Examining Wal Marts Information System
Technology has become an increasingly important business issue in the last few decades, to the extent that the use of information technologies has become more or less inevitable. Furthermore, increased competition in the market has led to an acceleration of the development of new strategies related to information systems. Some people argue that whoever controls the information system controls the market. As such, information systems and information technology is a key factor in increasing one’s competitiveness in the market.
“Always low prices”. This is the slogan of Wal-Mart, a company that believes that low pricing strategies can secure their competitiveness in the market. Based on this business model, Wal-Mart early on applied information technologies to their business process. Also, Wal-Mart adopted information services to all of their major business areas such as customer and supplier management, inventory management and supply chain management (Wal-Mart, 2011). Those information systems are designed to interact with each other in order to increase the efficiency of inter-departmental relations.
In order to understand information systems, this essay firstly explores why information systems are important and why organisations deploy them. Secondly, it examines the structure of Wal-Mart’s information system. Finally, it discusses the limitations of Wal-Mart’s current system.
2. Theoretical context
Before examining Wal-Mart’s information system, it is important to define why every organisation develops an information system as part of their strategy. Parker and Case (1993) states that “a system is a set of interrelated elements that collectively work together to achieve some common purpose or goal.” As such, information strategy is one of the business strategies in a firm and is closely related to other strategies. According to Pearson and Saunder (2006), organisations have a three major strategies; Business strategy, Information strategy and organisational strategy, and these are all linked together. Thus, the successful interlinking of each strategy is crucial for an organisation to carry out their business. Figue 1 shows the relationship between business strategy and information strategy.
<Figure 1. The relationship between strategies>
Source: Venkataman, Henderson & Oldach (1993), continuous strategic alignment
In order to maintain a business, an information system is essential as it can provide best fit information to operate a business strategy. That is why many firms have changed their business model from traditional methods to an online/internet based model. As can be seen in figure 1, the information strategy cannot stand without IT. That is because IT makes the process of gathering and analysing of information from customers possible. Thus, when all the strategies are functioning well, organisations can have a market power. Venkataman, Henderson and Oldach (1993) emphasise that organisational strategic infrastructure and processes reflect organisational expectations and requirements and it need the enough capability of information system.
Wal-Mart is the world’s biggest retailer with 8,986 stores in the world. Its total revenue is approximately three times higher than its nearest competitorÂ Â . That fact reflect its wide business reach but also means that it needs to control many shops, warehouses and suppliers. Wal-Mart aims to provide best quality products with the lowest costs to its customers. From its slogan, ‘always low prices’, it can be understood that the priority of its business is the customer. However, the low cost is not the only reason of their successful business. Their strategy, which is based on information systems, is also one of the reason why it maintains the position of the largest retailer brand in the world. Ward and Peppard (2006) argue that it is important to define “what resources are available to the enterprise as a basis for defining what can be achieved by the enterprise.” In this sense, it is crucial to evaluate how Wal-Mart well integrates each of its resources to dominate its market with respect to information systems.
3. Wal-Mart’s information system
3.1 Customer relationship management
Traditionally, the activities of Wal-Mart focus on customer relationship management (CRM).
Through CRM technology, the corporation can generate loyal customers by gathering valuable information using the CRM software. Furthermore, organisations also can learn what their customers’ need through interacting with their customers (Rigby, Reichheld and Dawson, 2003). However, even though the system performs well, this technology cannot be a substitute for human interaction as the system is just a tool to interpret the data. Therefore, in order to operate its CRM system more effectively, Wal-Mart’s needs to outline clearly its objectives and job description prior to operating the CRM system. In other words, it needs to gather data in a well-defined way and ask, for instance, who are the most profitable customers, why do they buy from us and not other competitors and so on (ibid).
In this respect, Wal-Mart set a clear strategy and goal. They understood what their customers wanted and made their customers think that its prices were cheaper than other shops. As a result, the CRM system of Wal-Mart successfully managed to evaluate and cater to its customers’ needs. This can be confirmed by their market position. Through its CRM system, Wal-Mart can be regarded as having successfully measured their customers’ expectations. This is the value of IS/IT as a support strategy for business objectives (Laudon. C and Laudon. J, 2007).
One the other hand, those activities is related to result of efficiency of the supply chain. It is possible how Wal-Mart efficiently establish their information system infrastructure. Especially, their commitment for customer has shown in their supply chain
3.2 Supply Chain: Distribution centre and EDI
Wal-Mart is a retailer that also plays a role as a distributor (wholesaler) (figure 2). This can have the advantage of setting up an effective supply chain because there are more opportunities to adopt more information systems to the supply chain. However, if they cannot control their supply chain well, the probability of business inefficiency can be higher as Wal-Mart has a double responsibility (and so greater room for economic loss) as both supplier and provider.
According to Word and Peppard (2006), an organisation’s desire to achieve their objectives compels them to find proper ways to manage given resources. The objective of Wal-Mart is simple. They stick to a clear strategy: provide the best quality goods with the lowest price. However, it is very difficult to achieve this objective without effort to reduce redundant costs. Hence, Wal-Mart has spent a large amount of time and effort to improve the efficiency of the supply chain. Mondragon et al (2006) notes that “Reduction of time to market, switching from mass production to mass customisation and compression of product life cycle are trends forcing permanent changes to the way companies do business.” In the current rapidly changing market, the supply chain management affect businesses, and Wal-Mart is no exception. A series of activities such as adaptation of IT resources and elimination of redundant operation processes can be the key factors for a successful business. Figure 2 explains a characteristic of Wal-Mart’s supply chain
<Figure 2. Wal-Mart’s supply chian>
Wal-Mart introduced new a paradigm to its supply chain. As described above, Wal-Mart is both a retailer and distributor (figure 2) and this is directly related to their business strategy. Firstly, for the benefit of this supply chain, they have used “hub-and-spoke” system in which goods are centralised in its warehouse (also known as distribution centre or hub). Assembled goods are dispatched to the each shop (spoke). As a result Wal-Mart can directly deliver 85% of inventory from its warehouse, as compared to about 60 percent for other competitors. This hub-and-spoke system enabled them to have price competitiveness (because it cut down transport costs?…explain why). Moreover, because Wal-Mart directly purchases its goods from suppliers, this allowed a reduction of purchasing costs (because the costs of intermediate stages were eliminated) (Alderighi and Cento, 2005). In short, Wal-Mart was able to streamline their supply chain to great effectiveness.
Secondly, with regard to the inventory management, Wal-Mart has sought a fast way of delivering goods to its customers. In this sense, they introduced a system known as the point of sales (POS) system, which can enhance the control of fast moving consumer goods. Furthermore, the POS can improve the business decision making process by making it possible to track inventories. This is possible because through the POS, data has been recorded at the retail shops (i.e information about every transaction has been kept) (Barnejees, 2000).It plays a role as collecting valuable information of the behavioural data and characteristics of customers’ purchases. Thus, the POS terminal can track the stock levels in the store (ibid).
Finally, Wal-Mart uses the EDI system for procurement. The EDI system is an electronic data interchange system, which is used to transfer data through the internet. This system allows suppliers to monitor their products sales. EDI makes it especially easy for small vendors to provide goods effectively. This also enables suppliers to get real-time information from store to store (Angeles, Nath and Hendon, 1988). Thus, each vendor can easily send its products to the distribution centre of Wal-Mart. This strategic and systematic framework makes it possible for Wal-Mart to gain an advantage as suppliers were able to prepare the fluctuation of selling of goods. As such, the Wal-Mart EDI system plays a significant role between the supplier and Wal-Mart. In terms of business to business (B2B) performance, the EDI system can increase efficiency at the supply chain.
AlI of Wal-Mart’s information systems are closely linked in this way. Their whole supply chain process is strategically interlinked each other, from the purchasing to the selling of goods.
3.3 Introduction of RFID system in the supply chain
Although the EDI system can enhance efficiency for the supplier, it was not enough for Wal-Mart to deal with many goods; they provide over 10 thousands of goods to customers. Furthermore, it is important for Wal-Mart to control out-of-stock merchandise in the shops. In this respect, Wal-Mart chose a radio frequency identification system to make sure of their strategy.
In 2003, Wal-Mart needed a new system to support their supply chain and thus deployed a radio frequency identification system (RFID) at its distribution centre. Furthermore, due to the fact that Wal-Mart’s business area expanded, they needed to keep track of their cargos which were sent different regions. Also, the fact that it now had to maintain a lot of warehouses across the world became an important matter for Wal-Mart (yes, but why? You must always give evidence or explanations for your assertions). Wal-Mart anticipated that reduction of out-of stock would be made possible by the development of RFID system. In this sense, RFID was suitable for their business because RFID could deal with the whole process from production to sales of the product with a tiny chip. This chip can be tracked by radio frequency (Wamba et al, 2008). As such, RFID was regarded as new system to replace the barcode system. Furthermore, one notable feature of RFID is that this can be tagged to almost every item (which allows this system to be widely applied) (ibid). After the deployment of the RFID system, the tracking of inventories become much more effective as RFID was able to link into the POS and EDI systems. As a result of this set of interactions, collaboration between systems was significantly enhanced. Also, through the interrelated elements, synergies in the supply chain are generated.
However, the introduction of the new system also brought about a negative effect for Wal-Mart. Wal-Mart has sustained a long-term relationship with its vendors. Based on this relationship, in 2003 Wal-Mart suggested its supplier to use radio frequency identification tag on its products when suppliers ship their goods to distribution centres (Roberty, 2003). Even if they maintained a good relationship with their vendors, it was hard to bring all the suppliers’ into agreement. According to Christopher (1998), supply chain management brought about a new relationship between the traditional buyer and supplier. Wal-Mart spent a lot of time meeting with their vendors trying to negotiate and impress on them the necessity of the new system. Yet some companies did not want to change system as they would have had to learn new technologies and that would have involved additional costs for them. Consequently, the development of the new system caused them to lose some traditional partners (which partners?).
4. Assessment of the success or failure
An effective supply chain enables business to achieve a competitive advantage. There are still many organisations which have not realised of importance of logistics and supply chains (Christopher 2005). A well-organised supply chain management can deliver superior customer value (ibid). Figure 3 explains competitiveness advantage and relationship between the customer and the companies.
<Figure 3. Competitive advantage>
Source: Christoper, (2005), Logistics and supply chain management>
The competitiveness of a company comes from the ability of company itself. In other words, if companies do not have unique competitiveness features such as low prices, long-term experience and so on, it is impossible to survive in the market. Recently, thanks to the development of internet service, customers can easily compare the prices of goods (Christopher, 2005). Therefore, companies have to take actions in order to reduce price. Streamlining the supply chain can be the one way to achieve this competitiveness. In this aspect, Wal-Mart’s unceasing efforts to use information systems to provide low price goods to its consumers are a crucial business strategy. In this respect, the use of information strategies been successfully accomplished and has widened the gap between Wal-Mart and its competitors. This is why they still can keep their position.
On the other hand, Fortune and Peter (2005) argues that the information system should respond more sensitively to real world situations?. This means a method of comparison which tries to match real world reactions toward and ideal models. Figure 4. Illustrates the analyse cycle along to each stage.
<Figure 4. The analysis cycle: application to Wal-Mart case>
Source: Fortune and Peter (2005), Information system
According to this analysis model, the whole process of development of information systems can be evaluated. Wal-Mart began a development of its information system due to a significant growth in its business. The primary objective behind introducing information system was that it could provide low cost products to its consumers. It can be seen in figure 4 that a series of their process proceeded well based according to this objective. As a result Wal-Mart was able to obtain greater understanding of its customers. The market share and revenue demonstrate convincingly that their system was working. In conclusion, Wal-Mart’s adoption and manipulation of information system can be seen as a success.
5. Limitations and weaknesses
With all these advantages and the successful management of the supply chain, Wal-Mart can be confident of continuing success. However, there is no such a thing as perfect information system. Wal-Mart’s current systems also have some limitations. First of all, there are some risks in implementing new technologies, especially, for instance, the RFID system. A single globally accepted standard has not yet been set. As such, it is important for multinational companies to set a global standard. When Wal-Mart used the barcode system, it did not need to apply different standards according to different regions. The RFID, which was chosen for supply chain efficiency, set up a series of new problems for Wal-Mart. Second, some researchers found a technical problem in the RFID system (Sellito, Burgess and Hwaking, 2007). The performance of the tag also has some technical issues. According to recent survey, an average rate of defective tags is approximately 20 percent (ibid). Moreover, accurate reading rates of the tag are especially low with some products such as metal goods and liquids. These factors are matters that Wal-Mart urgently needs to solve, because a few minor problems can cause a problem, in the long run, for the efficiency of the corporation
Finally, there is a cost problem in introducing and operating new technologies (Gaukler and Seifert, 2007). Owing to the introduction of RFID, Wal-Mart spent a lot of money for its implementation. For example, the cost of each tag is 30 cents. Wal-Mart provides more than ten thousands of goods for its customers. This is simply the number of kinds of goods. When we think about number of individual goods, it is hard to imagine how many tags are needed. Regardless of who pays money for tags, it is clear that the cost of tags will influence the price of product. But when the tag is damaged, an additional cost is then incurred (ibid). Furthermore, these cost-related problems, as mentioned before, can affect the relationship with its partners. If other competitors offer existing methods of supply, the suppliers have a possibility to move to other retailers. This matter is related to the industry standards problem. Once their system has set the world standard, other competitors will be able follow them.
Consequently, new systems can increase an organisation’s competitiveness in the market, but if the organisation cannot successfully estimate the costs of integrating new technology with other systems, operating costs and so on, they will not receive the full benefits from new systems.
The above analysis has showed how standardisation is an important issue. Regarding, standardisation Fortune and Peter (2005) note that “it requires the variation in terminology between individuals, between departments Ã¢â‚¬Â¦ to be ironed out and guidelines and protocols, standard definitions, structures and codes to be agreed before proofreads can be designed.” Like this, standardisation is not easy to achieve. However, since the process requires a vast amount of time, Wal-Mart should do their effort to set a standard model as a long-term strategy of the company. A plan of cooperation, and one which involves all of their partners, is a key feature in the success and operation of information systems. In the short term, it may incur some loss in its business but this investment will bring about a global competitiveness in the long term. If a globally accepted standard is set, the reduction of operation costs can be a natural concomitant of standardisation.
On the other hand, to prevent the failure of information systems operating efficiently, careful management between specific systems is necessary. According to Markus (2005), “the impacts of systems are caused by the interaction between specific system design features and the related features of the system’s organisational setting.” Thus, the best-fit approach between systems is recommended for Wal-Mart (ibid). Each system has to suit the organisation’s particular objectives and tasks. Furthermore, Wal-Mart must each that one system is intimately connected to another. This is important because the lack of fit between systems can lead to conflicts and consequently cause a decrease of productivity.
Finally, Wal-Mart should narrow the scope of products in order to accurately track of their stocks. As described earlier, accurate reading rates are lower in liquid and metallic goods than others. If some stocks still cannot read accurately, Wal-Mart will not achieve the initial goal of introducing a system (RFID) which improves its efficiency. It this case, it is better to find another system to support RFID system. Thus, redefinition of products is suggested.
Wal-Mart is highly estimated in the retail industry as an example of a successful application of information systems. This success has set a strong direction for the company. Based on clear goals and objectives, Wal-Mart has managed to improve its productivity. The use of Information system has been one of the strategies that made this possible. Wal-Mart early introduced information system into their supply chain management. Also, they linked together many information systems and technologies to support their supply chain. Wal-Mart’s efficient performance in this regard continues to make it a strong market competitor today and promises much for the futureÃ¢â‚¬Â¦Ã¢â‚¬Â¦Ã¢â‚¬Â¦