The Walmart Model

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The Wal*Mart Model

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Translate Abstract With Wal-Mart Stores Inc petitioning the Federal Deposit Insurance Corporation to get into the banking business, it is only fair that banks take a few lessons from the world's largest retailer as they seek to manage costs and attract business in today's mortgage lending marketplace. In the lending industry, scale allows for more sales channels and a greater variety of product offerings. Yet most struggle to realize their potential economies of scale because of the inherent limitations of legacy processes and technological infrastructures (or lack thereof). When Wal-Mart gets into lending, it will know how much it costs to do initial underwriting of cash-out refis in Orange County, California, and, more important, it will know that it will cost 3.5% less next year. A business' willingness to be flexible and adapt quickly to shifts in business conditions is ineffectual unless its infrastructure can allow change to be implemented quickly and with minimal cost. Wal-Mart invests in process technology with this in mind, and lenders should, too.

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Headnote Mortgage lenders could learn a lot from the king of retail efficiency-Wal-Mart. "We view Wal-Mart as the best supply-chain operator of all time. Efficiency is a key factor in maintaining Wal-Mart's low-price leadership among retailers. Their margins can be far lower than other retailers' because they have such an efficient supply chain. The company's cost of goods is 5 percent to 10 percent less than that of most of its competitors," says Pete Abell, retail research director for AMR Research Inc., Boston. * Turnabout is fair play. With Bentonville, Arkansas-based Wal-Mart Stores Inc. petitioning the Federal Deposit Insurance Corporation (FDIC) to get into the banking business, it's only fair that banks take a few lessons from the world's largest retailer as they seek to manage costs and attract business in today's mortgage lending marketplace. * WalMart became the "best supply-chain operator of all time" by following two fundamental strategies. First, it leverages its scale in multiple ways to create operational efficiencies that drive significant competitive advantage. second, and less obviously, it uses its scale to create additional competitive advantage through best execution and supply-chain investments. * The first factor is the kind of pure power play that banks understand well. Scale leads to bigger stores that have more products and thus become more of a shopping destination-more akin to a mall than a store that offers a narrower, more focused selection. * Wal-Mart's overhead costs are distributed across a bigger footprint, allowing it to price more aggressively while maintaining good net margins. Scale gives a company a negotiating advantage with suppliers, which supports aggressive pricing strategies.

Wal-Mart's leverage creates a snowball effect in which increasing purchase volume leads to more selection and lower prices for customers, leading to more purchase volume. In the lending industry, scale allows for more sales channels (loan officers, call center, wholesale, correspondent, joint ventures and so on) and a greater variety of product offerings (prime, alternative-Á, subprime, home-equity lines of credit, construction, etc.). Large lenders are able to distribute fixed investment costs over larger transaction volumes, and, in theory, scale should also drive operational cost advantages. Yet most struggle to realize their potential economies of scale because of the inherent limitations of legacy processes and technological infrastructures (or lack thereof). Whether it is brittle legacy infrastructure due to prior merger-and-aqusition (M&A) activity, outdated point-of-sale (POS) and loan origination systems (LOSes), or lingering channel and organizational conflict, many lenders are actually burdened by their size. The irony is that developing a unified POS...
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