Walmart Case Analysis

1. What are the sources of Wal-Mart’s competitive advantage in retailing?

In order to achieve a competitive advantage in retailing, Walmart used a combination of

technology, competitive benchmarking and operational efficiency to lower cost structures. They

also created a culture where the workforce was empowered to make decisions at a store level

to optimize operations to meet local market conditions. Walmart had the lowest operating

expense as a percentage of sales at 18% as opposed 25% for Kmart giving them higher

operating margins. In addition they excelled in generating revenue/sq ft. Based on our analysis

we found that walmart has 0.27$/Sq ft as opposed to 0.1$/Sq ft for Kmart.

In the following sections we will explore each of the above mentioned techniques.

Technology : Walmart was the leader among retail chains in adopting technology to improve

bottom line.

● Traiting – Information systems were used to index product movements in the store to

over other stores and market traits, giving store managers data on local demand and

empowered them to make decisions on which products need to be displayed or taken off

shelf space. This helped reduce lost sales and leftover inventory at Walmart Stores, and

also lower operation costs compared to its competitors.

● Electronic Scanning: To facilitate dynamic pricing in store and improve operational

efficiency, Walmart introduced electronic scanning of UPC codes at point of sale.

● Refunds Tracking: A technology system was implemented to track refunds and check

authorizations that helped minimize shrinkage arising from pilferage or shoplifting.

● Satellite System: Walmart installed a satellite system in 1983 that improved

communications between stores, distribution centers and headquarter and resulted in

better sales forecasting based on data analysis. The satellite system was further utilized

for credit card authorizations that helped Walmart expand its customer base. Walmart

also improved its inventory control via satellite system.

● “Pick to Light” System: A computerized system allowed associates to find correct

location within distribution system for the orders, improving operations of distribution

center that could serve up to 150 stores within an average radius of 200 miles.

● Electronic Data Interchange (EDI): Walmart installed EDI with 3600 vendors to expedite

ordering, enable electronic invoicing and share inventory information to improve sales

forecasting, planning and replenishments.

Supply Chain : Walmart used innovative mechanisms to lower operating costs which enabled it

to price aggressively vs competition

Distribution:

● About 80% of purchases for walmart stores were shipped by its own distribution centers

as opposed to 50% for Kmart. This helped them have lower cost structures and better

profit margins. It could perhaps enable Walmart to price aggressively vs competition.

● Hub and Spoke Network: Walmart optimized the delivery process to stores by carrying

merchandize to a distribution center and after sorting, shipping out the products within

48 hours of the original request. This further lower operating costs.

● Cross Docking: To accelerate the hand-off, products were directly transferred from

incoming vehicles to store-bound vehicles and this lowered inventory costs at distribution

centers. Compared to competitors’ cost of inbound logistics of 4.8%, Walmart’s cost of

inbound logistics was only 3.7%.

● Returns Shipment: Walmart minimized trips between stores and distribution centers,

and between distribution centers and vendors, by using same trips for both procurement

of new products and return merchandize.

Vendors:

● Negotiations Strategy: As it became a market leader, Walmart used it market power to

negotiate favorable terms with suppliers. Walmart eliminated manufacturers’

representatives from negotiations with suppliers, resulting in an estimated savings of

3%-4%.

● Vendor managed inventory: Key vendors like P&G, Wrangler and GE started using

vendor managed inventory systems to replenish stocks in Walmart stores and

warehouses. Walmart shared sales and inventory data to enable these vendors to make

forecasts and perform replenishments. Sharing data with vendors was a key factor to

lower operating costs and meet consumer demand. This potentially enabled them to

further maximize profits and manage inventory better.

Work Culture and Policies :

● Walmart created a culture where employees were empowered to make decisions at a

store level. This enabled pricing and operational strategies that were optimized for local

market conditions as opposed to competitors that used a centralized approach that gave

them