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Course name (Course code)
1
Wal-Mart’s Application of Information
System and Critical Success Factors
Student Name
Student code
Programme name
2
Table of Content
1. Introduction
4
2. Wal-Mart Business Strategies and Competitive Forces
5
3. Wal-Mart’s Automation of Business Processes
8
3.1 Procurement Management
8
3.2 Transportation Management
13
4. Critical Success Factors
18
5. Conclusions
XX
References
XX
List of Figures
Figure 1 : Wal-Mart’s Procurement Processes
9
Figure 2 : Oracle Collaborative Planning Screen
10
Figure 3 : Demand Forecast Graph
11
Figure 4 : Wal-Mart’s Transportation Processes
13
Figure 5 : Oracle Transportation System Screen
14
Figure 6 : Carrier Companies List
15
Figure 7 : Delivery Tracking Status Screen
16
Figure 8 : Benefits of Information System
16
3
1.
Introduction
The aim of the assignment is to get a comprehensive and critical understanding of the life of
information systems (IS) from their connection with corporate strategies and the creation of
concrete benefits from the processual perspective to the critical success factors for a correct
implementation and use. IS can be defined as a set of interrelated components that collect,
process, store, and distribute information to support decision making and control in an
organization (Crain, 2012). Until recently, IS has become an integral and interactive tool in
organization’s decision making and daily operations. This is no exception to Wal-Mart, the
US leading low-cost retailer. Wal-Mart was established in 1933 by Sam Walton in Arkansas
and has grown rapidly to become today’s largest profit making enterprise (Liechtenstein,
2012). It owns 10,942 stores globally and employs more than 2.2 million workers (Wal-Mart,
2014). Wal-Mart’s focus is to deliver EDLP (everyday low price) on wide range of products
such as groceries, apparels, and furnitures. The success of Wal-Mart in delivering low price
was reinforced by its $3 billion investment in Oracle information system in 2008 (Oracle,
2008), which brought sales up to $476 billion and a net profit of $4 billion annually (WalMart, 2014). The focus of this paper is towards Wal-Mart’s supply chain management. The
first part discusses Walmart’s business environment at the time of the decision to adopt the
new systems and the implementation, which pushed the firm to reinforce its long-term core
competences. The second part demonstrates Wal-Mart’s IS applications in business
processes to achieve the business strategies mentioned in the first part, whilst highlighting
the benefits they create. The following part discusses the critical success factors for the
materialization of benefits of this type of systems, industries and corporations. We conclude
by summarizing the essay, describing what competitors are doing in the same area and
commenting on the sustainability of the competitive advantages supported by the systems.
4
2. Wal-Mart’s Business Strategies and Competitive Forces
Before a company decides to implement a competitive strategy, it must firstly analyse the
current situation the business is operating within (Laudon, 2012). This involves
understanding the business environment from the external and internal perspectives, which
could later help the company to adopt the most effective strategy to enhance business
performance. This section firstly looks at Wal-Mart’s macro and micro-environments by
applying PESTEL framework and the five competitive forces (Porter, 2004). This helped WalMart to appreciate the need to reinforce its long-standing generic competitive strategy. It
then explains how Wal-Mart utilizes its internal capabilities to achieve success.
PESTEL analyzes the external forces in the industry (Porter, 2004) and the most relevant
aspects for Wal-Mart include the economic and technological forces. The global economy is
still recovering from the 2008 financial crisis, especially for the US economy, whose
economic growth has shrunken by 2.9% (New York Post, 2014). This significantly impacted
US consumers who suffer from 4.2% decline in spending power (Morath, 2014), thus,
making consumers to be more price-conscious while buying goods. Moreover, the rapid
growth in technology and the Internet have allowed information to be easily accessed by
everyone. This allowed price-conscious consumers to be exposed to more choices and
obtain information about products with the cheapest price (Yang, 2011)
These external forces subsequently become the competitive forces that Wal-Mart have to
face (Porter, 2004). As economic condition declines and technology improves, this means
consumers’ bargaining power is enhanced (Laudon, 2012). Consumers are likely to buy from
retailers who can provide the cheapest products which indicates lower brand loyalty
(Papazoglou, 2008). Subsequently, this increases the level of rivalry among Wal-Mart’s
5
competitors, such as Costco and Target, in terms of capturing market share in the retailing
industry (Mottner and Smith, 2009). Similarly, technology advancement makes transaction
process easier by allowing supplier to eliminate the need of intermediaries and supply
directly to consumers (Porter, 2001). The suppliers of Wal-Mart hence have gained some
bargaining power and can also more easily supply goods to Wal-Mart’s competitors (Curtis
and Cobham, 2002). This could make difficult Wal-Mart’s ability to maintain stock levels and
charge lower prices to consumers.
Hence, all of these issues put pressure for large retailers to compete based on price
(Gosman, 2006). As a result, Wal-Mart decided to strengthen its traditional cost-leadership
strategy to tackle these issues (Bloom, 2012). To be a low-cost leader, from a resourcebased view of strategy (Prahalad and Hamel, 1990; Rothaermel 2013), Wal-Mart has always
tried to ensure its supply chain management is carried out at maximum operational
efficiency (Chandran, 2003). For example, Wal-Mart cuts costs in procurement and
transportation processes. Stock level, warehouse management and distribution routes are
synchronized and monitored continuously to ensure inventory are kept at the lowest level
and delivered promptly (Chiles, 2004). Thus, Wal-Mart’s warehouses do not carry excessive
stock which saves a substantial amount in total cost. In fact, Wal-Mart’s stock turnover rate
is 40% higher than its competitors (Tuttle, 2013). Similarly, Wal-Mart shares sales forecast
and up-to-date demand information with suppliers (Lopez, 2014) This is important given
that Wal-Mart’s suppliers consisted of several tiers, hence a single inaccurate sales
information affects the whole supply chain (Constantino et al 2013). Thus, not only suppliers
are prevented from over or underproduction, this strategy builds a closer relationship
between Walmart and its suppliers, which could act as a switching cost that minimizes
suppliers’ tendency to switch to Walmart’s competitor (Xu, 2014). Also, this gives Wal-Mart
6
greater bargaining power to obtain lower prices on product procurements (Shields, 2004).
Despite that historical focus, Wal-Mart’s directors decided that, as a reaction to the external
pressures at that time, they still should further improve its value chain, specifically the
collaboration with suppliers and the management of transport of products to warehouses
and stores.
7
3. Wal-Mart’s Automation of Business Processes
3.1 Procurement Management
Wal-Mart currently sells 142,000 types of products and has 60,000 suppliers (Wal-Mart,
2014), which indicates that Wal-Mart needs to ensure its procurement activities are handled
efficiently. This also means that Wal-Mart needs to collaborate with its suppliers because if
it does not, this leads to inaccurate information and suppliers would hold unnecessary
inventory, which then results to higher inventory cost passed on to Wal-Mart (Anand, 2007).
To solve this issue, Wal-Mart purchased Oracle’s Value Chain Planning system to manage
procurement activities (Oracle, 2008). Oracle provides several modules under this system
and Wal-Mart specifically installed the Collaborative Planning (CP) system to automate its
business processes. In order to provide clearer understanding of Wal-Mart’s procurement
activities, Figure 1 illustrates the detailed procurement processes.
8
9
Firstly, the system notifies employees that certain products have fallen below the minimum
quantity. As shown in Figure 2, every item that Wal-Mart has is displayed, including product
name, code, quantities, and replenishment time (Oracle, 2014a). This informs Wal-Mart how
much and when to order more products to replenish the store shelves.
However, in order for this system to operate efficiently, Wal-Mart encourages all of its
suppliers to connect their systems to the CP platform, which then allows the system to build
a supplier database (Oracle, 2014b). Consequently, when Wal-Mart decides to order goods,
the system will act as an ‘online shopping platform’ by providing a list of suppliers that Wal10
Mart can choose from. Through this system, employees could easily select the best supplier
with the best price and release a purchase order. Before the order is finalized, the system
automatically requests approval from sales managers. If the purchase is authorized, a
purchase order will be released to suppliers. Similarly, the system directly connects to
financial department to handle the payments with the suppliers (Oracle, 2014b).
Another important feature of this system is that it enables Wal-Mart and its suppliers to
compare order forecasts and view demand-supply mismatches (Oracle, 2014b). This feature
is important because inventories are often not reviewed until multiple shortages occur from
different Wal-Mart’s store locations, and this could reduce stock availability and negatively
affect customer satisfaction (Teece, 2010). Moreover, Wal-Mart’s suppliers consists of
several tiers, thus it needs a collaborative platform that could synchronize information
across these suppliers (Pena, 2008).
As shown in Figure 3, the system displays a ‘projected available balance graph’, which shows
11
the forecasted demand quantities that Wal-Mart needs in the future (Oracle, 2014b).
It specifically shows the amount of safety stock, and the minimum and maximum on-hand
quantity. This forecast allows Wal-Mart to analyse inventory trends over time, thus WalMart and suppliers could decide the accurate level of goods they should produce to prevent
stock-outs or overproduction (Chiles, 2004).
12
3.2 Transportation Management
After procuring the products, Wal-Mart needs to transport these orders from the location of
suppliers to Wal-Mart’s warehouses and stores (Ward and Peppard, 2002). Wal-Mart
currently owns 158 warehouses and 4,281 stores (Walmart, 2014), thus if transportation
activities are not handled efficiently, it would incur high expediting cost and waste of time
(Chaffey, 2002). To solve this issue, Wal-Mart purchased the Oracle Value Chain Execution
system, and the exact module that it has bought is the Oracle Transportation System (OTS)
(Oracle, 2008). Figure 4 illustrates the transportation automation processes.
13
When an order is ready to be delivered, Wal-Mart could utilize OTS to efficiently manage
and streamline the entire delivery processes. As shown in Figure 5, the system allows WalMart to specify the pick-up, drop-off location and how the orders are transported. The
system then directly calculate the freight rating cost, which is the process of assigning
carrier rates based on distance, volume and weight (Chaffey, 2002). The special feature of
this system is that it can also reduce transportation cost by consolidating multiple deliveries
in a single trip (Oracle, 2014c).
14
Subsequently, as shown in Figure 6, the system provides a list of available carriers
companies including the price rates, hence Wal-Mart could select the best rate to suit the
delivery requirements (Oracle, 2014c). The system then automatically handles the payments
with the carrier company and the delivery will be processed.
Finally, another important feature of this system is that once the delivery is confirmed, it
directly generates a tracking tool which provides continuous feedback on the status of the
delivery (Oracle, 2014c), which includes pick-up location, in transit events, and current
status of the delivery (Figure 7).
15
Overall, Wal-Mart’s decision to leverage information system in its business processes has
allowed it to strengthen its low-cost strategy. As shown in Figure 8, given that suppliers have
a more accurate data of the quantity they should produce, it allows them to produce based
on just-in-time system (Itasca, 2013). This is mutually beneficial for both parties as procuring
and replenishing activities are better coordinated and efficient (Russell, 2012). This reduces
order cycle time and increases ability to quickly react to demand changes (Marquard, 2007).
Subsequently, this will reduce needs for inventories because stocks are only replenished
16
based upon real demand data, which allows Wal-Mart to gain benefits in cost savings. It is
suggested by Durlinger (2012) that 45% of company’s total cost depends on inventory,
which indicates that efficiently managing stock level could save a substantial amount in total
cost. In fact, Wal-Mart’s operating cost is 7% lower compared to its rivals (Crain, 2012).
Similarly, automating transportation processes helps Wal-Mart to efficiently manage each
delivery; which eliminates overlapping routes while transporting the goods (Traub, 2012). In
fact, Oracle’s IS has saved the Wal-Mart 28 million miles worth of journeys (Walmart, 2014).
All of these savings are then passed on to consumers in in a form of lower price, thus,
enhancing Wal-Mart’s strategy as the low-cost leader in the retailing industry.
17
4. Critical Success Factors
XXX
5. Conclusions
However, although information system guarantees the stated benefits, Carr (2003) strongly
argued that information system is starting to become a commodity, because its cost has
decreased which made it increasingly available and affordable to other companies. WalMart’s competitors such as Costco and Target, also installed similar system from SAP to
manage its business processes (Itasca, 2013). Thus, from a strategic standpoint, information
technology is no longer a competitive advantage for Wal-Mart, because competitive
advantage only exists if the company performs some activities better than rivals and be the
only one who benefits from it (Mintzberg, 2003). Hence, Robson (1997) argued that the
sustainability of Wal-Mart’s as a cost leader requires it to possess some barriers to make
imitation of the strategy difficult. It is important that Wal-Mart pursue a unique edge over
its rivals because once Wal-Mart’s products are not perceived as comparable by buyers,
Wal-Mart’s favourable cost position will be nullified (McFarlan, 2010). In fact, recent news
suggests that Wal-Mart has lost $3 billion in sales due to failure in keeping up with market
trends (Morphy, 2014). For instance, the clothes that Wal-Mart sells in stores are not up-todate with current trends and design, which fails to capture the fashion-conscious consumers
(Rosenblum, 2014). This shows that Wal-Mart is merely utilizing information system as a
tool for basic business operations, while fails to analyse what currently is happening in the
market (Anand, 2007; Saporito, 2013). This failure highlights the importance of human
resource capabilities, because as information system provides convenience and automation
18
of activities, the key driver of organizational success rests upon the decisions made by
people in the companies (Wailgum, 2007). Relying solely on IS to carry out organizational
tasks is insufficient for Wal-Mart to sustain its position in the long term because people is
the source of knowledge and key assets of any organization (Porter, 2001; Zhang, 2013).
Thus, the next step for Wal-Mart could be to improve its human resource capabilities, such
as by providing training and workshops in order to polish employees’ skills and knowledge.
In fact, Wal-Mart could install Oracle’s Human Resource System Modules to track, deploy,
and improve labor work management (Oracle, 2014d). This could be combined with the
implementation of business intelligence systems precisely for the marketing department to
define the most convenient products based on different criteria such as season and
geographical area (Oracle, 2014e). This mix of better human resources and support systems
for decision-making, in combination with its current strengths in the supply chain, would
eventually bring long-term and difficult to imitate benefits to Wal-Mart’s future
performance.
19
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