Wal-Mart Stores - Research Paper Example

?Inventory Systems Summary Several studies showed inventory control practices of companies, but this study will be limited to the periodic inventory system and the just-in-time inventory system. An insight of how these systems are applied to business is illustrated. In this study, the perpetual inventory system as used by Wal -Mart and the Just-in-time inventory system applied by Toyota Motors are presented, a description of each system is shown, and a comparison describing the advantages and disadvantages of each system are discussed. Wal-Mart Stores Wal-Mart is a U.S. based company that started operation in 1962. Sam Walton, its founder, always believed on management practices of sales improvement, cost reduction, and using innovative technologies to advance progress of the company. For instance, in the past, Wal-Mart promoted technologies that streamlined inventory and supply chain management through the bar code scanning in 1980. According to Chin (2003), the use of bar code was approved in 1973 but it was only used by Wal-Mart in 1984 and correspondingly applied by its 75,000 suppliers. Wal-Mart uses a perpetual inventory system wherein a good deal of technology is required. Perpetual inventory system according to Accounting Study Guide is a system that updates inventory accounts after each purchase or sale. In this system, inventory quantities are updated continuously and subsidiary ledgers are updated after each transaction. Perpetual inventory provides a high degree of control, aids the management inventory levels and comparison of physical inventories. The perpetual inventory system, according to Buckfelder (2010) requires advanced technology such that a company should have the POS system or aided by the presence of RFID (radio frequency identification) checkers allowing the sale of the products to be recorded immediately. The use of RFID checkers is introduced by the company in 2003 in its efforts to overhaul the world’s supply chain. According to Chim (2003), RFID is expensive (costing about 30 cents per electronic tag) and Wal-Mart is expected to throw in a lot of investment for this inventory system. However, Chim believes that there are more considerable paybacks that could be gained by Wal-Mart in return for its costs. RFID, according to him is a system that makes inventory management more efficient by allowing manufacturers to trail the flow of goods. Advantages of REID to Wal-Mart, according to Chim (2003), is the substantial cost savings of about 6 % to 7% that would amount to $1.2 to $1.3 billion (using the 2002 financial figures as basis) This savings would come from costs associated from transporting, storing and keeping track of goods that has been estimated at 10% of overall sales. Kang, P. (2006) reported benefits gained by Wal-Mart in sales growth are due to significant inventory reduction, among others. The effectiveness of Wal-Mart Inventory system could also be measured by its inventory turnover that means the relative amount of the cost of goods sold to inventory. It is also an indication of the effectiveness of inventory management as it shows of the number of times the inventory is created and bought by customers at a specified time. It is computed by getting the cost of goods sold divided by inventory. The inventory turn over of Wal-Mart for 5 years is presented below: In million $ 2010 2009 2008 2007 2006 Revenue 408,214.0 404,374.0 377,023.0 348,368.0 312,101.0 Cost of goods sold 304,657.0 304,056.0 284,137.0 263,979.0 237,649.0 Inventory 33,160.0 34,500.0 35,159.0 33,685.0 31,910.0 Inventory turn- over 9.18 8.81 8.08 7.83 7.44 Source of financial data: msn.com. (2010) Wal Mart Stores, Inc. Financial Statement. As compared to the benchmark of competitors in the industry that is 7.9 %, Wal-Mart has a higher turn-over ratio that emphasizes efficiency in turning inventories into cash faster (msn.com. 2010). It is observed that the inventory level of Wal-Mart gets lower over the five years operations and at the same time, its inventory turn over gets higher. Disadvantages. The cost of the RFID system is high that requires big investment for Wal-Mart. On the supply side, suppliers find the inventory management system of Wall-Mart disadvantageous on their part. According to Atkinson (2006), an author on inventory management topics, suppliers of Wal-Mart are under pressure to hold on to incredible safety stocks to make sure they can satisfy the demands of Wal-Mart, thus leaving them with more inventory. Manufacturers and suppliers of Wal-Mart think RFID cost to be impractical to them, and price should be reduced to about 5 cents per tag. This will be an added cost to the supply chain as RFID has to be tagged at the source suppliers (Chim, 2003). Toyota Motors Toyota Motors Co. Ltd. uses the Just-in-Time (JIT) inventory as one of its reduction cost efforts. JIT has been defined as a production and inventory control system wherein “materials are purchased and units are produced only as needed to meet actual demands of the product” (“Just in Time”, 2009.) As the concept suggests, the JIT inventory system, reduces manufacturing inventories to a minimum, and in some instances, to a “zero level”. Under the JIT system, ordering system are done in such a way that raw materials arrived on the exact moment for the production, assembling and completion into product. It is scheduled in a manner that it is just in time for delivery to customers. Toyota Motors benefitted from this arrangement since their funds are not tied up to inventories that could be used in other improvements; there is lesser need for large warehouses to store inventories. JIT also results to the reduction of deficiencies, smaller wastes and greater customer approval. Using the JIT system, inventory turnover of Toyota Motors is presented in table below. 2010 2009 2008 2007 2006 Total revenue 18,950,973.00 20,529,570.00 26,289,240 23,948,091 21,036,909 Cost of revenue 16,683,797 18,455,800 21,520,353 19,228,393 16,944,944 INVENTORY 1,422,373 1,459,394 1,825,716 1,803,956 1,620,975 Inventory turn over 11.72 12.64 11.78 10.65 10.45 Source of Financial data: msn. Money Central (2010) It will be noted that the inventory level gets lower each year while there is a high inventory turn over during the five year period. As compared to competitors in the industry that has a benchmark of 9.3% inventory turn over, Toyota has achieved a higher inventory turn-over for 2010. A high inventory turn over is often desirable because a lower one indicates ineffective inventory management that results to carrying too much inventory and out of date inventory. As one Toyota worker explained, in his words: “In JIT, you don’t produce anything, anywhere for anybody unless they ask for it somewhere downstream. Inventories are evil that we are taught to avoid.”(Just in time, 2009). Disadvantages. Other manufacturers find the Just in time system uncomfortable, because JIT system would require a complete change of the management procedure that is very expensive and not easy to set up. The JIT system is also open to many risks particularly linked to the suppliers’ capability. For instance, production line could stop when the essential part is unavailable due to inability of supplier to deliver. As illustrated in the Just in time (2009) article, Toyota experienced the difficulty of JIT when, as quoted: “One Saturday, a fire at Aisin Seiki Company's plant in Aichi Prefecture stopped the delivery of all break parts to Toyota. By Tuesday, Toyota had to close down all of its Japanese assembly line. By the time the supply of break parts had been restored, Toyota had lost an estimated $15 billion in sales.” Source: "Toyota to Recalibrate ,'" International Herald Tribune, February 8, 1997, cited by “Just-In Time” article (2009) Conclusion The study has presented two inventory systems from two different fields of industry. One is in the retail industry that sells multiple products in the supermarket shelves daily and the other is in manufacturing of cars. In the first scenario, tracking of individual products in its different chains and warehouses is a difficult task and would need an efficient system of monitoring and control. In this set up the perpetual inventory system with the aid of high level and expensive technology is found advantageous to Wal-Mart Stores but posed difficulties to its suppliers. Suppliers are tied up because they cannot pass on the opportunity of being in the supply chain of Wal-Mart. In the second example, the “Just-in-time” inventory system has reduced the inventory level of Toyota that helped in the profitability of the company. Toyota saves on cost as money is not tied up with inventories and tags on savings on leased warehouse spaces. It is a more responsive method because company orders only what it needs thus avoiding obsolete inventories and losses. The system is ideal for manufacturers as other car manufacturers have began to use JIT, e.g. Ford Motor Company and General Motors. The system, however, exposes Toyota Corporation to risks of having to deal with inability of suppliers to deliver and shipping delays that could also lead to customer service issues, and in extreme cases, losses. Each system has both strength and weaknesses that should be properly addressed by the users in order to fully benefit from it. References Atkinson, C. ( 09 April 2006). Wal-Mart increases its suppliers’ inventory level. Inventory Management Review, retrieved 15 January 2011 from http://www.inventorymanagementreview.org/2006/04/walmart_increas.html. Buckkfelder, B. (2010). Types of Inventory Control System. eHow.com. Retrieved 15 January 2011 from Chim, R. (05 June 2003), Wal-Mart to throw its weight behind RFID. News, Cnet.com. Retrieved 16 January 2011 from Farfan, B. (2010). Top U.S. Retail Industry Corporations on the 2010 Fortune 500 List. Revenue Rankings and Yearly Comparisons for America's Top Retailers 2008 & 2009. About.com Guide. Retrieved 16 January 2011 from Hoovers (2010). Wal-Mart Stores Company Description. Retrieved 15 January 2011 from “Just-in-Time Manufacturing and Inventory Control System” (2009). Accounting for Management.com. Retrieved 15 January 2011 Kang, P. (2006). Wal-Mart to benefit from Inventory Control. Market Scan Report, Forbes.com Retrieved 16 January 2011 from msn.com (2010). Toyota Motors Financial statement. Money Central. Retrieved 15 January 2011 from msn.com. (2010) Wal Mart Stores, Inc. Financial Statement. Money central. Retrieved 15 January 2011 from Read More