Process and Location Strategy: Wal-Mart - Research Paper Example

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In the essay “Process and Location Strategy: Wal-Mart” the author examines the understanding of supply chain management at Wal-Mart providing valuable insights into the flawless process strategy that the company follows. Impeccable logistics form the backbone Wal-Mart’s success…
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Process and Location Strategy: Wal-Mart
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Process and Location Strategy: Wal-Mart Wal-Mart has, since its inception in 1962, grown by leaps and bounds to become the worlds largest retail company today. According to Walmartstores (2011), the Bentonville, Arkansas based company has been ranked among the top ten retailers in Fortune Magazine’s 2010 Most Admired Companies survey.
Managing 9700 retail units spread across 28 countries is no mean job. Catering to customers more than 200 million times per week definitely takes some doing. Wal-Mart has been able to handle such large volumes with the help of a sound location and process strategy.
In line with its mission statement; ‘Save people money so they can live better’, the retailing behemoth follows a low-cost, high volume strategy. The company derives its competitive cost advantage from infallible processes, appropriate location of stores, inside-out growth patterns, cross-docking and superior information management.
Process Strategy
The understanding of supply chain management at Wal-Mart provides valuable insights into the flawless process strategy that the company follows. The retailing behemoth recognizes the fact that to be able to give a low price to the consumer, the company has to buy cheap. It is for this reason that Wal-Mart bypasses intermediaries and purchases goods directly from the manufacturers and in the process cuts costs.
Impeccable logistics form the backbone Wal-Mart’s suceess. The retail chain has as many as 40 Regional Distribution Centers. Most of the times, the retailer’s own fleet of trucks carry goods to these regional distribution centers, which on average are 1 million square feet in size. These distributional centers are operational throughout the day and ensure that the stores they service are adequately stocked. Walmartstores (2011). All the stores that a distribution centre caters to are within a day’s drive of the distribution center.
More than five miles of conveyor belts move over 9,000 different lines of merchandise inside each distribution centre. Wal-Mart thus adopts mass customization as its process strategy which deals with high volume and high variety. The entire distribution network is backed up by an electronic linkage of sales and inventory information.
Saccomano (1998) avers that the company has also mastered the techniques of ‘in-store’ logistics. The retailer adopts a cross-docking operation inside the store. This enables the company move the SKU (stock-keeping unit) directly from the truck to the shelf of the shop floor. This, in turn helps the company save on cost of inventory and valuable store space.
Location Strategy
The distribution centers of Wal-Mart are so located that each caters to anywhere between 75 to 100 stores in a 250-mile radius. Walmartstores (2011). In terms of deciding the location of a new store, the company follows the principle of proximity. Fettig (2006) maintains that Wal-Mart economizes on transportation costs as it opens and operates stores that are close to each other. Wal-Mart never gives up on store density even if it means delaying the launch of a store in lucrative market.
The company, as a location strategy, builds out its store network to reach out to that ‘plum location’ even if it means sacrificing the first mover advantage in a particular market. This location strategy also enables Wal-Mart to easily transfer its experienced managers to new stores and spread the ‘Wal-Mart’ culture.
Thus both the location policy and the process policy of Wal-Mart is geared to save costs enabling the company to achieve an ‘Everyday low price.’
Fettig, D. (2006). Thomas J. holmes on wal-marts location strategy. Fedgazette, 18(2), 11-11-13. Retrieved from
Saccomano, A. (1998). The next frontier. Traffic World, 256(3), 9-9-10. Retrieved from (2011). About Us. Accessed September 15, 2011. Retrieved from
Fettig, D. (2006) Editors note: Thomas J. Holmes is a professor of economics at the University of Minnesota and a Research Department consultant at the Federal Reserve Bank of Minneapolis. He recently presented a paper titled "The Diffusion of Wal-Martand Economies of Density" at an applied microeconomics conference at the Minneapolis Fed. The paper follows from a body of his work over the years investigating corporate decision-making based on taxes, location, plant size, trade patterns and other factors. The following interview describes Wal-Marts locationstrategy and possible implications for the Ninth District.
fedgazette: Lets begin with a description of the economics of density. How should readers understand the term, especially in light of your work on Wal-Mart?
Holmes: Briefly, Wal-Marthas an incentive to keep its stores close to each other so it can economize on shipping. For example, to make this simple, just think about a delivery truck: If Wal-Martstores are relatively close together, one truck can make numerous shipments; however, if the stores are spread out, you wouldnt have that benefit. So, I think that the main thing Wal-Martis getting by having a dense network of stores is to facilitate the logistics of deliveries.
There are other benefits, too. Opening new stores near existing stores makes it easier to transfer experienced managers and other personnel to the new stores. The company routinely emphasizes the importance of instilling in its workers the "Wal-Martculture." It would be hard to do this from scratch, opening up a new store 500 miles from any existing stores.
fedgazette: This idea leads to another term at the core of your paper, "diffusion path," which I understand to be a description, in this case, of a stores locationchoices. Please describe Wal-Marts diffusion path.
Holmes: This is an important point. Wal-Martstarted with its first store near Bentonville, Ark., in 1962. The diffusion of store openings radiating out from this point was very gradual. And this diffusion didnt just occur in one direction, but spread out in all directions, with the same measured deliberation. Imagine a slowly blooming flower, or a pebble dropped in a pond, with the waves moving across the water in slow motion. It is very helpful to view a movie of the entire year-by-year diffusion path that is posted on die Web. [See conclusion for Web address.]
fedgazette: You observe in your paper that Wal-Martchooses lower-quality sites over more optimal ones. This seems counterintuitive: Why would Wal-Martengage in such a strategy?
Holmes: Lower-quality is a funny term, and we have to be careful about how were using those words. If Wal-Martlooks at the whole United States, there are naturally going to be some places that look more attractive than others. We have to take into account that all potential locationsare not born equal. Now, if we would rank those sites, what would be the chance that all of the best ones would be in Arkansas or in Missouri, which is where Wal-Martinitially put all its stores? Not very likely.
For the sake of this discussion, lets say that Wal-Marts most desirable location, or "sweet spot," when it was starting its business was a town the size of 20,000. One strategy Wal-Martcould have pursued would have been to go around the country opening stores in its sweet spot locationsand then later go back and "fill in" less desirable locations. With this alternate strategy, the first store in Minnesota would have opened a lot sooner than it actually did, as there certainly are locationsin Minnesota right in Wal-Marts sweet spot. But with this strategy, stores would initially have been much more spread out. Wal-Martwould have lost the gains from having a dense network of stores.
Instead, Wal-Martwaited to get to the plum locationsuntil it could build out its store network to reach them. It never gave up on density.
fedgazette: And when you see what its done, with the benefit of hindsight, it seems like the right thing to do, almost the obvious thing to do. But that would suggest that other retailers would have also recognized the benefits of density and should have engaged in the same behavior. Did Wal-Martinvent, if you will, this retailing idea?
Holmes: It is useful to contrast Wal-Martwith Kmart, as both opened their first stores in 1962. Wal-Mart, from the very beginning, was different from Kmart. Wal-Martbuilt up its store network gradually from the center out; Kmart (and Target, for that matter) began by scattering stores all over the country. Early on, Wal-Martfocused on logistics, with things like daily deliveries from its distribution centers, early adoption of advanced communication technology and so forth. Kmart did not do these things. A customer going into these two stores might not be able to see much of a difference between the two stores. But underneath, in the way that merchandise was getting on the shelves, these stores were very different.
But to get to your question: I dont think that Wal-Marts logistics strategy was appreciated at the time. Its model, now being replicated by others, was a new model.
fedgazette: It would seem that Wal-Martwas confident enough in its retailing product that it wasnt concerned about being late into a particular market; that is, it stuck to its density strategy without leapfrogging to a new sweet spot, even if that sweet spot may have been threatened by a competitor. Is that an accurate assessment?
Holmes: Thats almost the way it seems. It knew it had a good product and strategy and perhaps didnt worry too much about other players. But I think its a bit of an open question about how much Wal-Martmay have been partially preempted in some markets. For example, it may have been a little late getting into Minnesota and the Ninth District more generally, as Target has filled in the area, leaving less room for Wal-Mart. The median person in our district is 6.3 miles to a Wal-Mart, the largest distance across all districts, with the exception of the New York district. Contrast this with the Dallas district, where the median person is only three miles to a Wal-Mart. Of course, the median distance of 6.3 miles here still represents a significant amount of penetration on Wal-Marts part.
It may have been that by waiting to get to Minnesota until it was able to build up its network to reach it, Wal-Martgave Target time to preemptively build up its network here. The key thing to note, however, is that if Wal-Marthad done something different-if it had jumped ahead to Minnesota before it had built out its network-it wouldnt have been Wal-Mart. It would have been undercutting the strategy that made it successful in the first place. Read More
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