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As a student of business, it is very disheartening to read CEO's and business men discuss how the single biggest threat to their growth is Wal-Mart. Every piece of communication from retailers and wholesalers in every publication blames the woes of the world on Wal-Mart. There is no doubt that Wal-Mart has developed a business model which has provided them with the ability to replicate stores across the country with no significant competitive threat. Other than the various state and local governments altering regulations to make it more difficult to open super centers, where is the competitive threat? The issue here is not Wal Mart, but the competitions inability to develop a model and a culture of there own which can infiltrate a niche where Wal-Mart cannot go, thereby eliminating or reducing the threat.
What about the customer?
Every business strategy begins with the customer. Hence, my analysis will also begin with the customer. Whenever all of the discussions about Wal-Mart begin, I always throw this point out, if the customers weren't satisfied with Wal-Mart, they would not have a model which enables them to continually grow and prosper. Certainly the customer is not opposed to Wal-Mart. They get the benefit of lower prices on core household items. If customers were dissatisfied with Wal-Mart, it would reflect in the sales and profits. Judging by their last year financials ($256 billion in sales, 4.82% Sales Growth, 3.5% net profit margin); customers must be a little satisfied. Whenever someone tells me a story of how Wal-Mart entered a market and every competitor closed down, I sit amazed. Again, the customer went to Wal-Mart because they were not getting something at the competitors. Wal Mart serves the needs of its customers better than anyone else, bottom line. Wal Mart doesn't put companies out of business, lack of customers do!
What about the Manufacturers?
Manufacturers who do business with Wal-Mart certainly are not upset by the relationship. The volume of product flowing through Wal-Mart is tremendous. The manufacturers who are upset with Wal-Mart are the ones who are not doing business with them. Wal Mart is a model of efficiency and those who do business with Wal-Mart become more efficient themselves. There is a tremendous amount of inaccurate information out in the world about how Wal-Mart does business with manufacturers. Contrary to the 1000 lb gorilla they are made out to be, the process is very much a collaborative effort. Wal-Mart has a tremendous amount of information regarding their customers. They understand the Price/Value relationship better than anyone and they also understand volume and incremental dollars.
The negotiation with a prospective manufacturer begins with the need of the customer. Is this a product that the customer needs? If the need is determined, then the next question is what is the optimal selling price? What is the price that will move volume and allow Wal-Mart to remain the low price leader? Once the optimal price has been established, the next question is what profit does Wal-Mart need to make. Then, working backward they get to the optimal cost. The manufacturer has a decision at this point, he can either meet that cost, or he can't. Sometimes, it requires the manufacturer to rethink his or her operations to become more efficient and remove the unnecessary costs inherent in the manufacturers business.
I see nothing wrong with this approach to the negotiation and sale of a product. The manufacturers who do business with Wal-Mart understand that if they maintain the agreed to service levels, costs and sales goals, then they will continue to be the supplier of choice for their item. No hidden charges, no hidden fees and not subjected to annual bidding. This is totally counter to the rest of the industry and therein lies the problem. Wal Mart does business differently and rather than change their business practices, competitors would rather complain about the Wal-Mart threat and seek to gain an advantage through regulations and laws to keep Wal Mart out.
The Wal Mart Model
The primary source of Wal-Marts profitable operating model, and the key to their lower price advantage, lies in the Supply Chain. Wal-Mart has made no secret of it. They have put their supply chain management system in the public domain for everyone to see. It has been proven, studied, debated, tested, and piloted to death. Collaborative Planning Forecasting and Replenishment, CPFR, works and has been adopted in a number of retail sectors. However, it requires a dramatic change to the culture of a business.
There are many definitions of collaboration, depending on the chosen dictionary. The one I like the best is "To work together especially in a joint intellectual effort." I can think of no greater "joint intellectual effort" than attempting to figure out today's consumer. In today's retail environment, the ability to effectively sell depends on the ability to "know" a customer, which is done through the efficient capture, analysis and communication of clean, accurate and timely data, sharing this information among all trading partners.
CPFR
So, what is Collaborative Planning Forecasting and Replenishment or CPFR? In its simplest form, it is bringing together everyone and every piece of data involved in the value chain for a specific product group of sku's in one common area. There is an inherent commitment of trust involved here as the sales data, purchase data, ship data, forecasting data, budget and growth objectives, etc. which all need to be shared among the trading partners. This gathering of information and intellect in one area accomplishes several key things:
1 – It gets everyone, (the manufacturer, the category manager, buyer, warehouse, store level) focused on the customer. Now everyone involved with the specific product group is looking at what was sold when, where and by whom and how quickly it needs to be replenished.
2 – Sales grow because the correct product is in the correct place at the correct time to meet the customers' need.
3 – Profits grow because the correct product in the correct quantity is in the correct place at the correct time to meet the customers' need. Spoilage is reduced, inventory-carrying costs are reduced, and labor becomes more efficient and effective.
This approach is what has enabled Wal-Mart to price about 20% below the competition, yet achieve only a 5% lower gross profit.
Retail Price Differential -20%
Collaborative Replenishment 6%
Centralized Buying 2%
Distribution Efficiencies 2%
Distribution Labor cost efficiency 2%
Product Mix Effect 2%
Lower Shrink/Spoils 2%
Global Procurement 1%
Gross Margin Differential -5%
Store Labor Cost Advantage 3%
Depr. & Amort 1%
Operating Efficiencies 2%
Operating Margin Differential 2%
Culture is the real Key
The concept of collaboration in business between trading partners is actually very simple. The implementation is not so simple. It requires a tremendous change in the mindset, culture and "the way we do business today." Here is where Wal-Mart has the true advantage over every competitor. They have developed the ultimate culture based upon the companies guiding principle, "We Sell for Less." Everyone in the company is committed to this and the strategies and operating procedures are all focused around supporting this mantra. In order to sell for less, they need to buy for less and remove any unnecessary cost imbedded in the system. There are allowances of how much an associate can spend when they travel and everyone adheres to it, Including the CEO. How many CEO's of a multi-billion dollar company share a room under $100 with another associate on a road trip? That is a testament to how deeply committed this company is to its core values. Whereas most companies talk the talk, Wal Mart walks the walk and it reflects in their growth and profitability.
The company continually works with their primary vendors to eliminate waste from the Supply Chain, from point of manufacture to point of sales. Both companies profit from it in the end. Proctor and Gamble has stated publicly that they can sell products to Wal Mart cheaper than anyone else, and make a higher profit because Wal Mart is so efficient.
Wal Mart shares information with their trading partners to make better business decisions. They provide this open access to data FREE. This open access to data and information re-enforces the collaborative partnership they foster with their supplier partners. Many of the larger retailers and wholesalers have tried to replicate this data sharing, unfortunately, they charge their partners for the privilege of working "collaboratively" and then they wonder why their pilots fail, or never achieve the same results as Wal-Mart. I watched one company implement an open access data system and charged the suppliers a sum of money equal to the amount they estimated the supplier would save by using their system. That sets the wrong tone for collaboration and defeats the entire purpose. While the rest of the world talks about culture, Wal-Mart walks the culture walk. For this reason, Wal Mart should be held up as the model corporation and Sam Walton should go down in history as the greatest cultural architect in business history.
Why Isn't the "Wal Mart Model" Widely Accepted?
There are 2 specific reasons for this, in my opinion. First, it has been approached in the past as a technology initiative requiring very large investments in software and hardware. No business can justify those investments without seeing a tangible return first. In reality, collaboration is a culture; a process change; a change in the way we do business. The technology is important in the facilitation of the process and the information. Great technology certainly helps, but a company could collaborate with a paper and pencil if it wanted to. Second, the correct people in the industry have not been targeted. CPFR, or any supply chain process begins with the category management of an organization. The buyers and merchandisers have the largest effect on the supply chain and have the closest relationships with the vendors.
Developing a customer driven differentiation model and reducing unnecessary costs is the only way for retailers to survive against all of the competitive threats to their respective industry. There is only so much labor to be reduced; only so much to be gained from benefits and insurance; operating expenses can be tightened only so far. However, the average retail company could increase their gross profit by 1.3% by eliminating the waste in the supply chain. Companies who have adopted these principles have had tremendous success in lowering the cost of product, while increasing their net profit, which ultimately benefits the consumer. They have better in stock, lower inventory costs and higher productivity. CPFR.Org has case study after case study, pilot after pilot, which have proven the model.
What every business that is complaining about Wal-Mart needs to do is to take a step back and re-strategize. How can we take our points of differentiation and modify Wal-Marts operating model to beat them at their own game. Target is just one example of this type of thinking. They also have a very efficient supply chain model which they have adopted to their differentiated operating model. There are several parts to the Wal-Mart model which are vulnerable. For example:
1 - They cannot adapt their merchandising strategy to localized preferences very easily or quickly.
2 – They do not target the upper middle to upper income brackets with an enticing offering.
3 – In the food arena, they are weak in the core perishable areas with variety and freshness.
4 – They are inconvenient for quick trips.
5 – Selection in the core electronic, toy and sporting goods is very limited and falling behind.
My point here again is there are vulnerabilities in the model. But until competitors focus, strategize and revamp their culture, they will continue to struggle against Wal-Mart.
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