A Strategic Case for Rfid: an Examination of Wal-mart and Its Supply Chain

Although Radio Frequency Identification (RFID) implementation faces a host of challenges, WalMart perseveres in its drive for RFID adoption throughout its supply chain. By being such early adopters of RFID, Wal-Mart’s suppliers suffer increased costs which put pressure to bear on their profitability. In the face of the additional costs of RFID, why has Wal-Mart chosen to mandate the use of RFID tagging in its supply chain and insisted on such a short implementation period? This paper reviews Wal-Mart’s relationship with its supply chain, describes Wal-Mart’s RFID initiative, and proposes a possible unexpressed motivation underlying Wal-Mart’s drive to go to RFID. Early results are indicating incremental improvements at Wal-Mart due to RFID implementation; however, the argument can be made that Wal-Mart’s ultimate goal is an innovative improvement on a Schumpeterian scale – the desire to radically improve an important supply chain metric, the cash-to-cash cycle. This reasoning supports fertile areas for future research in the relationship between RFID and the Cash-to-Cash Cycle. Introduction: Supply Chain Metrics Supply chains consist of companies bound by trade with each other, and stretch from the initial raw materials to the finished product placed in the consumer’s hand. Supply chain companies recognize the critical role partnership plays and the impact that a firm’s suppliers and customers can have on its operational and financial performance. AMR Research listed the top 25 supply chain firms in a report called “The AMR Research Supply Chain Top 25 and the New Trillion-Dollar Opportunity” (Friscia, et al, 2004). The basis of the report is that supply chain superiority is crucial to the success of companies operating in today’s competitive environment, and that superior companies are following a model AMR dubs “Demand-Driven Supply Network (DDSN).” Table 1 contains the data reported for the top 5 vendors on AMR’s list. There are notable findings in these ratings. Dell Computer has a composite score significantly higher than its next highest competitor. The composite scores for the next four are closely clustered, with IBM and Wal-Mart in a virtual tie. Of the financial ratios, the most startling is Dell’s Sales/Inventory ratio of 126.7. Dell uses a unique business model capitalizing on the use of the Internet and Just-in-Time manufacturing. The extremely high Sales/Inventory number reflects Dell’s superb leveraging of the material costs that are needed for each sale. Of the top five firms in AMR’s study, Wal-Mart had the lowest Sales/Inventory ratio and the lowest Return on Assets, a ratio also related to a firm’s ability to leverage its inventory. The AMR report states that the four most critical metrics a company can use to evaluate its own supply chain are “demand forecast accuracy, perfect-order fulfillment..., supply chain cost, and cash-to-cash cycle time.” This last, cash-to-cash cycle time, is a corollary to the Sales/Inventory ratio, and a paramount measurement of the effectiveness of a company within a supply chain (La Londe, 2004; Murphy, 2004). It represents the elapsed time between a company’s payment for material purchased from a supplier and receipt of payment for that material when sold to a customer. Between 1995 and 1998, best-in-class supply chain companies reduced their cash-to-cash cycle times by 18 percent (“Top Performers”, 1999). Dell Computer is legendary for its ability to achieve a negative cashProceedings of the 2006 Southern Association for Information Systems Conference 148 to-cash cycle from its operating model. In 2004, Dell had a negative 36 days cash-to-cash cycle, meaning that on average, Dell collected payment from its customers 36 days before it paid its vendors (Murphy, 2004). Table 1. AMR Research Supply Chain Top 25 Report (Excerpt). Vendor AMR Research Opinion (40%) ROA (20%) Sales/Inventory (20%) Trailing 12 Months Growth (20%) Composite Score 1 Dell 238 13.7% 126.7 17.1% 20.75 2 Nokia 145 15.0% 25.2 17.5% 13.31 3 Proctor & Gamble 188 10.7% 11.9 7.8% 11.70 4 IBM 137 13.5% 29.3 9.8% 11.31 5 Wal-Mart Stores 175 8.5% 9.8 10.9% 11.27 It is significant that the top four positions were occupied by manufacturers – supply chain theory has its roots in understanding how manufacturers work with both customers and suppliers to achieve efficiencies. Of AMR’s 25 suppliers, 72% are manufacturers (Friscia, et al, 2004). Although retailers in the supply chain benefit from a reduced accounts receivable (sales are made on a cash or credit card basis which shortens the collection side of the cash-to-cash cycle), they are hampered by the need to stock items that might or might not be purchased by consumers. Every day and hour an item sits on a retailer’s shelf increases the cash-to-cash cycle on the payables side. The very nature of retailing requires goods to be available for sale for some period of time before the consumer makes the purchase, so it is remarkable that eight retailers are included in the top 25. At number 5, WalMart is the highest ranked retailer (Woolworths is the next highest at number 12). Wal-Mart and its Supply Chain From its inception, Wal-Mart recognized the need for discount pricing (Moore, 1993). In the 1980s, as Wal-Mart grew to a size that gave it bargaining power, it began to pressure its vendors to keep costs down. As early as the 1970s, Wal-Mart invested in its distribution systems, taking advantage of economies of scale and scope; from the 1980s through today, Wal-Mart has recognized that distribution is a crucial element in its success. Wal-Mart is geared towards continually scanning the environment in search of new opportunities to reap benefits from its supply chain. Ongoing uses of supply chain efficiencies to keep costs, and therefore prices, down allow Wal-Mart to boast of “Every Day Low Prices.”