Wal-Mart Company



Wal-Mart Company

Introduction and Overview

Wal-Mart Stores, Inc. operates retail stores in a variety of methods all over the world. It operates through three primary channels: Wal-Mart Stores, Sam’s Club, and International. The Wal-Mart Stores channels includes ‘super centers’, reduction stores, and neighborhood markets in the US, as well as . This channels tenders common merchandise, including clothing, domestics, materials and notions, stationery and book, shoes, house-wares, hardware, electronic devices, home furnishings, domestic devices, automotive supplies, horticulture and ornaments, sports items, games, groceries for pets and pet items, cell-phone devices, and cell-phone plan agreements. Its stores also offer groceries and even financial services and products. The Sam’s Club channel includes the warehouse membership clubs in the US, as well as . This channel mainly consists of hard-goods, soft-goods, bulk grocery items, and selected private-label items. The International channel includes diverse arrangements of retail stores and eateries, including concession stores, super-centers, and Sam’s Clubs that operate all over the world.

Wal-Mart was ranked 17 on the 2007 Forbes 2000 list and is known to be the world’s largest retailer. In this I believe that Wal-Mart would be ranked in the top position in the industry and is probably contributing a lot to the success of such industry.

Since Wal-Mart is the largest retail company that sells a variety of products from small cheap items to large expensive ones, it is probably concerned about theft because some customers might try clothing for example and just leave the store wearing those clothes without actually paying for them. Another concern would be a high employees’ turnover because from what I have seen at Wal-Mart, most employees are young and usually young people frequently change jobs until they gain enough experience to settle with one employer. Finally, because the company buys its merchandise in bulk, there is a risk of defective merchandise being delivered hence the company should be worried about the number of returns as well as lost sales arising from such a concern.

One of the ethical situations that might be facing the company is employees’ theft; this is because many items do not have price tags and the cashiers have to enter the prices for such items manually and when they do that, they might enter a lower price for the items. Unfortunately, this risk cannot be avoided unless a person is assigned to compare prices from the cash register receipt to the price tag on the merchandise which would probably take a long time to do because customers usually buy a lot of items in one visit.

Journal Entries

Appendix B:

The six Business Functions of a value chain are:

1) Research and Development: generating and experimenting with ideas related to

new products, services, or processes.

2) Design of Products, Services, or Processes: detailed planning and engineering of

products, services, or processes.

3) Production: Acquiring, coordinating, and assembling resources to produce a product

or deliver a service.

4) Marketing: promoting and selling products or services to customers or prospective

customers

5) Distribution: delivering products or services to customers.

6) Customer Service: providing after-sale support to customers.

Differences among Manufacturing, Merchandising, and Service-Sector Companies:

1. Manufacturing-sector companies purchase materials and components and convert

them into various finished goods. Examples are automotive companies, food processing

companies, and textile companies.

2. Merchandising-sector companies purchase and then sell tangible products without

changing their basic form. This sector includes companies engaged in retailing (such

as bookstores or department stores), distribution, or wholesaling.

3. Service-sector companies provide services (intangible products)—for example,

legal advice or audits—to their customers. Examples are law firms, accounting firms,

banks, mutual fund companies, insurance companies, transportation companies,

advertising agencies, radio and television stations, and Internet-based companies

such as Internet service providers, travel agencies, and brokerage firms.

Inventory Types:

The three inventory types are:

Direct Materials Inventory

Work In Process Inventory

Finished Goods Inventory

A manufacturing company would hold the three types of inventory, while a merchandising company carries only one type of inventory typically called “Merchandising Inventory”. A Service-sector company would hold no inventory.

Since Wal-Mart is a merchandising company, it holds only one type of inventory which is the Merchandising Inventory.

Although it is hard to tell whether or not Wal-Mart applies an Activity Based Costing system, I believe that it does apply it since ABC has many advantages such as:

➢ More accurate costing of products/services, customers, SKUs, distribution channels

➢ Better understanding overhead

➢ Easier to understand for everyone

➢ Utilizes unit cost rather than just total cost

➢ Integrates well with Six Sigma and other continuous improvement programs

➢ Makes visible waste and non-value added

➢ Supports performance management and scorecards

➢ Enables costing of processes, supply chains, and value streams

➢ Activity Based Costing mirrors way work is done

➢ Facilitates benchmarking

Since I could not find a flexible budget for Wal-Mart, Exhibit I – attached is an imaginary Flexible Budget.

A Flexible Budget calculates budgeted revenues and budgeted costs based on the actual output in the budget period.

For simplicity, I have assumed that Wal-Mart prepares a Flexible Budget for each Department. The Flexible Budget I have prepared is for the Shoes Department. I am assuming that the actual units sold were 1,000,000 pairs, while the budgeted number of units was 1,200,000; I am also assuming that the sales price per pair of shoes is $15 (same as the static budget). Finally all budgeted Variable and Fixed Costs are assumed to be the same as the static budget with a difference in the unit sales figure only.

Increased Sales could result from two situations:

1) Long-term relationship with customers

2) Discounts

If increased sales are a result of Wal-Mart’s ability to maintain a long-term relationship with its customers. Such “loyal customers” would expect prices to be stable for a long period of time, hence the company would not be able to increase its prices so as to maintain its market share especially if the prices of competitors are stable. Wal-Mart might attract new customers, however through offering discounts and price cuts. Since Wal-Mart operates in a perfectly competitive market, it has no control over prices even with increased sales. This is because in a perfectly competitive market, the company is a price taker; it has to accept the price determined by a market consisting of many participants. If the managers at Wal-Mart were fooled by an increase in sales and regard it as a signal that customers would still buy its products no matter how much prices increase, then the company would ultimately lose sales as well as the market share because the products offered by Wal-Mart are offered by many competitors throughout the industry.

On the International Side, increased sales could be a result of inflation in the foreign country in which Wal-Mart operates. This increase in sales would also be met with an increase in costs. Hence, in situations where inflation plays a major role in the increased sales, the company would be able to increase its prices since all competitors in the market would also increase their prices.

In short, since Wal-Mart operates in a competitive market, it must implement the Market-Based Pricing approach. Under this approach, pricing starts by asking “What do our customers want? How will competition react to what we do? Once those questions are answered, the company can start setting a target price which is an estimation of the price the customers would be willing to pay for a certain product. Such a price is usually estimated based on surveys conducted by the marketing department. The target price is also based on the company’s analysis of its competitors; the company must understand and analyze the technologies as well as the products and services offered by the competition. Once the company understands the needs of its customers, the value that customers assign to products, as well as understanding how competition might react, it would do a cost analysis to see if there are possible cost reductions (In Wal-Mart, self-checkout booths are available so that Wal-Mart can save on the cahiers’ salaries). If some costs could be reduced, as in the case of self checkout booths, then the company would be able to offer lower prices (Target, for example does not have such booths and hence it has to incur higher costs than those of Wal-Mart, which in turn translates to higher prices).

Conclusions and Recommendations:

Wal-Mart is the world’s largest retail store operating in three segments Wal-Mart Stores, Sam’s Club, and International. As per the attached comparative analysis (Exhibit II), it is clear that Wal-Mart is the major contributor to the industry’s Net Income. Comparing the Quarterly Revenue Growth of Wal-Mart to the industry, we can see that Wal-Mart is above the average industry figure by 1.3%, while it is above the industry Operating Margin figure by 1.72%. This is because Wal-Mart operates in three segments with international operations. Such diversity in the operations of Wal-Mart enables the company to maintain its growth goals because even with a drop in the retail industry in the United States, Wal-Mart is able to reap profits in other countries, hence it can balance its business cycles. The success of Wal-Mart is due to its hiring efficient employees as well as dealing with trusted suppliers who provide the company with defect-free merchandise that meets its customers’ expectations. Based on real life experience with Wal-Mart, I believe that Wal-Mart was able to meet the tastes and expectations of many customers due to the presence of a multiplicity of products that address different customers’ needs. Wal-Mart’s successful operations are probably a result of not just being able to meet customers’ expectations, but are also a reflection of a sound pricing strategy that enables the company to offer the right products at the right price to its customers. Again, such a success is also attributed to the managers of the company who are able to make sound purchasing, costing, and pricing decisions.

Although I could not find information about the costing method used by Wal-Mart, I believe that a company of such a size and with such product variety, Wal-Mart must be applying the Activity Based Costing system which is an essential success factor of a company of such a size.

Activity Based Costing coupled with Flexible Budgets and variance analysis would allow the company to accurately assign costs to products as well as enabling management to breakdown costs to see which costs could be lowered or even eliminated. Whenever there is a cost savings, management would be able to price its products lower than its competitors hence increasing its sales volume. Actually decreasing the costs of sales of one product might enable the company to offer such a product at a discount, and most customers when they are in the store tend to buy other items that were not on their original shopping list, hence the total revenue of the store would increase.

Flexible Budgets compare actual results to budgeted data, if there are any variances, they should be thoroughly investigated by management so as to arrive at the cause of the variance. Only through Variance analysis would managers be able to detect areas with problems. Once those are detected, processes should be investigated, corrected, and even redesigned if the need arise. This is what is known as “Management by exception” – the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely the area is not operating as expected.

Wal-Mart must also apply the Value Chain analysis so as to meet customers’ needs and expectations. That is a very important goal of managerial accounting and should be implemented by Wal-Mart if it wishes to maintain its position as an industry leader.

I would recommend that Wal-Mart employs better internal control procedures so as to ensure that the risk of theft and employees’ inaccurate price entries are avoided. Some of such controls would be to have a supervisor or a store manager double checks the price or the bar codes of items missing price tags. I would also recommend the company’s offering career advancement opportunities to its employees such as offering them educational grants with a chance of a higher position if the employee successfully obtaining his/her degree. When offering such grants or scholarships, the company should have the employee sign a contract which obliges the employee to keep working for the company after obtaining his degree or in case an employee wants to resign his job, he should pay back the amount granted by the company.

Works Cited

Birchall, J. (2006). A purchase on psephology. Financial Times.

Walmart (Ticker: WMT). Yahoo Finance. Retrieved on February 10, 2009.

Walton, S. (1993). Made in america: my story. New York: Bantam.

Zook, M. (2006). Walmart nation: mapping the reach of a retail colossus.

Routledge.

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