The Case of Wal-Mart Stores - Research Paper Example

?The Just-in-time inventory system The case of Wal-Mart Stores Rapid changes in technology, consumer tastes, behaviors and lifestyles makes inventories out of fashion and obsolete, thrown out to wastes leading to inventory imbalances. This situation creates an oversupply of inventories; deplete cash flow and uses warehouse spaces unnecessarily. An inventory system developed in Wal-Mart corrected inventory imbalances that reduced its inventory costs and had added to its profitability. The system referred to is the Just-in-time inventory system that checked the inventory misallocations in the purchasing system of Wal-Mart. In this context, this study focuses on the Just in time inventory system and the logistics management Wal-Mart is using. Just-in-Time Concept of Inventory Many authors defined just in time inventory (JIT) system differently, but it all refers to a system wherein materials are delivered just in time for its use whether in manufacturing or selling. In JIT system, it has been the practice of companies like Wal-Mart to schedule purchases and production only as needed to meet actual consumers’ demand. The purpose of this system is to reduce inventories to a minimum level, or wherever possible to a “zero level” (Accounting for Management, n.d.). As the concept would suggest, JIT for Wal-Mart is a cycle that means products for sale are received from supplier just in time to replenish the stocks on the shelves, thereby reducing inventories from their previous level. The Just in time inventory system has been applied at every stores of Wal-Mart, and as observed, the secret lies in its sophisticated just in time logistics system found in the RFID technology. The system has provided Wal-Mart a continuous tracking, real-time sales feedback from every store and plot stock depletion rates so they can arrange new deliveries just as existing supplies are about to run out. The illustration below depicts a Just in-time system inventory management that begins with the order of the customer, and the processes that channels the ordering system. JIT system is ideal for manufacturing and merchandising concerns that tends to eliminate too much inventories which are not needed in the manufacturing or sale immediately. Source of diagram: (Accounting for Management.com) The logistics management of Wal-Mart, an introduction to RFID In order to understand the complexity of Wal-Mart operations and why there is a need for a logistics management process, an insight to its structure is presented. Wal-Mart manages retail stores worldwide in a range of set-up. Its segments include US market, International market and the on line ordering system. The US segment carries almost all items ordinarily found in a supermarket store, or may be easier said, “ask it, Wal-Mart has it” (WMT Profile). The international segment has various formats of stores and restaurants that include a combination of discount and grocery stores, supermarkets, supercenters, cash and carry stores, hypermarkets, general merchandise stores and the Sam Clubs. The Sam Club segment, which is available thru membership, carries merchandise, hard and soft goods and selected private-label items. Profile of Wal-Mart stores showed the following number of stores as of January 31, 2010 (Table1). Table 1 Number of Wal-Mart Retail Stores as of January 31, 2010 Number of stores Location Number of stores Location 803 discount stores United States 43 Argentina 2,747 supercenters United States 434 Brazil 1158 neighborhood markets United States 317 Canada 596 Sam Clubs United States 252 Chile 170 Costa Rica 77 El Salvador 164 Guatemala 53 Honduras 1 India 371 Mexico 55 Nicaragua 56 Puerto Rico 371 United Kingdom 279 Peoples Rep. of China Source: Yahoo Finance, 2010. Wal-Mart Stores Profile Logistics management process of Wal-Mart In the above scenario of retail stores, tracking of individual products in its different chains and warehouses is a difficult task. This would need an efficient system of monitoring and control such that Wal-Mart saw a need for a logistics and management technology that will be able to track all the product movements in its different stores worldwide. As an advocate of technological improvement and efficiency, Wal-Mart introduced the Radio Frequency Identification System (RFID) in 2003. RFID is an inventory management technology that uses wireless signals to track products from the factory to the store shelves. RFID is a system that replaces the bar code system that has been popular in 1980s. According to Keener and Bonsor (n.d.) and Crosby (2010) the system is an ideal way of tracking items as the RFID tags to “talk” to a networked system to track every product that is placed in the consumers’ cart. Aside from eliminating long check out lines in the stores, the system provides information to customers, retailer and manufacturers. Basically, RFID works this way: An electronic reader detects every item that is put in the customer’s cart instantly. As customer lifts the product, instant information such as expiration date is transferred to the customer’s cell phone. The reader is connected to a large network that sends information to the product manufacturer and to Wal-Mart Store . Manufacturers are instantly informed that their product have been purchased, and the retail stores computers will know exactly how much of the item has to be reordered. Bank is automatically notified of the purchase and the amount of the bill will be deducted from the customer’s account. As soon as customers exit, he/she passes doors with embedded tag reader that tabulates the costs of all the items in the grocery cart, then sends the grocery bill to the bank that automatically deducts the amount from the customer’s account. Source: Keener and Bonsor. The RFID process as illustrated in chart (Keener and Bonsor) shows that information does not just end from the grocery stores transactions. As an RFID tag is attached to the product that consumers take home, the retail store gets to know the customers’ unique preferences. It also helps in the marketing plans such that the store can create customer-specific marketing information. For instance, once the grocery store finds out that the customer has preference for pet foods, marketers may send marketing information on discount items for dog foods. In the same way, possibilities are endless once information becomes available. As a tracking device, RFID helps management track which segment holds too much inventory and supplies; helps out in facilitating decisions and negotiations with vendors for better prices. Advantages / benefits of Just in time inventory system Wal-Mart has invested in RFID system because of the scale of its supply chain which is difficult to monitor in the traditional inventory system. The main purpose of this system is to be assured that the products are available on their shelves when the consumers need them. According to the Association for Automatic Identification and Mobility (AIM), n.d., an RFID alerts staff when the “smart shelves” are running low. The system also reduces theft incidences in the stores because it has a device that alerts staff when there is “an unusual shelf-activity” (AIM, n.d.) The advantages and benefits of the JIT system become evident in the inventory level and inventory turn over of Wal-Mart. Financial data were taken from the financial statement of Wal-Mart wherein the effectiveness of JIT system is figured out by getting the relative ratio of inventory turnover to costs of good sold. The inventory turn over is computed by getting the cost of good sold divided by inventory (Investopedia, n.d.). Shown below in Table 2 is the result that concludes JIT system helped improved the inventory management of Wal-Mart. Table 2. Inventory turn over of Wal-Mart Stores In million $ 2010 2009 2008 2007 2006 Revenue 408,214.0 404,374.0 377,023.0 348,368.0 312,101.0 Cost of goods sold 304,657.0 304,056.0 284,137.0 263,979.0 237,649.0 Inventory 33,160.0 34,500.0 35,159.0 33,685.0 31,910.0 Inventory turn- over 9.18 8.81 8.08 7.83 7.44 Source of financial data: msn.com. (2010) Wal Mart Stores, Inc. Financial Statement. As shown from Table 2, the revenue and cost of goods sold increased during the 5 five years of Wal-Mart’s operations. As a result of JIT system, inventory decreased and a faster and higher inventory turnover ratio is observed during this time period. For relative position to Wal-Mart’s competitiveness, the turnover ratio is compared to competitors in the industry. Benchmark data of competitors in the industry showed an inventory turnover of 7.9% which is lower than Wal-Mart’s 9.18% (msn.com 2010). A high inventory turn over is often desirable because a lower one indicates ineffective inventory management that results to carrying too much inventory and out of date inventory; while a high inventory level is not good for the company because they become a zero rate of return investment (Guinan, J. 2009). In a company structure such as Wal-Mart, JIT system has helped in managing and controls of its inventories and costs. By combining the RFID technology with JIT system, Wal-Mart is able to foresee which products are fast sellers on the stores when people want them. The system eliminated the hand count system which is not practical and costly for Wal-Mart. The main benefits from the JIT system include savings because funds are not attached to inventories. From Table 2, 4% savings have been realized by the JIT inventory system wherein the level has been reduced in 2010. This amount that has been saved from inventories could be channeled to other investment purposes of Wal-Mart. Second advantage is that there will be lesser need for warehouse spaces to store inventories. The free space could be allocated to other store’s purposes and business that could generate another income. The ultimate benefits of the system go to the customer satisfaction because waiting time is reduced due to quick response to demand, defects are reduced and eliminated. In a speech delivered by Wal-Mart Executive Vice President and CIO Rolin Ford on May 1, 2007 before the largest users of RFID audience in Orlando Fla, Ford emphasized the benefits occurring to the RFID use. Specifically, Ford mentioned current benefits that include: ” ….a 30 percent reduction of out-of-stocks, reduction of excess inventory in the supply chain, and sustainability impacts”. Ford also outlined advancements including pallet locators now being used at Sam’s Club locations – increasing inventory accuracy and reduced member waiting time -- as well as future benefits in pharmacy accuracy, grocery freshness, software, CD and DVD authentication, and 30-second store checkouts (Wal- Mart Corporate, 2007). Ford said that the company is committed to this system and will use the system to more of its stores on a faster rate. It could also be stated here that no system is ever perfect because of disadvantages it brings. Let us take risks and expenses for example as possible disadvantages to Wal-Mart. First, implementing a combination of Just-in-time system and RFID technology needs a total overhaul of their management operation, from the bar code system that Wal-Mart used in 1980s to RFID today. For instance, it is hard and expensive to introduce. In 2003, Shim, in a news report, stated that Wal-Mart had “to throw its weight behind RFID”. Wal-Mart had to convince its numerous suppliers to adopt the technology because the company’s objective is to overhaul the supply chain systems worldwide. Wal-Mart argues, according to Shim, that the RFID system is costly, but the advantages it will bring will outweigh the costs on a long run basis. Shim continued in presenting the cost advantage that will save Wal-Mart an estimated 6 to 7 percent annually (coming from the 2002 financial figures). In 2010, calculations as presented above surpassed this estimate that showed Wal-Mart is correct in its presumptions in using the JIT and RFID. One disagreement on RFID use come from manufacturers that find the RFID tags to be costly and impractical because it costs around 50 cents to 60 cents a piece. Manufacturers are suggesting lowering it down to 5 cents per piece to make it affordable for them. In response RFID cost is being examined with the hope that it will be lowered some more from its present cost (Shim, 2003). Another divergence of opinion is that in JIT system, business is open to risk coming from the inability of supplier to deliver on time, such that a small disturbance in supplies to the business would cause dissatisfaction of customers. In conclusion, the combination of JIT and RFID technology established the presumptions of Wal-Mart in using it in their stores as a correct management decisions. The advantages seen in using the system in their supply chain provided advantages that lower costs, inventories and unnecessary store spaces. Several marketing plans could also be adopted as a result of tracking information gathered by the system. Disadvantages seen are coming from the suppliers as risk of inability to supply on time and cost of RFID that is external to Wal-Mart already. List of references AIM (Association for Automatic Identification and Mobility) n.d. General RFID Information Retrieved 21 January 2011 from http://www.aimglobal.org/technologies/rfid/rfid_faqs.asp. Accounting for Management.com., 2009. Just in Time (JIT) Manufacturing and Inventory Control System. Retrieved 21 January 2011 from http://www.accountingformanagement.com/just_in_time.htm Bonsor, Kevin & Keener, Candace. 05 November 2007. How RFID Works. Howstuffworks. Retrieved 21 January 2011 fromhttp://electronics.howstuffworks.com/gadgets/high-tech- gadgets/rfid.htm Crosby, Tim, 2010. How Inventory System Management Work. How Stuff Works.com. Retrieved 20 January 2011 from http://communication.howstuffworks.com/how- inventory-management-systems-work.htm Investopedia, n.d. Inventory turn over definition. Retrieved 21 January 2011 from www.investopedia.com/terms/i/inventoryturnover.asp Guinan, J. 2009) Inventory Turnover. Retrieved 21 January 2011 from http://financial- dictionary.thefreedictionary.com/Inventory+Turnover msn.com. (2010) Wal Mart Stores, Inc. Financial Statement. msn.com. Retrieved 21 January 2011from Read More