CASE STUDY Guosat Case Stuny retailer is faltering in recent years, and it’s WALMART? . renowned IT driven supply chain is a contributor WAL pa in its, woes, In October 2006, Wal-Mart had to Introduction sell its stores in South Korea and Germany. In While supply chain ‘Matt's pioneering Germany alone, it incurred a $1 billion loss. This “id's most efficient, the was reportedly due to its failure to adapt to 5 Souree: This case has bean. repx Kumar Jain to whom the @: xced from www.casestudyine.com with special permission from Mr Manish -epresses acknowledgement and thanksthe local cultures and inability to compete with established players. In the US, Wal-Mart reduced the number of new US supercentres it planned to open in 2007 by 30 per cent. in August 2007, Wal. Mart warned that its profits would be lower than expected for 2007 (it had missed second-quarter profit estimates). Experts blamed Wal-Mart's negligence to customer service, merchandising mistakes, and its inattentivenéss to local markets abroad for its inefficiency. Tesco's entry to the US market in 2007 may have caused further challenges, A variety of strategies to strengthen growth have mostly not been successful. In 2006, Wal. Mart bought retail applications from HP and Oracle,.and..quietly contracted with a social networking company, Bazaarvoice. Wal-Mart's online presence with its website also struggled. It was behind competitors such as Amazon.com and Target. Its promotion experiments using social networking concepts Bot mixed results, in addition, there were delays in implementation of radio frequency identification (RFID) tags throughout its supply chain. Later in the year, Wal-Mart changed its RFID strategy, with more focus on promotional items, category managementtrials, and Sam’s Club pallet location management. Vendors were rightly bemused and confused. . For Wal-Mart, one thing remained clear that just squeezing more Pennies out of the supply chain would not be enough. President and CEO Lee Scott, (who retired in Jan. 2009), commented on the company’s Performance in a press release, ‘ttis:not what we expect of ourselves, but what our shareholders expect of us.’ He said that the Management.would spend the rest of this year ‘focused on inventory improvements, delivéring quality products at low Prices, and store execution at the highest standards.’ Wal-Mari—The Retail Market Wal-Mart is the world’s largest retailer with $345 billion in sales for the fiscal year ending 31 January ie ne 2007. Wal-Mart Stores, Inc Supercentres, Discount sto: Markets and SAM’S Club warchous ploys 1.9 million associates worldwide and more than 1.3 million in the Us, making it one of the largest Private employers in the US. The retail giant has been a dominant player in the US retail market, which is most competitive in the world, a fact well- known to British retailers Sainsbury's and Marks & Spencer, which failed to attract US customers. Wal-Mart has more than 7000 stores and wholesale clubs across 14 markets. It operates more than 4000 facilities in the US and more than 2800 more in Argentina, Brazil, Canada, China — Costa Rica, E! Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom. in 2007, Wal-Mart became No. 7 on the FORTUNE 500 list and in 2003 and 2004 it was named ‘Most Admired Company in America’ by the FORTUNE magazine, Wal-Mart—The Corporate Background in 1945, Sam M, Walton opened a franchisee the Ben Franklin variety store in Newport, Arkansas. In 1946, his brother, James L. Walton, opened a similar store in Versailles, Missouri, Until 1962, the business focused entirely on the operation of variety stores. In 1962, Sam Walton started Wal-Mart's first discount store, ‘Wal-Mart Discount City’: He and his wife, Helen, put up 95 Per cent of the money for the first Wal-Mart store, Sam believed that the American Consumer was shifting to a different type of general store and discount stores would be very successful. Wal-Mart was incorporated in Delaware in October 1969, (During the initial years, Walton had focused on establishing new stores in smal! towns, with an average population of 5000, These towns were largely neglected by leading retailers such as Sears Roebuck & Company, K-Mart, and Woolco, which Concentrated more on larger towns and bigger cities. In his efforts to attract people from the rural areas to his stores, Walton introduced the conceptthe local cultures and inability to compete with established players. In the US, Wal-Mart reduced the number of new US supercentres it planned to Ren in 2007 by 30 per cent. In August 2007, Wal. Mart warned that its profits would be lower than expected for 2007 (it had missed second-quarter Profit estimates), Experts blamed Wal-Mart's negligence to customer service, merchandising mistakes, and its inattentiveness to local markets abroad for its inefficiency. Tesco's entry to the US market in 2007 may have caused further challenges, A variety of strategies to strengthen growth have mostly not been successful, I, 2006, Wal- Mart bought retail applications from HP and Oracle, and quietly contracted with a social networking company, Bazaarvoice, Wal-Mart's online presence with its website also struggled, It \was behind competitors such as Amazon.com and Target. Its promotion experiments using social Toworking concepts got mixed results, In addition, there were delays in implementation of radie frequency identification (RFID) tags throughout its supply chain. Later in the year, Wal-Mart changed its RFID strategy, with more focus on promotional items, category management trials, and Sams Club pallet location management. Vendors were rightly bemused and confused, For Wal-Mart, one thing remained clear that Just squeezing more pennies out of the supply chain would not be enough. President and Ce Lee Scott, (who retired in Jan. 2009), commented on the company’s performance in a press release, ‘Its not what we expect of ourselves, but what Our shareholders expect of us.’ He said that the management would spend the rest of this year ‘focused on inventory improvements, delivering Guality products at low prices, and store execution at the highest standards,’ Wal-Mart—The Retail Market ‘Wal-Mart is the world’s largest retailer with $345 billion in sales for the fiscal year ending 31 January RSS oo a Oe 2007. Wal-Mart Stores, Inc. includes Wal-Mart Supercentres, Discount stores, Neighborhood Markets and SAM'S Club warehouses, It employs 1.9 million associates worldwide and more than 1.3 million in the US, making it one of the largest pilvate employers in the US. The retail giant has been a dominant Player in the US retail market, which is most Competitive in the world, a fact well. known to British retailers Sainsbury’s and Marks & Spencer, which failed to attract US customers. Wal-Mart has more than 7000 stores and wholesale clubs across 14 markets, It operates more than 4000 facilities in the US and more than 2600 more in Argentina, Brazil, Canada, China, Costa Rica, E] Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom. In 2007, Wal-Mart became No. 1 on the FORTUNE 500 list and in 2003 and 2004 it was named ‘Most Admired Company in America’ by the FORTUNE magazine, Wal-Mart —The Corporate Background In 1945, Sam M. Walton opened a franchisee the Ben Franklin variety store in Newport, Arkansas. In 1946, his brother, James L. Walton, opened a similar store in Versailles, Missouri, Until 1962, the business focused entirely on the Speration of variety stores. In 1962, Sam Walton started Wal-Mart's first discount store, ‘Wal-Mart Discount City. He and his wife, Helen, put up 95 Per cent of the money for the first Wal-Mart store. Sam believed that the American consumer was shifting to a different type of general store and Giscount stores would be very successful. Wal-Mart Was incorporated in Delaware in October 1969, (During the initial years, Walton had focused on establishing new stores in small towns, with an average population of 5000. These towns were largely neglected by leading retailers such a Seare Roebuck & Company, K-Mart, and Weolco, which concentrated more on larger towns and bigger Cities. In his efforts to attract people from the reral ateas't his stores, Walton introduced the conceptof every day low pricing (EDLP), it Promised Wal- Mart’s customers a wide variety of high quality, low price,’ In the 60s, K-Mart expanded across the Country, while Wal-Mart had only 15 stores. But this changed in the 70s when Public offering Walton died after a prolonged illness in 1992, ‘Wal-Mart Suffered a setback but it continued its expansion ef Brazilian retail nture, and the acquisition ‘ona! sites in South Korea wean Makro. In January 1999, Wal-Mart sanded its German operations by buying 74 stores of the hypermarket chain, Interspar. The ores were acquired from Spar HandeleAG, which Owned multiple retail formats and Wholesale operations throughout Germany, Wal-Mart—The Business Milestones The major business events and some salient facts are given respectively in Exhibits 2.9 and 2.3. Doing It the Wal-Mart Way senor teenies Sens1962 Sam Walton started Wal-Mart in 1962 1970 First distribution center in Bentonville, Arkansas 1972 Listed on the New York Stock Exchange 1970s 276 stores in 11 states 1975 Famous ‘Wal-Mart Cheer’ was introduced by Walton 1978 Wal-Mart purchased the Hutcheson Shoe Company 1980s Sales grew to $26 billion by 1989 at 1,400 stores 1983 First Sam’s Club 1988 First Supercenter 1991 First international store in Mexico 1992 Wal-Mart entered Puerto Rico 1993 ‘Wal-Mart formed an international division 1994 Expansion into Canada, Wal-Mart acquired 122 Woolco stores from Woolworth, Canada 1995 Entry in Argentina and Brazil 1996 Entry in China 1997 Wal-Mart acquired the 21-store German hypermarket chain, Wertkauf 1999 Wal-Mart expanded its German operations by buying 74 stores of the hypermarket chain, Interspar 2002 Wal-Mart acquired a 6.1% stake in Seiyu 2003 Majority interest in Sefyu, making it a Wal-Mart subsidiary 2007 Wal-Mart's 3000th international store Source: www.casestudyinc.com be applied to big manufacturers such as Procter & Gamble (P&G). As one of the former employees puts it, ‘We would tell the vendors, don’t leave in any room for a kickback because we don’t do it here. And we don't want your advertising pro- gramme or delivery programme. Our truck will pick it up at your warehouse. Now what is your best price?’ Such transparency helped Wal-Mart know that the manufacturers were doing theirbest to trim down costs, This also helped in establishing a long-term relationship with the manufacturers, Generally, Wal-Mart preferred local and regional vendors and suppliers. Also, economies of scale gave Wal-Mart a negotiating advantage with suppliers, thereby allowing aggressive pricing strategies.NEP CHAIN MANAGEMENT Wal-Mart Stores Inc (NSE: WaT) es for the fiscal year ending Jan. 31, 2007 sale full year 2006 consolidated sales were US $6.5 1.9 million associates worldwide (38,541 in Japan) Company Corporate Headquarters Us. Revenues $345 billion in tn Japan, Seiyu’s billion Industry Retail, Retailing Services Employees Operations 14 International Markets Total Stores Store Formats 7000 (3000 international stores) 275 Seiyy supermarkets in Japan and SAM'S Club warehouses Major Competitors Major Brands/Labels s Tesco * Sainsbury * Marks & Spencers» Carrefour Sam’s Choice, Great Value, Everstart, Ol Roy, Puritan, Equate, » George, Athletic Works, Durabrand, 1LO, Hometiends, Mainstays, Metro 7, Parent's Choice, Ozark Tal, Relion, White Stag and Kid Connection. MEMBER'S MARK, Licensed brands include General Electric, Disney, McDonald's, Mary-Kate and Ashley, and Starter Business/Growth Strategy Low-cost Leadership, EDLP - Every Day Low Prices, Offering Permanent discounts across all stores Portfolio optimization and global leverage Key Executives Name, Designation (as in 2007) Supply Chain H. Lee Scott, Jr, President and Chief Executive Officer. Michael T. Duke, Vice Chairman Wal-Mart Stores, Inc. Johnnie c, Dobbs, Jr., Executive Vice President, Logistics and Eduardo Castro-Wright, Executive Vice President, President and Chief Executive Officer, Wal-Mart Stores Division Souree:weawewalman.com, www.samsclub com Integrating Supply Chain though Knowledge sharing Wal-Mart always believed that it was Negotiating on behalf ofthe customer and the best price wae Passedlon tothe customer. Its advantage created a Snowball effect in which increasing purchase Nolume led to more choice for the customer anf lower prices, leading to more purchase volume This price leverage was backed by systems and Processes in place that enabled Wal-Mart to take1s scale advantages to the next level to achieve unmatched success. Competitors struggled to warlize thei potential economies of scale because «the natural limitations of legacy processes and technological infrastructures (or lack thereof). Wal- wart excelled at business process efficiency by snvolving suppliersimanufacturers in the process The company was more than willing to share proprietary knowledge and processes with its supplier base to improve quality and eliminate svastecosts out of the supply chain. This process! product tenowledge sharing enabled super-effective aeet management with a constant focus On continuous incremental improvement. 19 other words, reducing costs 2 few pennies at a time over an extended time frame. Developing Partnerships with Suppliers ‘Traditionally, suppliers to the retailers had rather monolithic supply chains with litle effective forecasting. A ‘one size fits all’ approach meant the same price list irrespective of ordering. efficiency, Products delivery was done | the manner the customers desired and thus it came at the cost of efficiency. Wal-Mart invited its major suppliers to Co- develop profitable supply chain partnerships. ‘These partnerships are intended to amplify product flow efficiency and, in turn, Wal-Mart's profita- bility. 7A cage in point is Wal-Mart’s supplier rela- tionship with P&G. The relationship did ot begin well. Wal-Mart saw P&G as One of its bad suppliers because P&G's organization and processes were far t00 complex for Wal-Mart's efficiency-oriented culture. P&G's culture was (0 focus on day-to-day results. A long-term strategic plan was not its main focus. Besides, P&G's systems could not support & relationship with a distribution giant such 3s Wal-Mart. This felationship changed with the process of tenabling interoperability between the companies’ systems at transactional, operational, and strategic levels. Since 1988, the relationship evolved to yield tremendous value to both companies and their mutual business grew manifold. Wal-Mart and PAC also incorporated several other Inter, company innovations such as vendor-managed inventory and category management among others. In August 2003, Wal-Mart ‘announced that it would require all suppliers to put RFID tags with electronic product codes (EPC) on their pallets and cases by the end of 2006. By ‘April 2007, 600 suppliers were using RFID (about 3 pet cent of its base of 20,000). Afew suppliers felt that Wal-Mart was such a demanding, price-obsessed customer that making special technology investments at /s behest was cost-prohibitive, especially for small companies scraping by on slim margins. Others felt that this was one way smal suppliers become big suppliers. They could hone their technology strategies for their biggest potential markets even in the face of considerable risk. Distribution Strategy During fiscal 2007, approximately 80 pet cent of the Wal-Mart Stores purchases of merchandise were shipped from 121 distribution centres (OCS). ‘The remaining merchandise was shipped directly to stores from suppliers. Wal-Mart owns and operates 40 general merchandise DCs, 38 grocery DCs, 7 apparel and shoes DCs, 12 pr fessional services and specialty DCs, 2 import DCs and 3 DCs that support walmart.com Wal-Mart has 126 distribution facilities located in various countries that serve its international segment stores. In 1998, Wal-Mart stocked more than 80,000 items in over 40 DCs in the US. While its competitors directly supplied 50-65 per cent of inventory from their warehouses, ‘Wal-Mart's own ‘warehouses directly supplied 85 per cent of the inventory. This meant that Wal-Mart was able to provide replenishments within two days (on an Sverage) while competitors took five days. Shippingcosts for Wal-Mart were approximately 3 per cent as against 5 per cent for competitors, The inventory turnover rate was very high, about once every two weeks for most of the items. While some suppliers delivered goods such as automotive and drug products directly to its stores, about 85 per cent of the goods passed through the DCs. Wal-Mart managed each DC the same way for both cases and palletized goods, Goods which were to be distributed within the US usually arrived in pallets, while imported goods arrived in reusable boxes or cases. Wal-Mart used advanced bar code technology and hand-held computer systems to ensure an unfailing flow of products to support the supply function. Managing the centre became easier and more economical with technology. With real-time information about inventory levels of all the products in the centre, an employee had to just make two scans—one to identify the pallet, and the other to identify the location from where the stock had to be picked up. Different bar codes Were used to label different products, shelves, and bins in a centre. The hand-held computer guided an employee with regard to the location of a Particular product from a particular bin or shelf in the centre. When the computer verified the bin and picked up a product, the employee confirmed whether it was the right product or not, The quantity of the product required from the centre Was entered! into the hand-held computer by the employee and then the computer updated the information on the main server. The packaging department also had accurate information about the products to be packe Hand-held computers ensured that unnecessary Paperwork was eliminated. Centre supervisors could easily monitor their employees closely and Suide them even on the move. This enabled effi- cient distribution centre management operations and serves customer needs quickly. es for maintaining personal hygiene such as shower bath and fitness centres at each DC which also had ‘ood, sleep, and personal business provisions. They could also he used for meetings and paperwork The Logistics at Wal-Mart A fast and responsive transportation system was key to Wal-Mart's logistics infrastructure. At one Point about 3500 company-owned trucks served its DCs. Dedicated trucks meant Wal-Mart could replenish its stores twice a week from its DCs. Hiring dedicated and experienced drivers was given priority. All hired drivers had to have 300,000 accident free miles and no major traffic violation. A coordinator controlled and scheduled dispatches based on driver availability and estimated time between the DC and the retail store. A strict vigil over the drivers was maintained and a record of their activities was kept in the ‘private fleet driver handbook’. A code of conduct ensured safe delivery. Cross-docking In order to make the distribution process more efficient, Wal-Mart used cross-docking, Cross- docking involved eliminating the DC and the retail store while making a direct delivery to customers after picking and sorting the finished goods directly from the supplier. This was possible only if the supplier ensured delivery within a specified time. The requisition from the store was then converted into purchase orders and goods were forwarded to a staging area. The goods were then packed and delivered to customers as per the order. Such cross- docking meant that centralized decision control for merchandising, pricing, and promotions) was shifted from the corporate level, thereby trans- forming the supply chain into a demand chain. That is, instead of retail stores pushing goods into the system, the customers pulled the goods when required.‘Managing the Inventory at Wal-Mart The company was able to reduce inventory because the stores managed their own stocks. Stores could reduce pack sizes across products and also ensure timely price markdowns. Using IT applications, more inventories could be made available for high demand goods instead of cutting inventories across the board. By networking with suppliers, a quick replenishment order could be placed via the satellite communication system Wal-Mart had set up its own satellite commu- nication system in 1983. The supplier could then deliver the goods directly to the store concerned or to the nearest DC. The supplier was also able to reduce costs due to better coordination In 1991, Wal-Mart invested $4 billion ina retail link system. Around 10,000 suppliers used the system to monitor the sales of their goods at the stores and accordingly replenish inventory. In 2001, Wal-Mart tied up with Atlas Commerce to upgrade the system Line Wal-Mart Discount stores ‘Wal-Mar with Internet-enabled technologies. ‘Wal-Mart used advanced satellite communication systems, massively parallel processing (MPP) computer systems, and had extensive disaster recovery plans to track goods and inventory levels. This ensured uninterrupted service to its customers, suppliers, and partners. In the fiscal year 2008, Wal-Mart Inter- national's net sales reached level of $90.6 billion. ‘They leveraged best practices, lessons from multiple: store formats and global procurement services. In addition, relationships with key global suppliers ‘continued to help Wal-Mart leverage their volumes ‘across countries. Itadded 300th international unit ‘and 101 locations in China through the Trust-Mart transaction while it also formed a joint venture with Bharti Enterprises in India. The basic retail store format of Wal-Mart is given in Exhibit 2.4 that follows and the inter national operating format in Exhibit 2.5. Re RUE LE ‘Average 107,000 square feet, employ an average of 225 associates and offer 120,000 items Wal-Mart Supercentres Developed in 1988 More than 2,300 nationwide in US ‘Average 187,000 square feet, employ 350 or More associates on average and offer 142,000 different items Wal-Mart Neighborhood markets First opened in 1998 ‘More than 120 Neighborhood Markets ‘Average 42,000 square feet Employ 95 associates on average and offer about 29,000 items Sam's Club More than 584 Sam's Club locations ‘Average 132,000 square feet Average of 160 to 175 associates and offers approximately 5,500 different products Source: www.caseshvelyine.comArgentina Brazil Canada China Costa Rica El Salvador Guatemala Honduras Japan Mexico Nicaragua Puerto Rico United Kingdom Source: Wal-Mart Annual Report Supercenters -13 Supercenters - 26 Sam's Clubs ~ 19 Hypermarkets (Hiper Bompreco, Big) ~ 66 Supermarkets (Bomprego, Mercadorama, Nacional) - 57 Cash-n-carry stores (Maxxi Alacado) ~ 11 Combination discount and grocery stores (Todo Dia) — 15 General merchandise stores (Magazine) - 3 Discount stores (Mini Bompreco) ~ 2 Supercenters ~ 7 Discount stores ~ 276 Sam’s Clubs - 6 Supercenters ~ 68, Neighborhood Markets 2 and 3 Sam's Clubs 4 Hypermarkets (Hiper Mas), 23 Supermarkets (Més por Menos), 8 ‘Warehouse stores (Maxi Bodega) and 102 Discount stores (Pali) 2 Hypermarkets (Hiper Paiz), 32 Supermarkets (La Despensa de Don Juan) and 29 Discount stores (Despensa Familiar) 6 Hypermarkets (Hiper Paiz}, 28 Supermarkets (Paiz), 8 Warehouse stores (Maxi Bodega), 2 Membership clubs (Club Co) and 88 Discount stores (Despensa Familiar) 1 Hypermarket (Hiper Paiz), 6 Supermarkets (Paiz), 5 Warehouse stores (Maxi Bodega) and 29 Discount stores (Despensa Familiar) 97 Hypermarkets (Livin, Seiyu), 203 Supermarkets (Seiyu, Sunny) and 2 General merchandise stores (Seiyu) 118 Supercenters, 77 Sam's Clubs, 100 Supermarkets (Superama, Mi Bodega), 219 Combination discount and grocery stores (Bodega), 61 Department stores (Suburbia), 312 Restaurants and 2 Discount stores (Mi Bodega Express) 5 Supermarkets (La Unién) and 35 Discount stores (Pali) 6 Supercenters, 8 Discount stores, 9 Sam’s Clubs and 31 Supermarkets (Amigo) 23 Supercenters (Asda), 291 Supermarkets (Asda), 7 General merchandise stores (Asda Living), 12 Apparel stores (George) and 2 Discount stores (Asda Essentials)