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Value Chain Assessment

Case study

Value Chain Analysis:Learning objectives

• Mapping Industry value chains

• Calculating the economics of value chains

• Understanding the difference between Industry value chain and a company's value chain

• Understanding a company's value creating activities

• De-constructing value chain to create competitive advantage

Economics of Industry Value Chain

Vendors Distributors Retailers ConsumersRetailers Revenues 100.00%Retailers Margin 5.90%RetailersOpEx 22.20%Retailers COGS 71.90%Distributors Margin 1.44%Distributors OpEx 2.00%Distributors COGS 68.46%Vendors Margin 4.79%Vendors OpEx 63.67%Vendors COGS

assumptionData in the Case

Value Creating Activities

Value added

Profit

Price Paid by Consumer

Walmart Value Chain

The World of Walmart Map Growth of Walmart

Economics of Walmart Value Chain

“Dis-intermediate”Vendors Distributors Retailers Walmart “no brainer” Walmart Actual Consumers

Walmart Revenues 100.00%Walmart Ret. Margin 5.90% 7.34% 8.59%Walmart Ret OpEx 22.20% 24.20% 17.64%Retail COGS 71.90%

Walmart Distr.Margin 1.44%Walmart Distr. OpEx 2.00%Walmart Dist.COGS 68.46% 68.46% 73.77%Vendor RevenueVendors Margin 4.79%Vendors OpEx 63.67%Vendors COGS

Walmart Value Chain

Vendors Distributors Retailers Walmart “no thought” Walmart Actual Consumers

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Walmart Value Chain

1985

Walmart Revenues Retail COGS Walmart Dist.COGS Walmart Ret OpEx Walmart Ret. Margin

Walmart Distr. OpEx Walmart Distr.Margin Vendor Revenue Vendors OpEx Vendors Margin Vendors COGS

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Presented by: Benjamin FiemanMBAM 619 Strategy ManagementProfessor Sunil Mehrotra

WAL*MART Value Chain

Value Creating Activities

Inbound Logistics (3.4%*) Operations (Building Rentals) (1.9%**) Licensing (0.2%) Marketing (1.1%) Shrinkage (1.3%) Salary/Wages (10.8%***) Cost of Goods Sold (~74%****)

*= Averaging 1984 and 1985 logistics numbers** = Adding 0.1% to the late 1970’s number*** = Averaging the salary figures given**** = Averaging COGS/Sales for 5 years

Natalie-Rosanna Rebot

WAL*MART’s Value Creating Activities% Sales

COGS Operating Profit75.3% 24.7% Oper. Activities

17.6%

Oper. Income7.2%

Operating Flows Sales $8,451 million - COGS $6,361 million (75.3% of Sales) Gross Profit $2,090 million (24.7% of Sales) - Operating Activities (Value creating activities below) $1,485 million (17.6% of Sales) Operating Income $605 million (7.2% of Sales)

Wal-Mart's Value Creating Activity Value Created Cost % of Sales (1985)Store merchandise in distribution center Buy in volume at attractive prices $25 million 0.3%Centralized purchasing (in store termial + central computer) Inventory control 0.5%Central computers linked to several hundred vendors Expedited deliveries 0.1%Hub- and- spoke distribution network (400+ truck tractors) Less than 48 hour delivery and backhauls 2.0%Inbound logistics Distribution network 1.0%Leasing costs More capital (high sales/sq.ft. & bargain- basement acquisition 1.8%Store manager salary Autonomy in ordering stock and setting up displays 1.0%Store renovations Upscale look 0.1%Licensing fees Specialty departments $55 million 0.2%Computerized system in each store Computerized inventory system to track sales and do accounting 0.5%Satellite system Ease real- time communication to headquarters and cap phone costs ($10 million) $20 million 0.0%UPC at point of sale Speed checkouts, bypass, paperwork, simplify inventory, reorders, postaudits $500,000/store 1.0%Increased store size (42 to 85,000 sq. ft.) and more locations More floor space and increased efficiency of delivery trucks 0.1%Advertising expenditures Newspaper, circulars, and spot TV to advertise promotions 1.1%Terms of sale No questions asked return policy, credit transactions 5.0%Computer aided design Merchandise mix for each store based on 100 factors 0.0%100,000 Employee salaries "We care about our people" reduced shrinkage to 1.3% of sales 10.1%Administrative costs Regional vice- presidents living in Bentonville and flown to stores 1.0%Warehouse club Sam's club diversification $10 million 1.0%

Category of Sales Description % of SalesSoft goods sales Apparel, linen, and fabrics 29%Hard goods sales Hardware, houseware, automotive, small appliances 28%Stationary and candy 11%Sporting goods and toys 10%Heatlh and beauty aids 9%Gifts, records, and electronics 5%Shoes 3%Pharmaceuticals 3%J ewelry 2%

Total 100%Ben Fieman

Walmart optimized its Value creating

processes!!Industry WMT % DiffNet sales 100.00% 100.00% 0%Lic fee/other inc 1.10% 0.81% -26%COGS 71.90% 73.77% 3%Payroll expense 11.20% 9.00% -20%Advertising exp. 2.30% 1.10% -52%Rental exp 2.20% 1.90% -14%Misc. exp 7.60% 6.45% -15%Operating Income 5.90% 8.59% 46%

Op exp 23.30% 18.45% -21%

Everyday low prices

More customers

More goods sold

Lower prices from suppliers

Lower operatingCosts

Walmart's Business logic