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Digitization at Wal-Mart

Wal-Mart has relentlessly pursued the Every Day Low Price (EDLP) focal point in its quest to become the world's largest retailer.9 Process digitization based on the cornerstone EDLP focal point is a core part of its strategy.

Wal-Mart—A Brief History

Wal-Mart was born in 1945 when Sam Walton opened a Ben Franklin variety store in Newport, Arkansas. In 1946, his brother, James Walton, opened a similar store in Versailles, Missouri. In 1962, the first Wal-Mart Discount City, a no-frills discount store, opened its doors. In 1984, Wal-Mart created the first three SAM'S CLUBs, and in 1988, the first Wal-Mart Supercenter, a format that combines a supermarket with a general merchandise discount store, was unveiled.

Due to its aggressive acquisition strategy, customers from many countries can now appreciate the benefits of Wal-Mart's relentless focus on ELDP. In 1992, Wal-Mart went global with a joint venture (50 percent interest) in Mexico with Cifra. Since 1992, Wal-Mart's international presence has continued to thrive.10

  • In 1996, Wal-Mart entered China with a Supercenter and a SAM'S CLUB in Shenzhen. By 2003, Wal-Mart had opened 20 units and employed more than 10,000 associates.

  • To enter Germany, Wal-Mart bought the 21-store Wertkauf hypermarket chain in 1997. In 1999, Wal-Mart bought 74 Interspar hypermarkets from Spar Handels AG, a unit of the French retailing conglomerate Intermarche.

  • In 2000, Wal-Mart purchased ASDA Group PLC, the third-largest retailer in the United Kingdom (229 U.K. stores) for $11 billion.

  • In 2002, Wal-Mart bought 6.1 percent of The Seiyu Ltd., a Japanese chain, for $46 million.

The company has changed considerably and now forms almost 2 percent of the U.S. economy. Each week over 100 million customers, tempted by rock-bottom prices, traipse through the stores where they can buy diverse products and services, do their banking, get their eyes checked, or have the oil changed in their car—truly a one-stop shopping experience.

Wal-Mart's Blueprint for Digitization

Wal-Mart's blueprint for process digitization is illustrated in Figure 1.4. This blueprint captures four different layers:

Figure 04Figure 1.4: Blueprint for Wal-Mart's Digitization

  1. Customer—the Every Day Low Price strategy for creating sustainable value and differentiation from the customer's perspective.

  2. Business Services—the strategic priorities for various business processes, which enable low cost leadership, differentiation, and execution focus. They include expertise in store management, logistics, and supply chain management. Sales are primarily on a self-service, cash-and-carry basis, with the objective of maximizing sales volume and inventory turnover while minimizing expenses.

  3. Enterprise Application Infrastructure—the layer that helps digitize and integrate business processes tasks into streamlined information flows.

  4. Technology Infrastructure—the foundation that supports the various applications across diversified store formats and geographic locations.

Of these, the customer's perspective is the most important. The ability to offer value and service continuously to customers largely determines Wal-Mart's top position within the retail industry. Wal-Mart employs many programs designed to meet the competitive pressures within the industry. These include Every Day Low Price, Low Price—Always, Item Merchandising, Store-Within-a-Store, Price Rollbacks, and Store of the Community.

Wal-Mart has core competencies and size advantages that allow it to fulfill the promise of Every Day Low Price. They include expertise in store management, logistics, and information technology. Let's look at each in detail.

Wal-Mart Differentiator—Effective Localized Store Management

Wal-Mart discount stores are mammoth. Many Supercenters, the larger cousins of the discount stores, have 500 associates and more than $100 million in annual sales, almost the size of a midsize business. A wide range of merchandise is sold and is grouped under 40 different departments.

Although Wal-Mart stores are ubiquitous, each one is different. Every Wal-Mart store is tailored for its community, which is no easy task. To keep customer-service levels high and sales increasing, Wal-Mart encourages associates to think creatively about how they merchandise and stock products.

One way that associates hone their merchant skills is through the VPI (Volume Producing Item) contest. VPI provides a store-level opportunity for associates to showcase their ability to promote items they think can be top sellers. Associates choose the VPI item, order it, design an eye-catching display, conduct promotional activities, and track and report sales progress. The goal of VPI: finding creative ways to turn products with potential into big sellers.11

Given the size of Wal-Mart, decentralized store management is extremely important. The managers who are closest to the action know what is important in their locale.

Wal-Mart Differentiator—Logistics Management

The processes for which Wal-Mart has set the best-practices standard are distribution and supply chain management (see Figure 1.5).

Figure 05Figure 1.5: Wal-Mart's Process Expertise

The company's distribution network spans the globe. A total of 84 percent of Wal-Mart Discount Stores' and Supercenters' purchased merchandise was shipped from Wal-Mart's 72 distribution centers. Of these, 32 are general merchandise distribution centers, 20 are grocery distribution centers, eight are clothing distribution centers, and nine are specialty distribution centers. The specialty distribution centers ship items such as jewelry, tires, and optical supplies. The balance of merchandise purchased is shipped directly to the stores from suppliers.12

A key part of supply chain management is "global sourcing." Over the last few years, Wal-Mart has improved the quality of its goods—as well as its supply logistics and retail prices—by acquiring certain products for all of its stores around the world from a single source. To support global sourcing, Wal-Mart operates three import distribution centers in the United States and a total of 35 international distribution facilities.

Wal-Mart also controls logistics costs by having its own private fleet of trucks. This enables customized, cost-efficient delivery to stores, accommodation for peak seasonal periods, night deliveries, and accelerated delivery.

Wal-Mart Differentiator—Information Technology Execution

Using technology to simplify processes, eliminate waste, and analyze and react to more meaningful information has been the execution focus of Wal-Mart. Thus far, technology has aided in Wal-Mart reducing its operating and SG&A expenses as a percentage of sales to less than 15 percent.

Technology is the catalyst that enabled Wal-Mart to wring efficiencies out of processes that are unmatched by leading companies in other industries. Take, for instance, the replenishment problem. At any given moment, a typical Wal-Mart Discount Store has more than 70,000 standard items in stock. Every one of them has to be identified, ordered, inventoried, and replenished. A typical Supercenter is even tougher to stock since it carries more than 20,000 additional grocery items, many perishable. These have to be reordered frequently, sometimes even daily.

How does technology enable this? Since 1996, Wal-Mart has been using handheld computers linked to in-store servers by a radio-frequency network. It's a high-tech conduit to an internal inventory system. These handhelds help keep track of real-time information for the inventory on hand, deliveries, and back-up merchandise in stock at distribution centers. Mobile computing has enabled Wal-Mart to have higher quality sales and inventory information. As a result, suggested ordering quantities on many items are available to associates in real time to assist them in the task of keeping stores replenished and items in stock.

Across all of its formats, Wal-Mart is one of the most effective users of technology. Some other impressive technological feats include:

  • In the 1980s, using satellite communications to link stores to headquarters for Just-In-Time inventory management (the first major retailer to do so).

  • In the early 1990s, building the Retail Link system, which provides sales data—by item, store, and day—to vendor partners. This information saves suppliers time and expense in planning their production and distribution, which translates to lower merchandise costs.

  • In the mid-1990s, utilizing an item locator system that allows associates to scan an item and electronically check on its availability in other area stores.

  • In the late 1990s, creating the New Retail Link Private Hub, which allows more than 10,000 Wal-Mart suppliers to log into a Web portal, peruse databases, and find out which store sold how much of its products. With a latency of a mere six hours from transaction to analysis, Wal-Mart is using the Web to provide real-time information not only to stores and corporate managers, but to vendors as well.

The value of technology shows up in a crisis. An article in the Wall Street Journal on September 18, 2001, described how Wal-Mart used its Data Warehouse (built on NCR's Teradata technology) to understand its customers' changing buying patterns the week after the World Trade Center attacks. On the morning of the attacks, stores were desolate. By that Tuesday evening, customers stockpiled guns, ammunition, bottled water, and gasoline containers. On Wednesday, sales of flags shot up, causing a shortage and triggering orders to restock the flag inventory. By Friday, the number of customers in the stores returned to normal, but the average number of purchases declined. Based on predictive analysis, some stores were able to foresee a sharp increase in sales by the fifth day. As a result, they increased staffing by 20 percent for the weekend and stocked up on items that customers normally buy. This paid off as sales increased by 25 percent that weekend compared with the same weekend a year earlier.

Data-driven merchandising means that Wal-Mart shelves are hardly ever empty. The financial result: some of the highest sales per square foot of floor space in the retail world.

Other retailers, such as Lowe's (a home improvement store for the do-it-yourself consumer) are copying Wal-Mart's model. LowesLink gives vendors secure access to daily sales data—down to the SKU level—on the products they supply. The system also allows vendors to add item information to the database. Ultimately, Lowe's wants its vendors to control inventory levels in individual stores based on what's selling. Long-range purchasing forecasts (90 days to six months) will be e-mailed to vendors who can use the data to improve fill rates, lead times, and production efficiency.

So, if Lowe's could copy Wal-Mart's Retail Link, why couldn't Kmart?

Wal-Mart versus Kmart—A Blueprint Comparison

For more than three decades, Wal-Mart has demonstrated the willingness to embrace technology both in-house and with its suppliers. Competitors did not follow until it was too late.

Let's contrast Wal-Mart to Kmart. Kmart sprang from a pair of five-and-ten-cent stores, called Kresge's, in Memphis and Detroit, established in 1897 by Sebastian Kresge, a traveling hardware salesman. In 1962, Kresge's entered the large-scale discount retail market with the construction of the first Kmart outside Detroit. With success, the company expanded aggressively and began selling home improvement supplies, office supplies, and sporting goods.

When Charles C. Conaway became Kmart's CEO in May 2000, he announced a massive $1.4 billion investment in technology in an attempt to make up for past neglect. The subsequent supply chain troubles were well documented. Lack of supply chain integration resulted in expensive advertising snafus where consumers could not buy the advertised specials because they were not on store shelves. Kmart could not effectively fix the supply chain problems, and it took a $195 million write-off in 2000.13 Why the mismatch between effort and result?

In the long run, every business at its core is an information business. Wal-Mart embraced this trend in the late 1970s, while Kmart tried half-heartedly. The difference between Wal-Mart and Kmart was technology savvy and a pragmatic supply chain blueprint that took years to polish. In 1997, Wal-Mart had an annual technology and communication budget of $500 million and an information systems staff of 1,200. Kmart, on the other hand, had four CIOs in four years—no stability, no consistent strategy.

The Kmart example illustrates the challenges of execution. Blueprints— focal point, processes, applications, and technology—need to evolve in tandem with the corporate vision. Modern business is a study in perpetual motion—expansion, cost-cutting, mergers, acquisitions, divestitures, turnarounds, and bankruptcy. Organizations are in a constant state of flux as they reshape themselves to meet the demands of investors and customers. The companies that are built to last are those that change on all fronts: customer, data, and process.

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