Wal-Marts approach to Purchasing and Supply-Chain Management - Essay Example

Wal-Mart’s approach to Purchasing and Supply-Chain Management Module 6LO501 Module Leader: Gino Franco Imanjit Malhi - 100070649 ExecutiveSummary Wal-Mart is among the leading Fortune 500 companies spread across the globe. Sam Walton founded it in 1962. It is one of the largest retail chain stores dealing with everything from consumer electronics to food. Wal-Mart leads in terms of revenue generation among the Fortune 500 business companies like Microsoft and GE Courtemanche & Carden (2011). The retail chain store offers affordable prices and together with its aggressive market and online strategy, it has gained preference in major world cities and towns Apte & Viswanathan (2000). Perhaps, Wal-Mart is the only retail chain store servicing the common people not only in the United States but also globally. Supply chain management (SCM) has been the key pillar to Wal-Mart’s high performance, and remains to be the retail chain store’s main competitive advantage in the retail industry. The channels of distribution at Wal-Mart are regarded as the most effective and efficient systems offering a visible approach to supply chain management and which allow sharing of information with suppliers. This report looks at the present concepts and models pertaining to supply-chain management and purchasing at Wal-Mart. However, it was found that none of these models could actually explain in detail the business models employed by Wal-Mart. Although, Porter’s value-chain model, Reck, and Long model were found to have a closer resemblance to Wal-Mart’s present model. However, there is a substantial reason to believe that Wal-Mart considers purchasing and supply-chain management as integral components of general marketing activities, rather than separate entities as Porter suggested in his value-chain model. Table of Contents Executive Summary 2 Introduction 4 What Wal-Mart is doing? 6 What the concepts and models are saying? 9 Evaluation of Wal-Mart’s approach 12 Conclusion 16 References 18 Introduction Every organisation has their own status and faces many difficulties along the way, and finally the strategies it has employed to reach its current position in terms of financial performance, growth, market share, and financial position in the industry. Wal-Mart has earned a name for itself in the retail chain industry because of the efficiency and effectiveness of its SCM systems and satisfaction that it creates to customers all over the globe. The giant retail chain store has operations across 28 countries in the world under 60 different banners e.g., Wal-Mart has operations in Canada, Britain, Japan, South Korea, and Puerto Rico William (2007). The company has been able to fight against all odds of competition to establish itself both locally in the United States and globally by adopting the right business models and developing competitive strategies, which competitors cannot match. Wal-Mart is a retailer of consumer goods. Its ultimate strategy is to offer products at low prices thus becoming a common primary area of interest among various business experts in terms of costs. This low pricing strategy is the core competitive strategy for the retail store. However, besides this, its purchasing and supply-chain management have great contribution too; the actual business world William (2007). The firm has been able to maintain its reputation in the retailing industry by relying on its purchasing and supply-chain management. From these activities, the firm has been able to accomplish great volumes, continued growth, and eventually lower cost for its products. The firm has also been able to establish efficient and advanced inventory management systems, and less costly promotion and advertising efforts. So, concerning this, it is vital to examine the prevailing concepts and models of the purchasing and supply-chain management of Wal-Mart to find out if they reflect the retailer’s current position. This includes: B2B Single network Business Model operated under SAM’S CLUB and aims at supporting small business and creating a network of loyal partners who can coordinate distribution channels and provide exceptional brand name merchandise value at the “Members Only” terms. B2C E-Tailor Business Model– This models involve “clicks and bricks” methodologies providing millions of Wal-Mart customer an online version where they can shop 24/7. Operations at Wal-Mart The operations of the retail chain store consist of three business branches: Wal-Mart International SAM’S CLUB Wal-Mart Store Fig. 1 Wal-Mart Business branches Wal-Mart International Wal-Mart International supply chain management are situated in Canada, Germany, Argentina, United Kingdom, South Korea and Puerto Rico, joint venture businesses in China & majority owned subsidiaries in Mexico and Brazil. This branch of Wal-Mart generated about 19.7% of revenue in the year 2005 through its operations in restaurants and stores, which include Discount Stores, Super-centers, and SAM’S CLUBs. To give an overview of the retail chain stores other operations: The SAM’S CLUB branch, consisting of warehouse clubs for member covering about 128,000 square feet generated about 13.0% of profits in the year 2005 to the retail store. The Wal-Mart Stores which is the largest branch, located in the America, generated about 67.7% of the 2005 fiscal sales through its three retail formats including Discount Stores, SAM’S CLUB and Super-centers. Therefore, having established the nature and flow of work activities at Wal-Mart, we now focus our attention to the main topic of evaluation to determine the things that Wal-Mart is doing in its industry primarily concerning its purchasing and supply-chain management activities. What Wal-Mart is doing? Wal-Mart’s ultimate goal is to achieve competitive advantage in the retail chain industry, Wal-Mart has developed competitive strategies and the right business models that can enable it achieve its long-term competitive advantage enabling it obtain large discounts from suppliers (Haig, 2011). One common point drawing a staggering concern among different business experts is how operation activities especially, supply-chain management and purchasing are organised and coordinated at Wal-Mart. Looking at this, it is imperative to consider the actual approach Wal-Mart’s employs to manage its SCM and purchasing activities and obtain large discounts after optimising its fixed costs. Purchasing As a leading retail chain store, Wal-Mart is able to generate big discounts from its suppliers Haig (2011). This means having a big discount will benefit the customers because it can lead to low prices of the final products. This is one remarkable secret of Wal-Mart in the retailing industry making it a scale brand. Its scale that is getting even bigger allows it to sustain its competitive advantage in the modern retailing industry. There is an essence of sustainability in this action, because suppliers are gaining too when a large volume is ordered. Nevertheless, large volumes of production will always ensure that fixed costs are optimised; implying that` manufacturing firms will generate substantial gains even if they will have to offer their products at a certain discount Garrison and Noreen (2000), Costa and Addison (2001), Brigham (1992). Aside from these considerations of costs, Wal-Mart is also active in collaborative planning and coordination with its suppliers Hays (2003). Being a dominant retailer in the world, Wal-Mart has reached out to its suppliers and influenced them to measure the environmental impact of their products offerings Sullivan (2010). From this perspective, Wal-Mart has also reached suppliers of national brands and private label products to inform them on the importance of reducing sodium, added sugar, and Tran’s fats that are contained in some of its 165 products that it carries for sale Strom (2012). However, from this focus regarding its products, Wal-Mart also uses category management and SCM collaboration approaches, which include information sharing Krafft and Mantrala (2009). One of the most important observations experts trying to evaluate and determine is how Wal-Mart is able to attract a large pool of shoppers because of its inexpensive products some of which are imported but the retail store manages offering low prices to customers again (Hays, 2003). Wal-Mart uses supply chain management as a strategy to reduce its cost of goods and services to improve its relationship with suppliers Bacon and Pugh (2004). To evaluate this point, it is important to consider various factors regarding Wal-Mart’s operations, which are fundamental for differentiation Schnaars (1998) Porter (1998). Business model Wal-Mart over the years has been enlightening and transforming its business models to align them to its organisational goals and objectives. Due to successful implantation of its business models, Wal-Mart has always managed to meet its customer demands and stay at the top all year round Garrison and Noreen (2000) Costa and Addison (2001), Brigham (1992). The B2B Single network Business Model- This is operated under SAM’S CLUB and aims at supporting small business and creating a network of loyal partners who can coordinate distribution channels and provide exceptional brand name merchandise value at the “Members Only” terms. B2C E-Tailor Business Model– This models involve “clicks and bricks” methodologies providing millions of Wal-Mart customer an online version where they can shop 24/7. Both of these models enable Wal-Mart achieve its business perspectives of helping manage its customers, goods, and services and attaining of organizational goals and objectives. To be able to evaluate these models, other various factors that define, shape, and support this mixed business model need to be observed. Wal-Mart Market Strategy The retail chain store uses the strategy of Everyday Low prices. This concept entails low pricing of items with aim of maintaining and building customers’ loyalty and trust in the pricing of good and services. Because the chain store uses, “bricks and mortar and the “clicks and bricks” techniques in marketing their products, clients get the opportunity to choose a variety of products either online or in the traditional way at any time of the day Kotler et al. (1999), Boone and Kurtz (2006). However, the retail chain store does not engage in aggressive advertising like many of its rivalry business, they have gained customer loyalty and trust, which cannot be eroded easily. Organisational Development Wal-Mart restructured its business operations into two parts to deal with specific organisational needs. Specialty Division This deal with: Tire and Lube Express; Wal-Mart Vacations; Wal-Mart Optical; Wal-Marts Auctions for Used Fixture; Wal-Mart Pharmacy, and the Alaska Bush Shopper of Wal-Mart Barboza (2007). Retail Division This deal with: Wal-Mart Stores; Neighborhood Market; SAMS CLUBS; Super centers. Supply Chain Management (SCM) at Wal-Mart. What the concepts and models are saying? Purchasing is an integral component especially among retailing firms that are trying to establish their operations in a sustainable way in order to achieve their corporate goals and create a sustainable market share in the end. Purchasing is crucial component for both the manufacturing and retail firms in the management of flow of inventory for business operations, survival, and growth of the firm. Retailing firms, constantly try to find potential suppliers for their goods. Therefore, if the demand for products will exist in the market, then retailers’ products will flow to consumers as depicted below hence bridging the gap between customers and manufacturers Van Assen et al. (2010), Dunne (2013). Illustration showing purchasing is the bridge Van Assen et al. (2010), Dunne (2013) Based on the above illustration, it is evident that purchasing plays a very important function in business operations Reck and Long model (1997). In this evolution, purchasing function has a certain degree of characteristics making it the backbone of business operations. The ultimate peak of this evolution is when a firm and its purchasing function focus on best the product management methods. This methodology combines management relationships, processes, and outcomes, in evolutionary paths. Most businesses are shifting from product centered’ approach of purchase towards the level of implementing ‘performance centered’ depending on the prevailing needs or target corporate goals Fig. 2: The evolution of purchasing: The Reck and Long model Cousins et al. (2006), Koo (1996) Supply chain management is an activity within an existing firm that deals with the effective and efficient flow of inventory, information and cash in a bid to control the total cost of ownership and maintain it lower Bacon (2004), Krafft and Mantrala (2009). Firstly, we are going to look at the entire SCM from a broad perspective. Based on Figure 3 below, the bottom most part of the supply chain is concerned with materials management; then logistics as the bridge, and lastly, the surface level, which is concerned with purchasing, and supply management and physical distribution management. From the figure it is evident that purchasing is an integral component of the supply-chain management. Figure 3: The entire supply chain management Geunes et al. (2006) Agrawal and Smith (2009) Overbeck (2009) According to Porter, the value-chain model comprises two important activities - primary and support activities. The primary activities include all those activities responsible for addressing the prevailing or existing customers’ demands. These activities include operations, logistics, marketing and sales, and services. Logistics being one of the SCM activities, SCM can be regarded as a primary activity in the value chain if Porter’s model is anything to go by. This can be illustrated in the models as shown in figure 4 below to indicate the significant relationship between purchasing and supply chain management. Fig. 4: Porter’s value chain model, 1985 Porter (1998), Bischoff (2013) Rakowski et al. (2010) Evaluation of Wal-Mart’s approach Supply chain management The supply chain management is an activity within an existing firm that deals with the effective and efficient coordination of flows of inventory, information and cash, to control the total cost of ownership and maintain it lower Bacon (2004; Krafft and Mantrala (2009). The SCM at Wal-Mart can be analyzed from three perspectives: Procurement and Distribution The process of procurement at Wal-Mart aims at cutting down purchasing costs to the maximum possible limits in order to enable it offer the best prices to its respected clients Rosenbloom (2009). Wal-Mart procures its products directly from manufacturers without involving any intermediaries. The chain store has its distribution centers located at different geographical places, which account for about 80% of its inventory supply ensuring a continuous and steady supply of inventories to the retail chain entity. Logistics Management Wal-Mart has the best responsive and fast transportation system consisting of over 7000 trucks that services its distribution centers. These trucks facilitate the shipping of products to stores from distribution centers two days and replenishing of store shelves two times week. Wal-Mart employs a logistic technique known as ‘Cross Docking’, which allows finished products to be picked up directly from manufacturing sites belonging to suppliers, then sorted out and supplied to the customers directly thus reducing storage and handling costs of finished goods. Either because the cross-docking system, the supply chain shifted to demand chain where retailers ‘pulled’ the goods, where and when required rather when the retailer pushed goods or products into the system. Fig. 5: Apte & Viswanathan (2000). Cross-docking strategy has made Wal-Mart famous in the retail chain store industry. The retail chain delivers about 85% of its products through cross-docking methods. This technique has enabled the retail chain store gain economies of scale which in turn have enabled it reduce its cost of sales. Through this method, products are delivered to the retail chain’s stores where they are continuously sort, repackaged & finally distributed to its stores without being stored as inventory. Cross Docking has some has some advantages to Wal-Mart. These include reduced costs of labor through less handling of inventory at the store; educed holding because no storage times or safety stocks are kept by Wal-Mart; products reach distributors and customers fast; has streamlined the SCM of Wal-Mart and finally the method has enabled the retail chain get economies of scale. However, the method has also some challenges at Wal-Mart which include product damages resulting from additional freight. Inventory Management Fig. 6: Inventory management Apte, U. M., & Viswanathan, S. (2000). Due to rapid expansion of the retail chain store’s it was considered imperative to have good communication systems for monitoring inventory movement. Thus, because of this, the retail chain store set-up its business owned internal satellite communication in the year 1983, that allows management to monitor activities at different stores in real time. To minimise holding costs, the retail chain store ensures unproductive inventory is kept at low levels by allowing the different stores manage their inventories hence minimizing pack sizes across a number of categories and timely markdowns of prices. Competitive Advantage(s) Wal-Mart has been a leader in the retail chain store offering the lowest market prices to clients. It has all time given “price match guarantee”, challenging other retail chain stores to offer lower prices in return for a reimbursement of the difference in price if any is realised. No other store has managed to meet such and Wal-Mart has always leaded the pack for all years. This has earned Wal-Mart trust and loyalty from customers hence increasing its market share. Use of Technology at Wal-Mart The use of technology and information system at Wal-Mart is seen as one of the strategies that have streamlined operations making the retail store efficient especially in its SCM activities. Management of distribution centers has been efficient with the use of sophisticated information technology like handheld computer systems which enables all employees to access the required information on all inventory levels in real time. Employees make 2 scans for identification of location where stock has been picked up and another for identifying pallet. Bar codes help in labeling different products, bins, and shelves in the distribution centers. This helps to record and update the server on information pertaining to stock shipments. The handheld computers also enable supervisors to monitor employee movements. Wal-Mart employs logistic techniques known as ‘Cross Docking’, which allows finished products to be picked up directly from manufacturing areas or sites of manufacturer’s or suppliers, sorted out, and supplied to the customers directly reducing storage and handling costs of finished goods. Either because the cross-docking system, the supply chain shifted to demand chain where retailers ‘pulled’ the goods, where and when required rather when the retailer pushed the good or products into the network system. Wal-Mart makes use of IT infrastructure to ensure there is more inventory demanded by customers while at the same time reducing overall inventory. By using Handheld Bar-coding technologies, various processes such as receiving and proper inventory control, and efficient picking, packing and counting for products was ensured. Either Wal-Mart owns the most sophisticated and largest computer network system in the private sector. RFID in Wal-Mart The retail chain store, initiated its plan of using RFID technology in its SCM in June 2003. Subsequently, it strengthened its plans and actively began defining the standard for its RFID. It planned implementing Class 1 version 2, a worldwide acceptable protocol, which incorporates specifications of both Class1 and Class0. In addition, the retail chain store is planning enhancing mobility of its existing readers for RFID tags by implementing RFID-powered forklift. These readers are presumed to have ability to read the tags’ pallets while in transit and be able relay data through the RFID computer network, which would aid the users of the SCM be informed about the chain data. RFID implementation enhances transparency of the SCM hence helping Wal-Mart minimize cost and labor, which will enhance inventories control. According to Courtemanche & Carden (2011), “with the business selling in the year 2003 over $245 billion cost of goods, then a 1% could generate about $2.5 billion in out-of-stock improvement issue for every profitable sales.” In addition, a Cohen study at Wharton chalks pointed out the difference existing between inventories RFID managed inventory and an enabled SCM. He further argues that, “in the current Wal-Mart systems, you can know there are ten items on the shelf because the information is compiled stored in an EPS system with RFID; their lot number, age, & expiration date & warehouse origin.” RFID will help you know their details and names. Thus from the above it evident that, use of technology has shaped the SCM of Wal-Mart giving cost efficiencies. Limitations of RFID Technology problems: E.g. signal distortion, reader speed, and accuracy, and tag transmission poorly and defective performing RFID and damaged RFID tags among many others Wal-Mart’s Failures Germany, Japan, and Britain The Wal-Mart failed in Germany because the management wanted to implement the United States model to the Germany market. The Wal-Mart management pressured the executives in Germany to enforce management styles of American in the workplace. For instance, workers were forbidden dating colleagues in the organization’s influential positions or flirt with colleagues Huff Post Business (2014). Labor costs also became a hindrance coupled with and great employee resistance to management. According to William (2007), “Wal-Mart had to confront numerous issues in Japan, from longtime Seiyu managers resisting its initiatives to a tendency among Japanese shoppers to equate low prices with inferior products.” He goes on to say that, “bulk deals dont play well in a country where many live in small urban apartments, and the countrys grocery distribution system is populated with wholesalers who broker deals between suppliers and retailers, skimming profits.” Either Wal-Mart acquired Asda the umbrella upon which it is operating in Britain. However, the retail chain is facing harsh competition from Britains feverishly competitive industry of supermarkets. Conclusion In conclusion, it clearly shows that the presented activities, Wal-Mart are trying to employ in order to create there competitive advantage primarily using it’s purchasing and supply-chain management for this reason have proved effective. 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