Make an essay in brief on the below case study, Mention the issue face and the Recommendation on the below case study

HALF CENTURY OF SUPPLY CHAIN MANAGEMENT AT WAL- MART¹

INTRODUCTION

James Neuhausen was a U.S. stock analyst tasked with preparing a recommendation on what his firm, a large U.S. investment house, should do with its stake in Wal-Mart Stores, Inc. It was an unseasonably warm day in early February 2012, and Neuhausen was reviewing his notes on the firm. Wal-Mart, the world's largest retailer, was trying to recover from a series of missteps that had seen competitors such as Dollar Stores and Amazon.com close the performance gap. Competitors had copied many aspects of Wal- Mart's distribution system, including cross-docking product to eliminate storage time in warehouses, positioning stores around distribution centres and widespread adoption of electronic data interchange (EDI), to manage ordering and shipping from suppliers. Neuhausen stated:

Wal-Mart is believed to have one of the most efficient supply chains in the retail world. What impact will the increasing variety of product, store formats and the growing importance of international stores have on the way it distributes product? What improvements to its supply chain does the company need to make in order to continue to stay ahead of competitors?

Last year, Wal-Mart suffered nine consecutive quarters of declining same store sales. Procter & Gamble's Chief Executive, Robert McDonald, pointed out that part of the problem was that there were execution issues at Wal-Mart's U.S. stores.² More nimble competitors such as Dollar General are rolling out small format stores that are eating into Wal-Mart's share. In the online space, Amazon.com has become a major threat. Wal-Mart has also changed over the years and it now operates a variety of store formats under 60 different banners around the world. International sales hit US$109 billion in fiscal year 2011, more than a quarter of its business. Can its supply chain keep up and still deliver efficiency gains?

THE RETAIL INDUSTRY

U.S. retail sales, excluding motor vehicles and parts dealers, reached US$3.9 trillion in 2011. Major categoriesintheU.S.retailindustryincludedgeneralmerchandise,foodandbeverage,healthandpersonal care and other categories as can be seen in Exhibit 1. In the United States, retailers competed at local, regional and national levels, with some of the major chains such as Wal-Mart and Costco counting operations in foreign countries as well. In addition to the traditional one-store owner-operated retailer, the industry included formats such as discount stores, department stores (selling a large percentage of soft goods, or clothing), variety and convenience stores, specialty stores, supermarkets, supercentres (combination discount and supermarket stores), Internet retailers and catalog retailers. Online retail sales were rising in importance, accounting for US$197 billion in2011.³

The top 200 retailers accounted for approximately 30 per cent of worldwide retail sales.⁴Major retailers competed for employees and store locations as well as customers. There were two broad strategies in global retailing: variable pricing, or "hi-lo pricing," and everyday low price (EDLP). Hi-lo pricing, practiced by retailers for decades, involved adjusting the retail price of items to optimize gross margins. Forexample,attraditionalgrocerystores,whilepricesofkeyitemssuchasmilk,sugar,eggsandbutter

werekeptconsistentlylow,itemssuchastoothpaste,detergentandtissuehadhighprices.Thegoalina hi-loenvironmentwastogenerateincreasedsalesbyhavingthemanufacturerfundthetradepromotionson someitemsloweringpricesby25to30percenteverymonthorquarter.

On the other hand, an EDLP strategy meant that prices on items were generally consistent from week to week but were kept as low as possible so as to generate the highest consumer foot traffic. Running an EDLP strategy generally required the retailer to focus on keeping operational costs as low as possible and investing any savings into lowering retail prices. The goal, in an EDLP environment, was to generate higher aggregate gross profit by increasing the volume of items sold.

As many of the top global retailers faced intense competition in their home markets, a growing trend for these global retailers was international expansion, especially into developing markets such as Asia, South America and Africa. The objective of international expansion was to find a way to continue to grow earnings at a faster pace than was possible domestically. Retailers going abroad sought to capitalize on global purchasing economies of scale and to leverage international expertise from one market to another. But international expansion was fraught with risk, and it was not uncommon for retailers to pull out of a market if they were unable to build profitable operations.

WAL-MART STORES, INC.

BasedinBentonville,ArkansasandfoundedbythelegendarySamWalton,Wal-Martwasthenumberone retailer in the world with fiscal year 2011 net income, from continuing operations, of US$16 billion on sales of US$419 billion. It had over 2 million employees and 8,500 stores in 15 countries, the result of a series of acquisitions over the past 20 years. Beginning with its "big box" discount store format in the 1960s, Wal-Mart's store formats around the world had grown to include supercentres, which were a larger versionofadiscountstorethatincludedgroceries,supermarkets,wholesaleoutlets,restaurantsandapparel stores. Globally, it served about 200 million customers perweek.⁵

Wal-Mart's strategy was to provide a broad assortment of quality merchandise and services at "everyday low prices" (EDLP) and was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware. In the U.S. general merchandise arena, Wal-Mart's competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors includedKroger,AlbertsonsandSafeway.Themajormembership-onlywarehousecompetitorwasCostco Wholesale. Wal-Mart was facing growing competition for large ticket general merchandise products and from online retailers such asAmazon.com.

THE DEVELOPMENT OF WAL-MART'S SUPPLY CHAIN

Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and transport these goods to his stores directly. When Walton realized that a new trend, discount retailing based on driving high volumes of productthroughlow-costretailoutletswassweepingthenation,hedecidedtoopenuplargewarehouse- style stores in order to compete. To stock these new stores, initially named "Wal-Mart Discount City," Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to sendtheirtruckstohisstores,whichwerelocatedinruralArkansas,self-distributionwasnecessary.

Wal-Mart undertook an initial public offering in 1969 to raise funds to build its first distribution centre in Bentonville, Arkansas. As the company grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of "resale price maintenance," which had prevented retailers from discounting merchandise. To keep an eye on his growing network, Walton piloted a small single-engine airplane, which he would land at air strips close to his new stores.

Wal-Mart's supply chain, a key enabler of its growth from its beginnings in rural Arkansas, was long consideredbymanytobeamajorsourceofcompetitiveadvantageforthecompany.Itwasoneofthefirst firms to rely on data to make operational decisions, using bar codes, sharing sales data with suppliers, controlling its own trucking fleet and installing computerized point-of-sale systems that collected item- level data in real time. When Wal-Mart was voted "Retailer of the Decade" in 1989, its distribution costs were estimated at 1.7 per cent of its cost of sales, comparing favourably with competitors such as Kmart (3.5percentoftotalsales)andSears(5percentoftotalsales).⁶

Its successes were widely publicized, and competitors had adopted many of Wal-Mart's management techniques. Yet Wal-Mart continued to lead the industry in efficiency, achieving inventory turns of 11.5 times in fiscal year 2011. For perspective, for the same period, key U.S. competitors Target Corp., Amazon.comandSearshadinventoryturnsof8.7times,6.2times,and4.7times,respectively.ButKroger Co., the second largest grocery retailer in the United States, had inventory turns of 14.2 times, primarily due to its focus on high-turning perishable fooditems.⁷

Procurement

As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart's

U.S.buyers,locatedinBentonville,workedwithsupplierstoensurethatthecorrectmixofstaplesandnew items were ordered. Over time, many of Wal-Mart's largest suppliers maintained offices in Bentonville, staffed by analysts and managers supporting Wal-Mart'sbusiness.

In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the mid-1980s.Wal-Mart'sinternationalpurchasingofficesworkeddirectlywithlocalfactoriestosourceWal- Mart's private label merchandise. Private label products were appealing to customers as they were often pricedatasignificantdiscounttobrandnamemerchandise;forWal-Mart,theprivatelabelitemsgenerated higher margins than suppliers' branded products. Private label sales at Wal-Mart, first developed in the 1980s, were believed to account for just 16 per cent of Wal-Mart's sales, compared to 25 per cent at U.S. rivals Safeway and Kroger.⁸This was because Wal-Mart's stated strategy was to be a "house of brands," procuring top brands in volume and selling them at lowprices.⁹

Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and review a fully merchandised prototype store, which was located in a warehouse. In order to gather field intelligence, buyers toured stores two or three days a week and worked on sales floors helping associates stock and sell merchandise.

Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increase bargaining clout was a contributing factor in Procter & Gamble's (P&G) acquisition of chief rival Gillette.¹⁰Priortotheacquisition,salestoWal-Martaccountedfor17percentofP&G'sand13percentof Gillette's revenues.¹¹On the other hand, these two suppliers combined accounted for about 8 per cent of Wal-Mart'ssales.¹²SomeviewedWal-Mart'sclosecooperationwithsuppliersinanegativelight:

Wal-Mart dictates that its suppliers . . . accept payment entirely on Wal-Mart's terms . . . share information all the way back to the purchasing of raw materials. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods and even encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to supplierswheretomanufacturetheirproducts,aswellashowtodesignthoseproductsand what materials and ingredients to use in thoseproducts.¹³

When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for co- operative advertising, discounting or distribution. Globally, Wal-Mart was thought to have around 40,000 suppliers, of whom 200 such as Nestle, P&G, Unilever, and Kraft were key global suppliers. With Wal-Mart's expectations on sales data analysis, category management responsibilities and external research specific to their Wal-Mart business, it was not uncommon for a supplier to have several employees working full-time to support the Wal-Mart business.

Distribution

Wal-Mart's store openings were driven directly by its distribution strategy. Because its first distribution centre was a significant investment for the firm, Walton insisted on saturating the area within a day's drivingdistanceinordertogaineconomiesofscale.Overtheyears,competitorshadcopiedthis"hub-and- spoke" design of high volume distribution centres serving a cluster of stores. This distribution-led store expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores, expanding across the nation from its headquarters inArkansas.

Stores were located in low-rent, suburban areas close to major highways. In contrast, key competitor Kmart's stores were thinly spread throughout the U.S. and located in prime urban areas. By the time the rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient logistics network of any retailer. Wal-Mart's 75,000-person logistics and its information systems division included the largest private truck fleet employee base of any firm 6,600 trucks and 55,000 trailers, which delivered the majority of merchandise sold at stores.¹⁴ Its 150 distribution centres, located throughout the United States, were a mix of general merchandise, food and soft goods (clothing) distribution centres, processing over five billion cases a year through its entire network.

IntheUnitedStates,Wal-Mart'sdistributioncentresreceivedabout315,000inboundtruckloads,ofwhich 115,000 were shipped "collect," which meant they were picked up directly from suppliers' warehouses by Wal-Mart's trucking fleet, The remaining 200,000 loads were shipped by suppliers' trucks or by logistics providers. The goal at Wal-Mart's distribution centres was for high turning items such as fresh food or other perishable merchandise to be cross-docked, or directly transferred from inbound to outbound trailers without extrastorage.

The average distance from distribution centre to stores was approximately 130 miles. Each of these distribution centres were profiled in a store friendly way, with similar products stacked together. MerchandisepurchaseddirectlyfromfactoriesinoffshorelocationssuchasChinaorIndiawereprocessed at coastal distribution centres before shipment to U.S.stores.

On the way back from delivering product to stores, Wal-Mart's trucks generated "backhaul" revenue by transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart's backhaul revenues

its private fleet operated as a for-hire carrier when it was not busy transporting merchandise from distribution centres to stores were more than US$1 billion per year.¹⁵ In mid-2010, Wal-Mart was looking to expand its backhaul program, to pick up more product directly from suppliers' factories. It was seeking,insomecases,a6percentreductioninthemanufacturer'ssellingprice.Forperspective,suppliers estimatedtheactualtransportationexpensewasjust3percentofthesellingprice.¹⁶

Because their trucking employees were non-unionized and in-house, Wal-Mart was able to implement and improve upon standard delivery procedures, coordinating and deploying the entire fleet as necessary. Uniform operating standards ensured that miscommunication between traffic coordinators, truckers and store level employees were minimized. During an analyst meeting in October 2011, Johnnie Dobbs, Wal- Mart Stores' (Wal-Mart's) EVP Logistics, had stated:

Everyday low cost is the foundation for everyday low prices. So our focus across the organization is delivering products that our customers need in the most efficient method

and process available. So, here's an example of a sustained cost reduction in our transportation area. We have improved visibility and routing tools. We've reengineered processes that have decreased the number of empty miles and out-of-route miles that our drivers drive. Our merchants and our suppliers have improved packaging, and we've adjusted methods that we use to load our trailers, resulting in increased cases in cube in every trailer that we ship (This year) we'll ship 335 million more cases while we'll

drive 300 million fewer miles.¹⁷

Store Network

In the early years, Wal-Mart grew rapidly as customers were attracted by its assortment of low-priced product. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. It bought in bulk, bypassing distributors, and passed savings on to consumers.

Each Wal-Mart store aimed to be the "store of the community," tailoring its product mix to appeal to the distincttastesofthatcommunity.Thus,twoWal-MartStoresashortdistanceapartcouldpotentiallystock differentmerchandise.Incontrast,mostotherretailersmadepurchasingdecisionsatthedistrictorregional level.

Thedisplayofmerchandisewassuggestedbyastore-widetemplate,withauniquetemplateforeachstore, indicating the layout of Wal-Mart's various departments. This template was created by Wal-Mart's merchandisingdepartmentafteranalyzinghistoricalstoresalesandcommunitytraits.Associateswerefree toalterthemerchandisingtemplatetofittheirlocalstorerequirements.ShelfspaceinWal-Mart'sdifferent departments from shoes to household appliances to automotive supplies was divided up, each spot allocated to specificSKUs.

Unlike its competitors in the 1970s and 1980s, Wal-Mart implemented an EDLP policy, which meant that products were displayed at a steady price and not discounted on a regular basis. In a "hi-lo" discounting environment, discounts would be rotated from product to product, necessitating huge inventory stockpiles in anticipation of a discount. In an EDLP environment, demand was smoothed out to reduce the "bullwhip effect." Because of its EDLP policy, Wal-Mart did not need to advertise as frequently as their competitors and channeled the savings back into price reductions. To generate additional volume, Wal-Mart buyers workedwithsuppliersonpricerollbackcampaigns.Pricerollbacks,eachlastingabout90daysandfunded by suppliers, had the goal of increasing product sales between 200 and 500 per cent. A researcher remarked: "Consumers certainly love Wal-Mart's low prices, which are an average of 8 per cent to 27 per cent lower than thecompetition."¹⁸

Thecompanyalsoensuredthatitsstoreleveloperationswereatleastasefficientasitslogisticsoperations. The stores were simply furnished and constructed using standard materials. Efforts were made to continually reduce operating costs. For example, light and temperature settings for all U.S. stores were controlled centrally fromBentonville.

As Wal-Mart distribution centres had close to real-time information on stores' in-stock levels, the merchandise could be pushed to stores automatically. In addition, store level information systems allowed manufacturers to be notified as soon as an item was purchased. In anticipation of changes in demand for some items, associates had the authority to manually input orders or override impending deliveries. In contrast, most of Wal-Mart's retail competitors did not confer merchandising responsibility to entry level employees as merchandising templates were sent to stores via head office and were expected to be followed precisely. To ensure that employees were kept up-to-date, management shared detailed information about day/week/month store sales with all employees during daily 10-minute long "standing" meetings.

Information Systems

Walton had always been interested in gathering and analyzing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent on hiring the smartest person in the class to come to Bentonville to computerize his operations.¹⁹ Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, due to his use of a personal airplane, which he used to observe new construction development (to determine where to place stores) and to monitor customer traffic (by observing how full the parking lot was).

In the mid-1980s, Wal-Mart invested in a central database, store level point-of-sale systems and a satellite network. Combined with one of the retail industry's first chain-wide implementation of UPC bar codes, storelevelinformationcouldnowbecollectedinstantaneouslyandanalyzed.Bycombiningsalesdatawith externalinformationsuchasweatherforecasts,Wal-Martwasabletoprovideadditionalsupporttobuyers, improving the accuracy of its purchasingforecasts.

In the early 1990s, Wal-Mart developed Retail Link. At an estimated 570 terabytes which, Wal-Mart claimed,waslargerthanallthefixedpagesontheInternetRetailLinkwasthelargestciviliandatabase intheworld.By2008,RetailLinkhad2.5petabytes(2,500terabytes)indatastoragecapacity,secondonly to eBay's 4-petabyte installation.²⁰For a description of how Retail Link fits in with Wal-Mart's supply chain, see Exhibit 2. Retail Link contained data on every sale ever made at the company during a two- decade period. Wal-Mart gave its suppliers access to real-time sales data on the products they supplied, down to individual stock-keeping items at the store level. In order to harness the knowledge of its suppliers, key category suppliers, called "category captains," first introduced in the late 1980s, provided input on shelf space allocation. As an observernoted:

One obvious result [of using category captains] is that a producer like Colgate-Palmolive will end up working intensively with firms it formerly competed with, such as Crest manufacturer P&G, to find the mix of products that will allow Wal-Mart to earn the most itcanfromitsshelfspace.IfWal-Martdiscoversthatasupplierpromotesitsownproducts attheexpenseofWal-Mart'srevenue,theretailermaynameanewcaptaininitsstead.²¹

In 1990, Wal-Mart became one of the early adopters of collaborative planning, forecasting and replenishment (CPRF), an integrated approach to planning and forecasting through sharing critical supply

chain information, such as data on promotions, inventory levels and daily sales.²² Wal-Mart's vendor managed inventory (VMI) program (also known as continuous replenishment) required suppliers to manage inventory levels at the company's distribution centres, based on agreed service levels. The VMI program started with P&G diapers in the late 1980s and by 2006 had expanded to include all major suppliers.²³In some situations, particularly grocery products, suppliers owned the inventory in Wal-Mart stores up to the point that the sale was scanned at checkout.

Retail Link had an estimated 100,000 registered users, working for suppliers, who accessed the system. Theyranapproximately350,000weeklyqueriesofthedatawarehousethatcontainedtwoyearsofweekly point-of-sale information.²⁴ Wal-Mart buyers held regular meetings with category captains, who would come to the meeting prepared with category analyses and recommendations for how shelf space for the various competitors should be allocated. In exchange for providing suppliers access to these data, Wal- Martexpectedthemtoproactivelymonitorandreplenishproductonacontinualbasis.

To support this inventory management effort, supplier analysts worked closely with Wal-Mart's supply chainpersonneltocoordinatetheflowofproductsfromsuppliers'factoriesandresolvedanysupplychain issues,fromroutineissuessuchasensuringthatproductswerereadyforpickupbyWal-Mart'strucksand arranging for the return of defective products, to last minute issues such as managing sudden spikes in demand for popular items. When Wal-Mart buyers met, on a frequent basis, with a supplier's sales teams, two important topics of review were supplier's out-of-stock rate and inventory levels at Wal-Mart, indicationsofhowwellreplenishmentwasbeinghandled.Supplierswereprovidedtargetsforout-of-stock rates and inventorylevels.

In addition to managing short-term inventory and discussing product trends, Wal-Mart worked with suppliers on medium- to long-term supply chain strategies including factory location, cooperation with downstream raw materials suppliers and production volume forecasting. Wal-Mart's satellite network, in additiontoreceivingandtransmittingpoint-of-saledata,alsoprovidedseniormanagementwiththeability to broadcast video messages to the stores. Although the bulk of senior management lived and worked in Bentonville, Arkansas, frequent video broadcasts to each store in their network kept store employees informed of the latest developments in the firm. In an effort to emulate Wal-Mart's ability to share information with suppliers, Wal-Mart's competitors began developing systems similar to Retail Link. Available through Agentrics LLC, a software service provider, the software platform, built with the input of dozens of global retailers, was made available through a subscription and collected and made available store level data by retailer. Agentrics' customer base included many of the world's top retailers including Carrefour, Tesco, Metro, Costco, Kroger and Walgreen's. Many of these retailers were also investors in Agentrics.

RFID

Toensurethatcasesmovedefficientlythroughthedistributioncentres,Wal-Martworkedwithsuppliersto standardizecasesizesandlabeling.Since2003,Wal-Marthadrequireditstop100supplierstoaffixRFID (radio-frequency identification) tags to shipping cases to facilitate the tracking and sorting of inbound product.

RFID tags allowed Wal-Mart to increase stock visibility as stock moved in trucks through the distribution centres and on to the stores. Wal-Mart would be able to track promotion effectiveness within the stores while cutting out-of-stock sales losses and overstock expenses. The company placed RFID tag readers in several parts of the store: at the dock where merchandise came in, throughout the backroom, at the door from the stockroom to the sales floor and in the box-crushing area where empty cases eventually wound up.Withthosereadersinplace,storemanagerswouldknowwhatstockwasinthebackroomandwhatwas on the salesfloor.

According to researchers, about 25 per cent of out-of-stock inventory in the United States was not really outofstock:theitemscouldbemisplacedonthefloorormis-shelvedinthebackroom.U.S.-wide,about8 per cent of merchandise was out of stock at any given time, leading to lost sales for retailers.²⁵In a study performedbytheUniversityofArkansas,Wal-MartstoreswithRFIDshowedanetimprovementof16per cent fewer out-of-stocks on the RFID-tagged products that were tested. However, RFID tags cost approximately 17 cents each.²⁶ It was estimated that Wal-Mart saved US$500 million a year by using RFID in itsoperations.²⁷

Human Resources

By visiting each store and by encouraging associates to contribute ideas, Walton was able to uncover and disperse best practices across the company in the 1960s and 1970s. To ensure that best practices were implemented as soon as possible, he held regular "Saturday morning meetings" that convened his top management team in Bentonville. At 7:00 a.m. each Saturday, the week's business results were discussed and merchandising and purchasing changes implemented. Store layout resets were managed on the weekend,andtherejiggedstoreswerereadybyMondaymorning.Waltonandhismanagementteamoften toured competitors' stores, looking for new ideas to"borrow."

Wal-Mart believed that centralization had numerous benefits including lower costs and improved communications between different divisions. All of Wal-Mart's divisions, from U.S. stores, International and Sam's Club, to its logistics and information systems division, were located in Bentonville, a town of 28,000 people in Northwest Arkansas. Regional managers and in-country presidents were the few executives who were stationed elsewhere. Another key to Wal-Mart's ability to enjoy low operating costs was the fact that it was non-union. Without cumbersome labour agreements, management could take advantageoftechnologytodrivelabourcostsdownandmakeoperationalchangesquicklyandefficiently. Being non-union, however, had its drawbacks. As its store network encroached on unionized grocers' territory, unions, such as the United Food and Commercial Workers' Union, started to become more aggressive in their anti-Wal-Mart publicity campaigns, funding so-called grassroots groups whose goals were to undermine Wal-Mart's expansion. Wal-Mart's size also made it a target for politicians: every stumble was magnified and played up in thepress.

FOCUSING ON THE SUPPLY CHAIN

Wal-Mart remained focused on improving its supply chain. A recent initiative was Remix, which was started in the fall of 2005 and aimed at reducing the percentage of out-of-stock merchandise at stores by redesigning its network of distribution centres. As Wal-Mart stores increased its line-up of grocery items

(Wal-Mart was the U.S.'s largest grocer in 2005), the company noticed that as employees sorted through truckloads of arriving merchandise to find fast-selling items, delays in restocking shelves occurred.²⁸ Moving from its original model of having distribution centres serve a cluster of stores, Wal-Mart envisionedthatfast-movingmerchandise,suchaspapertowels,toiletpaper,toothpasteandseasonalitems, wouldbeshippedfromdedicated"highvelocity"fooddistributioncentres.Fooddistributioncentres of which there were 40 were designed to handle high-turn fooditems.

High velocity distribution centres differed from general merchandise distribution centres in the following ways: as primarily food distribution centres, they were smaller and had temperature controls and less automation.²⁹Incontrast,generalmerchandisedistributioncentresrequiredautomationandconveyorbelts tomovefullpalletsofgoods.Wal-Martdidnotelaborateonhowmuchsavingsthismovewasexpectedto generate, but it was believed to be an incremental improvement to the current system. Wal-Mart's CIO, Rollin Ford,stated:

We could have done nothing and been fine from a logistics standpoint . . . but as you continuetoincreaseyoursalespersquarefoot,you'vegottodothingsdifferentlytomake those stores moreproductive.³⁰

In 2006, Wal-Mart continued to seek improvements to its supply chain. Although the company publicly declined to outline its targets for inventory reduction, its suppliers stated that Wal-Mart's top executives spoke in January 2006 about eliminating as much as $6 billion in excess inventory.³¹In addition, the firm was undertaking a significant program to remodel most of its U.S. stores to improve "checkout speed, customer service and store appearance."

The company reported that remodeled stores could drive 125 to 200 basis points of improvement in both salesandgrossmarginand8to9percentinlowerinventories.³²Fromfiscalyear2008tofiscalyear2011, Wal-Mart had remodeled just under 70 per cent of its store base. The company was opening fewer large format supercenters, down to 113 a year in fiscal year 2011 from 277 in fiscal year 2006, and was facing competitionfromonlinecompetitorssuchasAmazon.com,whichenjoyedannualsalesincreasesof40per centfrom2009to2011.Andsmallerformatstores,orDollarStores,whichwere10,000squarefeetinsize or smaller, were becoming popular. Wal-Mart had a small store format as well, Wal-Mart Express, aiming tobeafill-instoreforspace-constrainedurbanareas.ButevenascompetitorssuchasDollarGeneralwere opening over 500 new stores in 2011, Wal-Mart seemed hesitant with its small store format, opening only 35 small stores that year (see Figure1).³³

Figure 1: Net New Small Store Plans FY 2011

But execution issues at the store level and disruption from the remodeling had a negative impact on Wal- Mart's sales. There was also the financial crisis that started in 2008, along with a cutback on staffing levels.Theresultwasnineconsecutivequartersofsamestoresalesdeclinestartinginthesecondquarterof 2009.³⁴

By October 2011, due to its lacklustre topline and earnings growth prospects, Wal-Mart's stock price had languished in the $45 to $55 dollar range for the entire decade. The stock price seemed to be a topic of conversation at every analyst meeting that Neuhausen had attended for the past few years. This year, however,hewonderedwhetherWal-Mart'smanagement'seffortstodriveadditionalgainsfromitsalready efficient operations could help its lagging stockprice.

NEW INITIATIVES AND A REORGANIZATION

There were three significant initiatives at Wal-Mart whose goals were to improve its supply chain as the firm operated an increasingly varied number of store types and grew its global operations. There were changestothewayitprocuredproduct(GlobalSourcing),optimizingproductdeliverytostorestoincrease on-shelf availability (Project One Touch) and finding ways to leverage its strength in physical store locations to boost its online business (Multi-Channel). To facilitate the improvements, Wal-Mart reorganized, combining its real estate division with store operations and logistics. Wal-Mart was split into threegeographicbusinessunits(GBUs)intheUnitedStates:West,South,andNorth.³⁵

Global Sourcing

In February 2010, the Wal-Mart buying group was reorganized into Global Merchandising Centers: general merchandise; food; consumables, health and wellness and Wal-Mart.com; and softlines.³⁶For its private label business, instead of purchasing directly from factories, it entered into a partnership with Li & Fung. The latter would assist with product sourcing in a range of categories and markets where Wal-Mart did not "have the scale or the competencies and skills to leverage."³⁷ In 2010, the first year of the agreement called for approximately $2 billion in goods to be purchased through Li & Fung.³⁸Wal-Mart was targeting 5 to 15 per cent savings on the $100 billion in product it was purchasing through non-direct channels.³⁹

Project One Touch

"Across the organization, we're focused on the supply chain all the way down to the customer," said Dobbs. "Improvements in our DCs [distribution centres] and our transportation operations generate savings, but if you improve processes at the store level, you have a significant multiplier, when you think about the 3,800 plus stores out there (in the United States)." He continued:

So we've been working with our store operations team and our innovations teams to develop what we call Project One Touch. We aligned the merchandise flow, our delivery schedules, and the store labor schedules together. Then, we reorganized our high velocity distribution centers to deliver category group pallets that allow our associates to easily transfer product from our trailers to the sales floor. Then, we added aisle and modular locationstothegeneralmerchandisecaselabelstomakeiteasyforourstoreassociatesto getthesetypesofproductsontotheshelf.Andfinally,thispastyear,weinstalleda

systems-driven process that dramatically improves the less than case back processing in our back rooms. ⁴⁰

Inthe10monthsfromJanuarytoOctober2011,Wal-Mart'son-shelfavailabilityincreasedby5.7percent to over 90 per cent. On key items, it had 93 per cent availability. In addition, as a result of reorganizing its logistics, Wal-Mart was able to reinvest the US$2 billion in cost reductions into reducing prices at store level.⁴¹

The Multi-Channel strategy

Wal-Mart aimed to build a "continuous channel approach" to leverage both its physical store and distribution centre infrastructure and its growing presence online. Wal-Mart.com aimed to carry a broader selectionofitemsnotavailableinstores.Inaddition,thefirmlookedtofindwaystousethestorestodrive online business. Joel Anderson, EVP and president of Wal-Mart.com,stated:

Our store teams next year (in 2012) will get sales credit for both store sales and .com sales. This is like unleashing a sales force of over 1 million people. That is a differentiation that will be hard to replicate. Secondly, I want to focus on access. Several pilots are currently in place to leverage our ship food storage capabilities. We will offer next day delivery at a very economical price. We will use these capabilities to reach customers in urban areas that we have not yet penetrated. And finally, our online marketing efforts will over index in these areas we haven't penetrated so that we can continue to provide access to the Wal-Mart brand. The third area is fulfillment. We already have unlimited assets in place. Nearly 4,000 stores, over 150 DCs, this will give us the flexibility to offer our customers best in class delivery options.

For example, last week, we transitioned several disparaged shipping offers into one comprehensive fulfillment program. We are now offering three compelling free shipping programs. This is an excellent example of multi channel strategy beginning to come to life. Let's look at this one a little bit closer. We call it fast, faster, fastest. You have our sitetostoreoffer.Andthisoffersourbroadestmerchandiseassortmentbeyondthestores. Site to store allows a customer to pick it up in our store or hundreds of urban FedEx locationsforfree.Homefreeinthemiddleisournewfasterprogram.

This launched just last week. Home free allows our customers to bundle their items into one order and have it delivered to home for free. And there are no membership fees like some other online retailers currently charge. Pickup today . . . is our third program. It is our fastest option, and it provides the convenience of same day pickup in our stores for free. Pickup today is available in every one of our stores on the hottest assortment we have to offer.⁴

DECISION HOLD, BUY OR SELL?

Neuhausen put his notes down and walked into the conference room where his analyst team was assembled. He switched on the projector and clicked through the Wal-Mart stock presentation to the comparativeinformationslidesthatincludedfinancialinformation(seeExhibit3)andadescriptionofeach competitor (see Exhibit 4). Neuhausen hit "enter" and brought up Wal-Mart's stock performance over the past 10 years (see Exhibit 5). Heconcluded:

We've owned Wal-Mart stock for the past decade, and it's been basically flat over that period. During the same time, we'd have made more money had we been invested in the S&P 500 index of the largest 500 U.S. stocks. Should we continue to hold Wal-Mart stock?

I'd like to find out your views on Wal-Mart's key competitive advantages, especially its supplychainstrategy,andwhethertheseadvantagesaresustainable.Thedatasuggestthat new competitors, especially the Dollar Stores, Amazon.com and Tesco,⁴³are gaining in popularity in the United States. Is Wal-Mart's high volume "buy it low, stack it high, sell it cheap" model still validtoday?

Exhibit 1

U.S. RETAIL CATEGORIES (PARTIAL LIST)

Category	2011 (US$ billions)
General merchandise stores	630.9
Food and beverage	615.4
Food services and drinking places	494.2
Gasoline	533.6
Building materials and gardening equipment and supplies	300.2
Furniture, home furnishings, electronics and appliances	190.9
Health and personal care	274.9
Clothing and clothing accessories	226.5
Sporting goods, hobby, books, music	88.9

Exhibit 3

WAL-MART AND COMPETITORS FINANCIAL RESULTS, 2002-2011

Exhibit 4 COMPETITORS DESCRIPTION

Target Corporation

Target operates as two reportable segments. Its Retail Segment includes its merchandising operations, including its online business. Its Credit Card Segment provides the Target Visa and the Target Card credit cards, as well as the TargetDebitCard.Target'sCanadiansegmentconsistsofitsleaseholdinterestsinCanada.ItoperatesTargetgeneral merchandise stores and SuperTarget stores, providing a range of general merchandise and food. The company's merchandise includes household products, hardlines, apparel and accessories, food and pet supplies and home furnishingsanddecor.AsofJanuary28,2012,Targethad1,763storesin49statesandtheDistrictofColumbia.

Kroger Co.

Kroger operates retail food and drug stores, multi-department stores, jewelry stores and convenience stores. It also manufactures and processes some of the food for sale in its supermarkets. As of January 29, 2011, Kroger operated, either directly or through its subsidiaries, 2,460 supermarkets and multi-department stores, 1,014 of which had fuel centres. In addition, as of January 29, 2011, it operated through subsidiaries 784 convenience stores and 361 fine jewelry stores. Additionally, 87 convenience stores were operated through franchise agreements. These convenience stores offer an assortment of staple food items and general merchandise and, in most cases, sell gasoline.

Costco Wholesale Corp.

Costco Wholesale operates membership warehouses. Its products include sundries, such as candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and institutional supplies; hardlines, such as appliances, electronics, health and beauty aids, hardware, office supplies, cameras, garden and patio, sporting goods, toys, seasonal items and automotive supplies; food, such as dry and packaged foods; softlines, such as apparel, domestics, jewelry, housewares, media, home furnishings and small appliances; fresh food, such as meat, bakery, deli and produce;andancillaryandother,suchasgasstations,pharmacy,foodcourt,optical,one-hourphoto,hearingaidand travel.

Safeway Inc.

Safeway is a food and drug retailer in North America, with 1,678 stores at December 31, 2011. Its U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area and the Mid-Atlantic region. Its Canadian retail operations are located principally in British Columbia, Alberta and Manitoba/Saskatchewan. Its stores provide an array of grocery items tailored to local preferences. Most stores provide food and general merchandise and include specialty departments such as bakery, delicatessen, floral, seafood and pharmacy. The majority of stores provide Starbucks coffee shops and adjacent fuel centres.

Amazon.com

Amazon.com serves consumers through its retail websites. It provides merchandise and content purchased for resale fromvendorsandthoseprovidedbythird-partysellers;italsomanufacturesandsellstheKindlee-reader.Itprovides services such as Amazon Web Services; fulfillment; miscellaneous marketing and promotional agreements, such as onlineadvertising;andco-brandedcreditcards.Ithastwoprincipalsegments:NorthAmerica,whichconsistsofretail sales of consumer products and subscriptions through North America-focused websites; and International, which consistsofretailsalesofconsumerproductsandsubscriptionsthroughinternationallyfocusedlocations.

Exhibit 4 (continued) COMPETITORS DESCRIPTION

Dollar General

DollarGeneralisadiscountretailer.AsofFebruary25,2011,itoperated9,414retailstoreslocatedin35statesinthe southern, southwestern, midwestern and eastern United States. It provides a selection of merchandise, including consumables, seasonal, home products and apparel. Its products portfolio includes home cleaning supplies, food, beverages and snacks, personal care products, pet supplies, decorations, toys, batteries, small electronics, greeting cards,stationery,prepaidcellphonesandaccessories,gardeningsupplies,hardware,andautomotiveandhomeoffice supplies,aswellasaselectionofhomeproductsandapparelproducts.

Dollar Tree, Inc.

Dollar Tree is an operator of discount variety stores providing merchandise at the fixed price of $1.00. Its merchandise mix consists of consumable merchandise, which includes candy and food and health and beauty care, and household consumables such as paper, plastics, house chemicals and frozen food; variety merchandise, which includes toys, housewares, gifts, party goods, greeting cards, softlines and other items; and seasonal goods, which include Easter, Halloween and Christmas merchandise. At January 28, 2012, it operated 4,252 stores in 48 states and theDistrictofColumbia,aswellas99storesinCanadaundertheDollarTree,Deal$,DollarTreeDeal$,DollarGiant and Dollar Billsnames.

Big Lots, Inc.

Big Lots is a broadline close-out retailer. Its merchandising categories consist of Consumables, which include food, healthandbeauty,plastics,paper,chemicalandpetdepartments;Furniture,whichincludestheupholstery,mattresses, ready-to-assemble and case goods departments; Home, which includes domestics, stationery and home decorative departments; Hardlines, which include electronics, appliances, tools and home maintenance departments; Seasonal, which includes lawn and garden, Christmas, summer and other holiday departments; and Other, which includes toy, jewelry, infant accessories and apparel departments. At January 29, 2011, it operated a total of 1,398 stores in 48 states.

Fred's Inc.

Fred's operates discount general merchandise stores and pharmacies. Its stores generally serve low, middle and fixed income families located in small- to medium-sized towns. It also markets goods and services to its 24 franchised stores. Its stores stock over 12,000 purchased items that address the needs of its customers, including brand name products, its label products and off-brand products. Its FRED'S brand products include household cleaning supplies, healthandbeautyaids,disposablediapers,petfoods, paperproductsandavarietyoffoodandbeverageproducts.As of January 29, 2011, it had 653 retail stores and 313 pharmacies in 15 states primarily in the southeastern United States.

Sears Holding Corp.

SearsHoldingsistheparentcompanyofKmartHoldingCorporation(Kmart)andSears,RoebuckandCo.(Sears).It is a broadline retailer with 2,172 full-line and 1,338 specialty retail stores in the United States operating through Kmart and Sears and 500 full-line and specialty retail stores in Canada operating through Sears Canada Inc., a 95%- owned subsidiary. As of January 28, 2012, it operated three reportable segments: Kmart, Sears Domestic and Sears Canada.

Exhibit 4 (continued) COMPETITORS DESCRIPTION

Walgreen Co.

Walgreen, together with its subsidiaries, operates a retail drugstore chain. It sells prescription and non-prescription drugs as well as general merchandise, including household products, convenience and fresh foods, personal care, beauty care, photofinishing and candy. Its pharmacy, health and wellness services include retail, specialty, infusion and respiratory services, mail service, convenient care clinics and worksite clinics. In addition, its Take Care Health Systems,Inc.subsidiaryisamanagerofworksitehealthcentresandin-storeconvenientcareclinics.AsofAugust31, 2011,itoperated8,210locationsin50states,theDistrictofColumbia,PuertoRicoandGuam.

CVS Caremark Corporation

CVS Caremark, together with its subsidiaries, is a pharmacy health care provider in the United States. Its segments include Pharmacy Services, which provides a range of pharmacy benefit management services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing; and Retail Pharmacy, which sells prescription drugs and a range of general merchandise, including over- the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods. As of December 31, 2011, it had 7,300 CVS/pharmacy retail stores.

Carrefour S.A.

CarrefourisadistributiongroupbasedinFrance.ItengagesinretailingbusinessprimarilyinEurope,Asia,andLatin America. It operates under four main grocery store formats: hypermarkets (offers food and non-food product lines); supermarkets;harddiscount(offersareducedrangeatdiscountprices);andconveniencestores,whichincludedCash & Carry stores (which are conveniences stores for professionals) and E-commerce. Some of its trade names are Carrefour, Carrefour Market, GB, GS, Dia, Ed, Shopi, Marche Plus, 8 a Huit, Proxi, Promocash and Docks Markets. As of December 31, 2010, it operated 15,937 storesworldwide.

Tesco plc.

Tesco is engaged in retailing and associated activities. Its core U.K. segment consists of four different store formats: Express, Metro, Superstore and Extra, as well as one trial format called Homeplus. Its Non-Food segment includes merchandise such as electricals, home entertainment, clothing, health and beauty, stationery, cookshop and soft furnishings,andseasonalgoodssuchasbarbecuesandgardenfurnitureinthesummer.ItsRetailingServicessegment consists of several operations, including Tesco Personal Finance, Tesco.com and Tesco Telecoms. Its International segmentoperatesin13marketsoutsidetheUnitedKingdominEurope,Asia(includingIndia)andNorthAmerica.

FISCAL YEAR	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002
Wal-Mart Sales	418,952	405,046	401,244	374,526	344,992	312,427	285,222	256,329	244,524	217,799
COGS	315,287	304,657	306,158	286,515	264,152	240,391	219,793	198,747	191,838	171,562
Operating expenses	81,020	79,607	76,651	70,288	64,001	56,733	51,105	44,909	41,043	36,173
Net income	16,993	14,848	13,400	12,731	11,284	11,231	10,267	9,054	8,039	6,671
Inventories	36,318	33,160	34,511	35,180	33,685	32,191	29,447	26,612	24,891	22,614
Total assets	180,663	170,706	163,429	163,514	151,193	138,187	120,223	104,912	94,685	83,451
Target Corp Sales	68,466	65,786	63,435	62,884	61,471	57,878	51,271	45,682	46,781	42,722
COGS	47,860	45,725	44,062	44,157	41,895	39,399	34,927	31,445	31,790	29,260
Operating expenses	14,106	13,469	13,078	12,954	13,704	12,819	11,185	9,797	10,696	9,416
Net income	2,929	2,920	2,488	2,214	2,849	2,787	2,408	3,198	1,841	1,654
Inventories	7,918	7,596	7,179	6,705	6,780	6,254	5,838	5,384	5,343	4,760
Total assets	46,630	43,705	44,533	44,106	44,560	37,349	34,995	32,293	31,392	28,603
Kroger Co
Sales	90,374	82,189	76,733	76,000	70,235	66,111	60,553	56,434	53,791	51,760
COGS	71,494	63,927	58,958	58,564	53,779	50,115	45,565	42,140	39,637	37,810
Operating expenses	15,345	13,811	13,398	12,884	12,155	11,839	11,027	10,611	10,354	9,618
Net income	596	1,133	57	1,249	1,181	1,115	958	-100	315	1,205
Inventories	6,157	5,793	5,705	5,659	5,459	5,059	4,886	4,729	4,493	4,175
Total assets	23,476	23,505	23,093	23,211	22,299	21,215	20,482	20,491	20,184	20,102
Costco
Sales	87,048	76,255	69,889	70,977	63,088	58,963	51,862	47,146	41,693	37,993
COGS	77,739	67,995	62,335	63,503	56,450	52,745	46,347	42,092	37,235	33,983
Operating expenses	8,682	7,840	7,252	6,954	6,273	5,732	5,044	4,598	4,097	3,576
Net income	1,542	1,323	1,086	1,283	1,083	1,103	1,063	882	721	700
Inventories	6,638	5,638	5,405	5,039	4,879	4,569	4,015	3,644	3,339	3,127
Total assets	26,761	23,815	21,979	20,682	19,607	17,495	16,514	15,093	13,192	11,620
Safeway Sales	43,630	41,050	40,851	44,104	42,286	40,185	38,416	35,823	35,553	32,399
COGS	31,837	29,443	29,157	31,589	30,133	28,604	27,303	25,228	25,019	22,303
Operating expenses	10,659	10,448	10,348	10,662	10,381	9,981	9,898	9,423	9,231	7,719
Net income	518	591	-1,098	965	888	871	561	560	-170	-828
Inventories	2,470	2,623	2,509	2,591	2,798	2,643	2,766	2,741	2,642	2,493
Total assets	15,074	15,148	14,964	17,485	17,651	16,274	15,757	15,377	15,097	16,047