Wal-Mart Supply Chain Analysis - Report Example

Wal-Mart Report inserts his/her s Contents Wal-Mart Report Contents 2 Introduction 3 1. Introduction The case presents an interesting insight into the issues that Wal-Mart is encountering in its seafood supply chain as far as the management of fish stocks is concerned. Retailers such as Wal-Mart have come to terms with the fact that in a world dominated by a competitive marketplace, adding value seems to be the only way in achieving a competitive edge. The prevailing state of overexploitation of fish stocks globally and growing concerns of stakeholders regarding corporate social responsibility have led to an increasing concern amongst retailers such as Wal-Mart to sell sustainable seafood. However, the process of achieving sustainability is not that easy given the dynamism and complexity involved in seafood supply chains and the challenges involved in ascertaining the quality of sustainable seafood. The focus of this report is to analyze the challenges encountered in the achievement of sustainable seafood supply chain in the context of Wal-Mart and to look at varying approaches to overcome these challenges. In this context, various factors affecting possible solutions to Wal-Mart’s sustainability issue shall be analyzed. It is interesting to note how coordination with suppliers, cost-benefit analysis of short-term versus long-term and industry dynamics determine, to a large extent, the range of possible solutions to the attainment of sustainability in Wal-Mart’s seafood supply chain. 2. Challenges of Wal-Mart’s supply chain Wal-Mart’s biggest challenge is to lower its costs and at the same time maintain sustainability. This tug of war is similar to that faced by many retailers today; at one end they are inclined to maximize customer value and satisfaction and, on the end, they need to maintain cost-cutting to achieve productive efficiency (Anderson et al., 1997). The challenge often lies in determining what issue needs to be addressed and what problems need to be fixed (Anderson et al., 1997). One of Wal-Mart’s concerns seems to be the continuity of supply of its fish stock amidst rising demand for fish and falling supply of the same. The issue, as mentioned in the case, is that global supply of fisheries has been falling by 3% whereas demand has been growing by 25%. Research suggests that in industries characterized by low shelf lives (such as food and grocery), brand switching is rapid due to frequent stock-outs. Furthermore, the rate of stock out for short shelf life products in such supermarkets is as high as 18% which makes sustainability in supply chain a crucial concern (Karrkainen, 2003). It raises a major concern for Wal-Mart since it could not afford to lose its customers in a tough marketplace, especially when products such as seafood are highly substitutable. Therefore, there is an immediate need to address the problem of stock shortage. Since there were concerns regarding sustainable fishing globally and since $750 million of Wal-Mart’s seafood business relied on global stocks, it had become necessary for Wal-Mart to adopt a system which complied with global standards. Another major problem facing Wal-Mart is little control over its suppliers. Considering the fact that $750 million of Wal-Mart’s seafood supply was coming from international suppliers, there was an increasing threat regarding the quality of this supply and the credibility of its suppliers. Research demonstrates that loss of control to outsourced logistics providers is one of the most serious challenges encountered by companies who outsource their logistics (Razzaque & Sheng, 1998). Apart from this, failure of the company to manage these providers and rigidity with respect to catering to customer’s changing requirements present greater challenges to such companies (Razzaque & Sheng, 1998). Since Wal-Mart has little control over its suppliers’ activities in foreign land, it would be relatively easy for suppliers to get away by supplying unhygienic or poor quality fish without immediately getting caught. Transaction and transportation costs would also high since most of the fish was sourced from foreign land. Furthermore, there is an immediate need to address the issue of sustainability by adding value to its products as is indicated by the implementation of the MSC certification program. Cutting costs has, therefore, became an even greater concern following heavy investment in the implementation of this program. The company had decided to cut corners in order to recover the expenditure of $50,000 to $500,000 made under this program. Perhaps, one of the most subtle yet important challenges to Wal-Mart at this stage is to weigh its short-term costs and benefits against its long-term projections. For instance, the MSC implementation would result in an immediate outflow of $50,000 to $500,000. Furthermore, it would require additional suppliers in its network which could make downstream coordination and communication difficult due to added complexity. It would also involve Wal-Mart obliging its partners to invest in the MSC program by providing appropriate incentives to them. Perhaps, by developing a reward program where socially ethical suppliers are rewarded, Wal-Mart can get its suppliers to work on the MSC program in little time. Although this may incur heavy costs initially; after two years it would bring greater customers to the company considering that it would be a sustainable seafood retailer. For acquiring additional suppliers (as indicated in the case), companies such as Wal-Mart would need to ascertain whether inventory control, least cost or competitiveness was its major goal. Furthermore, Wal-Mart is targeting wild catch of some of its fish which is of great concern to environmental protection groups. Ultimately it becomes the responsibility of Wal-Mart’s suppliers to ensure that the feed content to the fish is appropriate along with appropriate water conditions and that no damage to the ecosystem is caused during the fishing process. The use of chemicals and damage to habitat must be avoided by Wal-Mart’s suppliers which presents a major challenge to a company like Wal-Mart that operates offshore. Another challenge that Wal-Mart faces is that of seasonality in its fish stock. As the case suggests, the fishing of wild salmon depends on the spawn season. If the supply of fish in the rivers increased during the spawn season, the fishing period was extended whereas if the supply was little, the fishing period closed down early. This presents a serious challenge to Wal-Mart since it is already facing a shortfall in its supply. Not only was there volatility of supply but volatility of prices. The next question that arises is that of processing of the procured seafood in China versus Alaska. This in itself presents a tough scenario. The overall costs in China were significantly lower than in Alaska. Labor, in particular, was very expensive in Alaska. The former alternative would mean that fish would be labelled as re-frozen which could potentially lower sales on the basis that the stock was not fresh. Since the products that Wal-Mart is selling in this case (seafood) are perishable, quality plays a vital role in determining the usability of its products. However, the latter alternative was not financially feasible as there was volatility in both output and price. Also, processing delays during the peak fish catch in Alaska would lower quality anyway. In its attempt to streamline its supply chain activities to be able to cater to customer demand, accurate forecasting and demand planning shall remain a great concern to Wal-Mart. Errors in forecast are likely to lead to inaccurate figures for safety stock whereas frequent revisions of forecasts are likely to result in drastic alterations in plans. Ultimately, the success of Wal-Mart’s sustainable supply chain efforts shall depend on the level of trust it enjoys with its supply chain partners. Considering the company’s plans of elongating its supply chain by adding additional suppliers, the complexity of its supply chain is bound to increase. This will bring with it the added challenges of streamlining information and resources and smooth interaction and co ordination across partners. Furthermore, in order to truly attain sustainability, Wal-Mart faces the issue of becoming myopic. If the company loses track of its core competencies and core business it is bound to be led off track. Thus, if the company’s core competency is to deliver lowest cost products to customers, then that should be reflected in its overall strategy including supply chain and logistics. However, focusing on any one parameter is deceiving as it almost always results in a tradeoff. The setting of competitive priorities is, in itself, a challenge for companies today. Ultimately, this decision shall drive Wal-Mart’s direction with respect to its technology, process, planning and control. Low-cost producers typically seek to lower waste levels and enhance productivity, often resulting in the standardization of processes. The question now arises that to what extent shall Wal-Mart be able to control operations considering that it does not produce inhouse but outsources its seafood products. 3. Recommendations Research suggests that for companies whose main aim is low cost, adopting the lean paradigm is quintessential (Karlsson & Åhlström, 1996). Under this paradigm, quality, level of customer service and lead time become the qualifying market parameters (Christopher & Towill, 2001). In order to minimize its supply chain costs, companies must target both the physical costs of manufacturing, distribution and storage as well as marketability costs of stock out and depletion (Kouvelis et al., 2006). Cost reduction further requires the effective operation of cycle time (Christopher & Towill, 2001). Research indicates that effective cycle times and flexibility are linked. As cycle time decreases, flexibility is enhanced (Stewart, 1995). It has been suggested by researchers that companies pay increasing attention to the cost-saving aspect of supply chain technologies than its revenue-enhancing features (Spekman et al., 1998). It seems that Wal-Mart is not following the lead of such companies which is demonstrated in the company’s decision to adopt the MSC program demonstrates its ability to espouse a long-term view which may lead to an initial drainage of funds, thus, increasing costs for Wal-Mart in the short run. Furthermore, research shows that for supply chains to be truly sustainable they must contain the three qualities of being agile, aligned and adaptable (Lee, 2004). For instance, agility in Wal-Mart’s case would exist when the supply company’s fish stock can be quickly altered to suit changes in demand. To some extent, the Just-in-time process being implemented by one of Wal-Mart’s major suppliers- The Fishin’ Company provides one way of catering to sudden changes in demand. However, at this point the company would have to trade-off between the quality of fish (freshness of the fish) versus the obvious gains it gets from being quickly able to respond to customer demand since the Just-in-time system would require fish to be kept frozen for some time. However, it must be considered that the seafood business is subject to large seasonality. This is demonstrated by the fact that the duration of fishing season for Salmon could be as little as a week to as much as several months. The volatile markets and highly seasonal nature of fishing means that this strategy of just-in-time fish supply by The Fishin’ Company would be a viable option. However, another option was that of farmed Salmon that Kumar’s company was able to obtain from Chile. Unlike fresh Salmon, farmed Salmon’s supply was not seasonal in nature and was available during all times of the year. However, Kumar decision to stockpile farmed Salmon instead of purchasing it regularly is debatable. If cost were Wal-Mart’s sole objective then this decision was prudent. However, freshness of the fish would be compromised again which could potentially bring down the number of customers and, hence, revenues. Whether the lower costs (resulting from reduction in ocean freight expense) would outweigh the reduction in revenue (from lost customers) is debatable. Therefore, the overall effect on profits is uncertain. The company’s supply chain must be adaptable. It must be capable of evolving given a change in market, political, cultural, social and technological dynamics (Lee, 2004). Therefore, suppliers must be willing to adapt themselves in accordance with changing dynamics which is what the company’s suppliers were aiming at. Keeping in view that majority of its fish supply comes from around the globe; the company ought to employ intermediaries who assist in getting hold of trustworthy suppliers in unknown countries (Lee, 2004). There is an indication of some degree of flexibility on the part of Wal-Mart’s suppliers in this case as is demonstrated by the fact that The Fishin’ Company used the same processor for various types of fish that came at different intervals from various parts of the world. The option of working with the Alaska-only processor was therefore not a feasible option at all. Wal-Mart can break down its demand into base and surge demand. Base demand (or regular demand) can be effectively sourced from low-cost economies, whereas, surge demand can be catered to by sourcing from locations nearer to the company’s host country. Considering that Wal-Mart faces increased demand for its seafood products, it would be wise to source its regularly demanded seafood products from locations where costs are low, and top up the surge demand by sourcing from nearby locations such as Chile. Next, in order to drive down costs, the company must align its partners in a way that cost-cutting becomes a part of performance at all levels. Considering that Wal-Mart’s partners are mostly global, it is essential to clarify each partner’s roles in order to avoid clash. It is necessary for Wal-Mart to set incentives such that its partners maximize the performance of the entire supply chain along with performance of their partnership. Another area that Wal-Mart has not explored is that of employing green technology. In the contemporary world, companies’ operational strategy today must incorporate environmental issues. Technologies such as Ozone have now become widely available for companies operating in the seafood industry. It is important to note that contemporary supply chain management represents a paradigm shift which entails a model where success is interdependent and where there is seamless flow if information across all partners (Spekman et al., 1998). To this end, there is little mention of the use of any real-time systems in Wal-Mart’s inventory management under this arrangement. Such a system ensures that companies (such as Wal-Mart) develop a satellite network which enables them to stay connected with their distributors, suppliers and logistics partners (Lee, 2004). This would allow the company meet sudden upsurge in demand by reallocating fish stock between its various stores. A major consideration for Wal-Mart at this point is to explore cross-docking for its seafood inventory. Cross-docking allows companies to transfer their inventory from one shipment to another which virtually eliminates the need for holding inventory, thus reducing the costs associated with it. The use of this system allows inventory to be virtually eliminated (Kurnia & Johnston, 2001). Cross-docking also allows suppliers to get more specific targets by each individual store of the retailer which allows them to plan production more accurately and lower their inventory costs (Kurnia & Johnston, 2001). Therefore, cross-docking is linked, according to various studies, to the facilitation of “efficient customer response” (ECR) (Kurnia & Johnston, 2001). By adopting this strategy, Wal-Mart can save on its inventory holding costs which includes the cost of moving the fish from port to the storage facility ($ 0.01), the cost of handling the fish inventory when it is transferred from the storage facility to the warehouse ($0.01) and the holding costs of $0.05. This would translate to a saving of $0.07 per pound per month on average. This system would reduce Wal-Mart’s dependence on buffer stock which would enable it achieve cost savings (as stated above) along with catering to customer demand much more quickly. Considering that its suppliers were employing just-in-time systems, cross-docking would complement this system by ensuring seamless flow of inventory without any stoppage. However, full cross-docking of all seafood inventories may present great challenges to Wal-Mart which includes heavy investments in real-time information systems and high level of trust with suppliers. Any failure to deliver the order by suppliers may result in an out-of-stock situation (Kurnia & Johnston, 2001). Furthermore, the seasonal nature of fish stock makes it even more difficult for Wal-Mart to implement cross-docking with full force. Demand for fish may also be seasonal also because of the fact that price fluctuations could go as high as 30% during the peak season. Hence, both demand and supply uncertainties make the full implementation of cross-docking inappropriate. Therefore, a more feasible option would be to implement partial cross-docking. Wal-Mart can choose to keep buffer stock for half of its stock, while the rest is transported directly from the incoming to the outgoing shipment. The system of cross-docking would particularly suit Wal-Mart in this case since it is selling a product (seafood) that, by nature, has limited storage capacity. By applying cross-docking, Wal-Mart is not only reducing its costs but also reducing storage of its seafood which means fresher stock compared to if it were stored. Nevertheless, Wal-Mart must ensure that its suppliers reduce lead-times for overseas shipments or else this system is futile. Another solution attached to the notion of cross-docking is to use the system of RFID. Considering that most of its products are sourced from abroad, Wal-Mart may consider asking its vendors to use RFID for the shipments they make to Wal-Mart. The use of RFID requires less labor compared to the traditional bar-code scanning. Research shows that industries characterized by the trade of low shelf life benefit from increased efficiency by the use of RFID (Karrkainen, 2003). The large volume of seafood products makes it necessary to ensure efficiency in Wal-Mart’s supply chain which means that trivial alterations in operational expense tantamount to significant impact on the profit margins. Competitive advantage may only be achieved if there are sufficient cost savings to Wal-Mart in this case. Since seafood is classified as perishable item, temperature control becomes an important factor in its movement and storage. Therefore, operations that are not undertaken in chilled temperatures need to be expedited in order to reduce the threat of contamination. Also, since seafood contains several product variants (including ready-to-cook and packed meals) the complexity of supply chain increases further which requires goods to be tracked efficiently. Data needs to be captured efficiently so that inventory management is seamless. The quantity required for stock replenishment can only be optimized through greater transparency which is one of the benefits of using RFID (Karrkainen, 2003). Cost savings result from the use of RFID since the same tags can be used repeatedly if these tags are used in recyclable containers (Karrkainen, 2003). Furthermore, the use of RFID by Wal-Mart would reduce the cost of labor needed for stock counting and lead to more accurate results. It would also reduce spoilage which would result in more fish stock fit for sale. It has been indicated in research that labor accounts for more than half of the distribution costs. The use of RFID reduces labor costs in order receipt by approximately 30% and also reduces the expenses related to verification by almost 90% (Michael & McCathie, 2005). Since there is enhanced visibility and since inventory is always in the sight buffer stock is dramatically reduced and, therefore, waste is eliminated which corresponds with the lean philosophy. Furthermore, since seafood requires regular checking and inspection, RFID would allow Wal-Mart the added advantage of being able to track its stocks. Considering that Wal-Mart is deciding to implement MSC’s program, the use of RFID will simplify regulatory processes and complement the certification process. Not only do these tags monitor the stock count but also monitor moisture levels, temperature, and bacteria and provide evidence of tampering (Michael & McCathie, 2005). This shall help Wal-Mart in keeping track of its shipments from around the world. By using ‘smart-shelves’, Wal-Mart can track its inventory levels in real-time which can be relayed to suppliers. Companies’ ability to forecast demand is enhanced by 20% when using RFID technology (Michael & McCathie, 2005). According to David H. Taylor, value stream management can be used to effectively reduce costs by reducing lead times and enhance customer service (Taylor, 2009). Short sea shipping is a phenomenon that enables businesses to capture value in global supply chains in the light of environmental and sustainability concerns (Taylor, 2009). This would allow Wal-Mart to virtually eliminate the need for land commutation by using port to port feeder interchange. Asking suppliers to switch to transport that has low emissions is one way of achieving sustainability on Wal-Mart’s part. By implementing the fore-mentioned recommendations, Wal-Mart shall move towards an integrated, sustainable supply chain which shall increase stakeholder value. As indicated, stock-outs will be less prevalent, costs will reduce, customer service shall be enhanced (by being able to respond in real-time to customer needs) and adaptability shall be increased. This is sure to equip Wal-Mart for success in the future where sustainability in supply chain shall dictate competitive advantage. 4. Conclusions As indicated before, the implementation of the above mentioned recommendations will require a high level of mutual trust between Wal-Mart and its suppliers. Both suppliers and the firm must be willing to share information seamlessly and also invest resources for mutual benefit (Shin et al., 2000). Kumar’s company has already realized this and is willing to invest resources for ensuring sustainability in the business. However, the extent to which other suppliers will be proactively willing to do the same is debatable. As mentioned earlier, all parties involved must understand the short-term versus long-term trade-off before going ahead with advancement in the supply chain. References Anderson, D.L., Britt, F.E. & Favre, D.J., 1997. The Seven Principles of Supply Chain Management. Supply Chain Management Review, 1(1), pp.31-41. Christopher, M. & Towill, D., 2001. An integrated model for the design of agile supply chains. International Journal of Physical Distribution & Logistics Management, 31(4), pp.235-46. Karlsson, C. & Åhlström, P., 1996. Assessing changes towards lean production. International Journal of Operations & Production Management, 16(2), pp.24-41. Karrkainen, M., 2003. Increasing efficiency in the supply chain for short shelf life goods using RFID tagging. International Journal of Retail & Distribution Management, 31(10), pp.529-36. Kouvelis, P., Chambers, C. & Wang, H., 2006. Supply Chain Management Research and Production and Operations Management: Review, Trends, and Opportunities. Production and Operations Management, 15(3), pp.449-69. Kurnia, S. & Johnston, R.B., 2001. Adoption of efficient consumer response: the issue of mutuality. Supply Chain Management: An International Journal, 6(5), pp.230-41. Lee, H.L., 2004. The Triple- A Supply Chain. Harvard Business Review, October. Michael, K. & McCathie, L., 2005. The Pros and Cons of RFID in Supply chain management. In ICMB 05 Proceedings of the International Conference on Mobile Business. Washington, 2005. IEEE Computer Society Washington. Razzaque, M.A. & Sheng, C.C., 1998. Outsourcing of logistics functions: a literature survey. International Journal of Physical Distribution & Logistics Management, 28(2), pp.89-107. Shin, H., Collier, D.A. & Wilson, D.D., 2000. Supply management orientation and supplier. Supply management orientation and supplier/buyer performance, 18, pp.317-33. Spekman, R.E., Jr, J.W.K. & Myhr, N., 1998. An empirical investigation into supply chain management: a perspective on partnerships. Supply Chain Management: An International Journal, 3(2), pp.53-67. Stewart, G., 1995. Supply chain performance benchmarking study reveals keys to supply chain excellence. Logistics Information Management, 8(2), pp.38-44. Taylor, D.H., 2009. An application of value stream management to the improvement of a global supply chain: a case study in the footwear industry.. International Journal of Logistics: Research & Applications, 12(1), pp.45-62. Read More