Analyze the case study Half a Century of Supply Chain Management at Wal-Mart and submit a two-page write-up on the following:What attributes demonstrate the effectiveness of Wal-Mart’s supply chain?How does Wal-Mart’s performance compare to its competitors? Is it performing better or worse? How?Is Wal-Mart’s supply chain strategy and performance sustainable? What recommendation would you give to James Neuhausen?The case write-up should not exceed four-pages, (2 page writing and two pages of Exhibits) double-spaced, font size 12 Times Roman or equivalent.The write-up should be professionally done, with arguments or points made in a logical flow. You can use prose or bullet-point format, but key arguments should be articulated clearly and concisely.
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HALF A CENTURY OF SUPPLY CHAIN MANAGEMENT AT WALMART 1
Ken Mark wrote this case under the supervision of Professor P. Fraser Johnson solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
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University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2012, Richard Ivey School of Business Foundation
Version: 2013-11-12
INTRODUCTION
James Neuhausen was a U.S. stock analyst tasked with preparing a recommendation on what his firm, a
large U.S. investment house, should do with its stake in Wal-Mart Stores, Inc. It was an unseasonably
warm day in early February 2012, and Neuhausen was reviewing his notes on the firm. Wal-Mart, the
world’s largest retailer, was trying to recover from a series of missteps that had seen competitors such as
Dollar Stores and Amazon.com close the performance gap. Competitors had copied many aspects of WalMart’s distribution system, including cross-docking product to eliminate storage time in warehouses,
positioning stores around distribution centres and widespread adoption of electronic data interchange
(EDI), to manage ordering and shipping from suppliers. Neuhausen stated:
Wal-Mart is believed to have one of the most efficient supply chains in the retail world.
What impact will the increasing variety of product, store formats and the growing
importance of international stores have on the way it distributes product? What
improvements to its supply chain does the company need to make in order to continue to
stay ahead of competitors?
Last year, Wal-Mart suffered nine consecutive quarters of declining same store sales.
Procter & Gamble’s Chief Executive, Robert McDonald, pointed out that part of the
problem was that there were execution issues at Wal-Mart’s U.S. stores. 2 More nimble
competitors such as Dollar General are rolling out small format stores that are eating into
Wal-Mart’s share. In the online space, Amazon.com has become a major threat. Wal-Mart
has also changed over the years and it now operates a variety of store formats under 60
different banners around the world. International sales hit US$109 billion in fiscal year
2011, more than a quarter of its business. Can its supply chain keep up and still deliver
efficiency gains?
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Wal-Mart or any of it employees.
2
http://operationsroom.wordpress.com/2011/03/07/is-wal-mart-losing-focus/, accessed January 4, 2012.
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THE RETAIL INDUSTRY
U.S. retail sales, excluding motor vehicles and parts dealers, reached US$3.9 trillion in 2011. Major
categories in the U.S. retail industry included general merchandise, food and beverage, health and personal
care and other categories as can be seen in Exhibit 1. In the United States, retailers competed at local,
regional and national levels, with some of the major chains such as Wal-Mart and Costco counting
operations in foreign countries as well. In addition to the traditional one-store owner-operated retailer, the
industry included formats such as discount stores, department stores (selling a large percentage of soft
goods, or clothing), variety and convenience stores, specialty stores, supermarkets, supercentres
(combination discount and supermarket stores), Internet retailers and catalog retailers. Online retail sales
were rising in importance, accounting for US$197 billion in 2011. 3
The top 200 retailers accounted for approximately 30 per cent of worldwide retail sales. 4 Major retailers
competed for employees and store locations as well as customers. There were two broad strategies in
global retailing: variable pricing, or “hi-lo pricing,” and everyday low price (EDLP). Hi-lo pricing,
practiced by retailers for decades, involved adjusting the retail price of items to optimize gross margins.
For example, at traditional grocery stores, while prices of key items — such as milk, sugar, eggs and butter
— were kept consistently low, items such as toothpaste, detergent and tissue had high prices. The goal in a
hi-lo environment was to generate increased sales by having the manufacturer fund the trade promotions on
some items — lowering prices by 25 to 30 per cent — every month or quarter.
On the other hand, an EDLP strategy meant that prices on items were generally consistent from week to
week but were kept as low as possible so as to generate the highest consumer foot traffic. Running an
EDLP strategy generally required the retailer to focus on keeping operational costs as low as possible and
investing any savings into lowering retail prices. The goal, in an EDLP environment, was to generate
higher aggregate gross profit by increasing the volume of items sold.
As many of the top global retailers faced intense competition in their home markets, a growing trend for
these global retailers was international expansion, especially into developing markets such as Asia, South
America and Africa. The objective of international expansion was to find a way to continue to grow
earnings at a faster pace than was possible domestically. Retailers going abroad sought to capitalize on
global purchasing economies of scale and to leverage international expertise from one market to another.
But international expansion was fraught with risk, and it was not uncommon for retailers to pull out of a
market if they were unable to build profitable operations.
WAL-MART STORES, INC.
Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart was the number one
retailer in the world with fiscal year 2011 net income, from continuing operations, of US$16 billion on
sales of US$419 billion. It had over 2 million employees and 8,500 stores in 15 countries, the result of a
series of acquisitions over the past 20 years. Beginning with its “big box” discount store format in the
1960s, Wal-Mart’s store formats around the world had grown to include supercentres, which were a larger
version of a discount store that included groceries, supermarkets, wholesale outlets, restaurants and apparel
stores. Globally, it served about 200 million customers per week. 5
3
http://mashable.com/2011/02/28/forrester-e-commerce/, accessed January 15, 2012.
http://www.uneptie.org/pc/sustain/reports/Retail/Nov4Mtg2002/Retail_Stats.pdf, accessed May 10, 2006.
5
“WMT — 17th Annual Meeting for the Investment Community,” Thomson StreetEvents, October 13, 2010, accessed
January 5, 2012.
4
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Wal-Mart’s strategy was to provide a broad assortment of quality merchandise and services at “everyday
low prices” (EDLP) and was best known for its discount stores, which offered merchandise such as
apparel, small appliances, housewares, electronics and hardware. In the U.S. general merchandise arena,
Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited.
Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors
included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco
Wholesale. Wal-Mart was facing growing competition for large ticket general merchandise products and
from online retailers such as Amazon.com.
THE DEVELOPMENT OF WAL-MART’S SUPPLY CHAIN
Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben
Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract
to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to
selectively purchase merchandise in bulk from new suppliers and transport these goods to his stores
directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of
product through low-cost retail outlets — was sweeping the nation, he decided to open up large warehousestyle stores in order to compete. To stock these new stores, initially named “Wal-Mart Discount City,”
Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to
send their trucks to his stores, which were located in rural Arkansas, self-distribution was necessary.
Wal-Mart undertook an initial public offering in 1969 to raise funds to build its first distribution centre in
Bentonville, Arkansas. As the company grew in the 1960s to 1980s, it benefited from improved road
infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of
“resale price maintenance,” which had prevented retailers from discounting merchandise. To keep an eye
on his growing network, Walton piloted a small single-engine airplane, which he would land at air strips
close to his new stores.
Wal-Mart’s supply chain, a key enabler of its growth from its beginnings in rural Arkansas, was long
considered by many to be a major source of competitive advantage for the company. It was one of the first
firms to rely on data to make operational decisions, using bar codes, sharing sales data with suppliers,
controlling its own trucking fleet and installing computerized point-of-sale systems that collected itemlevel data in real time. When Wal-Mart was voted “Retailer of the Decade” in 1989, its distribution costs
were estimated at 1.7 per cent of its cost of sales, comparing favourably with competitors such as Kmart
6
(3.5 per cent of total sales) and Sears (5 per cent of total sales).
Its successes were widely publicized, and competitors had adopted many of Wal-Mart’s management
techniques. Yet Wal-Mart continued to lead the industry in efficiency, achieving inventory turns of 11.5
times in fiscal year 2011. For perspective, for the same period, key U.S. competitors Target Corp.,
Amazon.com and Sears had inventory turns of 8.7 times, 6.2 times, and 4.7 times, respectively. But Kroger
Co., the second largest grocery retailer in the United States, had inventory turns of 14.2 times, primarily
due to its focus on high-turning perishable food items. 7
6
7
“Low Distribution Costs Buttress Chain’s Profits,” Discount Store News, December 18, 1989.
Inventory turns calculated from respective firms’ 10-K filings.
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Page 4
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Procurement
As his purchasing efforts increased in scale, Walton and his senior management team would make trips to
buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart’s
U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new
items were ordered. Over time, many of Wal-Mart’s largest suppliers maintained offices in Bentonville,
staffed by analysts and managers supporting Wal-Mart’s business.
In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the
mid-1980s. Wal-Mart’s international purchasing offices worked directly with local factories to source WalMart’s private label merchandise. Private label products were appealing to customers as they were often
priced at a significant discount to brand name merchandise; for Wal-Mart, the private label items generated
higher margins than suppliers’ branded products. Private label sales at Wal-Mart, first developed in the
1980s, were believed to account for just 16 per cent of Wal-Mart’s sales, compared to 25 per cent at U.S.
rivals Safeway and Kroger. 8 This was because Wal-Mart’s stated strategy was to be a “house of brands,”
procuring top brands in volume and selling them at low prices. 9
Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and
review a fully merchandised prototype store, which was located in a warehouse. In order to gather field
intelligence, buyers toured stores two or three days a week and worked on sales floors helping associates
stock and sell merchandise.
Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increase
bargaining clout was a contributing factor in Procter & Gamble’s (P&G) acquisition of chief rival
Gillette. 10 Prior to the acquisition, sales to Wal-Mart accounted for 17 per cent of P&G’s and 13 per cent of
Gillette’s revenues. 11 On the other hand, these two suppliers combined accounted for about 8 per cent of
Wal-Mart’s sales. 12 Some viewed Wal-Mart’s close cooperation with suppliers in a negative light:
Wal-Mart dictates that its suppliers . . . accept payment entirely on Wal-Mart’s terms . . .
share information all the way back to the purchasing of raw materials. Wal-Mart controls
with whom its suppliers speak, how and where they can sell their goods and even
encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to
suppliers where to manufacture their products, as well as how to design those products and
13
what materials and ingredients to use in those products.
When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting or distribution. Globally, Wal-Mart was thought to have around 40,000
suppliers, of whom 200 — such as Nestle, P&G, Unilever, and Kraft — were key global suppliers. With
Wal-Mart’s expectations on sales data analysis, category management responsibilities and external
research specific to their Wal-Mart business, it was not uncommon for a supplier to have several
employees working full-time to support the Wal-Mart business.
8
http://www.ft.com/intl/cms/s/0/762b1f80-1259-11de-b816-0000779fd2ac.html#axzz1lv8XtooH, accessed January 15, 2012.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8ErNwolNpAw, accessed January 15, 2012.
10
http://www.newyorker.com/talk/content/?050214ta_talk_surowiecki, February 7 2005, accessed January 15, 2012.
11
Larry Dignan, “Procter & Gamble, Gillette Merger Could Challenge Wal-Mart RFID Adoption,” Extremetech.com, January
31, 2005. http://www.extremetech.com/article2/0,1558,1758152,00.asp, accessed January 15, 2012.
12
Mark Roberti, “P&G-Gillette Merger Could Benefit RFID”, RFID Journal, February 4, 2005.
13
Barry C. Lynn, “Breaking the Chain,” Harper’s Magazine, July 2006, p. 34.
9
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Page 5
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Distribution
Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution
centre was a significant investment for the firm, Walton insisted on saturating the area within a day’s
driving distance in order to gain economies of scale. Over the years, competitors had copied this “hub-andspoke” design of high volume distribution centres serving a cluster of stores. This distribution-led store
expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores,
expanding across the nation from its headquarters in Arkansas.
Stores were located in low-rent, suburban areas close to major highways. In contrast, key competitor
Kmart’s stores were thinly spread throughout the U.S. and located in prime urban areas. By the time the
rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient
logistics network of any retailer. Wal-Mart’s 75,000-person logistics and its information systems division
included the largest private truck fleet employee base of any firm — 6,600 trucks and 55,000 trailers,
which delivered the majority of merchandise sold at stores. 14 Its 150 distribution centres, located
throughout the United States, were a mix of general merchandise, food and soft goods (clothing)
distribution centres, processing over five billion cases a year through its entire network.
In the United States, Wal-Mart’s distribution centres received about 315,000 inbound truckloads, of which
115,000 were shipped “collect,” which meant they were picked up directly from suppliers’ warehouses by
Wal-Mart’s trucking fleet, The remaining 200,000 loads were shipped by suppliers’ trucks or by logistics
providers. The goal at Wal-Mart’s distribution centres was for high turning items — such as fresh food or
other perishable merchandise — to be cross-docked, or directly transferred from inbound to outbound
trailers without extra storage.
The average distance from distribution centre to stores was approximately 130 miles. Each of these
distribution centres were profiled in a store friendly way, with similar products stacked together.
Merchandise purchased directly from factories in offshore locations such as China or India were processed
at coastal distribution centres before shipment to U.S. stores.
On the way back from delivering product to stores, Wal-Mart’s trucks generated “backhaul” revenue by
transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart’s backhaul revenues
— its private fleet operated as a for-hire carrier when it was not busy transporting merchandise from
15
distribution centres to stores — were more than US$1 billion per year. In mid-2010, Wal-Mart was
looking to expand its backhaul program, to pick up more product directly from suppliers’ factories. It was
seeking, in some cases, a 6 per cent reduction in the manufacturer’s selling price. For perspective, suppliers
estimated the actual transportation expense was just 3 per cent of the selling price. 16
Because their trucking employees were non-unionized and in-house, Wal-Mart was able to implement and
improve upon standard delivery procedures, coordinating and deploying the entire fleet as necessary.
Uniform operating standards ensured that miscommunication between traffic coordinators, truckers and
store level employees were minimized. During an analyst meeting in October 2011, Johnnie Dobbs, WalMart Stores’ (Wal-Mart’s) EVP Logistics, had stated:
Everyday low cost is the foundation for everyday low prices. So our focus across the
organization is delivering products that our customers need in the most efficient method
14
http://walmartprivatefleet.com/AboutUs/LeadershipProfiles.aspx, accessed January 2, 2012.
http://www.dcvelocity.com/articles/july2004/inbound.cfm, accessed August 19, 2006.
16
http://www.businessweek.com/magazine/content/10_23/b4181017589330.htm, accessed March 3, 2012.
15
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