This case study tackles the supply chain management at Wal-Mart. It delves into the supply chain strategies of the company, which contributed to its success. It also looks into other possible rooms for improvement with regards to supply chain management that can impact the company positively to keep them ahead of the competition.
Fraser P. Johnson
Harvard Business Review (907D01-PDF-ENG)
November 28, 2006
Case questions answered:
- Describe Wal-Mart’s supply chain and how it integrates with other elements of its strategy.
- Discuss how Wal-Mart’s supply chain strategy metrics changed from 2000 to 2006 based on the company’s percentage of assets committed to inventory, inventory turnover, and weeks of supply.
- Compare the performance of Wal-Mart’s supply chain against its competitors in terms of the percentage of assets committed to inventory, inventory turnover, and weeks of supply.
- Based on the information provided in the case, what supply chain recommendations would you make to the CEO?
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Case answers for Supply Chain Management at Wal-Mart
a) Describe the supply chain management at Wal-Mart and how it integrates with other elements of its strategy.
The supply chain management at Wal-Mart is known in the retail industry as one of the greatest logistical and operational triumphs in the industry. The company employs more than 1.8 million associates worldwide. It consistently continues to grow and operate successfully due to the supply chain, the company’s founder, Sam Walton, instilled from the creation of this retail marvel.
Wal-Mart is an organization that is committed to a business model that drives costs out of the supply chains, which enables consumers to save money. Supply chain factors such as purchasing, location, distribution proved to be big contributors to the Walton’s wealth. Eliminating the middlemen, such as wholesalers and distributors, reduced administrative cost for Walton, but also gave him power over those suppliers.
The integration of Walton’s transportation and distribution method served as a dual benefit to the company with keeping operating costs low with non-unionized and in-house drivers, but also by utilizing the transports to bring back unsold merchandise. With the stores being placed in low-rent suburban areas, the low prices seemed compelling and affordable to those in the area in which the stores served.
b) Discuss how Wal-Mart’s supply chain strategy metrics changed from 2000 to 2006 based on the company’s percentage of assets committed to inventory, inventory turnover, and weeks of supply.
Percentage of assets committed to inventory from 2000 to 2006:
For seven years, from 2000 to 2006, the inventory assets ratio decreased over time. Hence Wal-Mart’s inventory efficiency increased for the past seven years. This could be because of the reduction of excess inventory. The case notes that Wal-Mart aimed at eliminating $6 billion in excess inventory in 2006. Wal-Mart probably also had improvements in cash flows.
Inventory turnover from 2000 to 2006.
Figure 1: Inventory turnover at Wal-Mart.
In 7 years from 2000 to 2006, Wal-Mart’s inventory turnover is consistent and shows a steady growth from 6.31 in 2000 to 7.47 in 2006. This is an improvement of over 18%, which is the same as adding cash to operating cash flow in 2006.
The inventory turnover for Wal-Mart was 7.39 per year in 2005 (=365 days/7.39 times per year) 49.39 days before sale and 7.47 times per year in 2006 (48.86 days). Wal-Mart held inventory for an extra day in 2005 compared to 2006. So, money was tied up unnecessarily in inventory in 2005 hence decreased inventory turns.
The increases inventory turnover might be because of:
- Improved inventory control systems, which reduced the levels of inventory and the cost of storage and obsolescence.
- A shift in the sales mix from 2005 toward fast-moving merchandise and grocery or other products that turn over more quickly.
- Merchandise display. Inventory is optimized when there is an effective store layout that offers ease of access to highly demanded products. The case states that Wal-Mart has a unique layout for each store. Shelf spaces in different departments are divided an allocated to specific SKU’s hence improving the ability of the customers to make purchases.