Question II Analyze Amazon and Walmart.com using The Value Chain and Competitive forces Models
Question II
Analyze Amazon and Walmart.com using The Value Chain and Competitive forces Models
2.1 Amazon.com
2.1.1 Amazon’s Value Chain Analysis
2.1.1.1 Primary Activities
2.1.1.1.1 Inbound Logistics
Amazon has the advantage of avoiding the overhead and carrying large amounts of inventory because it orders the books from the distributors.
They provide money and contracts to prospective authors and decide how many copies of a book to print. Typically a first run printing for a book varies from 5, 000 to 50, 000 copies. However, best-selling authors’ first run printings are generally set at around 300, 000 copies.
Amazon.com receives products from its distributors, partners, manufacturers, and publishers. Receiving is typically at the pallet or case level. In some cases, Amazon.com receives mixed cases that include many SKUs. Product is received and routed for putaway to a location type based on its SKU activity profile. Items are received and routed directly to prime storage locations or sent to reserve storage. Item types are also taken into account at receiving. If an item is "sortable", it comes in a mixed case with other items and needs to be sorted into unique SKUs before putaway. "Full Case" items arrive as a case of homogeneous products and can be putaway as such. "Non-conveyable" products are too large or awkward to flow smoothly on automated conveyors and thus are routed to unique locations (Zeppieri, 2004).
Amazon.com distribution centers are segmented into reserve storage locations and forward pick storage locations. Amazon.com refers to forward pick storage as prime storage.
Pickers select product from prime storage locations to fulfill orders. Replenishments are performed from reserve storage to prime storage. Amongst the prime locations, there are library bins, case flow bins, and pallet bins. Library bins are similar to bookshelves and contain unique bins that each can store a small number of items. Case flow bins are locations where cases of smaller moving, faster items are stored. Cases are replenished from the back of the shelves, and flow based on gravity to the front of the shelf where pickers can select the product. Pallet bins are traditional pallet storage locations that are typically associated with warehouse environments.
At Amazon.com, products are assigned to these locations according to "days of cover" and "velocity to bin type" mapping. Days of cover is a term to explain the amount of inventory to store in prime inventory to meet inventory demands over a specified number of days. A min/max replenishment system is employed where products are replenished from reserve when inventory drops below the min days of cover level. The min days of cover serves as safety stock and the max days of cover includes the cycle stock of a given product. Items are assigned to a particular prime area bin type based on forecasted velocity. SKU velocity is how much cubic volume moves through the distribution center over a specified time period. Velocity is calculated by taking the actual or forecasted demand and multiplying it by the cubic dimensions of the product. SKUs with a cubic volume of 0-1000m 3 are assigned to library bins. SKUs with a volume of 1000-2000m 3 are assigned to case flow bins. Items with a demand over 2000m3 are stored in pallet storage. The matching of SKU to bin type is a balance of space utilization criteria, replenishment costs, and picking efficiencies. For example, a set of highly demanded products may be picked more efficiently from library bins than case storage due to less picker travel. However, if demand requires multiple daily replenishments to the library bins, then case storage may be a better overall storage option based on reducing overall operational costs.
2.1.1.1.2 Operations
In 1995, Amazon.com sold its first book, which shipped from Jeff Bezos' garage in Seattle. In 2006, Amazon.com sells a lot more than books and has sites serving seven countries, with 21 fulfillment centers around the globe totaling more than 9 million square feet of warehouse space.
Amazon.com sells lots and lots of stuff. The direct Amazon-to-buyer sales approach is really no different from what happens at most other large, online retailers except for its range of products. we can find beauty supplies, clothing, jewelry, gourmet food, sporting goods, pet supplies, books, CDs, DVDs, computers, furniture, toys, garden supplies, bedding and almost anything else you might want to buy. What makes Amazon a giant is in the details. Besides its tremendous product range, Amazon makes every possible attempt to customize the buyer experience.
The other main feature that puts Amazon.com on another level is the multi-leveled e-commerce strategy it employs. Amazon.com lets almost anyone sell almost anything using its platform. You can find straight sales of merchandise sold directly by Amazon, like the books it sold back in the mid-'90s out of Jeff Bezos' garage -- only now they're shipped from a very big warehouse. Since 2000, you can also find goods listed by third-party sellers -- individuals, small companies and retailers like Target and Toys 'R Us. You can find used goods, refurbished goods and auctions. You could say that Amazon is simply the ultimate hub for selling merchandise on the Web, except that the company has recently added a more extroverted angle to its strategy.
2.1.1.1. 3 outbound Logistic
Amazon.com's DC outbound processes support the fulfillment of customer orders placed through Amazon.com or affiliate websites. Picking, sorting, packing, and shipping constitute the outbound processes of customer fulfillment in Amazon.com distribution center operations.
In Amazon.com operations, pickers select products from forward pick locations (prime locations) to start the order fulfillment process. Depending on the item and the volume requested, an item may be picked from library shelving, case flow racks, or pallet racks. Frazelle (2002) notes that picking accounts for 50% of operating costs in typical warehousing environments. Therefore, picking productivity is generally the highest priority initiative when companies assess warehouse productivity improvements. Picking productivity is defined as the number of units picked divided by the number of labor hours involved in picking. Among the costs associated with picking, traveling to and from picking locations accounts for 55% of labor (Frazelle, 2002). For this reason, initiatives to minimize picker travel and improve picking productivity are essential to reducing Amazon.com's fulfillment costs.
Amazon.com uses both full-path picking and zone picking to determine the scope of picker travel. Full-path picking is when a picker can travel to all locations within the pick area to pick items for orders. Zone picking confines the potential travel to a subset of locations within the picking area known as zones (Bragg, 2003). Zone picking can increase productivity through simultaneous multi-user picking, picker familiarity with locations, and increased pick density.
Pick density is a measure of how many items can be picked with a specified area. Although zone picking provides the benefits listed above, it increases the need for downstream sortation and consolidation, because multiple pickers could be working on a single order in different zones.
For example, an order for three items could require picks from three separate zones. In order to ship those items in a single box, manual or automatic sortation must be performed after picking to consolidate the items for shipment. Therefore, decisions regarding full-path picking and zone picking should take into account the tradeoffs in picking productivity to downstream sorting and packing requirements.
In the book publishing industry, the wholesaler of amazon distributes books to the thousands of retail bookstores located throughout the country. They take orders from independent booksellers and chains, and consolidate them into lot-order for publishers. Publisher supply wholesalers, who intern supply the thousands of retail bookstores throughout the countries.
There are more than 29, 000 private, public, and academic libraries in the United States. This market is crucial to publishers because of its stability and size. Since libraries order only what they want, this lowers the overhead costs associated with inventory and return processing, making this segment a relatively profitable one for publishers. Moreover, as hardcover trade books have become relatively expensive, many readers now borrow them from libraries instead of buying them. Industry experts observed that about 95 percent of general tiles published in any year sold less than 20, 000 copies; of that number, about 55 percent were purchased by libraries. Libraries also frequently repurchase titles to replace worn-out and stolen books. By doing so, they keep the backlist sales healthy.
Technological advances have made warehouse operations more efficient, which in turn has made it possible for wholesalers to provide attractive discounts to retailers.
Industry expert interviews uncovered that Amazon.com operates a number of transportation hubs that they refer to as injection points. Injection point locations are located in heavily customer concentrated areas. The purpose of these locations is to save on transportation costs. The process begins by consolidating orders in distribution centers and contracting less than truckload (LTL) or truckload (TL) shippers to provide the long-haul transportation from the DC to the transportation hub. Once in the hub, the inbound trailers are unloaded and the packages are then sorted the orders out to smaller carrier partners such as United Parcel Service
(UPS) or the United States Postal Service (USPS) The idea is that overall transportation costs are lower due to less expensive unit mile costs for LTL and TL carriers when compared to UPS and USPS. LTL or TL transportation is used for the long-haul and parcel carriers are used for "last-mile" delivery. This process is described in more detail later in this chapter.
Drop Ship Locations
Amazon.com utilizes the capabilities of its supply chain partners to deliver orders directly to customers. These shipments bypass the Amazon.com internal distribution center network. An example of this arrangement is an order for an item that Amazon.com does not have in stock in its distribution centers, but that Ingram Book Distributors does have in stock. Amazon.com will route this order request to Ingram, which will pick the order, pack it in an Amazon.com box, and ship it to the customer (Maltz et al., 2004). This process is seamless to the customer. Although
Ingram is provided as an example, other book distributors, CD distributors, wholesalers, publishers, and manufacturers support Amazon.com through drop shipments to customers. The third-party sellers that offer their products for sale on Amazon.com can also be considered drop shippers.
The distribution process is initiated by a customer ordering from the Amazon.com website or an affiliate website. Amazon.com's IT systems determine which Amazon.com distribution center to ship the item from or whether to ship the item from a drop shipper. The order sourcing decision is determined by product availability and the desire to minimize transportation costs in fulfillment costs. Drop shippers package items in Amazon.com packaging and deliver it directly to customers. Amazon.com distribution centers can ship items directly to customers or through transportation hubs. Orders are delivered to transportation hubs by Amazon.com contracted LTL or TL carriers. Upon arrival in the hub, packages are sorted and routed to small parcel carriers such as UPS or the US Postal Service for "last-mile" delivery.
2.1.1.1.4 Marketing and sales
The embedded marketing techniques that Amazon employs to personalize customers’ experience are probably the best example of the company's overall approach to sales: Know your customer very, very well. Customer tracking is an Amazon stronghold. If you let the Web site stick a cookie on your hard drive, you'll find yourself on the receiving end of all sorts of useful features that make your shopping experience pretty cool, like recommendations based on past purchases and lists of reviews and guides written by users who purchased the products you're looking at.
Amazon serves consumers through the retail websites, and focus on selection, price, and convenience. Amazon design websites to enable millions of unique products to be sold by it and by third parties across dozens of product categories. Amazon also manufactures and sells the Kindle e-reader. Amazon strive to offer customers the lowest prices possible through low everyday product pricing and free shipping offers, including through membership in Amazon Prime, and to improve operating efficiencies so that Amazon can continue to lower prices for customers. Amazon also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service.
Amazon fulfill customer orders in a number of ways, including through the U.S. and international fulfillment centers and warehouses that they operate, through co-sourced and outsourced arrangements in certain countries, and through digital delivery. Amazon operates customer service centers globally, which are supplemented by co-sourced arrangements.
Amazon direct customers to websites primarily through a number of targeted online marketing channels, such as their Associates program, sponsored search, portal advertising, email marketing campaigns, and other initiatives. Their marketing expenses are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent their mix of these channels shifts, Amazon would expect to see a corresponding change in our marketing expense.
The increase in marketing costs in absolute dollars in 2010 and 2009 compared to the comparable prior year periods is primarily due to increased spending on online marketing channels, such as sponsored search programs and our Associates program, and, in 2010, on television advertising.
While costs associated with free shipping are not included in marketing expense, Amazon view free shipping offers and Amazon Prime as effective worldwide marketing tools, and intend to continue offering them indefinitely.
Amazon Sales increased 40%, 28%, and 29% in 2010, 2009, and 2008. Changes in currency exchange rates positively (negatively) affected net sales by $(86) million, $(182) million, and $127 million for 2010, 2009, and 2008.
The North America sales growth rate was 46%, 25%, and 26% in 2010, 2009, and 2008. The sales growth in each year primarily reflects increased unit sales, a larger base of sales in faster growing categories such as electronics and other general merchandise, and, in 2010, its adoption of the new accounting standard update (“ASU”) 2009-13. Increased unit sales were driven largely by their continued efforts to reduce prices for customers, including from free shipping offers and Amazon Prime, by increased in-stock inventory availability and increased selection of product offerings, and by the impact of Zappos, which they acquired in the fourth quarter of 2009.
The International sales growth rate was 33%, 31%, and 33% in 2010, 2009, and 2008. The sales growth in each year primarily reflects increased unit sales and a larger base of sales in faster growing categories such as electronics and other general merchandise.
Sales of products by marketplace sellers on amazon websites represented 31%, 30%, and 28% of unit sales in 2010, 2009, and 2008. Revenues from these sales are recorded as a net amount. Because amazon focus on operating profits, they are largely neutral on whether an item is sold by amazon or by another seller.
Net sales information is as follows:
Year Ended December 31,
2010 2009 2008
(in millions)
Net Sales:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,707 $12,828 $10,228
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,497 11,681 8,938
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …… $34,204 $24,509 $19,166
Year-over-year Percentage Growth:
North America . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . ... . 46% 25% 26%
International . . ………………………………………………..... 33 31 33
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …... 40 28 29
Year-over-year Percentage Growth, excluding effect of exchange rates:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46% 26% 26%
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 34 33 31
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ………… . . 40 29 28
Net Sales Mix:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55% 52% 53%
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 48 47
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
2.1.1.1.5 services
From the beginning, Amazon focus has been on offering their customers compelling value. Amazon realized that the Web was, and still is, the World Wide Wait. Therefore, Amazon set out to offer customers something they simply could not get any other way, and began serving them with books. Amazon brought them much more selection than was possible in a physical store (Amazon’s store would now occupy 6 football fields), and presented it in a useful, easy to- search, and easy-to-browse format in a store open 365 days a year, 24 hours a day. Amazon maintained a dogged focus on improving the shopping experience, and in 1997 substantially enhanced Amazon’s store. Amazon now offer customers gift certificates, 1-Click SM shopping, and vastly more reviews, content, browsing options, and recommendation features. Amazon dramatically lowered prices, further increasing customer value. Word of mouth remains the most powerful customer acquisition tool they have, and they are grateful for the trust customers have placed in them. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.
2.1.1.2 Support Activities
2.1.1.2.1 Amazon’s procurement
Amazon.com replenishes its distribution center inventory through a variety of suppliers. Suppliers for their media product segment are large book distributors such as Ingram Book Distributors, Baker and Taylor, as well as other smaller book distributors. CD and DVD distributors also are utilized as well as other wholesaler partners. Publishers, CD, and DVD manufacturers are also parties that replenish products to Amazon.com distribution centers. To give some perspective regarding the structure of the industry, data from Amazon.com's early stages in 1996-1997 indicate that Amazon.com procured the 200,000 to 400,000 best selling books from wholesalers, and up to 1.5 million additional book titles from 20,000 different publishers (Spector, 2002).
Amazon.com utilizes a Sales and Operations (S&OP) planning process to determine forecasts for each product that it stores in its distribution center inventory. Amazon.com keeps track of its inventory position in real-time based on warehouse receipts and shipments. Purchase orders are placed to suppliers based on the forecasted amount needed minus the current inventory on hand in the warehouse (Zeppieri, 2004). A graphical representation of the Amazon.com DC replenishment process is shown below.
2.1.1.2.2 Amazon.com and Technology
Amazon.com utilizes technology innovation to differentiate itself on online customer experience. Innovations such as personalized recommendations, one-click ordering, and search inside the book are all Amazon.com innovations. These innovations comprise the virtual store experience for the Amazon.com customer.
While acknowledging Amazon.com's front-end innovations, Jeff Bezos recently noted that 90% of innovation has been to support back-end supply chain integration and execution (Kirkpatrick, 2004). Amazon.com has highly customized software applications that support their supply chain business model. For example, the integration of the partners in Amazon.com's multi-tier supply chain requires advanced information technology capabilities. For example, Amazon.com is linked into Ingram's systems to see Ingram inventory levels when deciding whether to use Ingram to drop ship an order to a customer (Digital4Sight, 2000). The ability to display products on the virtual storefront, source them to different supply chain partners, and manage the delivery of those orders while providing customer visibility illustrates Amazon.com's supply chain technology expertise.
In addition to using technology to support supplier collaboration and order sourcing, Amazon.com utilizes its core technology expertise to improve supply chain execution. Execution involves the internal distribution center processes that have been highlighted in this paper as well as the transportation initiatives. Vogelstein (2003) notes that Amazon.com's proprietary warehouse management system (WMS) has as many lines of code as their website does. The advanced labor management, load balancing, process alternatives, and optimization routines built into their WMS enable the efficient processes for internal DC processing that have been discussed in this paper. Amazon.com drives competitive advantage by utilizing proprietary information technology specifically designed to support their business model. An indication of Amazon.com's confidence in its technology is the bundling of its e-commerce front-end and back-end to develop the Merchant.com model. Additionally, Amazon.com evaluates technology to drive business value. For example, COO Jeff Wilke noted that RFID can provide value where inventory accuracy is poor, shrinkage rates are high, or more real-time information is needed (Bacheldor, 2004). Due to their existing IT capabilities, Amazon.com does not have issues in these areas, and thus they are not an early adopter of RFID. These examples show how Amazon.com leverages its technology expertise to support supply chain innovation on both the customer and supplier sides of the supply chain.
2.1.1.2. 3 Human Resources
Amazon.com has a great training for its employees. According to the annual report of amazon.com 2010, the past year’s success is the product of a talented, smart, hard-working group, and Amazon take great pride in setting up of this team. Setting the bar high in Amazon approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success.
It’s not easy to work here (when the HR of Amazon interview their employees, He told them “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy. We are incredibly fortunate to have this group of dedicated employees whose sacrifices and passion build Amazon.com.
Amazon employed approximately 33,700 full-time and part-time employees at December 31, 2010. However, employment levels fluctuate due to seasonal factors affecting Amazon’s business. Additionally, Amazon utilizes independent contractors and temporary personnel to supplement their workforce, particularly on a seasonal basis. Although Amazon has works councils and statutory employee representation obligations in certain countries, Amazon’s employees are not represented by a labor union and Amazon consider their employee relations to be good. Competition for qualified personnel in Amazon’s industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff.
2.1.1.2. 4 Amazon’s Infrastructure
Amazon has a huge fraction of the effort into building the infrastructure that lets a Web-scale business run. Amazon has all the scar tissue to show people they know how to do it. Amazon think it’s also going to be a very meaningful business for them one day. So Amazon’s motives for doing it are very straightforward: Amazon think it’s good business.”
With Microsoft and Google already building huge data center platforms, Amazon has come to see infrastructure as critical to its future. “Amazon’s a pretty serious dark horse” in that race, Tim O’Reilly, CEO of tech publisher O’Reilly Media Inc., tells Business Week. “Jeff really understands that if he doesn’t become a platform player, he’s at the mercy of those who do.”
Business Week goes on at some length about how the new startegy is not playing well on Wall Street, which wants Amazon to deliver blockbuster earnings, not visions for new capital expenditures that will eat into profitability. Wall Street’s disappointment in Amazon is not a new phenomenon, and has never deterred the company from pursuing investments in new technology and infrastructure.
Amazon has already won many converts among its new customer base, effectively remaking the economics of instantly scalable infrastructure. Lsabel Wang provides a compelling example of how Amazon’s services can cut costs, citing the virtual world Second Life and its use of S3 to manage downloads of new software.
In his Business Week interview, Bezos notes that “it’s a different way of doing back-end infrastructure and building these Web-scale applications. … There’s an evangelism effort that has to occur, because this is a new way of doing things.” Amazon’s evangelism effort begins this week with the Web 2.0 community.
In December 14, 2007, Amazon announced SimpleDB.
Amazon SimpleDB is a web service for running queries on structured data in real time. This service works in close conjunction with Amazon Simple Storage Service (Amazon S3) and Amazon Elastic Compute Cloud (Amazon EC2), collectively providing the ability to store, process and query data sets in the cloud. These services are designed to make web-scale computing easier and more cost-effective for developers.
2.1.2 Amazon’s Competitive Forces Models
2.1.2.1 The entry of competitors
It is relatively easy to set up an e-Shop. However, e-Shops such as amazon.com now have very sophisticated web sites and considerable investment in their supply chain infrastructure - they also have brand name recognition (amazon.com is currently the best recognised brand on the net). Setting up a large, general purpose, online bookstore and getting customers to know about that bookstore and to use it is not going to be easy and is not going to be cheap (bol.com is one start-up that has taken on amazon.com in Europe but it is backed by a very large German media group). Most of the large, conventional book retailers have now set up online bookstores - they had the advantage that they could use their existing supply chain arrangements to feed the online bookstore - they have not achieved the brand name recognition of amazon.com. It is perhaps doubtful that we will see many / any new entrants into this market, the costs of matching the infrastructure and brand recognition of amazon.com are just too great.
It has been argued that, for this online market, there will be just two or three organizations that have significant presence and that could be right (an online retailer cannot find a location that is not served by its competitors as a net presence serves all locations). Arguably each non English language market is a different market and it will be interesting to see developments in that field (Amazon already have a German site).
2.1.2.2 Threat of Substitution
The publishers could sell direct to the public - after all, excepting best sellers, many books are supplied to the retailer in ones and twos and if the order is taken online there is very little more work in selling direct - and no trade discount has to be given.
Electronic Publishing: If information is to be selected from electronic information banks and paid for in micro payments then there is no books and no bookshops - but to adapt a famous quote, the news of the death of the book has (probably) been greatly exaggerated.
There are those who like shopping online and those who do not. There are books than need inspection before purchase (illustrated cookbooks for example) and those which do not (the compulsory course text or the latest from your favorite fiction author). There are books that will not be in stock so, given they have to be ordered, why not order online. There are books that need immediate collection (something to read on the plane as you rush to board with your e-Ticket).
The problem is that margins have been eroded and a retailer may well be doing useful business but be unable to cover their costs. Interestingly (or perversely) financial institutions seem keen to support loss-making e-Tailers but not conventional stores that might be struggling.
The competition seems to between a couple of large online book retailers and the large book retail chains (Borders, Waterstones, etc.) many of which have their own e-Stores. Interestingly the conventional retailers are moving to offer mix modes, for example – order online and pick up at the bookstore - the outcome is unpredictable but, hopefully, the customers will retain a choice.
2.1.2.3 Bargaining Power of Buyers:
The buyers are the members of the public who purchase books. Books are not an item that one bargains on - the book retailer (or the publisher) set the price and that is what the customer pays.
Over recent years and, in particular with online booksellers, there has been a trend to offering discounts on an increasing number of titles - the customer can shop around for the best deal (and online there are 'shopbots' that will search out the online bookstore that is offering the best price on a given title).
2.1.2.4 Bargaining Power of Suppliers:
The book trade has, traditionally been a cozy sector with the retail price of books being set by the publishers and fairly standard trade discounts on that price being offered to both large and small retailers. Over recent years this position has been challenged by large retailers, e.g. supermarkets, seeking volume discounts on popular titles. This position has been pushed further by amazon.com with aggressive demands for discounting from the publishers. The other large booksellers (Borders, Waterstones, etc.) are also large customers of the publisher and are able to match the demands made by amazon.com. The suppliers are not in a strong position to resist - some have and the booksellers have simply stopped stocking their titles (although they still need to be in a position to meet their customers’ requirements).
Other causalities in these developments are the small, independent, booksellers who cannot get the same deal from the publisher as the large retailers.
Amazon has significant suppliers, including licensors, that are important to their sourcing, manufacturing and any related ongoing servicing of merchandise and content. Amazon do not have long-term arrangements with most of their suppliers to guarantee availability of merchandise, content, components or services, particular payment terms, or the extension of credit limits. If their current suppliers were to stop selling or licensing merchandise, content, components or services to them on acceptable terms, including as a result of one or more supplier bankruptcies due to poor economic conditions, Amazon may be unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all.
2.1.2.5 The Rivalry among the Existing Players
Research company comScore has said that of the top 10 global retail and auction sites, Amazon Sites reached the largest global audience with over 282 million visitors in June, or 20.4% of the worldwide Internet population. Other top brands in the study included eBay, with 16.2% of global Internet visitors, China's Alibaba (11.3% reach), Apple Worldwide Sites (9.7% reach) and Japan's Rakuten (4.2% reach).
2.2 Wal-Mart
2.2.1 Walmart’s Value chain analysis
2.2.1.1 Primary Activities
2.2.1.1.1 Inbound and Outbound Logistic Management
This involves fast & responsive transportation system. More than 7000 company owned trucks services the distribution centers. These dedicated truck fleets enables shipping of goods from distribution centers to the stores within 2 days and replenish the store shelves twice a week. The drivers hired are all very experienced & their activities are tracked regularly through “Private Fleet Driver handbook”. This allows the drivers to be aware of the terms & conditions for safe exchange of Wal-Mart property, along with the general code of conduct.
For more efficiency, Wal-Mart uses a logistics technique called “Cross Docking”. In this system, finished goods are directly picked up from the manufacturing site of supplier, sorted out and directly supplied to the customers. This system reduces handling & storage of finished goods, virtually eliminating role of distribution centers & stores. Because of “cross-docking” the system shifted from “supply chain” to “demand chain” which meant, instead of retailers ‘pushing’ the products into the system, the customers could ‘pull’ the products, when & where they required.
Walmart today about 60% inbound freight (closer to 80% for their grocery segment) is managed by suppliers. The important of Walmart’s logistics infrastructure was its fast and responsive transportation system. The distribution centers were serviced by more than 3,500 company owned trucks.
2.2.1.1.2 Operations
Wal-Mart operations are comprised of three business segments:
Wal-Mart Stores, SAM’S CLUB, and Wal-Mart International
Wal-Mart Stores segment is the largest segment, which accounted for approximately 67.3% of their 2005 fiscal sales. This segment consists of three different retail formats, all of which are located in the United States. This includes the following sections:
• Super-centers, which average approximately 187,000 square feet in size and offer a wide variety of products and a full-line supermarket;
• Discount Stores, which average approximately 100,000 square feet in size and offer a wide variety of products and a limited stock of food products; and
• Neighborhood Markets, which average approximately 43,000 square feet in size and offer a full-line supermarket and a limited variety of general merchandise.
SAM’S CLUB segment consists of membership warehouse clubs in the United States which accounted for approximately 13.0% of 2005 fiscal sales. SAM’S CLUBs in the United States average approximately 128,000 square feet in size.
Wal-Mart International operations are located in Argentina, Canada, Germany, South Korea, Puerto Rico and the United Kingdom, the operations of joint ventures in China and operations of majority-owned subsidiaries in Brazil and Mexico. This segment generated approximately 19.7% of 2005 fiscal sales. Here, it operates several different formats of retail stores and restaurants, including Super-centers, Discount Stores and SAM’S CLUBs.
2.2.1.1.4 Marketing and sales
Sam Walton started his retail career in 1940, as a management trainee with the J.C. Penney Company. Later, He modeled the Wal-Mart chain on “The Penney Idea” (strength in calling employee “associates” rather than clerks).
Sam walton became convinced in the late 1950s that discounting would transform retailing. He offer name brand “Merchandise at low price”.
Wal-Mart prided itself on its “everyday low price”, prodide the customer with a clean, pleasant, and friendly shopping experience.
The Differences between Wal-Mart and Its Competitors are:
Employees wore blue vests to identify themselves
Aisles were wide
Apparel departments were carpeted in warm colors
A store employee followed customers to their cars to pick up their shopping carts
Customer was welcomed at the door by a “people greeter,” who gave directions and struck up conversations.
In some cases, merchandise was bagged in brown paper sacks rather than plastic bags because customers seemed to prefer them.
A simple Wal-Mart Logo in while letter on front of the store served to identify the firm
2.2.1.2 Support Activities
2.2.1.2.1 Procurement
Wal-Mart’s process of procurement involves reducing its purchasing costs as far as possible so that it can offer best price to its customers. The company procures goods directly from the manufacturers, bypassing all intermediaries.
Wal-Mart has distribution centers in different geographical places in US. Wal-Mart’s own warehouses supplies about 80% of the inventory. Each distribution centre is divided in different groups depending on the quantity of goods received. The inventory turnover rate is very high, about once every week for most of the items. The goods to be used internally in US arrive in pallets & imported goods arrive in re-usable boxes.
The distribution centers ensured steady flow & consistent flow of products. Managing the center is economical with the large-scale use of sophisticated technology such as Bar code, hand held computer systems (Magic Wand) and now, RFID. Every employee has access to the required information regarding the inventory levels of all the products in the center. They make 2 scans- one for identifying the pallet, and other to identify the location from where the stock had to be picked up. Bar codes & RFID are used to label different products, shelves & bins in the center. The hand held computers guide employee to the location of the specific product. The quantity of the product required from the center is entered in the hand held computer, which updates the information on the main central server. The computers also enabled the packaging department to get accurate information such as storage, packaging & shipping, thus saving time in unnecessary paperwork. It also enables supervisors to monitor their employees closely in order to guide them & give directions.
This enables Wal-Mart to satisfy customer needs quickly & improve level of efficiency of distribution center management operations.
2.2.1.2.2 Wal-Mart Technologies
Technology is inevitable in every sphere of life today; it has always made things easier. Wal-Mart works on the same strategy. Traditionally, technology has been upgraded in billing systems and for storage purposes. A new area where technology could be applied to, where many expenses could be saved was in inventory management and logistics. Wal-Mart being so huge, needed to keep track of men and material sent across different countries and had to maintain hundreds of warehouses across the world. Bar-codes have been initially identified as a suitable technology to meet the purpose.
But due to the limitations of barcodes, a new emerging technology called RFID has been identified to meet the demands. RFID is low cost Radio Frequency Identification system which requires minimum human intervention to carry out tasks ranging from billing to materials tracking and supply chain management. It is a small wireless device which can store good amount of data and can virtually be tagged to anything.
RFID is an electronic tagging technology that allows an object, place, or person to be automatically identified at a distance without a direct line-of-sight, using an electromagnetic challenge/response exchange.
Why RFID over Bar-Code?
The ability to read without line-of-sight is the best advantage of RFID over bar-code systems. RFID readers can sense items even when the tagged items are hidden behind other tagged items. This enables automation. The challenging part of implementing RFID is that tagged items should not be missed by the reader due to interference, multipath fading, transient effects etc. Missed reads are an unfortunate reality with RFID systems. RFID uses a serialized numbering scheme such as EPC (Electronic Product Code). Each tag has a unique serial number. Serial number information is extremely powerful in understanding and controlling the supply chain and provides much more detailed behavior of the supply chain than can non-serialized bar codes such as UPC (Universal Product Codes) and EAN (European Article Numbering). Serial numbers have many advantages such as food freshness/expiration. This can tell how for how long an item has been in the supply chain where as such information is not captured in bar code system. Hence items can be reached the right place at the right time. Furthermore RFID implementation monitors theft too. For example if number of items reached at the retailer’s outlet is less than that was departed from supplier’s location, it can be easily tracked for. In all these ways, RFID systems have stronger sensor networking system or monitoring system than bar code systems.
2.2.1.2.3 Wal-Mart Human Resource Management
In related to the Human resource development, Turner, Chief Executive Officer of Wal-Mart's subsidiary corporation, explained in his interview that in any development effort, our [IS] people are expected to get out and do the function before they do the system specification, design or change analysis. The key there is to do the function, not just observe it. So we actually insert them into the business roles. As a result, they come back with a lot more empathy and a whole lot better understanding and vision of where we need to go and how we need to proceed.
We’ve learned some hard lessons in our stores, clubs and distribution centers when we developed something and people didn’t use it, and they chose to find other ways to get the job done. We are working hard to develop systems that are easy to use. That puts an awesome responsibility on that developer to get out and understand the business. That’s one of our key things: We’re merchant first, technologists second.
We have a very clear set of critical success factors that every associate in our division has to live by, and they are generally conditions of employment. Some of them are complicated and some of them are very simple: excellent customer service, testing and validation before you roll it out, balance and controls, payback and ROI. All new [IS] associates are indoctrinated into that set of disciplines, and all associates review it at least on an annual basis. The disciplines are the same for everybody regardless of what team you’re on.
2.2.1.2.4 Wal-Mart Infrastructure
Considering the rapid expansion of Wal-Mart stores, it was essential to have a very good communication system. For this, Wal-Mart set up its own satellite communication system in 1983. This allowed the management to monitor each and every activity going on in a particular store at any point of the day and analyze the course of action taken depending on how the things went.
Wal-Mart ensures that unproductive inventory is as less as possible, by allowing the stores to manage their own stocks, thereby reducing pack sizes across many categories and timely price markdowns. Wal-Mart makes full use of its IT infrastructure to make more inventories available in case of items that customers wanted most, while reducing overall inventory. By making use of Bar-coding & RFID technologies, different processes like efficient picking, receiving & proper inventory control of the products along with easy packing and counting of the inventories was ensured.
Wal-Mart owns the “Massively Parallel Processor (MPP)”, largest & the most sophisticated computer system in private sector, which enables it to easily track movement of goods & stock levels across all distribution centers and stores. For emergency backup, it has an extensive contingency plan in place as well.
Employees use “Magic Wand”, which is linked to in-store terminals through a Radio frequency network, to keep track of the inventory in stores, deliveries and backup merchandise in stock at the distribution centers. The order management and store replenishment of goods is entirely executed with the help of computers through Point of Sale (POS) system. Wal-Mart also makes use of sophisticated algorithm to forecast the quantities of each item to be delivered, based on inventories in the store. A Centralized inventory database allows the personnel at the store to find out the level of inventories and location of each product at a given time. It also shows the location of the product like distribution center or transit on the truck. When the goods are unloaded at the store, the inventory system is immediately updated.
In November 19, 2001, Wal-Mart spends an estimated $40 million to upgrade its e-business infrastructure. Dan Phillips, vice president of technology support and operations, said the new systems from IBM will give Wal-Mart "a faster processing time, greater availability of our systems and better systems operation without interruption." He added that the new systems have yielded a "significant improvement in our processing time, in some cases allowing us to cut our processing time for some jobs by more than half." Wal-Mart is replacing its old IBM mainframes with a dozen new IBM eServer z900 mainframes and its older storage systems with IBM's new Enterprise Storage Servers code-named Shark.
The mainframes and the storage servers provide the backbone of Wal-Mart's data center infrastructure. Among other things, the data center is used for data processing, reconciliation, debit and credit transactions, as well as product replenishment.
2.2.2 Wal-Mart Competitive forces models
2.2.2.1 Threat of New Entry
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry.
For Wal-Mart, Entry barriers are relatively high, as Wal-Mart has an outstanding distribution systems, locations, brand name, and financial capital to fend off competitors. Wal-Mart often has an absolute cost advantage over other competitors. Cost to build retail enterprise like Wal-Mart is formidable.
2.2.2.2 The Threat of Substitutes
When it comes to this market, there are not many substitutes that offer convenience and low pricing. The customers has the choice of going to many specialty stores to get their desired products but are not going to find Wal-Mart’s low pricing
Online shopping proves another alternative because it is so different and the customer can gain price advantages because the company does not necessarily have to have a brick and mortar store, passing the savings onto the consumer.
2.2.2.3 The Bargaining Power of Buyers
The individual buyer has little to no pressure on Wal-Mart. Consumer advocate groups have complained about Wal-Mart’s pricing techniques. Consumer could shop at a competitor who offers comparable products at comparable prices, but the convenience is lost.
2.2.2.4 The Bargaining Power of Suppliers
Some of the major suppliers of Wal-Mart are:
Gillette, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestle, Purina PetCare Company, Procter & Gamble and Unilever.
Kimberly Clark is a manufacturer of paper goods products that include Kleenex, Huggies and Depend. In April 2004, Kimberly Clark tagged its Scott paper towels shipment with RFID tags to be shipped to Sanger, Texas.
Kraft Foods, the largest food company employs RFID system to improve handling of its bulk containers. Kraft has outsourced its RFID system to TrenStar to handle the complete supply chain.
Smart razor blades have been introduced to the supermarkets. Gillette has ordered half a billion tags to track razors. The Gillette Company uses RFID for both pallet and case applications. All the cases in a pallet are scanned with RFID readers as they move along the conveyor belt. In a trial at Tesco's new market Road branch in Cambridge, the packaging of Gillette Mach3 razor blades has been fitted with tiny chips.
Since Wal-Mart holds so much of the market share, they offer a lot of business to manufacturers and wholesalers. This gives Wal-Mart a lot of power because by Wal-Mart threatening to switch to a different supplier would create a scare tactic to the suppliers. Wal-Mart could vertically integrate. Wal-Mart does deal with some large suppliers like Proctor & Gamble, Coca-Cola who have more bargaining power than small suppliers.
2.2.2.5 The Rivalry among the Existing Players
Currently, there are three main incumbent companies that exist in the same market as Wal-Mart: Sears, K Mart, and Target. Target is the strongest of the three in relation to retail. Target has experienced tremendous growth in their domestic markets and have defined their niche quite effectively Sears and K-Mart seem to be drifting and have not challenged K-Mart in sometime. Mature industry life cycle.
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