Monday, September 15, 2014

Wal-Mart’s Declining Margins

Wal-Mart, as we all know is the market leader in supply chain management with over 4000 stores in the U.S. and 6000 stores internationally. However, its margins have been coming down slightly in the recent past. This is primarily attributed to the rising wages in China. The other reason being its move from the discount stores to super centers, which offer complete range of the groceries.

Wal-Mart has been strategic in moving into the groceries business as this market is unaffected by the macroeconomic factors. The shift in the business is evident as the share of the groceries in the total revenue is 56% currently compared to 24% in 2002.  This shift has further affected the margins as the groceries market has low margins compared to other types of goods it sells.

Though both these factors have been pulling the margins downward, Wal-Mart’s efficient supply chain has been helping to control the damage by great extent. It has been able to implement the technique called cross docking, which allows it to reduce or eliminate the intermediate storage costs. 

Cross docking is a method where the shipped goods are transported directly to warehouses from the docks to avoid storage costs in between. Further more, vendor-managed inventory method has allowed them to be more vendors specific and attain 100% order fulfillment. Through this whole process they are able to reduce the costs and at the same time are able to avoid any shortages or surpluses in supply.

Gross Margin is important for Wal-Mart as it directly affects its stock price. The constraints to implementing such system are negotiable power and high initial cost in technology to track the inventory. As the vendors manage the inventory dynamically, they need to have the most updated information. This was addressed by Wal-Mart using RFID system that tracks the inventory.

Though the whole system looks very efficient and able to cut unnecessary costs, isn’t the variability undesirable in inventory management as there is no fixed amount of production and shipping. There is no doubt that Wal-Mart has been managing inventory in the most efficient manner, but the only question is about its over dependence on its vendors. If any of its vendors fail to meet the demand, can Wal-Mart find quick alternatives? This is important to think about as some of the products are its own produced in china and shipped only to Wal-Mart. What if one of its producers fail as their plant cannot catch-up with rising demand.  Also, Wal-Mart is infamous for driving out competitors, which will leave it with no alternatives.


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