Procurement and Supply Chain Management of Walmart - Research Paper Example

?Procurement Management Introduction Very large companies often undertake outsourcing procurement as a strategy to maximize their profitability. Procurement requires the companies to concentrate upon maximization of profit, cost reduction, and compliance. Good strategies of procurement often happen to be the fundamental factor differentiating between a failed and a successful business. Walmart is one of the companies that have gained competitive advantage by using procurement strategies. Procurement in a large company can be very cost consuming and complex. This causes some companies like Walmart to outsource procurement instead of development world-class procurement capabilities of their own. Procurement outsourcing helps leverage the economies of scale by utilizing the talent of trained personnel. Benefits of procurement outsourcing typically include; cost reduction, market leverage, lowering of transaction cost per purchase, marketing of information about the best suppliers, highly specialized staff in purchasing, improved communication between organizational personnel and purchasing experts, better management of information, and globalization. This paper analyzes the procurement practices at Walmart, studies the challenges faced by Walmart in the past because of its procurement practices, and the company’s approach toward the future for sustained competitive advantage. The paper also compares the procurement practices of Walmart with those of Target Corporation, the second largest retailer in the US. About Walmart Walmart is the largest retailer not only in the US but also all over the world. Walmart has played a major role in the economic progress of the US. Because of the massive size of Walmart, the power wielded by the retailer in incredible. Ever since its establishment, Walmart has caused many small retailers to go out of business because of the benefit of cost effectiveness it provides the customers with without compromising upon the quality of products. It has increased the efficiency of manufacturers, and has often caused the vendors to move the jobs of manufacturing overseas. Walmart has brought some radical changes in the way in which some very large industries have been doing business conventionally. Procurement practices at Walmart Walmart is known for sending the jobs of manufacturing overseas. In the year 1985, Walton launched a program with the title “Bring it Home to the USA” through which he offered 5 per cent more compensation to the suppliers if they made products within the US (Wilbert, 2013). However, in the subsequent years as Walmart joined other retailers in an attempt to identify the cheapest production sources globally, the program faded away. While the percentage of imported merchandise in Walmart was only 6 in the year 1995, it went up to 60 per cent in just a decade (Wilbert, 2013). Walmart’s procurement outsourcing does not only impact small suppliers, but its impact extends beyond them as well to include some major and very well-established companies like Pepsico and Coca-Cola. This can be estimated from the fact that at the request of Walmart, Coke and Coca-Cola Enterprises resolved to announce a change in their way of delivering PowerAde within the US, thus changing a basic method of distribution that has been followed for a period of over a 100 years. Procurement challenges for Walmart Effect on other retailers Walmart has been criticized for its procurement outsourcing practices because they, in effect, have been found to indirectly drive other competing retailers out of the market. Plenty of anecdotal evidence exists that local pharmacies, sporting good stores, and grocery stores in the town are threatened whenever a new Walmart store is established. According to the Economist Emek Basker, when a Walmart store opens in a typical US county, it causes three other retailers to go out of business within just two years of its opening whereas it takes no more than five years for four retailers to close (Wilbert, 2013). Employment of 300 people by Walmart results in loss of jobs by another 250 within five years. Impacts on the economy of the US There are various opinions about whether or not Walmart’s procurement outsourcing is good for the economy of the US. Stances of well-respected economists can be observed on the opposite sides of this debate. While some economists think that procurement outsourcing at Walmart is good for the economy of the US because it tends to keep the prices low at its own stores as well as at the stores of the other retailers, others think that Walmart’s procurement outsourcing is not healthy for the economy of the US because it tends to drive the competitors out of business and locate jobs overseas rather than within the US. However, saying that Walmart’s procurement outsourcing has a bad effect on the economy of the US is a conservative analysis; “If it's not 100 million people shopping there every week and it's not 8,000 people competing for 500 jobs [at a new Atlanta store], who is it? They're complaining because they're wrong and they don't understand that ending poverty means generating wealth and not just fighting to redistribute the existing wealth” (Young cited in Wilbert, 2013). Quality of outsourced services In order to minimize the cost of production, Walmart purchases things, goods, and services from vendors located in third-world countries. India and China are some of the main exporters of products and services used by Walmart. Owing to the limited resources and technological expertise available in these third-world countries, Walmart has been criticized for the quality of outsourced goods and services. Walmart’s approach to dealing with procurement challenges Walmart mentions on its website that the retailer takes every possible measure to ensure that the goods and services acquired from the distant vendors measures up to the critical standards of quality; Walmart states that it does collaboration with other NGOs, brands, government leaders, and retailers to verify that its products are manufactured in ways that make the supply chain workers feel respectable and dignified. In the capacity of the largest retailer of the world, Walmart has been actively trying to have a positive influence over the practices of supply chain globally. Walmart tends to achieve this by raising its standards of work and improving the conditions of work in the countries where it gets its sources from (Wal-Mart, 2013). In response to the allegations that Walmart is abusing the rights of its workers, one of the spokesmen of Walmart, Dan Fogleman said that the labor unions compile reports to distort the facts since they have their own financial and political agendas at play. Walmart holds both its main contractors and subcontractors to the best standards. Walmart makes it compulsory for its contractors and subcontractors to adhere to the applicable laws. In the logistics network of the retailer in the US, third party distribution centers make up no more than a fraction. Walmart’s facilities that are owned and operated by the retailer across the country are over 120 in number. These facilities serve as the support for over 70000 jobs at Walmart and help Walmart address its customers’ and stores’ needs. Many of Walmart’s customers are living from paycheck to paycheck and depend upon the retailer to offer them to offer them goods and services that are easily affordable for them (Fogleman cited in Jamieson, 2012). Way forward for Walmart Walmart is aware of the negative publicity it has acquired for its objectionable procurement practices and the company is making serious moves in order to restore the confidence of consumers in the retailer’s commitment and adherence to ethics. The zero-tolerance policy Walmart has adopted a zero-tolerance policy for any subcontracting that is unauthorized in its attempt to improve global supply chain’s transparency. In light of this policy, if any facilities subcontracting sources the merchandise of Walmart to a facility that is undisclosed or unauthorized, it would be red-failed in the retailer’s system and would thus be barred permanently from the practice of sourcing merchandise of any kind. Stricter requirements of factory prequalification In order to ensure that the vendors Walmart purchases goods and services from when it outsources jobs overseas adhere to the higher standards and meet the expectations of the retailer, Walmart requires all newly disclosed factories all over the world to prequalify with an audit rating before their commencement of making merchandise for Walmart. Company representatives Walmart requires its suppliers to have a company representative whose duties and responsibilities include and extend beyond those of a simple agent. All companies in which merchandise is actively sourced by the suppliers for sale at Walmart are required to have their representatives. It is the responsibility of the company representative to comply with the requirements of ethical sourcing established by Walmart. A global fire safety approach Walmart states on its website that it is committed to safety in the supply chain all over the world. The Ethical Sourcing program has been introduced by Walmart whose purpose is to verify that the suppliers comply with the retailer’s rigorous standards, to improve the environmental and labor practices at farms and factories that produce goods to be sold at Walmart, and to enforce such initiatives and policies that are friendlier toward the employees. Walmart’s performance in Bangladesh is an example of the way the retailer is addressing problems related to procurement. In light of the unique problems of safety experienced in the ready-made garment industry located in Bangladesh, Walmart felt the need to develop such programs that would ensure adequate maintenance of building and protecting of the infrastructure. This is the reason why Walmart made certain enhancements in its Ethical Sourcing program this year. Some ways in which the program has been improved include development of partnership with Bureau Veritas (BV) which provides services of assessment and certification for in-depth safety inspections in Bangladesh-based factories, providing factory workers with broad-based fire safety training, and a donation of $1.6 million to the Environmental Health & Safety Academy located in Bangladesh (Walmart, 2013). Creating more jobs within the US Walmart has been criticized for a long time for having taken jobs away and out of the US. Walmart believes that more jobs can be created within the US by supporting manufacturing within the US. To achieve this, Walmart is actively developing collaboration with stakeholders in order to renew manufacturing in the US. For the same reason, Walmart convened the US Manufacturing Summit so that government officials, suppliers, other retailers and leaders can be brought together to develop connections with each other, share their learnings, and make progress. In January 2013, Walmart made the commitment to buy US products worth $50 billion over the span of the next decade (corporate.walmart.com, 2013). Walmart mentions on its website that the data retrieved from its suppliers suggests that products that are made, grown, or sourced within the US account for almost 66.66 per cent of what they spend to purchase goods at Walmart US (corporate.walmart.com, 2013). Walmart plans on adopting three basic ways to achieve its goal of buying the additional $50 billion worth of products within the US, which are growth of business with already existing suppliers, acquisition of new suppliers that render manufacturing services within the US, and transferring the current items manufactured in other countries to the production lines located within the US. About Target Corporation Target Corporation is the second biggest discount retailer in the US after Walmart. Target is presently at the cutting edge of such businesses in which a variety of mediums including mobile phones, iPads, and online social networks are used by companies to sell their products. Target has the vision of becoming a retailer worth a $100 billion in the next few years while its present annual revenues sum up to more than $67 billion (Sabharwal, 2011). At the core of the vision of Target is technology and outsourcing. There are a lot of similarities between Walmart and Target including the range of consumer goods sold by both the brands that include but are not limited to clothing, office supplies, household items, furniture, electronicsm toys, and art. Procurement challenges at Target Corporation As one of the leading retailers in the world, Target has chosen outsourcing as its procurement practice in most of its divisions in general and the divisions of Information Technology in particular. Target is presented with a range of challenges and opportunities that include but are not limited to expected impact of law and economy and other political, customs’, and cultural hurdles. Target’s approach to dealing with procurement challenges Target has understood the differences between the cultures of the US and countries like India and has integrated them the company’s operations based in Bangalore, with a view to establishing an atmosphere where workers from all countries have equal opportunities toward success. Led by Walmart, retailers in the US are asking business insights from the vendors beyond back-office projects and labor arbitrage. Target requires its third party vendors to help the retailer increase its revenue. “We absolutely want them to help us on the innovation agenda, so I expect the third party to go beyond the base expectation of pounding out work. I would expect them to bring value add in form of competitive pricing, better quality and fewer defects, new ideas in business process that we can engage in. The expectations from our partners are fair and high” (Jacob cited in Sabharwal, 2011). Comparison between Walmart and Target’s procurement practices Target is just in a prettier package but not really different from Walmart in terms of working conditions it provides its workers with, the wages and benefits offered to the workers, effects on the local retailers, and sweatshop-style foreign retailers. Not a single Target store has a union out of over 1400 stores that employ over 300,000 people nationwide. “People ask what the difference between Wal-Mart and Target is…Nothing, except that Wal-Mart is six times bigger. The wages start at $7.25 to $7.50 an hour [at Target]. They'll say that's a competitive wage, but they can't say it's a living wage. We know a lot of their managers are telling people, 'If we find out you're involved in organizing a union you'll get fired” (Hesse cited in Lydersen, 2006). Target gas basically been drawing upon the weaknesses of Walmart and has been using the negative publicity of Walmart to its own advantage. Target has been cultivating the image of “anti-Wal-Mart” for many years by refusing to compromise upon workplace standards for maximizing profits. However, after a decade long growth of both the retailers, labor groups do not find the two very different in terms of their treatment of the workers. This is evident from the fact that entry-level hourly employees in the stores of Target almost earn just the same as they do at Walmart, only to face more difficulties qualifying for the coverage of health care than the employees do at Walmart. Unions are opposed by both the retailers and both have taken measures to deter the organization of efforts in the stores. Both Walmart and Target have outsourced the jobs overseas in order to cut down the costs and maximize their benefits. However, while Walmart is generally known to compromise upon all standards to maximize profits, Target has been more protective of its image in the public eye by taking help from advertising campaigns and contributing to several cultural and civic causes. The image of Target is more sophisticated compared to the image of Walmart because of the fact that Target has got a very good PR campaign running for the retailer (Cervantes cited in Lydersen, 2006). Irrespective of the reality, the image of Target of a benevolent employer happens to be a major advantage for the retailer as it advances toward establishing more stores. In such blue state markets as Chicago, New York, and the Twin Cities, city leaders welcome Target with open arms while Walmart generally faces opposition from the community which has been the major hindrance in the way of its expansion in many key markets like in the New York City. Target pays its entry-level workers anywhere from $6.25 to $8 an hour in the Twin Cities stores which is in line with what workers are paid by Walmart in this market, but entry-level workers at Walmart often earn anywhere between $9 and $10 an hour (Serres, 2005). Although health care insurance is offered to the employees by both the retailers, yet health care insurance offered by Target is more restrictive compared to that of Walmart. “No one here is excusing Target or anyone else for failing to live up to its responsibilities to its workers…But how do you change these very large companies? You have to go after the source of the problem, and that’s still Wal-Mart” (Blank cited in Serres, 2005). Conclusion A growing trend among the fastest and the largest growing industries is contracting out. Outsourced workers laboring on the behalf of some of the largest retailers in the world like Walmart and Target toil at alternative schemes of employment that increase their vulnerability to significant abuses of workers’ rights. An in-depth analysis of the procurement practices of both the retailers suggests that while both Walmart and Target outsource the jobs overseas, Walmart pays its workers higher wages as compared to Target in general. Paradoxically, Target has managed to have a better reputation for workers’ benefits in the market in comparison to Walmart. In fact, Walmart is also taking a range of initiatives in order to change its procurement practices for the better so that the challenges it has conventionally faced with respect to its procurement outsourcing are adequately dealt with. Walmart provides its workers with better health care insurance and medical benefits as compared to Target. In spite of this disparity of workers’ treatment, Target has a better reputation than Walmart which leads to the conclusion that the way a retailer manages its image in the public eye and the strategies it employs plays a pivotal role in depicting its popularity irrespective of the real practices followed by the retailer. Comparing Walmart and Target, Walmart has been in business for a longer period of time than Target and because of its size and growth potential, is better equipped of making practical changes and modifications in its procurement practices than Target. Target needs to review its procurement practices and make them friendlier toward its workers in order to avoid the mistakes that Walmart has made in the past. References: corporate.walmart.com. (2013). U.S. Manufacturing. Retrieved from http://corporate.walmart.com/global-responsibility/us-manufacturing. Jamieson, D. (2012, June 6). Walmart Outsourcing Depresses Wages In U.S. Warehouses: Report. Huffington Post. Retrieved from http://www.huffingtonpost.com/2012/06/06/walmart-outsourcing-depresses-wages_n_1573885.html. Lydersen, K. (2006, April 30). Target as Bad as Wal-Mart? You Decide. Retrieved from http://www.alternet.org/story/35610/target_as_bad_as_wal-mart_you_decide Sabharwal, S. (2011, July 21). Retail giant Target bets big on tech, outsourcing. The Times of India. Retrieved from http://articles.timesofindia.indiatimes.com/2011-07-21/strategy/29799173_1_retail-industry-outsourcing-vendors. Serres, C. (2005). Target vs. Wal-Mart. Reclaim Democracy! Retrieved from http://reclaimdemocracy.org/walmart_target_better/. Wal-Mart. (2013). Ethical Sourcing. Retrieved from http://corporate.walmart.com/global- responsibility/ethical-sourcing/. Wilbert, C. (2013). Target vs. Wal-Mart. Reclaim Democracy! Retrieved from http://reclaimdemocracy.org/walmart_target_better/. Read More