Wal-Marts Sustainability Strategy - Essay Example

Wal-Mart’s Sustainability Strategy Introduction The supply and demand for Wal-Mart’s seafood is in a state of imbalance, considering that the demand for the seafood is growing at the rate of 25% annually, while the supply for the same seems to be on the decline, by 3% since 1900. While the major objective of Wal-Mart at this point is to increase the accessibility of the seafood, so that it can eventually meet its customers’ demand, the supply chain appears to be very complex and costly, such that it threatens to hinder Wal-Mart from achieving its seafood sales targets. By 2007, Wal-Mart was sourcing $750 million worth of seafood annually, and with the growth of this business set to grow at the high rate of 25% annually, then, Wal-Mart has to seek an alternative for meeting its demand. However, this proves to be more complex, considering that continuous supply of the seafood is the greatest challenge faced by Wal-Mart, according to Peter Redmond, who is its vice President (Wal-Mart, n.d. p1). Since some of the fish are found seasonally, for example the Salmons, which are only available between May and September of every year, maintaining their continuous supply is a big challenge. Additionally, the availability of these types of fish is still low even during their season, and thus Fishin’ Company, based in the US has been contracted to supply Wal-Mart with frozen fish fillets. Commercial fishing of the Salmons is also regulated by the law, where it is allowed only to operators with permits, and during specified seasons. Thus, Wal-Mart has to seek a strategy for obtaining the certification of its boat operators from the Marine Stewardship Council, to enhance a sustainable channel of maintaining regular supply of the Salmons, and thus meet the growing seafood demand. 2. 0 Challenges to Wal-Mart’s supply chain 2.1 Shortage of supply The major challenge that Wal-Mart is facing is the shortage of supply of the seafood. The output of the world’s fisheries had declined by 3% since 1900, yet the demand for the seafood from Wal-Mart is constantly growing at the rate of 25% every year (Wal-Mart, n.d. p1). Therefore, the looming scenario in this case is that; while the demand for the products seem to be continuously growing, its supply seems to be consistently reducing, which raises the concern of how Wal-Mart will be able to meet the needs of its customers, while at the same time taking advantage of the growing seafood business. Several alternatives are available through which this gap can be minimized, considering that Wal-Mart can liaise with the boat operators and the suppliers to ensure increased supply of the seafood. However, the challenge involved here is that, the increase in the supply of seafood product requires the adoption of the MSC’s certification program by the company, which is costly and time consuming, with the direct cost of MSC certification requiring between $50,000 and $500,000, while the execution of the program is set to take between one and two years (Wal-Mart, n.d. p1). These two aspects acts as the hindrances to the achievement of the program in a timely and more efficient manner, which would have enhanced the fishing and supply of Salmon to Wal-Mart. 2.2 The threat of increasing operational cost Wal-Mart has a higher demand for the seafood product, than it is able to supply. This being the case, the business has to seek for all alternative means of satisfying the customers through availing the essential product. However, while there are several options that can be applied by Wal-Mart to improve its continuous supply of the seafood, the costs involved are very high for the business. The most viable option that Wal-Mart can apply is the Marine Stewardship Council (MSC) certification program, which would enable the suppliers and the boat operators to gain legal permits to fish for Salmons which are not easily available, owing to the legal requirements that only permitted operators can fish for the Salmons, since their availability is seasonal and limited to the period between May and September. However, the cost of implementing the Marine Stewardship Council certification is very high; costing between $50,000 and $500,000 (Wal-Mart, n.d. p1).Therefore, the implementation of this option would substantially increase the cost of operations for Wal-Mart, which would in turn affect the profitability margin of the business. This threat of increased costs of production for the commodity would also be contributed to, by the shipment costs that Wal-Mart incurs from the suppliers who supply the business with the seafood and the frozen fish fillets from other regions outside the USA, such as China and Chile. The increased costs of supplies will eventually affect the total costs of operation for the business, which means that Wal-Mart’s profitability might be headed for a decline. 2.3 Logistical complications The other challenge facing Wal-Mart is the looming logistical complications. The business is actually supply dependent, with it’s sourcing for seafood accounting for approximately $750 million annually (Wal-Mart, n.d. p1). This is a clear indication that the business is highly dependent on the external forces, to successfully conduct its business, and thus it must ensure the effectiveness of its supply chain. However, it is emerging that the supply chain of the company is bound to become even more complicated, with the introduction of the new requirement for its suppliers and boat operators, who are engaged in fishing and preservation of the fish fillets respectively. The boat operators are required operate under the provisions of the Marine Stewardship Council (MSC) certification program. This would mean that the suppliers and the boat operators must first obtain the permits from the relevant authorities, so that they can be allowed to fish for the Salmons during their season of fishing. Considering that costs and the long duration that it would take for the business to implement the Marine Stewardship Council (MSC) certification and the logistics involved in the fishing, then, the supply of the Salmons and other seafood will be distorted. The supply chain of the Salmons involves the direct purchase of the fish from the commercial fishing boats by Fishin’ Company, which freezes and then ships them to China, where it had contracted a processing plant for thawing, packaging and re-freezing the fillets (Wal-Mart, n.d. p2). Therefore, adopting an alternative where the fillets would be processed in Alaska will complicate the logistical systems of the supply chain, through increasing the labor costs from the initial cost of $200 incurred when the fillets are processed in china, to a cost of $2000 for processing the fillets in Alaska. Additionally, the shift of Salmon processing from China to Alaska would mean more disruption of the supply chain, since it would not be possible to guarantee when and how much production capacity would be required for the new facility, owing to the fluctuation in supplies, depending on different seasons and the regulatory requirements involved in controlling the quantity and the duration that Salmon fishing can be done. 2.4 Source Market volatility This is another major challenge facing Wal-Mart, considering that the season for different types of Salmons ranges from one week to a few months. Therefore, the commercial fishing boats has to catch as many Salmons as possible during the season, for their eventual sale to the Fishin’ Company, which then deals with freezing and eventual transport of the Salmon to China, where they are processed to fillets. The fluctuation in the seasons for fishing Salmons means that there must be some sort of supply chain uncertainty that Wal-Mart has to contend with, since most of the time, it is not clear on the quantity of different types of Salmons that are available to the business, since it depends on the ability of the commercial fishing boats to catch as many Salmons of different types as they can, during their fishing season. The other aspect of supply market volatility is the inconsistent change in the prices of the Salmons, where their prices may fluctuate by 30% within a season (Wal-Mart, n.d. p1). This serves to indicate that it is not possible for either Wal-Mart as a business, or Fishin’ Company, which is its supply company, to precisely determine the cost of supplies, since their prices are bound to fluctuate much within a season. This serves to create business uncertainty, because it is not possible for the business to assess accurately the costs of operations, and thus plan for the desired profits. 2.5 Resource waste The Wal-Mart supply chain involves a lot of waste of resources, which could be harnessed and applied towards making the supply chain more effective. While the whole supply chain entails incurring a lot of costs from purchasing the Salmons, to their shipment to China where they are processed and then shipped back to the USA, 50% of these resources go to waste. The Fishin’ Company ships 40,000 pounds of Salmons to china from where they are processed, packaged and re-frozen for their eventual shipment to the USA. However, it is only 50 percent of the headed-and-gutted fish that are utilized to form the fish fillets, while the rest 50% goes to waste (Wal-Mart, n.d. p2). This represents a high wastage of resources, since the Salmons that go to waste had been previously bought from the commercial fishing boats. This resource wastage serves to increase the costs of production of the seafood, while the quantity of the seafood produced is reduced. 3. 0 Recommendations 3.1 Specialize on Chile as the single source of supply This strategy seeks to enhance the principle of sustainability. The Fishin’ Company was also able to supply Wal-Mart with Salmons from Chile, although they were supplied at a relatively high cost of $3.00 per pound as the purchase price, then $0.50 per pound as the processing cost, $0.20 per pound as the transportation cost from Chile to the USA. This made the production cost of the Chile Salmon fillets to be $3.7 per a pound of fillets, which is relatively high, compared to fillets obtained through the China-to-USA supply chain, whose cost includes $0.15 per pound as the purchase price, $0.40 per pound as the processing cost, and $0.15 per pound as the transportation cost, totaling to $0.70 as the total production cost. While the Chile option is relatively costly, it is the most advantageous option, since farmed salmon was available all year-around, in any quantity (Walmart, n.d. p1). This means that it is the most sustainable option, since it will ensure a continuous supply of the seafood to Wal-Mart’s customers, which in turn serves to build on customer loyalty and goodwill, and thus enhance repeat purchase, which benefits the business even more (Hugos, 2011 p44). 3.2 Standardized price negotiations Price fluctuations have highly affected running of the seafood business for Wal-Mart, considering the high prices at which different types of Salmon fish are bought from the commercial fishing boats, which makes it difficult for the business to assess and plan its costs, and thus unable to plan for its profitability. Wal-Mart is not able to control its costs, considering that the costs incurred in purchasing different types of Salmon fish from the commercial fishing boats by The Fishin’ Company, which is the company contracted to supply Wal-Mart, keeps fluctuating to as high as 30% within a season. This is detrimental for a business, since business should control the costs incurred in operations, to be able to realize the desired profits (Basker, 2005 p177). Through negotiating with the commercial fishing boats for a standardized price offer for different types of Salmon fish that are sold to The Fishin’ Company, and eventually supplied to Wal-Mart, it would be possible for the business to set its costs at a certain level, which will in turn enable the business to plan for its desired profits. Costs form the fundamental determinant of the success of any business, considering that it is through the ability of a business to control its costs that it maximizes on its profits. Therefore, it is recommended that Wal-Mart negotiates the prices of the Salmon fish supplied to the Fishin’ Company, which is its contracted supplier, so that The Fishin’ Company can incur standardized costs of purchasing the Salmon fish, and thus transfer the same costs to Wal-Mart in standardized form, which would enable Wal-Mart to plan and control such costs, and thus be able to plan for its profits (Li, 2000 p44). 3.3 Seeking alternative channel of transport Wal-Mart has been depending on the shipment of seafood from The Fishin’ Company, which in turn purchases the Salmon from the commercial fishing boats and then ships them to China for processing, after which it transports them back to the USA. The whole process is costly and involves many logistics, which in turn translates to costs. The costs incurred by The Fishin’ Company in shipping the seafood include the shipment costs at an average of $0.15 per pound. The Salmons are then delivered to the company in China that is contracted to thaw, process, package and re-freeze the fillets, so they can be transported to the USA. The cost of processing the fillets, packing them and re-freezing them ready for transport is $0.4 per pound. The readily frozen and packaged fillets are then transported to the USA at another cost of $0.15 per pound. The end product is that; the unit pound of Salmon fillet delivered to Wal-Mart costs $4.5 and it is then retailed at $6.0 per pound (Wal-Mart, n.d. p2). These costs can be reduced through establishing an alternative method of transportation, where the Salmon fillets can be transported quickly from the Fishin’ Company to its contracted processing company in China and then back to the USA. This will effectively eliminate the additional costs such as the costs of re-freezing, since when the transport is easier and more efficient, the fillets will require freezing only once, and then delivering to Wal-Mart. This effectively curbs the high costs of production, which in turn allows the business to receive the supplies at a relatively lower cost, and thus manage to reduce the price at which it retails its products to the customers. Cost reduction is one of the core aspects of business management, which requires that the costs incurred by a business are reduced to the minimum possible level, while the revenues of the business are maximized (Fishman, 2006 n.p.). Cost minimization serves to enhance businesses growth, profitability and competitive advantage, in the market in which the business operates. 3.4 Establish own fillet processing plant The major aspect of cost increase associated with Wal-Mart is that; there is a lot of resource wastage in the course of its operations. While Wal-Mart incurs considerable costs in its purchases and shipments of the seafood, more costs are incurred in thawing, processing, packaging and re-freezing. However, great resource wastage occurs in the process of processing the Salmon fillets into finished and packed products, where the Salmons delivered to the processing company are wasted to the tune of 50%. In the processing plant, only 50% of the headed-and-gutted fish are used in the production of the fish fillets, while the rest of the supplies go to waste (Wal-Mart, n.d. p2). This wastage serves to increase the costs of the product, while reducing the revenues that the business earns from the seafood business. Thus, it is recommended that Wal-Mart should establish its own processing plant, so that it can make use of the Salmons that are not utilized in the production process, and make use of them in the production of other related products (Wisner, Tan & Leong, 2011 p62). Additionally, through the establishment of an own processing plant by Wal-Mart, it will become possible for the firm to plan on its production activities for the seafood, other than wholesomely depending on the suppliers. In the year 2007, it was observed that Wal-Mart was sourcing approximately $750 million worth of seafood annually from the chain of commercial fishing boat that sell their Salmons to The Fishin’ Company, which in turn delivers the Salmons to another contracted company in China for processing, and then it delivers the same to Wal-Mart. However, should Wal-Mart manage to establish its own fillet processing plant, it will eliminate the necessity to depend on the suppliers, which in itself comes with more inconveniencies, considering that the seafood market is a highly volatile one. The establishment of own processing plant also serves to reduce the logistical complications involved in the whole seafood supply chain, from the purchase of the Salmons to the time the fish fillets are retailed by Wal-Mart to its customers. This is because; intermediaries such as the contracted processing company that operates from China will no longer be required. This serves to reduce the logistics involved, and consequently reduce the costs of the whole supply chain (Soderquist, 2005 p22). 3.5 Demand and supply management The demand and supply management is an effective strategy that can be applied by Wal-Mart, to ensure that it balances between the forces of demand and supply. This management strategy entails controlling the forces of demand and supply, as opposed to allowing the forces to operate in the free market fashion (Blocher, 2005 p17). The demand and supply management can be achieved through the application of price as the main tool, where the business can increase the price of the seafood whenever it is apparent that the supply is low and thus there is likely to be a gap between the demand and supply. By increasing the price of the seafood when the supply is low, the demand of the seafood will be effectively reduced, and thus the imbalance between the forces of demand and supply will be eliminated. On the other hand, the business can reduce the prices of the seafood when their supply is high; especially during the period between May and September, when the Salmons are highly available and their fishing less restricted (Wal-Mart, n.d. p1). This will enable the business to exploit the available opportunity fully during the high seafood availability season, while countering the demand during the season when such seafood is not available. However, the application of this strategy should be gradual, where the prices start reducing when it is approaching the month of May, so that by the time the high availability season for the Salmons will be experienced, the prices of the seafood will be low. Similarly, the increase in the prices of the seafood should be gradual, and the prices should peak when approaching September, so that the prices will remain high during the period of shortage between October and April, thus reducing the gap between demand and supply (Basker, 2005 p182). 3.6 Backward integration Backward integration refers to a business strategy where the wholesalers or the retailers moves a step backward, and takes the role of the producers or suppliers of a certain product (Roberts & Berg, 2012 p56). This strategy is most suitable for Wal-Mart, since it will allow it to engage in the whole supply chain, through being involved in the purchase, processing, packaging, freezing and retailing of the seafood to the customer. The advantage associated with backward integration is the fact that; it enables the business to take control of the whole supply channel, and thus manage to control every aspect of the supply chain, including the logistics and the costs (Gattorna, 1998 p33). The Wal-Mart seafood supply chain entails a long and repetitive process, which includes the purchase of the Salmons by The Fishin’ Company from the commercial fishing boats, which is then shipped to China, where another contracted company is involved in processing and packaging of the seafood, which is then shipped back to the USA. However, through backward integration, Wal-Mart will be engaged in the direct purchase of the Salmons from the commercial fishing boats, which it then embarks on processing and packaging, and then availing the product to the customer (Radhakrishnan, 2001 p10). The benefit that would be obtained from applying this strategy is that; it would reduce the costs of the intermediaries, while also eliminating the unnecessarily complex logistical procedures involved in the supply chain. This way, the business will be able to take control of its destiny, through effectively planning for its supply, costs and profitability (Hill & Jones, 2001 p439). 4.0 Conclusion Wal-Mart is faced by a complex logistical and cost reduction decision-making situation, which requires effective strategies to pull it through the complexity. While it is faced with the challenge of looming operational cost increases, an alarming demand and supply imbalance, logistical complications, source market volatility and resource wastage, there are several strategies that can be applied by Wal-Mart to overcome the challenges and thus revive its retail business leadership role. Through applying strategies such as concentrating on Chile as the single source of Salmon supply; since it supplies the Salmons all year round, applying backward integration, implementing demand and supply management strategy, as well as seeking an alternative channel of transport, Wal-Mart will eventually overcome the seafood supply chain challenges it is facing. References Basker, Emek. 2005. Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion, Review of Economics and Statistics, 87(1):174–183. Blocher, E. 2005. Cost management: A strategic emphasis, Boston: McGraw-Hill/Irwin. Fishman, Charles. 2006. 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