Wal-Mart operational management system and strategy - Research Paper Example

?RUNNING HEAD: WAL-MART OPERATIONAL MANAGEMENT Wal-Mart Operational Management System and Strategy BY YOU YOUR SCHOOL INFO HERE HERE Wal-Mart Operational Management System and Strategy Introduction Wal-Mart is currently the highest revenue-earning retailer in the world. Even though the company operates in a highly competitive environment, Wal-Mart has managed to outperform competition with its dynamic supply chain methodology which continues to give the business considerable leveraging power over its vendors. The Wal-Mart supply chain is only part of the operational strategy that continues to drive profit and sales success, finding growth in its marketing prowess and the ability to undercut competition with lower pricing. Its everyday low pricing model, which continues to pique the interest of multitudes of mass market buyers, is borne of its supply chain strategy and advertising appeal. While other competitors continue to find profit erosion due to global economic problems, Wal-Mart continues to earn its high market share. This is largely due to Wal-Mart’s presence in over 14 different countries, thus it is not reliant on sales solely in the United States. In the U.S., this is a period of significant declines in consumer spending, thus giving Wal-Mart an edge due to its global marketing strategies and international presence. Wal-Mart currently provides a one-stop shopping experience, offering a wide variety of different products, from produce and grocery items to fashion apparel and electronics. For the purpose of this case study analysis, the research will focus on fashion apparel. Wal-Mart’s decision to divest its Phat Farm and Sean John urban clothing lines was an effort to reduce its reliance on under-performing fashion lines that were not contributing to its profit expectations. Will this decision to sell Phat Farm and Sean Jean clothing lines erode its edge over competitors or will Wal-Mart still continue to be a fashion apparel sales leader? This report analyses how these decisions will impact its sales and operational strategies. Wal-Mart’s Operational Strategy Wal-Mart currently maintains 120 distributions centers that service its 7,000 international stores (Google, 2011). Wal-Mart’s investment in providing decentralized distribution networks provides the business with greater efficiency in terms of meeting delivery timelines and the ability to provide a more diverse assortment of domestic and international products. In terms of distribution, volume alone provides Wal-Mart with significant competitive advantage related to stock replenishment and strategic procurement opportunities. Wal-Mart’s main competitors, both domestic and international, include the discount retailers K-Mart, Target, Sears, Marks & Spencer, Macy’s and Zara. In the United States, Wal-Mart continues to outperform major competitors K-Mart and Sears due to its more efficient supply chain infrastructure. Sears’ is forced to put higher prices on its merchandise as Sears maintains higher overhead costs due to its centralized and rather limited distribution network. K-Mart is losing customer appeal due to its rather notorious neglect of the store sales environment and growing poor customer service (Vance, Sandra and Scott, 1994; Hayden, Lee, McMahon & Pereira, 2002). Wal-Mart, on the other hand, continues to devote considerable labor and financial investment into improving the aesthetics of its sales environments, backed by the significant capital and credit worthiness of this firm which rests on both domestic and foreign cash flow. Wal-Mart has also experienced significant efficiencies in its supply chain network by consolidating global procurement. In the 1990s, Wal-Mart maintained a variety of domestic and international procurement operations bases that contributed to high payroll investment. This decentralized global procurement system also limited its ability to create a streamlined procurement model while it focused on purchasing that was geographically-near its international customers. Today, however, Wal-Mart has reduced its dependency on decentralized purchasing and now maintains the majority of its procurement talent that is headquartered in Shenzen, China (Barton, 2007). Wal-Mart recently terminated 250 different international procurement roles, consolidating the buying function to China that now oversees the procurement of merchandise from 55 different countries out of 6,800 international factories (Barton). Offers a spokesperson for Wal-Mart, “We have taken inefficiencies out of the organization and are taking better advantage of technology” (Barton, 2007, p.12). Wal-Mart now relies on radio frequency identification software in its purchasing and distribution systems, providing even more competitive advantage and responsiveness associated with inventory control and meeting delivery timelines. Wal-Mart also invests heavily in television advertising in the United States, offering insights into current sales strategy, merchandise offerings, and its new price matching guarantee as a competitive strategy. Wal-Mart does not seek specific target markets due to the vastness of its merchandise selections and its low-cost apparel variety that is suitable for markets of all socio-economic backgrounds. The television advertisements, as part of operational strategy in marketing, reinforce the company’s values and its commitment to providing low-cost products to mass market consumers. Using terminology and imagery that is linked with American culture and corporate social responsibility, Wal-Mart continues to gain market attention and loyalty. In certain less-developed international regions, Wal-Mart gains customer interest due to limited competition related to offering unique one-stop shopping experiences, especially in markets where small business owners and street vendors provide products to foreign consumers. Wal-Mart’s investment in establishing operations overseas rapidly continues to provide the firm with its sales advantages and higher profitability. The business operates in China, Argentina, Brazil, Costa Rica, El Salvador, Guatemala, Japan, Mexico, Puerto Rico, the United Kingdom, India, Canada and Brazil (Wal-Mart, 2008). In addition, the Wal-Mart-owned Sam’s Club and Neighborhood Markets stores continue to contribute to both its supply chain efficiencies and higher profitability through sales revenues. Again, volume strategies and its concentrated international presence, using a variety of market entry strategies, gives Wal-Mart significant competitive edge operationally. Even though the costs associated with these overseas stores are significant, the sales revenues greatly offset these investments to ensure the business does not experience losses associated with operational strategy. Wal-Mart does, however, continue to waste resources associated with its current procurement model, but it taking steps to ensure that inefficiencies are removed from the supply chain. Wal-Mart relies heavily on sourcing intermediaries for its global purchasing model, with less than 20 percent of good purchased directly from international suppliers (SC Digest, 2010). Wal-Mart is working to remove many of these third party intermediaries, changing its decentralized purchasing strategy to gain more control over its efficiencies. Wal-Mart is also attempting to expand on its private label brands, thus centralizing sourcing is even more vital while its own store brands are still in the growth stage in the product life cycle. The removal of sourcing intermediaries will save the company, literally, billions of dollars annually (SC Digest). Divesting of Apparel Lines Recently, Wal-Mart decided to remove the Sean John and Phat Farm clothing lines from its supply chain in an effort to keep high-performing fashion brands and remove outperforming clothing lines that did not adequately contribute to its profitability expectations. Phat Farm caters to a niche market of consumers, from 18 to 24 years of age, typically those who are drawn to make purchases of hip-hop inspired clothing (Tompor, 2005). However, low-cost apparel manufacturers, including Phat Farm, have been hit hard by consumer spending reduction in the United States and have been forced to slash their inventories due to lessened consumer demand (Lattman, 2009). Except for Wal-Mart, many such low-cost retailers have reported 10 straight months of sales reductions, which represents the longest sales decline in history (Lattman). Wal-Mart understands the economic conditions of the markets in which it thrives, thus removing Phat Farm from its inventories should be considered a proactive strategy as well as one which is based on solid sales declines on the balance sheet. In fact, G-III, owner of the Sean John clothing brand, had reported a financial loss of 30 to 35 cents per share, which was an increase from only three cents per share the year prior (Young, 2006). This, again, illustrates the significant financial losses being felt by low-cost fashion apparel manufacturers in the United States during a period of recession, reduced consumer confidence, and overall reduction of household discretionary incomes. The Sean John line is also targeted at the 18 to 24 year old consumer. However, this particular brand is considered “young, hip and aspirational” (Lockwood, 2011, p.1). According to a representative from G-III, this line is “no longer an urban collection, but is targeted to everybody” (Lockwood, p.1). In 2011, an agreement was forged with Macy’s to carry the Sean John men’s line exclusively while Wal-Mart and other retailers continued to provide only women’s wear. Wal-Mart seems to have realized that this exclusivity agreement with men’s lines would limit its ability to gain market attention by carrying Sean John, thus making the decision to divest this fashion line from its purchasing methodology. The ongoing financial struggles with Phat Farm and Sean John clothing lines (one was recently acquired by a larger apparel company) posed too much risk for Wal-Mart both in sales potential and in guaranteeing adequate stock levels due to the slashed inventory volumes associated with reduced consumer spending. How will Divesting Impact Wal-Mart? There are potential problems associated with divesting Sean John and Phat Farm lines, as well as potential advantages. First, research identifies that Wal-Mart already maintains a steadily shrinking reputation in the fashion consumer markets due to its limited investment in providing high levels of customer service associated with apparel merchandise. A recent study from the University of Michigan found reduced consumer satisfaction with customer service provision at the firm (Gogoi, 2007). A further investigation discovered that the apparel purchasing process at Wal-Mart was hindered by inefficient and limited support staff and locked fitting room doors with no access to support personnel (Gogoi). According to one analyst from Business Week, “Successful retailing is 10% a great idea and 90% execution. In the case of Wal-Mart, it looks like 90% was spent on strategy and thinking and 10% on execution” (Gogoi, 2007, p.1). Thus, as it is associated with fashion merchandise purchasing, Wal-Mart does not seem to have a positive market reputation for fashion purchasing due to the infrastructure limitations that reside in-store. With this sentiment applied broadly to the entire fashion offerings at Wal-Mart, it is unlikely that divestiture of a single clothing line will have significant impact. Wal-Mart also maintains limited in-store shelf space for its apparel merchandise, part of the strategy to devote more space to home goods, grocery products, and health and beauty products that provide significant profitability. Therefore, Wal-Mart is very limited on the volume of fashion products it can offer and inventory in all of its stores. Because of this, Wal-Mart must be selective on the types of fashion merchandise that it purchases and distributes, ensuring that each line will provide maximum profitability. The new exclusivity agreement with Macy’s of the Sean John men’s line will limit any legitimate competitive edge it might achieve with women’s wear in the same brand, especially when Macy’s devotes public relations or advertising materials to mass market consumers to expose this new sales agreement. Wal-Mart will want its fashion merchandise to achieve competitive advantages and by sharing this brand name with a major competitor, it would lose opportunities to exploit this particular fashion line and link it with Wal-Mart’s own brand and reputation. Thus, divesting this line was a quality decision by executive leadership as it would not, over the long-term, provide significant marketing benefit to the business. Furthermore, Wal-Mart maintains many different licensing agreements as well as the executive talent required to contract new agreements with established and up-and-coming fashion designers. A new line of products, Russell Simmons American Classic line, is another urban-inspired fashion manufacturer that has experienced higher sales gains due to the aesthetic nature of the clothing and its low-price. The majority of these new products for Wal-Mart are priced between $9.99 and $29, which include sports shoes, jeans, sweater vests and other woven shirts (Hip Rock Magazine, 2011). The American Classic line maintains the ability to appeal to a much larger middle class market, not just the 18 to 24 year old consumer that was typical of Phat Farm’s appeal. The pricing is also in-line with Wal-Mart’s low price guarantees and its everyday low pricing model, thus providing consumers with economic value and aesthetics. The point of introducing the new Russell Simmons line is to reinforce that Wal-Mart maintains significant ability to contract new clothing agreements to quickly replace divested merchandise lines. Not only does the high volume of distribution centers provide ease of timely delivery in the event of higher demand other than what is necessarily forecasted, Wal-Mart does not have to rely on the brand reputation of manufacturers such as G-III or Phat Farm as the business maintains significant leveraging power in the supply market. Up-and-coming fashion designers, unlike P Diddy who developed Phat Farm merchandise, would view Wal-Mart as an excellent launching point for brand establishment and recognition, thus representing a win-win scenario for Wal-Mart’s profit model and for the clothing manufacturer. With low cost advertising, Wal-Mart can essentially establish consumer following with any variety of merchandise that will satisfy the middle-class market and appeal to their price point limitations. Further, Wal-Mart has recently entered India and South Africa, two countries in which there is very high demand for one-stop shopping merchandise and where discount retail is most likely to gain a high consumer following (Bustillo, 2011; Bowers, 2007). According to research, Wal-Mart currently imports $600 million worth of goods every year from India (Bowers), thus the business already maintains a foothold for procurement and sales for consumers that are interested in purchasing Western apparel brands. Any losses stemming from Phat Farm and Sean John will likely be absorbed quickly by fashion sales in India, South Africa and other countries as well as the United States. Wal-Mart also maintains risks associated with the celebrity reputation of clothing manufacturers such as P Diddy in the event that their lifestyle or social status is tarnished. Independently, fashion producers that are also celebrities work to establish a linkage between fashion brands and their own celebrity reputations. Wal-Mart could, in the long-term, experience its own reputation damage in the event of celebrity dysfunction or any other type of negative press, which would link these fashion brands to their own well-established brand name. For issues of solely risk management in the operational model, Wal-Mart made an excellent decision to remove these fashion lines and replace them quickly with similar, affordable, and less-risky fashion lines such as the American Classic line. Even though Wal-Mart clearly needs to invest more labor and capital into improving its fashion purchasing system for better customer service, divesting of Sean John and Phat Farm clothing lines represented the best strategy for the business. Wal-Mart is used to exerting its market control on suppliers and demanding that many vendors comply with the business’ forecasts for delivery, labeling and other requirements. The constant uncertainty with both G-III and Phat Farm served the ability, over the long-term, to remove some of this leveraging power from Wal-Mart in the supply market. In this particular industry, there are many different opportunities for replenishment of immediate substitutes that can better serve Wal-Mart with reliability and timely delivery as well as guarantees of adequate stock levels. Phat Farm and Sean John could offer no such guarantees when sales revenues were depleting shareholders and there were constant concerns with bankruptcy and acquisition occurring. Further, middle-class consumers between the ages of 18 and 24 do not have very high discretionary income and are limited by their current career positions as well as the economic recession both domestic and international. This is not an ideal market, by design, for extensive profitability, especially in an environment that continues to tout a low-pricing fashion price structure. Wal-Mart, as part of operational strategy and long-term strategic focus, will want to carry fashion brands that maintain the ability to build long-run brand equity for the firm, something that neither Phat Farm or Sean John could currently provide. Wal-Mart has found the majority of its sales successes through its ability to appeal to mass market consumers and the business does not, long-term, benefit from niche apparel with a particular lifestyle theme. This type of strategy is better suited to organizations that maintain less product variety, more fashion merchandise shelf space, and are attempting to build its own private label brands for equity fulfillment. Wal-Mart is not, at all, reliant on other brand quality and reputation to ensure its longevity in the marketplace, thus when underperforming fashion brands are not achieving sales results, they should be immediately replaced as in the case of Phat Farm and Sean John. Wal-Mart achieves high enough profitability from its own Exsto brand that is directly linked with Wal-Mart reputation and capacity for durable and low-price merchandise with mass market appeal. Wal-Mart will, over time, require repositioning of the business with changing consumer values on pricing or quality, as part of marketing in the operational strategy. It is unlikely that the everyday low pricing model will always be the cornerstone of Wal-Mart’s market position both domestic and international. Thus, Wal-Mart requires fashion products and accessories that can thrive amidst a branding repositioning, one that might not necessarily focus on pricing alone. By selecting a more generic clothing manufacturer such as American Classic, this and other fashion brands can remain a quality addition to the product selection even if the business changes its market position to quality focus, selection variety, or other market oriented perceptions in the mass market sales environment. Wal-Mart needs not only low-priced garments, but those that maintain durability and functional appeal, rather than hip-hop inspired garments that are highly trend-conscious and affected by changing consumer preferences in the decision-making process. Conclusion Research uncovered significant advantages at Wal-Mart related to its current supply chain methodology, advertising and marketing focus, and in its corporate relationships with fashion manufacturers. Unfortunately, the limitations of being, proverbially, a little bit of everything, limits the ability of Wal-Mart to establish significant market position as a fashion apparel leader. As identified by the research, these limitations actually provided benefit for supporting the divesting of Sean John and Phat Farm for the sake of building long-term equity. Wal-Mart’s operational system, all things included, clearly outperform major competitors such as K-Mart, Target and Sears. Wal-Mart is one of the few retailers that really is not subject to territorial reductions in consumer spending, since many of its international locations offset any losses that occur in specific operating countries. Further, by selecting a growth strategy that includes a variety of different international investments and foreign market entry strategies, Wal-Mart continues to thrive based on volume and the cash and credit capital available for more facility development in distribution and actual in-store sales. There is absolutely no reliance on a particular vendor brand to support ongoing profitability, especially during a time when Wal-Mart is working out inefficiencies or over-spending in the procurement model to even worry about fashion apparel changes. It would actually seem that Wal-Mart would benefit from diversity in clothing by periodically changing out different fashion merchandise in order to cater to changing fashion trends in the consumer market, despite its catering to middle-class, pricing-conscious consumers. It should be said that Phat Farm and Sean John divestiture is of no concern to Wal-Mart. If the business did not maintain such superior operational systems, then fashion procurement and sales strategies would require additional focus. However, Wal-Mart is well-established as a pricing and quality leader in a variety of different merchandise categories, supported by a superior supply and distribution infrastructure as well as marketing that is successful in gaining consumer attention and loyalty. Wal-Mart is a benchmark for operational system capacity and efficiency. References Barton, Antony. (2007). Wal-Mart Cuts 250 Procurement Roles, Supply Management, 12(25), p.12. Bowers, Katherine. (2007). Wal-Mart Inks Deal for India Venture: Women’s Wear Daily, WWD 194(27), p.3. Bustillo, M. (2011). Wal-Mart Executive Aims to Accelerate Growth Overseas, Wall Street Journal, June 26. Gogoi, Pallavi. (2007). Wal-Mart: A Snap Inspection, Business Week, October 2. Retrieved December 1, 2011 from http://www.visibilitypr.com/Case_Studies_files/Case%20-%20Pao%20Principle%2007%20VisPR.pdf Google. (2011). Why Wal-Mart’s Supply Chain is So Successful. 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