Walmart is the world’s largest retailer. The company has operations in many countries around the world, but its biggest market remains the United States. For the 2015 fiscal year, Walmart had revenues of $485 billion and a net income of $16.3 billion, both of which represented an improvement over the year previous. The company’s revenues have increased steadily over the past five years, but profits peaked in FY2013 (MSN Moneycentral, 2015). As the company’s 3.3% net margin hints, Walmart competes as a cost leader, seeking to earn profits by selling high volumes at slim margins. The company sells a wide range of consumer goods, is the largest seller of groceries in the United States, with a 25% share, and groceries now account for 55% of the company’s U.S. revenues (Leeb, 2015). The company is also one of the world’s largest online retailers, at around $12 billion annually, but this makes it a distant player compared with industry leaders Amazon. Some have argued that Walmart’s emphasis on food holds it back in terms of online sales development, to the point where rival Target is actually better positioned (Wahba, 2015).
Operational Issue
Walmart wants to increase its share of online retail, but has struggled to gain traction. While it makes $12 billion in online revenue, this is just 2.4% of its total revenue. By contrast, industry leader Amazon makes $89 billion per year online. At one point, Walmart had targeted Amazon with the objective of becoming the industry leader online, but that proved a pipe dream and Walmart has since fallen behind many other companies in online retail. Thus, despite being the offline retail leader, Walmart has never found its footing as an online retailer. The company has utilized a number of different strategies to build its online business. For example, it allows people to order something, then pick it up at the nearest Walmart store. This tactic, however, removed the convenience of online ordering and because going to a store was not appealing to non-customers, this strategy mostly just cannibalized the offline business. Further, as Leeb (2015) notes, Walmart’s business is now heavily dependent on groceries, a good that is much less conducive to online ordering than consumer goods — groceries are wet, perishable, heavy and not purchased one at a time the way that other household goods are. In essence, despite a stated desire to be the industry leader in online retailer, Walmart simply does not have the operational capability to achieve that goal.
Thus, a major strategic and operational challenge for Walmart is to set itself up, operationally-speaking, to increase its online market share. There are a number of possible ways for the company to do this. It can focus on making groceries more attractive for online shopping or, alternately, it can find ways to make the online shopping and shipping experience better for customers in order to bring in new customers to its online marketplace that might otherwise not shop at Walmart. Its online strategy thus far might be preventing the bleeding of sales to Amazon, but it has not allowed Walmart to attract new customers, which is critical to growth.
The Current Operation
Walmart famously runs one of the best logistics systems in the world. The company is renowned as a supply chain innovator, something that has allowed it to deliver on its promise to consumers to offer the lowest prices — or least close enough that nobody notices the difference. This is an essential component to Walmart’s strategy, and they are among the very best. Walmart invests heavily in technology to ensure that it remains the industry leader. The company begins with sophisticated forecasting that allows it to estimate demand at each location, and then uses this information to initiate orders automatically. Shipments are routed through distribution centers around the country, each one serving 10-12 stores. The company makes extensive use of RFID, satellite tracking, and cross-docking in order to not only track shipments throughout the supply chain, but also to ensure that goods arrive when they are supposed to, on schedule, and that they are moved quickly from supplier to the store floor. This allows for lower overall system costs, and faster inventory turnover as well, both of which lower total cost. Thus, even though Walmart invests heavily in its supply chain, this investment pays off through lower total supply chain costs that contribute to its ability to execute on its overall strategy.
The problem for Walmart is that this system was built for its offline outlets, and thus is not optimized for online sales. A competitor like Amazon has built its entirely supply chain and distribution system with online sales in mind. It has massive warehouses and constant pickups from UPS to help move goods quickly through its system. The result is that Amazon enjoys substantial economies of scale. Amazon is also aided by the fact that it competes more based on selection and service than on price. Because of its size, consumers use it as the benchmark for online retailing and thus consumers value things like free shipping, rapid delivery times and a broad selection.
Walmart’s online strategy is based more on an extension of its offline strategy — low prices are the most important thing that it offers. Furthermore, Walmart has done things like offering pick up at stores, but that merely removes convenience and ensures that only existing Walmart customers will use the service. Nobody else would want to deal with those massive parking lots and the utter quagmire involved in actually trying to get and out of a Walmart efficiently. Plus, all you really get as a customer is that you save a few minutes of wandering around the store. In short, Amazon succeeds by offering consumers real benefits and charging people for those benefits. Walmart’s online strategy does not offer anywhere near the same benefits that Amazon offers, so the lower cost means little. Walmart’s tactic of trying to find ways to shoehorn its offline strategy into the online space was underwhelming, to say the least.
Walmart, recognizing that it had a problem, sought ways to improve its online offering and build that business. The company wants to add more access points for consumers to pick up goods, something that would improve the online offering, and maybe make it a value-added proposition. One tactic that the company is working on currently is to link consumers more directly with suppliers. The company notes that such an approach “requires a whole different level in terms of precision, pickup performance, and distribution” from suppliers, who now must be able to meet specifications that Walmart sold the customer (say, picking up from a specific location at a specific time the same day). In essence, because the customer has already paid, “they want to know when it’s going to be there and what condition it’s going to arrive in” (Whelan, 2015).
Walmart is also experimenting with its own home delivery trucks. This is in response to Amazon moving towards next day delivery with more fulfilment centers, and the possibility that things like drone delivery could have Amazon doing same day. With same day being the objective, Walmart is testing a small fleet of trucks to do home deliveries on a same-day basis as well. The company notes that each store is a distribution node, which is much better than what Amazon can offer (Whelan, 2015).
Thus, the current operation has some strengths that can be leveraged, but in general it lags what competitors like Amazon offer. The major weakness for Walmart is that it piggybacks the online business on the offline business. So the online business has a Walmart-level inventory, not an Amazon-level inventory (which is much bigger). It can fulfill faster, but it also often makes customers pick the order up. Thus, the benefit is more that the customer can save time shopping in the store, which is a moderate convenience, and also comes at the cost of reduced opportunities for impulse purchases. To succeed online, Walmart may need to increase delivery capacity, but it may also need to increase its inventory. The ideal performance would be to have a larger inventory, along with enhanced delivery capability — same day is the ideal, but overnight is more where the industry is presently.
The Opportunity
Each set of Walmart stores is served by a distribution center. The distribution centers are large enough to carry a greater variety of inventory. This would require some operational changes, however. For example, in order to increase the amount of inventory that is carried at a warehouse, Walmart would need to move staple goods through the warehouse more quickly. This would require more frequent shipments from its suppliers, along with better demand forecasting. There would be increased risk of stockouts as well, if anything went wrong. However, if executed properly, a bigger inventory of goods could be held at each distribution center, including items that are not available at every store. But these items could be ordered online to be delivered at any store, either the same day or the next day. So there is opportunity for Walmart to increase both its inventory and its delivery times, both tactics that would allow it to compete more effectively with Amazon. Moreover, such a strategy would allow Walmart to leverage its greatest strength, which is the 11,000 existing distribution nodes, something Amazon will never have.
In order to successfully make such changes to the distribution network, Walmart will need to balance out several issues that on the surface may seem mutually exclusive. When the objectives of operations management are considered, Walmart wants to maintain its ability to offer goods at lower prices, because price leadership lies at the heart of the company’s identity. Walmart must compete as a cost leader. However, they are benchmarking their service quality in line with Amazon, the industry leader, and a company that is not seeking to compete with a cost leadership strategy. The other objectives of operations management are productivity and output, two things that need to improve with the strategy. Output has to improve because one of the strategic objectives for Walmart is not only to increase online sales, but to attract new customers. Output need not increase if Walmart is simply cannibalizing offline sales, but the company wants to use its online business to actually increase sales, so output improvements have to be considered a part of the plan.
The other major consideration is that Walmart is going to want to increase productivity. The strategy that has been proposed — increasing in-house deliveries and having more frequently shipments from the distribution centers to the stores — are going to increase costs at least somewhat. Thus, in order to maintain cost leadership, Walmart needs to find some efficiencies elsewhere that will counterbalance those added costs. In particular, reducing the amount of time that goods spend in the system is a good way to increase productivity. The good news for Walmart is that the proposed new system is moving towards a model where the customer has already paid for a good before it enters the system. There is no better way to forecast demand than to actually have the money in hand already. By reducing the slack in the demand forecast, Walmart should be able to improve productivity and reduce inventory further.
One of the trickiest parts of this opportunity is that Walmart’s sales are over half in groceries. Some groceries are perishable, while things like canned goods are relatively inefficient for shipping because of their weight. Improving throughput at the distribution center actually should help with these issues, especially the perishability, because increasing inventory turn on perishables should always be a priority. In that sense, the connection between consumer and distribution should be tighter, because it will reduce waste of perishable items. If inventory levels are moved more quickly, that should not require additional investment. It should be noted that there will definitely be challenges with respect to individual product items, in particular agricultural goods that are subject to harvest, but the overall strategy is not intended to deal with individual item issues. It is worth noting that Amazon is also trying to resolve the perishables issue, and this is considered a key strategic battleground for the future of online ordering, but seems only viable in major cities, even then the economics may not be great (Schoultz, 2015).
Costs
The costs of all of this are not public knowledge — Walmart is not legally obligated to divulge these costs and quite frankly would be crazy to do so, given how critical these costs are to its competitive strategy. Thus, there is no meaningful cost information available in the public sphere. What the strategy does illustrate, however, is that there are cost trade-offs. The company is seeking to reduce the amount of time that goods spend in inventory (so increase inventory turnover), allowing it to increase the total SKUs that it offers, at least online. This adds value to the online business, and it leverages the fact that while there are 11,000 nodes (its stores), the distribution center can hold the goods and then ship out to the stores frequently in order to ensure deliver as rapid as possible. There is a cost associated with more frequent deliveries, but there are savings relating to faster inventory turnover and more accurate demand forecasting. So the hope is that not only are the trade-offs positive, but that the strategy makes Walmart.com a more attractive shopping option, enough to attract new customers.
Technologies
Increasing flowthrough at the distribution centers is relatively easy on paper, when the customers have already paid, thereby tightening the slack in demand forecasts. However, Walmart will also need more frequent deliveries from suppliers in order to facilitate this. Given Walmart’s bargaining power, this should not generally be a problem. The biggest issue is that Walmart is already the technological leader in logistics, so finding new technologies might be a significant challenge. The use of satellite technologies to aid with tracking can help Walmart to reduce any bottlenecks that remain in the transportation system but ultimately, there may not be anything other than incremental gains to be made until the next technological improvement. Walmart already invests heavily in this area, so the only recommendation that can be made is that the company should keep up the good work, but focus more on the new strategy.
Conclusion
The ultimate vision for this strategy is that Walmart will be able to match, more or less, Amazon’s delivery capabilities, but do so at Walmart prices. The company has an advantage in buying power, and it also has more distribution nodes, so the strategy seeks to take advantage of both of those strengths to counter Amazon’s leadership in selection and delivery times. Walmart merely needs to get close to Amazon on those issues, introducing the possibility that consumers will switch from Amazon because of their inherent price sensitivity. If properly executed, the proposed strategy should help get Walmart closer to that ultimate goal.
References
Leeb, S. (2015). Wal-Mart fattens up on poor America with 25% of U.S. grocery sales. Forbes. Retrieved August 9, 2015 from http://www.forbes.com/sites/greatspeculations/2013/05/20/wal-mart-cleans-up-on-poor-america-with-25-of-u-s-grocery-sales/
MSN Moneycentral (2015). Walmart. Retrieved August 9, 2015 from http://www.msn.com/en-us/money/stockdetails/financials/fi-WMT?ocid=qbeb
Schoutlz, M. (2015). Why the Walmart e-commerce strategy won’t beat Amazon. Digital Spark Marketing. Retrieved August 9, 2015 from http://www.digitalsparkmarketing.com/general-business/walmart-e-commerce-strategy/
Wahba, P. (2015). How do Target and Walmart stack up in the e-commerce wars? Forbes. Retrieved August 9, 2015 from http://fortune.com/2015/03/11/target-walmart/
Whelan, R. (2015). Walmart’s supply chain connecting customers with e-commerce orders. Supply Chain 24/7. Retrieved August 9, 2015 from http://www.supplychain247.com/article/wal-marts_supply_chain_connecting_customers_with_e-commerce_orders
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