Operational Characteristics of Wal-Mart - Essay Example

Operational Characteristics Objective The objective of this research is to evaluate the operational characteristics of Wal-Mart, with respect to its competitors in the market. Different operational aspects of the largest retailer in the world have been analyzed and innovative approaches have been researched that have been adapted by them to facilitate the attainment of competitive advantage in the market. Wal-Mart has adapted effective expansion strategies that have helped it to maintain its quality of service and product supply. Such strategies have also been discussed in the paper. 2. Methodology Secondary sources (including research papers, articles, technical reports and newspaper contents) have been consulted for the research of the respective topic. Case studies have also been analyzed that were related to the operational characteristics of Wal-Mart and its competitors. A descriptive approach has been adapted since the respective research involved the analysis of the existing operational characteristics of the retailing companies. 3. Analysis 3.1 Assumptions Kmart and Sears were competitors of Wal-Mart; however they merged into a single retailing organization in 2005- Sears Holding Inc. This report refers to the individual names of both the organizations whenever incidents have been quoted from the year before the merger. Wal-Mart is a multinational company with head offices in US, therefore only US markets and competitors have been discussed in the report. 3.2 Analysis of Operational Characteristics of Wal-Mart 3.2.1 Company Portfolio Wal-Mart is the largest retailer of the world. Sam Walton, the man behind the retailing stores chain, began its operations in 1962. The first store opened in Arkansas, which marked the start of the rapid expansion of the respective business. Sam Walton became known as a clever businessman in a very short span of time due to the success of his retailing stores. After conquering the US market, the owner decided to expand his business globally. According to a report issued by Wal-Mart in 2010 (Wal-Mart Stores); Wal-Mart operates around 4,000 stores around the world in 15 countries, namely China, India, United Kingdom, Japan etc. Kotabe stated that Wal-Mart is responsible for operating five divisions in US; Wal-Mart Stores, Wal-Mart Supercenters, Sam's Club, McLane's Company and Wal-Mart International. All of these different divisions amount to 4,300 establishments in US. The company recorded up to $405 billion as their annual sales last year, whereas target recorded up to $65 billion in 2009 (Target Corporation) as seen in figure 1 in the Exhibits section. The biggest competitors of Wal-Mart are Target and Kmart. 3.2.2 Operational Characteristics Operation management can be defined as the overseeing, management and formulation of business operations in such a manner that the quality of the service and products is maintained. The company has been able to attain competitive advantage in the market due to their low prices, coupled with quality. They believe that their customers should be able to have a share in their profits; that share is made available to them in the form of low costs. Wal-Mart is able to maintain low cost operational activities in their stores due to their efficient supply chain management, vendor relations and integration of information management processes. These aspects shall be discussed in detail in the following sections. The core expectations of a customer that need to be met by a retailer are: High quality Broad scope Low prices Good customer service Convenience (Cowgill) The percentage of expectations met by different retailers is shown in Figure 2 in the Exhibits section. 3.2.3 Channels of Distribution Wal-Mart owns up to 3,300 company trucks that facilitate the supply from the warehouses to the retail stores. Competitors do not maintain such an extensive distribution network of their own due to which their costs are much higher than Wal-Mart’s distribution costs. Wal-Mart suffers a cost of 0.9% of its total revenue as the distribution costs whereas Sears incurs 3.8% and Kmart spends 2.9% of their total revenues in the respective costs. Wal-Mart has maintained the aim of placing their distribution centers at location such that the all the stores have access to one of them at a maximum distance of 200 miles (The Resource Center). Wal-Mart owns 51 distribution centers in US that are responsible for 83% of the supply of the goods to the retail stores. The rest of the supply is done directly by the suppliers. It is due to the consistent and standard methods of distribution that Wal-Mart is able to reduce their distribution costs. The main actors and functions of supply chain of Wal-Mart are shown in figure 4 in the Exhibit section. Kmart has shown ineffective strategy formulation with respect to the distribution of goods to their retail stores. The incompetence of the organization can be judged by the fact that some of their stores used to be left under stocked while some were witnessed to have the goods in large trailers outside the stores. The ineffective merchandize flow played a part in the higher distribution costs for Kmart (Helfat). Forbes magazine stated Kmart faced late delivery (of goods from the distribution centers to the retail stores) once in every 11 deliveries i.e. 11% of the time, whereas this number is only 5% in other retailers (Comparing K-mart and Wal-Mart Management). Another issue that resided in the management of inventory was the inaccurate delivery of the goods; the retail stores’ orders of required goods were inaccurate 15% of the time. Target has improved its distribution strategies over the past few years; however they faced numerous out-of- stock states in Northeastern stores in the past years. Many other stores had been reported to possess the merchandizes but in few quantities. One of the biggest issues was the distribution of slower and faster turning objects from the same mediums. After some time, they realized the need to separate them and improved the process. Target has faced hitches in the past regarding their merchandize flow but things have been improved for the past few years (Helfat). 3.2.4 Incorporation of Technology in Business Operations One of the reasons that Wal-Mart has maintained such a great market share is the technological integration in the business operations. Wal-Mart has realized the need to be technologically equipped with the latest techniques and systems in the modern world. It is due to this realization that Wal-Mart forms the basis of its business operations on three main aspects; it maintains a centralized information management system, rather than a decentralized one. The centralized system is run from Arkansas that manages all the business operations that are run in the regional operating units and retail stores. The centralized approach promotes unison among all the regional units and provides an opportunity to the management of the head office to ensure that the same quality standards are being maintained everywhere. This aspect also ensures the presence of compatible systems and platforms in different units; this approach facilitates the sharing of data between them. The displacement of resources becomes easier since the transition time of being acquainted with the new systems is eliminated and the displaced employees quickly resume work in the new workplaces. Wal-Mart ensures that business processes and operational procedures are prioritized more than technology itself. Wal-Mart has adapted technologies in such a way that their business processes and operations have only been facilitated by them rather than being modified. List of digitized processes of Wal-Mart is shown in figure 3 in the Exhibits section. The top management of Wal-Mart has always been committed towards the incorporation of technology in their business processes. Such commitment was not visible among its competitors in the beginning. Competitors, like K-Mart, opted to embrace the technological processes in their business when its absence had already affected the productivity of the business and market share. K-Mart announced a massive investment of $1.4 billion for the introduction of technological processes in 2000. All the supply chain issues were documented so that they could be improved and the barriers could be eliminated. The delayed integration of technical processes could not rectify the issues in the supply chain management that resulted in a complete write-off of the system and resulted in a loss of $195 million for the company. 3.2.5 Inventory Management Wal-Mart has revolutionized their methods of inventory management with several innovative technologies. One of them is the Radio Frequency Identification (RFID). Wal-Mart has been amongst the first few retailers in the market to embrace this technology; this technology tends to facilitate better tracking of the products. RFID tags are put on the products to track the consumer behavior and buying trends of the market. The analysis of such data can provide an effective direction for the company and help them to deliver a service according to the needs of the masses. In this way, the desired products and services can be readily available for the consumers and save them repeated trips to the outlets for their desired purchase. RFID technology proves to be helpful in the scenarios of stolen or lost commodities. Their points of sales systems are also developed with the latest technologies; they scan the products and facilitate an immediate entry in the database; this ensures accurate and consistent data in the database. Correct and consistent data facilitates effective decision making and strategy formulation. K-mart has faced negative publicity in the past due to their incapability of handling sudden influx of demands for specific products. For example, K-mart launched ‘Blue Light’ campaign few years back which returned encouraging feedbacks from the customer. It was a campaign in which discounts were given to the customers in any specific chosen department; a blue light was lit to denote the effectiveness of the discounts. However, the company was not able to cater the influx of demands from the customers. The supply and distribution strategies of the respective organization either left the retail stores with too many commodities on the shelves or very limited in number. Wrong predictions about the buying trends of the customers also ended up creating losses for the suppliers since it affected their manufacturing patterns. In 2002, few investigations were carried out regarding the ineffective inventory management. It was discovered that the retail stores had outdated scanners that did not read accurate information from the scanned commodities. This inaccuracy led to the transfer of misleading information at the central planning system at the head office, due to which ineffective planning took place regarding inventory management (Comparing K-mart and Wal-Mart Management). 3.2.6 Vendors Wal-Mart has had a history of good relations with their vendors. The vendor relations and purchasing activities are done at the head quarters to ensure that costs are kept low. This even eliminates any chances of misconducts or dishonesty in the process since it is centralized at a single source. Wal-Mart has avoided any instances of creating supplier power, which is created if a single supplier is responsible for the supply for a greater fraction of commodities. They do not allow any supplier to exceed the supply limit from 2.4% of the total supply. This limitation on the supply of goods gives the power to Wal-Mart to negotiate the terms of agreement in the contract and the prices of the commodities. It has been recorded that if a company gets included in the suppliers list of Wal-Mart then the company’s 30-75% of revenues start coming from Wal-Mart. In other words, Wal-Mart becomes a major client for the supplier (Cowgill). Suppliers of Wal-Mart are expected to bring about innovations in their products every year to ensure customer loyalty. In case any supplier is not able to achieve such innovatory developments in the products, 5% of the product costs are reduced by Wal-Mart. This practice facilitates in the provision of low cost and innovative products to their customers. The technological intervention in the organization allows effective communication and information sharing with the vendors, such as replenishing data, inventory information etc (Wailgum). Wal-Mart tends to develop their vendor relations into partnerships. Vendors prefer becoming their loyal suppliers since Wal-Mart can provide valuable information about the customer buying trends and behaviors. Data is a valuable asset for any business in the modern world. The customer buying trends and behaviors bear great relevance for manufacturing companies and suppliers; the possession of such kind of data empowers the retailers. It is due to this reason that vendors cooperate with Wal-Mart in providing them good rates. Vendors are also known to dedicate teams for the management of products being supplied to Wal-Mart. The data interchange also facilitates in the accurate supplies of inventory, thereby not creating any instances of overstocking or out-of-stock. Wal-Mart has large multinational companies as their suppliers, for example, P&G and GE. Other competitors have also taken numerous steps to maintain good and profitable relations with their vendors, for example, Sears Holding has a “Vendor Compliance Policy” that needs to be followed to ensure that both parties benefit from the relation. However, the strategies that have been adopted by Wal-Mart seem to be most effective and advantageous for the all the participating sides. The level of data interchange that has been achieved by Wal-Mart with its suppliers has not been witnessed in any of its competitors. 3.2.7 Store layout and Customer Service Wal-Mart has always treasured its customers and therefore focuses on the betterment of the customer service so that the customer can cherish the experience of shopping at its retail stores. Wal-Mart has never ceased its efforts to make the layouts of its retail stores as convenient and accessible as possible. The management is always committed to providing their customers with greater and brighter spaces to shop to make their experiences better than the other retailing companies. Wal-Mart initiated a large project few years back to renovate its retail outlets; it included the widening of the aisles, brighter spaces, removal of the pile-ups on the floor to provide more room for the shoppers. It was a 5 year project that aims to renovate as much as 70% of the outlets i.e. 3,500 outlets in US (Mullins). Good store layouts improve the shopper’s experience which tends to increase sales and revenues for the retailers. Sears Holding’s retail stores are run down and do not provide a pleasant shopping experience (Clifford). It is because of these deteriorating conditions that their revenues went down 1.9% in 2010 as compared to the figures of 2009. 4. Conclusion After an extensive study of the operational characteristics of Wal-Mart, it can be stated that Wal-Mart has sustained its position as the market leader for numerous years. Wal-Mart’s operations are able to comply with the core competencies that are expected by customers; high quality, broad scope of products, low prices, good customer service and convenience. Wal-Mart has been able to attain competitive advantage in the market due to the incorporation of technology in its operations and business processes. Wal-Mart maintains extensive data of their daily transactions; this data proves to be a valuable asset for the suppliers. Suppliers benefit from the respective data from Wal-Mart to predict the buying trends of the market. In return, suppliers give Wal-Mart low prices and long term partnerships. 5. Exhibits Figure 1: Total revenues of Target 2005 to 2009 (Target Corporation) Figure 2: Percentage of expectations met by retail stores (Cowgill) Figure 3: Digitized processes in Wal-Mart (Kalakota and Robinson) Figure 4: Main actors and functions in the supply chain of Wal-Mart (Kalakota and Robinson) References Clifford, Stephanie. “A Tough Sell at Sears”, The New York Times, 21 December, 2010, Web. 22 April 2011. Cowgill, Race. How to exploit Wal-Mart’s weaknesses, Zenith Management Consulting, 2005, Web. 20 April 2011. “Comparing K-mart and Wal-Mart Management”, Yahoo! Contributor Network, 2006, Web. 21 April 2011. Helfat. Constance, Note on Kmart and Target 2003, Tuck School of Business, 2004, Web. 22 April 2011. Kalakota, Ravi, and Robinson, Marcia. Services Blueprint: Roadmap for Execution, Addison- Wesley Professional, 2003, Print. Kotabe, Masaaki. Global Marketing Management, John Wiley & Sons, 1997, Print. Mullins, Richard. “Walmart widening aisles and brightening stores in major overhaul”, The Tampa Tribune, 14 August, 2009, Web. 21 April 2011. Target Corporation, A Fresh Approach- 2009 Annual Report, 2010, Print. The Resource Center, Walmart Global Expansion Strategy, 2010, Web. 21 April 2011. Walmart Stores, Corporate Facts: Walmart by the Numbers, 2010, Web. 20 April, 2011. Wailgum, Thomas, “45 Years of Wal-Mart History: A Technology Time Line”, CIO, 17 October 2007, Web. 22 April 2011. Read More