our view the RFID implemented in the last year is showing its effects with the decrease in the amount of inventory. Operating expense and the inventory in 2005 are at their highest value. The implementation of RFID affects both in a way that inventory reduced down and operating expenses also decreased.

WALMART SUPPLY CHAIN MANAGEMENT

COMPETITORS FINANCIAL INFORMATION

(Exhibit 3)

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

Sales 40,358.00 52,935.00 22,390.00 16,023.00 60,553.00 49,124.00 38,416.00 52,620.00 312,427.00

Inventory 3,036.00 4,015.00 5,459.00 1,696.00 4,886.00 9,068.00 2,766.00 5,838.00 32,191.00

Inventory Turnover 13.29 13.18 4.10 9.45 12.39 5.42 13.89 9.01 9.71

Wal-Mart has lower ratio than its most of the competitors except Sears Holding Corp. and Federated Department Stores. This means that either sales is done poorly or there might be an excess inventory with the company. Wal-Mart cannot be fairly compared with the other stores as Wal-Mart has a totally different supply chain structure and their distribution center strategies and cutting out the middle man helps in reducing costs. Moreover, RIFD system will eventually help to improve its inventory turnover.