Statistics - Lecture notes - Walmart - Lecture notes, lectures 1 - 2 PDF

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Walmart

A) Over the period of 1991 to 2011 Wal-Mart went through vast expansions internationally (According to Table 1 from the case study). This incremental expansion resulted in large economies of scale, giving them the advantage to obtain supplies from various vendors for lower prices (Hicks, 2007). Thus they have an edge in their principal function of purchasing. They are able to reflect this cost savings on their prices provided to their customers. WalMart’s increased geographical expansion facilitated their storage capacity and their distribution function. Q) Identify the distinctive resources and capabilities in each of these functions/activities. A) Organization and management style: * Even after the death of Walton in 1992, the company continued to adhere to his initial beliefs and business principles. * Wal-Mart practices a close relationship between management and headquarters, promoting faster communication amongst members of the organization and also allows headquarters to keep a better track of individual stores. HRM * Walton introduced a unique spirit of motivation and employee involvement by giving them responsibilities, trusting them, keeping high expectations, providing clear incentives and maintaining close communication. * This created enthusiasm and increased involvement of employees which is not common in large retail chains. IT * By early 1990s, the implementation of EDI accelerated information processed about their sales and inventory, making transactions between the company and suppliers easier. Purchasing * They had high bargaining power due to their large economy of scale. * Implementation of EDI helped accelerate transactions between supplier and the company. In-store operations * Wal-Mart had put in a lot of efforts to reach their customers at a personal level by operating for longer durations, and having their employees attend customers with utmost care and attention. * Store managers were given important decision making power, which is usually limited to only the head office or regional offices. This made them feel more important and allowed them to implement strategies based on

their respective local environments. Distribution and warehousing * Wal-Mart ships 82% of its purchases to their own distribution centers, unlike most other retailers who depend on 3rd party distributors. * Wal-Mart’s cross ducking system enables faster distribution of goods. Marketing  Wal-Mart used the concept named “EDLP (Every Day Low Price)” to earn the trust of customers that their prices would not change during constant promotions. This was done by providing variety quality products at everyday low prices.

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Wal-Mart’s main competitive advantages lie in its cost advantages, which are brought by its economy of scale. The large economy of scale allows Wal-Mart to have lower prices for purchases and maintain special vendor relationships, independent of a single large supplier, and have vendors competing for its shelf space, instead of Wal-Mart seeking merchandising itself. The economy of scale also allows the company to have the most store space, supported by the largest distribution and warehouse network of any retailers, allowing 24-hour delivery turnovers, overnight delivery and cross-docking. This fundamental competitive advantage cannot survive without the supporting functions and activities that help to organize and manage such a large company. These functions include a marketing program that reflects the benefits of economy of scale, “Everyday Low Prices”; state-of-the-art IT systems; and quick, personal communications between management levels. 3. Identify the distinctive resources and capabilities in each of these functions and activities.  Purchasing and vendor relationships  Low prices resulted from large economy of scale Independent of a single, key supplier by controlling purchasing from every supplier under 2.5%  Implementation of EDI and internet-based systems to cut costs and accelerate information processing  Distribution and warehousing  Largest distribution/warehousing network, distributing the highest proportion of goods to own stores than any other retailer  New operation management processes such as cross-docking to improve speed  In-store operations  Wide range of merchandise, totaling over 50,000 SKU’s  Decentralized store management, allowing each store manager to design and implement strategies based on local environment  Plentiful customer service, with usually the longest hours, cheerful associates and “Satisfaction Guaranteed” return policy  Marketing  Key message, “Everyday Low Prices”, reflects the company’s fundamental values and key strategy  Low cost marketing achieved by word-of-mouth reputation, spending only about 25% of the competitors’ marketing budget  Emphasis on patriotism and national causes  IT  Implementation of EDI and internet-based systems to cut costs and accelerate information processing  Utilization of these systems include:  Marketing analysis, such as “data-mining”, that provides Wal-Mart with valuable information on merchandising selection and customer segmentation Store layout planning  Inventory control/replenishment  HRM  High expectations of employees  Close communication between management and associates due to flat organizational structure  Effective incentives, such as stock ownership scheme that created many millionaire associates, even at lower level  Avoidance of labor unions  Organization and management style  Flat organizational structure to allow faster communication and closer monitoring of individual stores by corporate headquarter  Constant monitoring of competitors by headquarter associates  Emphasis on management development, providing training and most hiring done by internal promotion

Resources and Capabilities of Wal-Mart

Wal-Mart had enough financial resources to make capital investments to improve its operations and labor productivity. Most important investments were technological investments such as the UPC (Uniform Product Code) infrastructure, the computerized system within stores and the satellite network that enabled almost real-time communication among the stores, the distribution centers and vendors. These technological resources can also be classified as equipment related resources. As a result of these resources, Wal-Mart had strengthened capabilities in financial management, purchasing, administration, inventory management, labor productivity and store management. The computerized system within the stores enabled Wal-Mart to wire the merchandise requests of the stores directly to the central computer at the related headquarter, which functioned as a distribution center. In case the stock levels were lower than the critical levels, the merchandise could be reordered directly from the related vendors thanks to this computerized system. This system not only enabled to track inventory, sales and accounting functions but also strengthened the bargaining power in purchasing of Wal-Mart. Each vendor could supply no more than 2.8% of total purchase of Wal-Mart. With the $20 million worth of satellite network investment, Wal-Mart could ease the real-time communication among the stores, the distribution centers and vendors. This investment also enabled to save from the administrative costs, especially telephone costs, up to $10 million and increase the efficiency in administrative meetings hold as a teleconference format among the headquarters and the stores. Finally, WalMart had a superior reaction time in adjusting its inventory than the competitors thanks to this satellite network. In addition to that, electronic scanning of the UPC at the point of sale enabled higher speeds in checkouts, eliminated the paperwork, and simplified the inventory management, reorders and postaudits of the merchandising programs. This infrastructure also improved the labor productivity in the stores. Using also its financial resources, Wal-Mart established a superior distribution network using its distribution resources. It established a twostep hub-and-spoke distribution network using its 400-plus truck-tractor fleet. Only 20% of the inbound merchandise was shipped directly from suppliers. The rest was supplied using “cross-docking” that is delivering the merchandise over this network using only trucks without ever sitting in the inventory like warehouses. Thanks to this distribution network, each distribution center could serve up to 175 stores within 150-to-300 mile radius. By the end of 1985, that was meant 3.9 million square feet of distribution space in 5 locations, delivery within 48 hours with 60% full on backhauls. As a result, the cost of inbound logistics in early 1980s was in

average 2% of sales which was the half of the industry average. Furthermore, due to increase efficiency in inventory management, the store management was easier and there was more space available in the store for sales providing increase in productive space in the stores.

As an intangible resource, the reputation of Wal-Mart enabled efficiently to do marketing and sales. With its brand reputation, it could do branded merchandize such that 95% of its non-clothing sales were branded. It used the marketing theme of “We Sell for Less”; therefore, it could create a customer value in terms of price and service, focusing on customer benefits like “no questions asked” policy on returns. Thus, it was preferred for shopping by price sensitive customers especially in the categories of health and beauty aids, housewares and appliances. Besides, its promotional strategy was governed by the philosophy of “everyday low prices”. There were 13 promotions a year; one each month, two in December, and promotional prices were 10%-20% less than the regular ones. These were less costly compared to those of the competitors and they could result in twice as many sales as the others. Furthermore, its credit transactions accounted for less than 5%of its total sales which was another financial advantage of it compared to the other discount retailer whose terms of sale was also cash-and-carry. In conclusion, due to its reputation in low price and customer service, it could improve brand awareness and keep customers loyal.

On the other hand, Wal-Mart’s reputation enabled another additional advantage provided by the suppliers in terms of store management. All of Wal-Mart shoe, pharmaceutical and jewelry departments were handled by the licensees in 1975. Two-thirds of these accounted for 0.2% Wal-Mart’s discount sales, which was half of the industry average, in 1985. Considering human resource management resources, Wal-Mart stresses on the importance of its employees in its operations. It also encourages its employees for stock purchasing of the company and has initiatives for profit-sharing; therefore, it has higher employee loyalty. Thanks to its “shrinkage” program to avoid shoplifting and its technological infrastructure inside the stores the labor productivity has increased. These practices make employees to act like an owner of the company. The mentioned resources and capabilities are listed below with the corresponding importance scores and relative strengths of Wal-Mart. purchasing: WM’s buying power derives from the huge size ofits purchases (itscritical resource in this area). However, it is also organized to maximize theimpact ofthis buying potential through: –

centralizing its buying; –placing vendors’ representatives under pressure (the windowless cubicles,metal furniture); –limiting the power ofsuppliers by limiting each supplier to a max. of2.5%ofWM’s total purchases; –collaborating with suppliers (e.g., EDI) to offer suppliers cost savings thatcould then be passed on in discounts for WM; –Internet-based buying that allows WM to access purchasing opportunitiesworldwide.• Warehousing & Distribution: Key distinguishing features: WM responsible fordistributing most ofits goods to its stores; WM’s hub-and-spoke system. Howdoes this differ from other retailers? They rely more on their suppliers to under-take delivery; because they didn’t expand in so systematic a fashion, they haveless well-integrated and less well-positioned hub-and-spoke systems. Is WM’ssystem superior? Yes! Why? Because it: –gives WM control – it has total control over scheduling its deliveries to storeswhich allows it complete integration ofits supply chain (thereby allowinglower levels ofstore inventories, reducing likelihood ofstock-out, etc.); –permits efficiencies from higher-capacity utilization oftrucks – largerdrop volumes (as compared with individual suppliers offering individualstore drops), ability to utilize truck backhauls to return excess in-storeinventories; –allows WM to introduce innovation throughout its entire distributionsystem – e.g., crossdocking. To show the advantage ofthe WM system it is useful to draw the WM hub-and-spokesystem where suppliers deliver to warehouses and WM delivers to stores, as comparedwith a system where each supplier delivers direct to the stores: In-store operations: two key features characterize WM’s in-store management: –Decentralization ofdecision making. A key feature ofWM’s system is thelevel ofautonomy given to store managers over pricing and merchandis-ing. This decentralization is extended down to individual departmentswithin stores. The result is flexibility to adjust to local conditions (stockingproducts that meet local needs; adjusting pricing to local competitive conditions) and flexibility to respond quickly to new local market conditions.

–High level ofconsumer service. Although WM’s competitive advantage isbasically its cost leadership, it also seeks differentiation advantage throughmeeting shoppers’ needs and preferences. Key aspects ofoffering a supe-rior retail service are seen in (a) offering a wide range ofgoods, (b) ensur-ing availability (avoiding stock-outs), (c) adjusting to local needs andpreferences, (d) offering a positive customer experience – e.g., “greeters,”“satisfaction guaranteed” program, etc.• Marketing: The hallmark ofWM’s approach to the market is simplicity andconsistency. “Everyday Low Prices” theme positions WM as the low-priceretailer while also allowing major economies in advertising and promotion.Note that WM’s advertising/sales ratio is a mere 0.5% – one-fifth ofKmart’s,one-seventh ofSears Roebuck.• Information technology: WM has long been a leader in the application ofIT toretailing (e.g., pioneered EDI with suppliers, EPOS data gathering, satellitecommunication, etc.). Key aspects ofWM’s IT system’s are:

(a)They are closely tailored to WM’s decision-making needs. The IT systemprovides a very rapid flow ofinformation (in many cases in real time) todecision makers to allow faster, more accurate decisions. In particular,POS data is continually being analyzed while it is being collected toprovide easy-to-use feedback to store managers, warehouse managers,and suppliers. (b)WM’s IT system creates close integration throughout the whole valuechain. The most remarkable aspect ofWM’s operation is the close linkageofthe entire supply chain. The result is a system in which inventory turnsare among the highest in the industry: Human Resource Management: Fundamental to WM’s capabilities across allits activities are the motivation, flexibility, and cooperation ofits employees.What is different about WM’s employees? The interesting feature is theirsheer ordinariness. The huge majority ofWM’s 1.4 million employees areworking-class individuals with modest educational attainments doing rela-tively low-skilled jobs for pay that is not very far above minimum wage. Sowhat is it that makes their performance so remarkable? Two factors seemcritical: –WM’s culture. WM’s culture has its roots in the principles and values of Sam Walton, which themselves are a reflection ofthe society ofwhich hewas a part. The protestant Christian, rural, comparatively poor areas of Arkansas and rural, southwest America are closely associated with WM’s values ofthrift, hard work, fairness, simplicity, and friendliness. UnderSam Walton there was a remarkable unity within WM. Even though SamWalton was the richest man in America while most ofhis associates wereearning less than $6/hour, they shared the same dress, way oftalking, andlifestyle. –WM’s people management. Human resource management is based uponthe WM culture and Sam Walton’s management principles. These are toreinforce motivation, both through “empowering” employees with deci-sion-making and consultation rights, and providing them with financialincentives. Not least ofthese was WM’s profit-sharing and stock owner-ship scheme which created several thousand millionaires among WMemployees. But WM’s HRM policies extend well beyond decentralizationand financial incentives; the real brilliance ofits people management liesin its ability to treat its employees as individuals, and to offer them respectin very tangible ways – listening to their suggestions, asking for their opin-ions, enlisting them in WM’s strategic initiatives. It is these values trans-lated into everyday practices that create a family atmosphere within thishuge corporation.• Organization and Management. The peculiarities ofWM’s top managementstructure are not always apparent to students, so establishing the distinctivefeatures ofWM may take a bit ofdrawing out. Ifthe students have difficultyarticulating the key features ofWM’s management structure and methods, Iask: “Would you like to be a manager at WM?” or “How many Harvard MBAsdo you think are working at WM?” I encourage them to picture life as a WMregional vice president. These key individuals live at the WM HQ at Ben-tonville, and spend most ofthe week visiting stores and warehouses withintheir region. They have no office within their region, and spend Friday andSaturday in meetings back at HQ. It’s a tough life – a lot oftravel, high expec-tations, and few perks (traveling on Southwest airlines; staying in budgetmotels). Who are the people that thrive in this lifestyle? – It’s not MBAs fromprestigious B-schools, but internally promoted managers who have workedtheir way up ...