MG 4700 Project #3 Supply Chain Management Wal*Mart Stores, Inc.

Transcription

1 MG 4700 Project #3 Supply Chain Management Wal*Mart Stores, Inc. OVERVIEW Wal*Mart s $218 billion in sales last year made it by far the world s largest company. Millions of people shop at their 4500 stores, which include 1000 supercenters, 500 Sam s clubs, and 30 neighborhood markets. Wal*Mart s slogan of everyday low prices is not just a marketing catch-phrase, but a strategic mission that drives decision making on every level, from the headquarters in Bentonville, Arkansas to each distribution and retail manager around the world. Wal*Mart is a relentless competitor in every market it decides to enter. Its downward pressure on prices is so great that the competition has no choice but to either try to match them or perish. Wal*Mart s sales per square foot are typically up to 50% higher then that of the competition. Their sales clerks, or associates, are among the lowest paid in America, with very high annual turnover. Wal*Mart wields enormous clout with its suppliers. It expects them to confirm to their low cost standards by exerting substantial control over any number of aspects of their operations, including product development and pricing. However, Wal*Mart consistently delivers high return for its shareholders and it singlehandedly keeps a large portion of inflation in check. And it continues to deliver on its promise of low prices to an ever growing number of satisfied customers. Discount Retail Model Discount stores started in the United States in the mid 1950s by selling food, and later more general merchandise, at the prices below their supermarket counterparts. They managed to achieve this by squeezing costs out of every aspect of their operations. The consumers were also more willing to try cheaper, self service retailers, supplying increasingly standardized products. This created a number of players at the local, regional, and national levels. The industry was growing in double digits throughout the 1960s and 1970s, and then slowed down to a more mature single digit growth in the 1980s and 1990s. Most of the original chains either went out of business or were acquired by the early 1990s, resulting in a much more concentrated industry, with Wal*Mart, Kmart and Target at the helm. Sam Walton, the founder of Wal*Mart built the company into a huge success by entering into underserved rural markets 20 years ago, with about 30 stores in rural Arkansas, Oklahoma and Missouri, and its own system of distribution centers. By the end of the 1990s, Wal*Mart established presence in every state and in a number of overseas locations and, along the way, the company became famous for its cost-cutting abilities and logistical expertise. Sam believed in a value of the dollar and was almost obsessed with keeping the costs at bay, always tirelessly arguing that a dollar saved on expenses is a dollar in savings passed to their customers. Wal*Mart s Operation Wal*Mart s merchandizing is tailored to particular markets and sometimes even to individual stores. This is achieved by a large investment in information systems that are able to gather enormous amounts of raw data and converted it to useful information. The local store managers have access to inventory and sales data, and can decide which products to display based on customer preferences. Wal*Mart has few promotions compared to its 1

2 competitors, but instead maintains its everyday-low-prices commitment, which helps keep advertising expenses low. Wal*Mart adopted a decentralized and dynamic pricing approach, giving its store managers the power to underprice competition. In the markets with direct competition, Wal*Mart prices are always a few percentage points lower, and in markets with no direct competition, the prices are always a few points higher when compared to its competitors. Although the majority of Wal*Mart s products are national brands, there were a number of private labels in apparel, health and beauty care and food. In an effort to replace the foreign-sourced goods in the mid 1980s, Wal*Mart developed its Buy American program, inviting a number of U.S. manufacturers to participate. Wal*Mart leases about 70% of its stores and owns the rest. A typical Wal*Mart store covers about 80,000 square feet, with newer units at about 100,000 square feet. It takes about four months to open the store with relatively low construction costs per square foot. Most of the stores are built on lots allowing for later expansion and, by early 1990s, most of its stores were three years old or less. Sales per square foot, a standard measure of store productivity, were about 50% higher when compared with the competition. Due to its extremely efficient distribution system, Wal*Mart stores have less space reserved for the inventory, which helps boost its per square foot productivity. Most Wal*Mart stores are open from 9 am to 9 pm six days a week, and from 12:30 pm to 5:30 pm on Sundays, with most of the supercenters open 24 hours. Store is generally organized into 36 departments offering a wide variety of merchandise, including apparel, shoes, housewares, automotive accessories, garden equipment, sporting goods, toys, cameras, health and beauty products, pharmaceuticals, and jewelry. Electronic scanning of Uniform Product Codes (UPC) at the point of sale were installed in all the stores by the end of 1980s. Store associates use hand-held bar code scanning units to price-mark merchandise. These scanners, which utilize radio frequency technology, communicate with the store s computerized inventory system to ensure accurate pricing and improved efficiency. Bar-code and radio frequency technologies, and the need for improved communications between stores, distribution centers, and the headquarters, led to installation of a satellite system during the early 1980s. The satellite allowed sales data to be collected and analyzed daily, and enabled managers to learn immediately what merchandise was moving slowly or quickly, and thus avoiding overstocking or stockouts. The system is also used for video transmissions, credit card authorizations, direct communication with major suppliers, and inventory control. At an individual Wal*Mart store, daily information, such as sales by store and department, labor hours, and inventory levels, can be compared to the results from any previous time period, with another region, or nationwide. Distribution Wal*Mart uses a two-level hub-and-spoke distribution network. First stage brings the merchandise from the suppliers to Wal*Mart distribution centers. In the second stage, the sorted merchandise is distributed to Wal*Mart stores, typically within 2 days of the store s order placement. The store s merchandise replenishment process starts at the point-of-sale terminals, from which the information is relayed via satellite to Wal*Mart headquarters or directly to the supplier. Majority of requests are delivered from Wal*Mart s distribution centers, with the rest delivered directly from major suppliers such as Procter and Gamble. A technique known as cross-docking was introduced to transfer merchandise directly from inbound vehicles to store-bound vehicles. This facilitated continuous delivery, including repacking, without holding the merchandise on inventory. By mid 1990s, approximately 10% of Wal*Mart s merchandise was cross-docked at several distribution centers equipped to 2

3 handle this technique. This resulted in a solid inbound logistic cost reduction, directly reflected in cost of goods sold, and therefore, in their bottom line. Another advantage was provided by careful facility location decisions, placing distribution centers in the proximity of several Wal*Mart stores, allowing trucks to resupply many stores on a single trip. On the return trips, these trucks were able to carry returned merchandise, as well as pick up new products from suppliers factories and warehouses, bringing them all to the distribution centers, to be shipped elsewhere. This allowed for a significant reduction in number of empty backhaul miles, increasing fleets efficiency and therefore reducing cost of goods sold even further. During the mid 1990s, there was couple of thousand drivers driving similar number of trucks. Stores had several options regarding the timing and frequency of shipments, with most of them selecting night deliveries. For certain stores, a 24-hour accelerated delivery was also available. The size of a typical distribution center is about 1 million square feet and it operates on a continuous 24/7 basis using several hundred associates per shift. The distribution centers were highly automated and designed to serve the distribution needs of couple of hundred stores within a few hundred mile radius. Orders were pulled from stock with a computerized pick to light system guiding associates to correct locations. Suppliers Wal*Mart is known to be a tough negotiator when it comes to its supplies. Increasingly, suppliers have no choice but to confirm to Wal*Mart s standards or lose their business, a scenario they cannot afford. Buying from a wide variety of suppliers is centralized at the headquarters, with the exception of few large suppliers that deliver directly to Wal*Mart stores. In the mid 1990s no single supplier accounted to more than a few percentages of Wal*Mart s purchases, making Wal*Mart s supplier risk virtually non-existent. In the 1970s, and to a lesser extent during 1980s, a powerful supplier, such as Procter and Gamble (P&G), would dictate how much it would sell and at what price. As Wal*Mart grew throughout the 1980s and 1990s, its relationship with suppliers involved into partnerships, with information sharing through EDI as a key element of those relationships. P&G was one of the first manufacturers to link up with Wal*Mart by computer with a dedicated team permanently residing at Wal*Mart s headquarters. EDI enabled several thousand of Wal*Mart s vendors to receive orders, make electronic payments, and communicate with Wal*Mart electronically. IT investment was later expanded to include forecasting, planning, replenishing, and shipping application, all of which are typically major modules of any Enterprise Resource Planning (ERP) system. By the late 1980 s several of the major suppliers were using vendor-managed inventory (VMI) systems to replenish stocks in Wal*Mart stores and distribution centers. Wal*Mart transmitted daily POS data to these suppliers, which they used to generate orders and plan deliveries to specific stores and DCs. This way, the orders were timely and accurate, all of which generated inventory savings and increased sales for both parties. In the early 1990s, Wal*Mart installed its retail-link system, which gave most of its suppliers a direct computer access to its POS data, which they used to analyze the sales trends and inventory levels of their products, on a store-by-store basis. Finally, Wal*Mart s merchandizing departments developed computerized annual strategic business planning guidelines for its suppliers (and themselves). These guidelines included department s sales, profitability, and inventory targets, and specified Wal*Mart s expectations from suppliers, as well as suggestions for improvement to the mutual benefit. 3

4 Stores In the 1980s, Wal*Mart started to introduce several different formats besides the retail store with the introduction of Sam s warehouse clubs (early 1980s) and hypermarkets, combining groceries and general merchandise, which were later replaced by smaller supercenters (late 1980s). There were several other concepts, such as drug discount stores, arts and crafts stores, and surplus/damaged goods stores, all of which were eventually either consolidated into the retail, warehouse or supercenter concepts, or abandoned altogether. Sam s warehouse clubs use high-volume (bulk), low-cost merchandizing, with smaller handling cost due to reduced need for restocking, repackaging, and generally fewer offerings. This, combined with membership fees, yields comfortable profit margins. Most of the merchandise comes directly from the suppliers, and a smaller portion from Wal*Mart s distribution centers. The major strategy of Sam s Clubs was in the limited offering of stock-keeping units (SKUs) as discussed above. The numbers ran in thousands vs. tens of thousands for a regular retail store. Most of the customers need to purchase certain items in bulk for their own use or for resell to their own customers. Sam s Club members come from various groups such as the government, education, utilities, hospitals, and various small businesses. In early 1990s, Wal*Mart acquired The Wholesale Club, operating mostly in the Midwest, as well as Kmart s Pace clubs, and began integrating it into Sam s Club network. Its main competitor is PriceCostco, Inc. (after merger of Price Co. and Costco Wholesale Co.). Supercenters are combination of a supermarket and discount store with sizes ranging from a hundred to almost two hundred thousand square feet. Unlike supermarkets, the supercenters carry only a limited number of products to keep the costs low. Various other conveniences such as bakeries, delis, portrait studios, photo labs, dry cleaners, optical shops, and hair salons contributed to the proliferation of a one-stop shopping concept available 24/7. In the early 1990s, independently operated supermarkets constituted about a third of the grocery sales, a steady decline as national supermarket chains, discount retailers, and warehouse clubs, with their more limited offering and low cost structure, started to chip away their market share. General merchandise and specialty offerings (bakeries, seafood, floral shops, and delis) increased customer traffic and provided higher margins compared to groceries, and hence, at least in part, subsidized low margin grocery business. Therefore, although the food accounted for approximately half of all the sales at Wal*Mart s supercenters, its main benefit was an increase in customer traffic flow, with profits coming from higher margin general merchandise. The grocery section is typically a quarter to a third of the entire store. It offers approximately fifteen to twenty thousand SKUs of food, compared with 60,000 SKUs of general merchandise in the remainder of the store. Just like their retail store counterparts, the supercenters started to appear in the rural south and Midwest. A number of distribution centers were purchased from a Texas retail grocery supplier in the early 1990s, and were used to service supercenters, as well as Sam s Clubs. Each of the DCs was little shy of million square feet and able to service a hundred supercenters. The competition from national supermarket chains such as Kroger and more regional chains such as Publix remains fierce. These and other specialty supermarket chains such as Whole Foods, are positioning themselves as higher quality alternatives with often comparable prices, and continue their investment in information technology and distribution know-how in order to fend off Wal*Mart s assault. Wal*Mart, however, continues to gain market share at their expense, with only marginal competition in the supercenter format 4

5 from its main discount competitors Kmart and Target. Once known exclusively as a discount merchandise retailer, by the end of 1990s, Wal*Mart had managed to position itself as a modern, low-priced supermarket. Neighborhood markets were introduced in the late 1990s as smaller supercenters in more urban areas serving customer s needs for lower-volume-between-weekly shopping trips. Their size is a quarter to a third of a typical supercenter, but comparable in size (and often larger) than a typical supermarket. It offers no-frills food, pharmacy, photo-developing service, and limited general merchandise. There are about 25,000 SKUs with roughly split between food and non-food items, with higher sales per square foot compared to supercenters. Similar to all of its formats, neighborhood markets were first launched in rural south and Midwest with about hundred associates and a 24-hour operation. As neighborhood markets expanded (there are about 30 or so today), they were typically located relatively close to existing supercenters, have the same price structure, and use the same distribution center, thus leveraging Wal*Mart s logistics network. Recent trend is to offer more of food merchandise and reduce general-merchandise to the type often found in local convenient stores. With its steady international expansion, Wal*Mart is poised to take over the world and further consolidate its lead as the world s largest company. On one hand, Wal*Mart contributes greatly to low inflation, higher productivity and operational efficiency of everybody involved in discount retailing. On the other hand, Wal*Mart s workforce of more than a million has the lowest wages in the business and Wal*Mart is fighting vigorously any attempt of its workers to unionize. Wal*Mart is one of the main proponents of global trade, because this allows it to import cheap products from overseas. In the end Wal*Mart is consistently putting into practice its corporate strategy of everyday-low-prices, benefiting American consumers and its shareholder, if not necessarily the society overall. YOUR JOB Your task is to summarize the way Wal*Mart operates its supply chain. Specifically, your summary should address the following issues: Wal*Mart s store formats, distribution system, and supplier relationships. Implications of Wal*Mart s discount retail model on competition in general merchandising, as well as food products Important differences between Wal*Mart and other major discount retailers In addition to the short Wal*Mart overview provided above, please use Wal*Mart s Web site, as well as several articles posted on WebCT and any additional material you think is relevant for this case. Please use Supply Chain Management Wal*Mart Stores, Inc. as the title, list the group member names, and use 12 size fonts. The length of the paper should be between a minimum of one to a maximum of two double-spaced pages. DELIVERY Once you ve completed the assignment, one group member should print it out and bring it to class on the date it is due. 5