Walmarts Value chain analysis

2.2 Wal-Mart 2.2.1 Walmarts Value chain analysis Wal-Mart is one of the largest Fortune 500 companies, which is spread across the globe. It is an arguably the largest retail chain which deals with everything from food to consumer electronics. In terms of the revenue generated, it leads the fortune 500 companies like GE and Microsoft. Simply put, it has everything a homemaker can ever think of. Affordable price range coupled with aggressive online and market strategy has lead to wide acceptance for Wal-Mart in towns and cities alike. Wal-Mart is probably the only largest fortune 500 corporations in the world, which directly services the common man. 2.2.1.1 Primary Activities 2.2.1.1.1 Inbound and Outbound Logistic Management This involves fast & responsive transportation system. More than 7000 company owned trucks services the distribution centers. These dedicated truck fleets enables shipping of goods from distribution centers to the stores within 2 days and replenish the store shelves twice a week. The drivers hired are all very experienced & their activities are tracked regularly through Private Fleet Driver handbook. This allows the drivers to be aware of the terms & conditions for safe exchange of Wal-Mart property, along with the general code of conduct. For more efficiency, Wal-Mart uses a logistics technique called Cross Docking. In this system, finished goods are directly picked up from the manufacturing site of supplier, sorted out and directly supplied to the customers. This system reduces handling & storage of finished goods, virtually eliminating role of distribution centers & stores. Because of cross-docking the system shifted from supply chain to demand chain which meant, instead of retailers pushing the products into the system, the customers could pull the products, when & where they required. Walmart today about 60% inbound freight (closer to 80% for their grocery segment) is managed by suppliers. The important of Walmarts logistics infrastructure was its fast and responsive transportation system. The distribution centers were serviced by more than 3,500 company owned trucks. 2.2.1.1.2 Operations Wal-Mart operations are comprised of three business segments: Wal-Mart Stores SAMS CLUB Wal-Mart International Wal-Mart Stores segment is the largest segment, which accounted for approximately 67.3% of their 2005 fiscal sales. This segment consists of three different retail formats, all of which are located in the United States. This includes the following sections: Super-centers, which average approximately 187,000 square feet in size and offer a wide variety of products and a full-line supermarket; Discount Stores, which average approximately 100,000 square feet in size and offer a wide variety of products and a limited stock of food products; and Neighborhood Markets, which average approximately 43,000 square feet in size and offer a full-line supermarket and a limited variety of general merchandise. SAMS CLUB segment consists of membership warehouse clubs in the United States which accounted for approximately 13.0% of 2005 fiscal sales. SAMS CLUBs in the United States average approximately 128,000 square feet in size. Wal-Mart International operations are located in Argentina, Canada, Germany, South Korea, Puerto Rico and the United Kingdom, the operations of joint ventures in China and operations of majority-owned subsidiaries in Brazil and Mexico. This segment generated approximately 19.7% of 2005 fiscal sales. Here, it operates several different formats of retail stores and restaurants, including Super-centers, Discount Stores and SAMS CLUBs. 2.2.1.1.4 Marketing and sales Sam Walton started his retail career in 1940, as a management trainee with the J.C. Penney Company. Later, He modeled the Wal-Mart chain on The Penney Idea (strength in calling employee associates rather than clerks). Sam walton became convinced in the late 1950s that discounting would transform retailing. He offer name brand Merchandise at low price. Wal-Mart prided itself on its everyday low price, prodide the customer with a clean, pleasant, and friendly shopping experience. The Differences between Wal-Mart and Its Competitors are: Employees wore blue vests to identify themselves

Aisles were wide Apparel departments were carpeted in warm colors A store employee followed customers to their cars to pick up their shopping carts Customer was welcomed at the door by a people greeter, who gave directions and struck up conversations. In some cases, merchandise was bagged in brown paper sacks rather than plastic bags because customers seemed to prefer them. A simple Wal-Mart Logo in while letter on front of the store served to identify the firm 2.2.1.2 Support Activities 2.2.1.2.1 Procurement Wal-Marts process of procurement involves reducing its purchasing costs as far as possible so that it can offer best price to its customers. The company procures goods directly from the manufacturers, bypassing all intermediaries. Wal-Mart has distribution centers in different geographical places in US. Wal-Marts own warehouses supplies about 80% of the inventory. Each distribution centre is divided in different groups depending on the quantity of goods received. The inventory turnover rate is very high, about once every week for most of the items. The goods to be used internally in US arrive in pallets & imported goods arrive in re-usable boxes. The distribution centers ensured steady flow & consistent flow of products. Managing the center is economical with the large-scale use of sophisticated technology such as Bar code, hand held computer systems (Magic Wand) and now, RFID. Every employee has access to the required information regarding the inventory levels of all the products in the center. They make 2 scans- one for identifying the pallet, and other to identify the location from where the stock had to be picked up. Bar codes & RFID are used to label different products, shelves & bins in the center. The hand held computers guide employee to the location of the specific product. The quantity of the product required from the center is entered in the hand held computer, which updates the information on the main central server. The computers also enabled the packaging department to get accurate information such as storage, packaging & shipping, thus saving time in unnecessary paperwork. It also enables supervisors to monitor their employees closely in order to guide them & give directions. This enables Wal-Mart to satisfy customer needs quickly & improve level of efficiency of distribution center management operations. 2.2.1.2.2 Wal-Mart Technologies Technology is inevitable in every sphere of life today; it has always made things easier. Wal-Mart works on the same strategy. Traditionally, technology has been upgraded in billing systems and for storage purposes. A new area where technology could be applied to, where many expenses could be saved was in inventory management and logistics. Wal-Mart being so huge, needed to keep track of men and material sent across different countries and had to maintain hundreds of warehouses across the world. Bar-codes have been initially identified as a suitable technology to meet the purpose. But due to the limitations of barcodes, a new emerging technology called RFID has been identified to meet the demands. RFID is low cost Radio Frequency Identification system which requires minimum human intervention to carry out tasks ranging from billing to materials tracking and supply chain management. It is a small wireless device which can store good amount of data and can virtually be tagged to anything. RFID is an electronic tagging technology that allows an object, place, or person to be automatically identified at a distance without a direct line-of-sight, using an electromagnetic challenge/response exchange. Why RFID over Bar-Code? The ability to read without line-of-sight is the best advantage of RFID over bar-code systems. RFID readers can sense items even when the tagged items are hidden behind other tagged items. This enables automation. The challenging part of implementing RFID is that tagged items should not be missed by the reader due to interference, multipath fading, transient effects etc. Missed reads are an unfortunate reality with RFID systems. RFID uses a serialized numbering scheme such as EPC (Electronic Product Code). Each tag has a unique serial number. Serial number information is extremely powerful in understanding and controlling the supply chain and provides much more detailed behavior of the supply chain than can non-serialized bar codes such as UPC (Universal Product Codes) and EAN (European Article Numbering). Serial numbers have many advantages such as food freshness/expiration. This can tell how for how long an item has been in the supply chain where as such information is not captured in bar code system. Hence items can be reached the right place at the right time. Furthermore RFID implementation monitors theft too. For example if number of items reached at the retailers outlet is less than that was departed from suppliers location, it can be easily tracked for. In all these ways, RFID systems have stronger sensor networking system or monitoring system than bar code systems. 2.2.1.2.3 Wal-Mart Human Resource Management In related to the Human resource development, Turner, Chief Executive Officer of Wal-Mart's subsidiary corporation, explained in his interview that in any development effort, our [IS] people are expected to get out and do the function before they do the system specification, design or change analysis. The key there is to do the

function, not just observe it. So we actually insert them into the business roles. As a result, they come back with a lot more empathy and a whole lot better understanding and vision of where we need to go and how we need to proceed. Weve learned some hard lessons in our stores, clubs and distribution centers when we developed something and people didnt use it, and they chose to find other ways to get the job done. We are working hard to develop systems that are easy to use. That puts an awesome responsibility on that developer to get out and understand the business. Thats one of our key things: Were merchant first, technologists second. We have a very clear set of critical success factors that every associate in our division has to live by, and they are generally conditions of employment. Some of them are complicated and some of them are very simple: excellent customer service, testing and validation before you roll it out, balance and controls, payback and ROI. All new [IS] associates are indoctrinated into that set of disciplines, and all associates review it at least on an annual basis. The disciplines are the same for everybody regardless of what team youre on. 2.2.1.2.4 Wal-Mart Infrastructure Considering the rapid expansion of Wal-Mart stores, it was essential to have a very good communication system. For this, Wal-Mart set up its own satellite communication system in 1983. This allowed the management to monitor each and every activity going on in a particular store at any point of the day and analyze the course of action taken depending on how the things went. Wal-Mart ensures that unproductive inventory is as less as possible, by allowing the stores to manage their own stocks, thereby reducing pack sizes across many categories and timely price markdowns. Wal-Mart makes full use of its IT infrastructure to make more inventories available in case of items that customers wanted most, while reducing overall inventory. By making use of Bar-coding & RFID technologies, different processes like efficient picking, receiving & proper inventory control of the products along with easy packing and counting of the inventories was ensured. Wal-Mart owns the Massively Parallel Processor (MPP), largest & the most sophisticated computer system in private sector, which enables it to easily track movement of goods & stock levels across all distribution centers and stores. For emergency backup, it has an extensive contingency plan in place as well. Employees use Magic Wand, which is linked to in-store terminals through a Radio frequency network, to keep track of the inventory in stores, deliveries and backup merchandise in stock at the distribution centers. The order management and store replenishment of goods is entirely executed with the help of computers through Point of Sale (POS) system. Wal-Mart also makes use of sophisticated algorithm to forecast the quantities of each item to be delivered, based on inventories in the store. A Centralized inventory database allows the personnel at the store to find out the level of inventories and location of each product at a given time. It also shows the location of the product like distribution center or transit on the truck. When the goods are unloaded at the store, the inventory system is immediately updated. In November 19, 2001, Wal-Mart spends an estimated $40 million to upgrade its e-business infrastructure. Dan Phillips, vice president of technology support and operations, said the new systems from IBM will give Wal-Mart "a faster processing time, greater availability of our systems and better systems operation without interruption." He added that the new systems have yielded a "significant improvement in our processing time, in some cases allowing us to cut our processing time for some jobs by more than half." Wal-Mart is replacing its old IBM mainframes with a dozen new IBM eServer z900 mainframes and its older storage systems with IBM's new Enterprise Storage Servers code-named Shark. The mainframes and the storage servers provide the backbone of Wal-Mart's data center infrastructure. Among other things, the data center is used for data processing, reconciliation, debit and credit transactions, as well as product replenishment. 2.2.2 Wal-Mart Competitive forces models The five forces model is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value) of an industry structure. And it is the tool to understand where power lies in a business situation. It is useful to help us to understand both the strength of our current competitive position, and the strength of a position of our considering moving into. Furthermore, the tool is used to identify whether new products, services or businesses have the potential to be profitable. Wal-Mart's competitiveness can be interpreted in terms of Porter's five forces model very well. Here we focus on Wal-Mart's position as a retail giant and competes with fellow retail chains or online stores such as K-mart, Target and Amazon. The details explanation of Competitive Five Forces Model for Wal-Mart specifically Wal-Marts competition in the consumer retail industry are as follow: 2.2.2.1 Threat of New Entry: New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry.

For Wal-Mart, Entry barriers are relatively high, as Wal-Mart has an outstanding distribution systems, locations, brand name, and financial capital to fend off competitors. Wal-Mart often has an absolute cost advantage over other competitors. Cost to build retail enterprise like Wal-Mart is formidable. 2.2.2.2 The Threat of Substitutes When it comes to this market, there are not many substitutes that offer convenience and low pricing. The customers has the choice of going to many specialty stores to get their desired products but are not going to find Wal-Marts low pricing Online shopping proves another alternative because it is so different and the customer can gain price advantages because the company does not necessarily have to have a brick and mortar store, passing the savings onto the consumer. 2.2.2.3 The Bargaining Power of Buyers The individual buyer has little to no pressure on Wal-Mart. Consumer advocate groups have complained about Wal-Marts pricing techniques. Consumer could shop at a competitor who offers comparable products at comparable prices, but the convenience is lost. 2.2.2.4 The Bargaining Power of Suppliers Some of the major suppliers of Wal-Mart are: Gillette, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestle, Purina PetCare Company, Procter & Gamble and Unilever. Kimberly-Clark Kimberly Clark is a manufacturer of paper goods products that include Kleenex, Huggies and Depend. In April 2004, Kimberly Clark tagged its Scott paper towels shipment with RFID tags to be shipped to Sanger, Texas. Kraft Foods Kraft Foods, the largest food company employs RFID system to improve handling of its bulk containers. Kraft has outsourced its RFID system to TrenStar to handle the complete supply chain. Gillette Smart razor blades have been introduced to the supermarkets. Gillette has ordered half a billion tags to track razors. The Gillette Company uses RFID for both pallet and case applications. All the cases in a pallet are scanned with RFID readers as they move along the conveyor belt. In a trial at Tesco's new market Road branch in Cambridge, the packaging of Gillette Mach3 razor blades has been fitted with tiny chips. Since Wal-Mart holds so much of the market share, they offer a lot of business to manufacturers and wholesalers. This gives Wal-Mart a lot of power because by Wal-Mart threatening to switch to a different supplier would create a scare tactic to the suppliers. Wal-Mart could vertically integrate.Wal-Mart does deal with some large suppliers like Proctor & Gamble, Coca-Cola who have more bargaining power than small suppliers. 2.2.2.5 The Rivalry among the Existing Players Currently, there are three main incumbent companies that exist in the same market as Wal-Mart: Sears, K Mart, and Target. Target is the strongest of the three in relation to retail. Target has experienced tremendous growth in their domestic markets and have defined their niche quite effectively Sears and K-Mart seem to be drifting and have not challenged K-Mart in sometime. Mature industry life cycle.