Reference no: EM132187057

Wal-Mart and Kmart

In 2002 five general merchandise retailers - Wal-Mart, Kmart, Target, Costco and Sears - accounted for 60 per cent of US sales in that sector. Wal-Mart was the undisputed market and cost leader and the main innovator in North American retailing. It was the first to introduce the ‘big box' retail format and flexible cross-trained employees who could work in more than one department. Historically Wal-Mart also led the way with aggressive investment in IT. Back in the 1960s it was one of the first to use computers to track inventory and was an early adopter of bar-codes technology in the 1980s. In 1983, it was reported that WalMart was spending only 2 cents in the sales dollar on getting goods into the stores, while its long-established competitor Kmart was spending 5 cents per dollar on the same activities.

Wal-Mart subsequently became a classic case study for supply chain management programmes, due to its use of Electronic Data Interchange (EDI) to improve co-ordination with suppliers. Technological innovations were coupled with a strategy that exploited economies of scale in purchasing and logistics, and gradually expanded operations around central distribution centres. By 1987 it  enjoyed a 9 per cent market share, but was 40 per cent more productive than its competitors as measured by sales per employee.

The introduction soon afterwards of wireless scanning guns and the Retail Link Program, which captures sales data giving real-time visibility of stock holding and sales patterns, were just two more technological innovations that boosted capital and labour productivity. They facilitated more effective micromerchandising campaigns as well as improved inventory management, allowing a better overall value proposition for customers, not least from significant cost savings, which were passed on to customers in the form of ‘every day low prices'.

By 1995 Wal-Mart had increased its market share to 27 per cent and widened the gap on productivity to 48 per cent. Other retailers adopted many of the same practices and technological solutions to improve their own performance. Nevertheless, Wal-Mart maintained a commanding lead, improving its own performance by an additional 22 per cent in the four years to 1999. Wal-Mart's sales per  employee leapt from $148,000 to $181,000 between 1995 and 1999. Kmart, for decades the dominant force in general merchandise
retailing, only managed to improve its own performance from $109,000 to $133,000 over the same period.

In sharp contrast to Wal-Mart, Kmart had been losing favour with US shoppers for years. Poor in-store presentation and unhelpful staff had eroded customer satisfaction, as had promotional flyers advertising cut-price products that were often missing from the shelves. Sometimes the stock was simply unavailable, while other times it was on site but had been left to linger in the back of the stores before being unpacked and logged on the central tracking system.

Kmart had tried to challenge Wal-Mart on ever more competitive promotional pricing, but its supply chain lacked the co-ordination to respond to the demand volatility the promotions induced. Its on-shelf availability had dropped to 86 per cent, while massively bloated stocks of seasonal items filled its warehouses long after the appropriate sales period had passed. The result was that while Wal-Mart enjoyed a stock-turn of 7.3 in 2000, Kmart could only manage 3.6 turns.

In September 2001 Kmart's Chief Executive issued a statement admitting that: ‘I believe the supply chain is really the Achilles heel of Kmart. Just fixing the supply chain could really turbo-charge Kmart. Efforts to ‘just fix' the supply chain involved the introduction of point of-sale systems a month earlier and followed a two-year $1.7bn IT upgrade, plus $70m spent on the introduction of hand-held scanners in 2000. The investment was too little too late.

Wal-Mart had spent $4bn on its supply chain system and then forced suppliers to invest a further $40bn in their supply chain operations. The suppliers had no choice other than to adopt the tools required to drive their own costs down further. Kmart had no chance of matching that level of performance. Its sales per square foot were by then only $227, almost half of Wal-Mart's $446.

The impact of the difference in performance of the two companies' supply chains has been dramatic. In January 2002 Kmart became the largest company, ever to file for Chapter 11 bankruptcy. Wal-Mart, the world's largest company, continues to prosper.

References

1. Johnson, B.C. ‘Retail: The Wal-Mart effect', McKinsey Quarterly, No. 1, 2002.

2. Simpson, L. ‘No so Special K', Supply Management, 2 March 2002, pp. 22-25. 3. Ibid.

3. Ibid.

This is an individual assignment.

01. ‘Sophisticated IT platforms help to gain competitive advantage in the market by reducing the cost of supply chain while increasing the customer service levels'. Critically analyze above statement relation to the case study. (750 words)

02. Describe at least five logistics initiatives that can increase customer satisfaction in retail supply chain and which can gain completive advantage (750 words)