Strategic Logistics Management - Essay Example

Strategic Logistics Management Table of contents Strategic Logistics Management i 1.0 Introduction Logistics refers to “the design, planning, control and handling of all flows of material, goods and information in line with market conditions to carry out customers’ orders” (Kannt, 2002, p. 5). It can therefore also be considered as part of the supply chain process that plans, executes and controls the efficient and effective storage of goods, services, and information from the point of origin to the point of consumption so as to meet the needs of customers. This means that organisations embrace logistics management as a strategically decisive task for attaining competitive advantage by means of logistical differentiations coupled with economic efficiency. Logistics also includes the integrated organisation of purchasing, distribution and storage on a functional basis; and on a channel basis, it encompasses the management of pre-production, in-production, and post production channels (Lummus, Krumwiede & Vokurka, 2001). The term logistics therefore implies more than mere physical distribution of goods or services, as the later usually implies only the post-production channel (Lummus, Krumwiede & Vokurka, 2001; Sople, 2007, p. 2). For large organizations such as GlaxoSmithKline, Carrefour, Walmart and Marks & Spencer, logistics holds a lot since their preproduction and postproduction operations are carried out in more than one country. How such companies organise their sourcing of supplies or raw materials to how they supply their items to consumers therefore matters a lot as it affects their reputation both at home and in overseas markets. 1.1 Identification of research paper for analysis This report discusses logistics management at Walmart and particularly focuses on the organisation’s operations in China. The paper content develops from an analysis of a research paper titled Walmart and Carrefour experiences in China: Resolving the structural paradox. While the research paper by Chuang et al (2011) makes a comparison of Walmart and Carrefour in China, this report will mainly focus on Walmart to highlight scope of how this giant retailer headquartered in the United States manages its business operations in China. Nevertheless, Carrefour is also highlighted because it is one of Walmart’s main competitors in China. 2.0 Current strategic position of Walmart in China According to Chuang et al (2011, p. 451), Walmart entered the Chinese in market in 1995 by partnering with a state-owned firm known as Shenzhen International Trust & Investment Co (SZITIC). The two organisations signed a “Joint Investment Contract” which resulted into the establishment of “Shenzhen Walmart Pearl River Co, Ltd,” and thereafter, Walmart launched its first store in Shenzhen in 1996 (Chuang et al, 2011, p. 451). The joint venture between Walmart and SZITIC was an important tool for marketing both companies, and was particularly important for Walmart since SZITIC was a well known company in China. Further, SZITIC is famous for developing premium commercial construction projects in the most commercially urbanised and richest cities in China. In the collaboration between the two organisations, when SZITIC puts up a new building, it includes a Walmart store, as this improves the visibility of the site. In addition, collaborating with the state-owned business enables Walmart to take advantage of the key sites that characterise a typical SZITIC project. With this agreement, Walmart signed lasting leases with SZITIC, and ostensibly gained an edge by learning to accommodate the guanxi culture of China that involves using social capital to develop business relationships. This arrangement was expected to allow Walmart to function efficiently with central, provincial and local government officials, but weaknesses of the partnership soon emerged. Walmart not able to develop social capital with local authorities and firms in other regions because all its financing operations were centralised in Shenzhen and were also affected by the operations of SZITIC. This resulted into a relatively slow expansion of Walmart’s operations in China (Chuang et al, 2011, p. 451). Despite the challenges identified in China, Walmart’s approach has always been to provide an array of reasonably priced products to consumers through its trade mark of “every-day-low-prices” (Soderquist, 2005, p. 96). The company has realised great success for decades, mostly in suburban and exurban areas in the smaller cities of the United States – areas that were characteristically limited in retail choices. Walmart’s most important business strategy has been not only to be cheap and reliable, but to offer a far wider variety of consumer products that had been available in the past. In recent times, and with some opposition, the company has ventured into large metropolitan markets. Its value position is eminent, it competes with others on price and quality benchmarks, and offers a wide array of products (Chuang et al, 2011, p. 451). 2.1 Analysis of strategic position It is notable that Walmart has capitalised on its fame in the United States to influence the China market. Thus, it can be said that the company has used the right business capabilities to nurture and the relevant investments to make, which have been supported by a shared understanding of the industry structure, the needs of the target customer segments, the positional advantages being sought and the trend in the business environment. According to De Wit and Meyer (2010, p. 290), these are some of the factors that help to determine a firm’s strategic position. Walmart’s strategic position can also be understood by analysing its resources. Firm resources include all assets, capabilities and organisational processes, firm attributes, information, knowledge and so forth, controlled by a firm that enable it to envisage and implement strategies that improve its effectiveness and efficiency. In short, firm resources are the strengths that a firm can use to conceive of and implement its strategies (De Wit & Meyer, 2010, p. 291; De Grahl, 2011, p. 18). In the case of Walmart, despite the not-so-good outcome of its joint venture with SZITIC, the company has continued to expand its operations in China. For instance, by 2006 the company had 66 stores in China and established another store in Jinjiang and it further planned to acquire a Taiwanese retailer at a cost of $1 billion (Wharton, 2006). This means that despite the challenges that were witnessed on entry into China, Walmart did not give up on its plan to venture in the new market - which can largely be attributed to its vast resources. Walmart has basically been able to defend its market both in China and in the United States applying a number of strategies as shown above, which can be likened to those proposed by Barca (2003, p. 33) in relation to Porter’s Five Forces. According to Barca (2003, p. 33) firms may position themselves to defend their positions against the market forces by positioning themselves to outperform their rivals through: i) a cost advantage; or ii) a differentiation advantage that somewhat protects them from the five forces. iii) Identifying a market niche in which the five forces are less severe The above points are also consistent with Porter’s value chain analysis. According to the Porter value chain (1985), there are two ways through which a firm can generate superior competitive performance: (1) by consistently being innovative than its rivals through differentiation; and (2) by offering customers with the same quality of product or service as rivals but at a low cost to itself (Botten, 2009, p. 90). Further, going by Fisher’s supply chain, efficient supply chains should be matched with functional products and responsive supply chains should be matched with innovative products (Lyons et al, 2012). With this model, price is a typical order winning criterion for a functional product and has been the mainstay of Walmart’s operations. Walmart has also expanded its market through the Ansoff growth matrix which involves using an existing market for an existing product; finding a new market for an existing product; using an existing market for a new product; and finding a new market for a new product (Partridge & Sinclair-Hunt, 2005, p. 135). Nevertheless, Porter’s value chain is more appropriate in this case because it focuses on cost advantage and price differentiation. Walmart has been able to achieve the points above by ensuring that it offers its products at very low prices and by interacting with suppliers to ensure that it gets the best deals from them to facilitate the low prices of its products. According to Kneer (2009, p. 3), consumers do not have to haggle with Walmart for low prices, higher quality or better services because the company has already inculcated these concerns in its business philosophy. In addition, Walmart has been able to deal with the second force in Porter’s Five Forces model: the bargaining power of suppliers (Kneer 2009, p. 3). Thus, even though suppliers have the ability to wield power by threatening to increase prices or lower the quality of purchased items, that is not the case for Walmart and its customers because Walmart handpicks its suppliers and has a good and long-lasting relationship in order to maintain its low pricing philosophy that customers are accustomed to (Kneer, 2009, p. 3; Deist, Marks & Emerson, 2009, p. 52). While this strategy enables Walmart to make still make profits and retain a significant customer base, it can be criticised for its discriminatory and exploitative approach towards suppliers. Another of Walmart’s key strategies is its market penetration approach. As it has already been discussed, Walmart’s market penetration strategy was to venture in small cities in the United States where there was high demand for its products and fewer competitors. The company has applied a similar strategy in China by venturing in cities that have fewer competitors. 3.0 Walmarts’s key strategic approaches to logistics management 3.1 Centralised logistics management According to Chuang et al (2011, p. 454), Walmart applies the same centralised procurement idea in China as it does in the United States. This idea is supported by Davies (2011, p. 98) who argues that Walmart “is a highly structured, bureaucratic, rule-driven organisation and while managers have power within an individual store’s hierarchy, they are relatively powerless to influence the systems set in place by the global corporation to manage its empire of more than seventy-two hundred stores.” The corporate system of the chain store circumscribes store managers’ authority to adjust product lines, set prices, allocate and arrange shelf space, modify advertising, or change visible aspects of the corporate brand. This means that store supervisors are only left with the role of managing people behaviour and maintaining the physical space stores as their key control areas (Davies, 2011, p. 98). After setting up a Walmart Global Procurement Centre (WMGP) in Shenzhen in 2002, Walmart’s purchase orders for all items made in China were moved from the United States headquarters to the WMGP. The Centre sources and bargains for new merchandise and sets prices with manufacturers (Chuang et al., 2011, p. 454). Chuang et al (2011, p. 454) further argue that centralisation has been very successful and Walmart’s international purchasing strength is unrivalled. For instance, even before expanding to China, Walmart always emphasised the desire to lower its purchasing costs and offer the finest price to its customers. The company obtained items directly from manufacturers, circumventing all intermediaries (Chandran, 2003, p. 4; Lamb, 2011, p. 341; Waters, 2010, p. 152). The company is also known to be a strong negotiator on prices and concluded a purchase agreement only when it was totally satisfied that the items being purchased were not obtainable somewhere else at a lower price. As Claude Harris, one Walmart’s first employees noted, “Every customer has to be tough” (Chandran, 2003, p. 4). Other employees were always informed that they were negotiating for Walmart’s customers, and that customers deserved the best prices that Walmart could get (Chandran, 2003, p. 4). 3.2 Merits and demerits of centralised logistics management The centralised strategy of logistics management as adopted by Walmart has both advantages and demerits. The obvious advantages as already stated above include cost savings in the supply chain. A Global Logistics Management report presented to the Secretary of Defence of the United States indicated that Walmart’s logistics management strategy resulted in a 10 percent cost reduction on procurement and an additional 5 percent out of the supply chain every year (Defence Business Board, 2007). But according to Davies and Seeman (2011, p. 132-133), while Walmart has been successful because of the highly centralised nature of its procurement, shipping and distribution logistics and the standardised experience of each store, applying the same strategy of logistics in China was a compromise the consistency of the store experience. In the same scope, Chuang et al (2011, p. 454), argue that economics researchers have termed Walmart an oligopsonistic vendor. The researchers note that oligopsony, that is oligopoly of the demand side, has adverse effects on the bargaining capability of manufacturers as well as food suppliers. Furthermore, the centralised purchasing system of Walmart allows the company inadequate flexibility to adjust swiftly to changes in the variable Chinese market (Chuang et al, 2011, p. 454). 3.3 Decentralised logistics management To counter the challenges in the market in china, Walmart has begun to change its procurement system by creating five local purchasing centres. Two of these centres focus exclusively on the on domestic purchases, and report directly to the headquarters in Shenzhen; one is located in the north while the other is in the south. Additionally, all product selections, display, promotions and price negotiation activities in China are managed by the purchasing centres. Further, every provincial capital has a procurement centre (Chuang et al, 2011, p. 454). The new Walmart procurement structure is shown in figure 1. Figure 1: Organisation of Walmart’s procurement in China Source: Chuang et al (2011, p. 455) 3.4 How Walmart can benefit from decentralised procurement in China Since decentralised purchasing seems to be the most preferred procurement strategy for the Chinese market, Walmart should consider engaging in it more seriously because this strategy allows better understanding of user’s needs as well as product specifications. Decentralised procurement also enables easier communication and coordination and facilitates shortest sourcing lead-time (Li, 2007, p. 67; Gopalakrishnan, 2001, p. 17). This is particularly true given the nature of the market in China where some of Walmart’s outlets are located over 1000 miles away from their nearby distribution centre. Moreover, China’s highway system is still underdeveloped (as opposed to the reputable interstate network of well maintain roads in the United States) and this makes the one-day centralised distribution strategy that is practised in the United States unfeasible in China (Chuang et al, 2011, p. 455). However, the company should be careful not to lose the quantity of discount and whole truckload freight it normally enjoys in its operations in the United States as this is one of the shortcomings of decentralised sourcing (Li, 2007, p. 67; Day, 2002, p. 17; Gadde & Håkansson, 1993, p. 124). 3.5 Walmart’s collaboration and push-pull strategies It is evident that Walmart’s growth strategy in China was premised on collaboration with renowned Chinese firms as happened with SZITIC. This was also the case when it outbid Carrefour in the acquisition of Trust-Mart, at $1 billion, to have access to a chain of 100 hypermarkets that sell wide range of merchandise (Chen, 2006). Through collaboration, Walmart has engaged in strategic alliances with many Chinese firms including suppliers. For instance, the company offers manufacturers with whom it does business daily sales data from each of its stores so that they can replenish inventory stocks in time (Tsai, 2003, p. 150). This system, referred to as automated inventory tracking system (AITS) is a pull strategy in that Walmart relies on customer orders to move products through the logistics systems. The company also applies a “push” in order to replenish inventory in anticipation of demand to move more products (Coyle et al, 2008, p. 346). Alliances with established firms have also enabled Walmart to penetrate the Chinese market by operating side by side with firms such as SZITIC. According to Tsai (2003, p. 150), strategic alliances and collaborative partnerships with foreign companies help to provide a primary means for a firm to penetrate global markets or to strengthen a firm’s competitiveness in world markets. Such alliances enable firms to share both risks and the resources required to enter global markets and are helpful in putting together the resources as well as capabilities to do business in several different markets. The strategy adopted by Walmart is also used by many other firms entering the Chinese market. As Tsai (2003, p. 150) notes, to enter the fast-growing Chinese market, foreign companies are pursuing strategic partnership arrangements with Chinese companies to help in dealing with government laws, to supply knowledge of local markets, to offer guidance on product designs to better match the preferences of Chinese consumers, to establish local manufacturing capabilities, and to help in distribution, marketing and promotional activities. In line with this, Walmart’s collaboration strategy also enabled it to adapt to the guanxi culture of China. Tsai (2003, p.150) further notes that strategic alliances can facilitate the growth of new core competencies that can contribute to the firms’ strategic competitiveness. But such alliances also have disadvantages in that in the long-term the foreign company (in this case Walmart) is hollowed out, leaving it with no competitive edge in the global marketplace (Hill & Jones, 2009, p. 275). For instance, it can be expected that in a matter of year to come, many local Chinese retailers will have understood Walmart’s structure and seek means to many perk up their rivalry. Other foreign retailers will also venture into the Chinese market and hence leave Walmart hollow with respect to coming up with new ideas that increase its competitiveness. 4.0 Management issues caused by implementing decentralised and low priced sourcing in China with consideration for available capital, technical and human resources Walmart faces a number of issues as it struggles to purchase merchandise locally in China at very low prices to maintain its low pricing strategy. A number of these problems relate to relationship with suppliers and available capital while others relate to Walmart’s low pricing strategy, which was not embraced by some players in the Chinese market. 4.1 Problems with suppliers Walmart does not seem to have problems with capital to invest in China (as by 2001 it was planning to increase its annual purchase in China by 25 percent or even more [China Internet Information Centre, 2001]), but most of its problems are related to how it interacts with suppliers. As noted earlier, low prices are critical to Walmart’s marketing strategy. In turn, Walmart puts pressure on its suppliers to seek all potential ways to lower costs (Chuang et al, 2011, p. 457). But doing so has led to dwindling relations with most of the better quality manufacturers. According to Chuang et al (2011, p. 457), some plants are beginning to demand higher prices or to give the low priced order contracts to manufacturers of lower repute, leading to a decline in worker safety and accountability. In fact, China’s biggest hosiery manufacturer, Yiwu’s Langsha Group declared in 2007 that it would not take low priced orders from Walmart any more (Chuang et al, 2011, p. 457; Wal-Mart Watch, not dated, p. 3). In equal measure, many other firms have complained that it is always difficult to make money from Walmart orders (Wal-Mart Watch, not dated, p. 3; Hong, 2011, p. 41; Bergdahl, 2004, p. 108). Further Shaun Rein, managing director of China Market Research, noted that if a company’s strategy is “cheaper than Chinese companies” (like Walmart) it cannot win the market (Lee & Kwok, 2011). 4.2 Human resource issues Walmart has encountered human resource issues with its suppliers as workers in the supplier companies have to work for long hours to meet the low price target. Even at Walmarts’s own Chinese distribution centre, workers have been illegally denied overtime pay (Wal-Mart Watch, not dated, p. 3; Hitt, Ireland & Hoskisson, 2008, p. 373). Moreover, Walmart has been accused of failing to provide health insurance for more than 60 percent of its employees (Ferrell & Ferrell 2012, p. 331), a good portion of whom should be in China. The aforementioned challenges imply that Walmart has not been able to gain the strong competitive advantage it has in the United States. Its revenues are still low vis-à-vis its major rivals, including Carrefour. But Walmart asserts that it treats vendors as its partners and this has made some suppliers to start acknowledging the supply chain management knowledge and activities that Walmart shares with them (Chuang et al, 2011, p. 457). 4.3 Technology issues Walmart has been striving to increase its local procurement and establish a good relationship with suppliers by having a modernised distribution channel and computerised system to improve efficiency and reduce cost (Johnsen, 2008, p. 5). But again, the technology capacity in China is still low compared to the level in the United States. The overall implications of the issues above is that the Walmart may fail to deliver what its customers want in case unsatisfied suppliers terminate their contracts with the firm; it may face legal battles from unsatisfied workers working for it and supplier companies; and it may have to invest more heavily in new technologies if it has to match its operations in China with those in the United States. 5.0 Strategic significance of new technology developments and business trends on future logistic strategies for Walmart in China The information technology situation in China is still at an embryonic stage and this has significant implications for Walmart’s logistics. From the beginning, Walmart has tried to train and instruct Chinese suppliers to adopt “Retail Link,” which is the system that effectively manages replenishment of inventory in the United States (Chuang et al, 2011, p. 458). However, at the start most suppliers were reluctant to install the electronic data interchange system due to high cost (Chuang et al, 2011, p. 458). However, Chuang et al note that over time, Walmart’s efforts have turned out to be much more effective in that all suppliers in China are now either partially or fully incorporated with the company’s Retail Link to fulfil orders. Another obstacle is the streamlining of the distribution and logistics between distribution centres and suppliers, and then from the distribution centres to the outlets. Further, Walmart’s sophisticated information technology system can only be wholly exploited if the Chinese Government goes on to productively invest in transportation and information technology infrastructure (Chuang et al, 2011, p. 458). The trends highlighted above therefore imply that Walmart should invest more in the field of information technology and transportation to counter the infrastructural limitations in China if it has to attain efficiency similar to what has been achieved in the United States. 5.1 Scope for new logistics capabilities Walmart can improve its technology at its own level but this also needs to be supported by government intervention in areas such as the road network. If both information technology and transportation areas are improved, Walmart would more easily realise its dream of selling products at the lowest price. Luger (2008, p. 40) gives an example of how his could happen: if total costs of logistics are 30 to 40 percent of wholesale prices in the Chinese market, and if as a result of competence improvements, those costs decline by 35 percent, then the portion of logistics costs in wholesale prices would drop by between 10 and 14 percentage points to 20-26 percent of wholesale prices. Such a scenario would significantly promote Walmart’s strategy of offering low prices and enable it to reach other areas of China, which would be ideal market for penetration. Walmart was quite successful in its collaboration strategy with SZITIC. In addition, to this, it has been encouraging its workers to perform better by offering opportunities for workers in China to train in the United States. However, the company has faced difficulties in applying the Just in Time Technology in China. This means that efficiency in the distribution of goods and offering of low prices may not be at the best. Additionally, the company has been unable to apply an aggressive expansion strategy as it was able to open only 77 stores in 11 years (Chen, 2007, p. 6). In future therefore, Walmart will have to invest more in its capacities such as Just in Time Technology to ensure success. 6.0 Conclusion Walmart’s venture in China has seen it collaborate with renowned Chinese firms to position is strategically in the market. Its vast resources have enabled it to spread a cross China and offer its merchandise to consumers at low prices. However, the strategy to offer low prices in China has met resistance due to logistics differences between China and the United States. Walmart realised that the centralised systems of logistics management applied in the United States could not be applied in China due to poor road infrastructure and inadequate information technology capacity. The company also faces human resource issues with suppliers and in its own stores since workers are either overworked or do not enjoy job benefits. Walmart can benefit from its strategy if the key areas of logistics highlighted are improved to increase efficiency, which will lower costs and enable it to penetrate inner areas of China where competition is still low. Walmart’s position in China can be analysed using the Porter’s value chain, Fisher’s supply chain, and the Ansoff growth matrix. Fisher’s supply chain is depicted as the company is able to liaise with suppliers to provide innovative products that match the needs of consumers in China still as a low price. For the Ansoff growth matrix, Walmart has been able adapt to the Chinese market by liaising with other firms to ensure that it offers the products that consumers want. But the most pronounced model is Porter’s value chain which has seen the company focus on cost advantage and price differentiation by ensuring that suppliers provide merchandise at very low prices, which it passes to consumers to its advantage. Walmart supply chain in China is enhanced by collaboration and push-pull strategies. Through collaboration, the company has been able to understand the particular needs of consumers in China and thus provide the relevant products. The strategy has also enabled Walmart to understand government regulations through established Chinese companies. The pull-pull strategy is particularly important in inventory management and helps to ensure that stock replenished in time to meet the needs of Chinese consumers. References Barca, M 2003, Economic Foundations of Strategic Management, Ashgate Publishing, Ltd., London. Bergdahl, M 2004, What I learned from Sam Walton: How to compete and thrive in a Wal-Mart world, John Wiley and Sons, New York. Botten, N 2009, CIMA Official Learning System Enterprise Strategy, 6th edn, Elsevier, New York. 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