Supply Chain Management

Walmart

Walmart is the worlds greatest retail business. That, however, does not mean that the Walmart
do not have to face competition in the industry. Schwarz, Carrefour, Ahold Delhaize and greatest of all,
Amazon are all in the play and over the years have developed to be an existential threat to Walmart.
Walmart developed following the strategy of cost leadership in the market. It created value by buying
bulk produce from suppliers and offering a large warehouse of discounted items to the end consumers.
To put it simply it relied on the economies any business would generate from operating large scale.
Amazon changed the game. It understood the need for items to be delivered directly at homes. It cut
costs for Amazon and produced leisure and comfort for customers. It does sound like a win-win
scenario, but lack of physical infrastructure did create an opportunity for Walmart itself. In theory, if
Walmart weaponizes its infrastructure optimally it can have an upper hand in certain key areas such as
speed with which items can be delivered on average and availability of perishable items.

This case considers the strategies Walmart has employed to mold its infrastructure to dynamic
American market. Walmart has understood the need of online retail services and has considered to
develop in certain key and growing sectors. It is offering specialized products as well as everyday items
that can be delivered to consumers in at most a couple of days free of cost, or at a lower cost to
Amazon. It has tests supply chain infrastructure that combined with modern surveillance techniques and
technologies (such as e-tag, POS (point of sale system) and distributed ledger technology) should be
enough to eradicate the competition. Not to say, that Walmart being an old organization should be
sentimentally, generally, more reliable for the customers. Quantitatively the situation can be
summarized as: Walmart is a $514 billion company that has access to an overwhelming majority of
American population with a store within 10-mile radius of 90% of the American population and (as the
case study explicitly states) have decided to withdraw from expansion in international markets. The
point that Walmart is not aggressively pursuing international market can help us understand the present
situation Walmart and the fact that why its may or may not make any sense financially or as a financial
investment.

Walmart has extensively invested in the communication and information techno logy
infrastructure. The idea is to reduce wastage and speedy delivery to customers, but Walmart is falling
short of its objectives. For example, the projected in-time delivery success rate is 87 percent where the
ground reality is that it only happens 70% of the time. Even an 87% success rate may not be enough to
compete with amazon and perhaps the reason is that Walmart was never built to work like this, and the
transition phase is simply not efficient enough. Walmart is making expenditure on consolidation centers,
analysts as well as AI experts and even after all this the results are not impressive. Perhaps the
complexity the Walmart has introduces in the system is acting as a hindrance itself.

One of the bigger problems is the fact that Walmart sales infrastructure simply can’t match the
dynamic compatibility of Amazon’s. The hundreds of stores Walmart has nationwide store billions worth
of inventory at point in time and that is a cost. Amazon does not have to experience problems to this
huge extent. It, largely, delivers the order to a third part producer and ships the order. The storage cost
and risk must be borne by the producer/supplier. This can prove to be specially beneficially in case of
natural disasters such hurricanes or pandemics that can decimate the physical infrastructure handled by
Walmart. The fact that Walmart is not pursuing an international expansionary regime like amazon is due
to the fact that it costs too much capital to build the infrastructure and too expensive to maintain and
since majority of the American market already has access to Walmart stores and services it does not
look that Walmart will be able to show any significant growth in comparison to its competitors such as
Amazon. Walmart has not shown any intention of diversifying out retail business either, the
characteristic not shared by major competitors such as amazon. Amazon’s integrated supply chain
network and business workspace system has made it efficient and reliable, again, a characteristic,
arguably, not shared by Walmart.

This analysis can be backed up by the financial information available in the extract. For year
2017 and 2018 the average proportion of cost of goods sold to revenue for Walmart is over 70%
whereas, the same ratio shows an estimate of 61% for Amazon. So, Walmart has a network of stores and
warehouses which it traditionally used as its advantage to cut costs but can’t do that anymore, yet it
insists to keep it a part of the main supply chain network. The previous extract considers variable costs.
These costs vary per unit produced and hence show that the difference in efficiencies is likely to linger in
the long run. Inventories are roughly 8% of the annual sales for Amazon where they are roughly 25% for
the Walmart. As said earlier, this substantial difference in inventories translates to substantial costs.
These are in the form of storage costs, product expires, products going out of fashion and more.

The receivables and payables management, however, represents a different picture. The
traditional structure of Walmart allows it more power when bargaining with suppliers. It also allows to
collect payments faster from the customers. In fact, for Walmart, receivables are only 3% of the total
assets when for amazon they are as high as 10% percent. More receivables mean more cash that is
bound up uselessly and hence is a cost. Similarly, Walmart has 19% of assets as payables which is much
more efficient indicator as compared to 8% of payables of assets for amazon. The more money you must
pay later means more free money one can enjoy meeting every day operational costs.

The capital expenditures have shifted extensively to E-commerce and remodeling functions. This
shows some promise that Walmart is considering adopting the changed business model but its
willingness to adhere to store infrastructure is a serious hinderance. This approach clogs up cash in form
of inventories and maintenance expenditure. The physical infrastructure should be shutdown. Not
immediately as stores are not completely out of fashion yet but capital expenditures to automate stores
to make large extensive robots is freakishly expensive and a step in the wrong direction. Walmart needs
to withdraw from the setup. I propose selling the stores to third parties under some kind franchise
contract. These stores will be independent businesses that would bear the risks such as pandemics,
earthquake, accidents etc. and yet will function as functional stores for Walmart. The franchising will
help the stores conserve the investmental value of the supply chain Walmart is so proud of. The lavish
sums can be used to invest abroad to produce more harmony and simplicity in the supply chain
infrastructure. This arrangement will present the Walmart’s image as a company preparing for
expansion which, if market appropriately, can bring in volumes of cheap capital.

Walmart can produce a global oligopoly with Amazon, Ali baba and more or perhaps it can
refine its e-commerce system even further than Amazon or Ali express. Geo-political factors will inhibit
the limit of the Walmart’s (not different to what happened with Brazil) expansion but that is not the part
of debate right now. An alternative strategy would be to focus on a niche, i.e., physical shopping which
is not likely to go completely redundant, especially, as the concept of shopping as recreation emerges. It
is considered recreation to shop and eat in massive malls perhaps Walmart can decide to grow into
something like that. The existing branches can be modified to include luxury items and eating spaces
where necessities can be delivered over internet. This approach carries an of risks of its own.