Role of Information Technology in Wal-Marts Success - Case Study Example

1. Overview of Wal-mart and its strategies Wal-mart is the largest retail company in the world and has been on the top of Fortune’s 500 list for several years. It is also the largest employer in the world. Wal-mart deals in general merchandise as well as specialized product lines such as pharmacy, tire and lube express and photo processing. Wal-mart sells high quality branded products to its customers at the lowest prices. Wal-mart achieves this seemingly contradictory combination right by making huge advances in information technology. In addition, it makes special long term contracts with big suppliers and removes middlemen. The basic idea behind Wal-mart’s business is discount merchandising that is keeping margins low by selling at a large discount but improving the top-line by selling a very large volume of products. 2. Role of Information Technology in Wal-mart’s success In realizing Wal-mart’s corporate strategies in practice, information systems have played the most significant role. Wal-mart’s supply chain is considered the best in the world due to a very efficient use of information technology. This is the company’s core competency. Wal-mart has been a pioneer of many supply chain management practices based on advanced information systems. The use of RFID (Radio Frequency Identification) is the biggest and most recent of these. The following sections of the report discuss the use of information technology systems used by Wal-mart and the strategic advantages derived by the company as a result of them. 3. Wal-mart’s Inventory Management System Wal-mart uses an inventory management system called Retail Link. This system allows the suppliers to have a look at the number of products of each type at the shelves in each retail store of Wal-mart at any given time. In addition, the system gives information about the sales rate for any period say an hour, a day, a week or a year. The suppliers also get real time information about the time of the day their products sell, the accompanying products which it sells and other details. All this information helps the supplier companies in efficient inventory management. In many cases, Wal-mart leaves the stock decisions entirely to the supplier companies. This saves considerable costs in administration. The inventory risks such as stock-outs are hence transferred to the suppliers. This leads to a significant cost reduction (PriceWaterHouseCoopers, 2010). 4. Channel Partnership with big companies through information technology Wal-mart has forged several strategic partnerships with major supplier companies. These partnerships have been facilitated by modern information technology and execution. A prominent case study is the strategic partnership between Wal-mart and Procter & Gamble. Both the companies are major players in their sectors. They have developed a common supply chain information sharing channel to better co-ordinate the supply chain activities. What began as a data sharing activity slowly permeated through strategic, operational and tactical levels in the two organizations. For achieving their objectives, Wal-mart and P&G together came up with a data highway that allowed the companies to share information on sales at all stores, types and time of sale, shelf information and so on. This drove down costs of both companies and increase customer satisfaction. The conceptual diagram for the data highway is shown in Figure 4.1. Figure 4.1: Channel Partnership Data Highway between Wal-mart and P&G Source: Grean, Michael; Shaw, Michael J. Supply Chain Integration through Information Sharing: Channel partnership between Wal-mart and Procter & Gamble In this approach, Wal-mart used scanners inside its retail stores to study their own business. The observations were critically analyzed. P&G used consumer buying patterns and compared it with the customer information available from market research or other activities. All the information collected and analyzed by the two companies was collected. This led to the development of various tools such as Joint business scorecards, Customer table checking, EDI and Category Management. The Joint scorecard consisted of several Key Performance Indicators such as Retail Sales, Gross margin, Inventory turns, Service Levels, Invoicing and Revenue details. The scorecard enabled the two companies to measure their performance as a whole rather than of individual entities which made greater business sense. The sharing of information using technologies such as EDI helped in Continuous Replenishment. The initiative enabled Wal-mart to sell its products before paying to its suppliers hence realizing negative cash flow cycles. The use of Category Management and extranet helped Wal-mart in realizing Collaborative Planning, Forecasting and Replenishment (CPFR) (Grean, Michael; Shaw, Michael J.). 5. Data Warehousing at Wal-mart Wal-mart has the world’s largest data warehouse and also the largest non-military based database. The database enables Wal-mart to boast of the tagline ‘Always Low prices. Always.’ The use of data warehouse allows Wal-mart to track sales of billions of products by a large number of customers. Information Technology has not only made Wal-mart’s operations better but it also enables the companies it works with to make their operations leaner, faster and efficient. Wal-mart’s data warehouse is basically a Decision Support System that allows Wal-mart to track Point to Point sales, delivery and movement of goods. The success of this data warehouse is due to the fact that both IT and business have contributed significantly to its development. Moreover, Wal-mart makes frequent changes and updates to the warehouse and doesn’t allow it to become obsolete (Ohlinger, 2006). 6. Use of RFID Wal-mart is widely recognized as the pioneer in implementing RFID technology in its retail stores. Prior to RFID, bar codes were used by most companies to identify the products on their shelves. However, bar codes had several limitations and they could only be used from a close distance. However, RFID uses radio frequency waves to identify products. Wal-mart announced the implementation of RFID in 2005 and was able to complete the process in all its stores within a time span of about 2 years. Due to the implementation of RFID, Wal-mart was able to cut its costs drastically. After Wal-mart several companies as well as government entities employed RFIDs in their systems. Some of them were successful while others failed. The biggest concern in the implementation of RFID has been its heavy cost as compared to benefits. The implementation of RFID may not make sense for small and mid-sized firms due to this. However, for giants such as Wal-mart, RFID gave a distinct competitive advantage over other retail firms (Krotov, Junglas 2008). 7. Electronic Selling Wal-mart was only a brick and mortar retail chain a decade ago but has now expanded to create a web-site that allows the company to sell online and be closer to its customers. While the web-site allows customers to buy products by selecting them in their shopping cart, it also allows suppliers to get this information. For example, Wal-mart has collaboration with Levi Strauss where both of them are connected through the web-site as well as the e-SCM system used by Wal-mart. While electronic selling has made a significant difference to the Supply chain costs of Wal-mart, it has also cast a positive impact on its suppliers. Suppliers such as Levi Strauss are motivated to use similar supply chain practices with their own suppliers as used with them b y Wal-mart. This leads to a positive Domino effect and saves costs in the entire supply network (Pena, 2008). 8. Conclusion Wal-mart has achieved very large scale benefits due to the use of Information Technology Systems in it operations. These include better profit margins, lower costs, increased supply chain visibility and velocity, customer trust and loyalty, economies of scale and scope and sustainable competitive advantage. In fact Wal-mart is treated as a benchmark by many organizations to use information technology in their operations. However, the companies need to tread cautiously and take decisions based on their size, application and business sense. References: PriceWaterHouseCoopers. (2010). Managing Information: A different game. The Economist Grean, Michael; Shaw, Michael J. Supply Chain Integration through Information Sharing: Channel partnership between Wal-mart and Procter & Gamble Ohlinger, Patrick. (2006). Wal-mart’s Data Warehouse. Vienna University of Technology Krotov, Vlad;Junglas,Iris. (2008). RFID as a disruptive innovation. Journal of Theoretical and Applied Electronic Commerce Research Pena, Jorge R. Leon. (2008). E-Business and the Supply Chain Management. Business Intelligence Journal Read More