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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Supply Chain Management at Wal-Mart Case Answers
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, and distribution proved to be big contributors to Walton’s wealth. Eliminating the middlemen, such as wholesalers and distributors, reduced administrative costs 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 by keeping operating costs low with non-unionized and in-house drivers, but also by utilizing the transport 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 has increased over 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.
For 7 years, from 2000 to 2006, Wal-Mart’s inventory turnover was consistent and showed 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 the 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 the 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 increased inventory turnover might be because of several factors. For one, the improved inventory control systems reduced the levels of inventory and the cost of storage and obsolescence. Also, there is a shift in the sales mix from 2005 toward fast-moving merchandise and grocery or other products that turn over more quickly.
Merchandise display is also one of the factors. 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 and allocated to specific SKUs, hence, improving the ability of the customers to make purchases.
Weeks of supply from 2000 to 2006.
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