Wal-Marts Approach to Purchasing and Supply-Chain Management - Essay Example

?Executive Summary Wal-Mart is a retailer of consumer goods that Sam Walton founded in 1962. Its ultimate strategy is to offer products with low costs. Its low-cost strategy is the leading source of its competitive advantage, but behind this, its purchasing and supply-chain management have great contribution too, which have become the common primary interest among various business experts in the academe and in the actual business world. The work at hand presented the activities that Wal-Mart employs in order to create its competitive advantage primarily on how it uses its purchasing and supply-chain management for this reason. It was found that there are various activities that Wal-Mart uses in order to make a substantial output in its purchasing and supply-chain management activities, and there is a great area of concern regarding the link of marketing activities to them in order to make a difference. Furthermore, the work at hand presents some remarkable concepts and models pertaining to purchasing and supply-chain management. It was found that none of these models could actually explain in detail the prevailing business model that Wal-Mart employed. However, Porter’s value-chain model and Reck and Long model were found to have closer resemblance to Wal-Mart’s employed model at present. However, there is a substantial reason to believe that Wal-Mart considers purchasing and supply-chain management as integral components of a general marketing activity, rather than separate entities as Porter suggested in his value-chain model. Keywords: Wal-Mart, purchasing, supply-chain management, value chain Table of Contents Executive Summary 1 Introduction 3 What Wal-Mart is doing? 4 What the concepts and models are saying? 9 Evaluation of Wal-Mart’s approach 13 Conclusion 15 References 16 Introduction Every firm has its own story to tell, including its humble inception, its ups and downs along the way, and finally the relevant moves it might have put into consideration in order to reach the highest point where it might have successfully situated itself at present. There are many firms that finally reached this point. Among them is Wal-Mart, a firm that is more than just a name, but it speaks of value for customers, that is why it is one of the most recognised retail brands and companies in the world for consumer goods. The firm is widely recognised as the retailing giant with major operations across 28 countries under 60 different banners. It was able to branch out overseas, extending its competitive advantage way beyond the bound of the competitive market in the United States. Wal-Mart is a retailer of consumer goods that Sam Walton founded in 1962. Its ultimate strategy is to offer products with low costs. Its low-cost strategy is the leading source of its competitive advantage, but behind this, its purchasing and supply-chain management have great contribution too, which have become the common primary interest among various business experts in the academe and in the actual business world. The firm is able to maintain its reputation in the retailing industry by counting on its purchasing and supply-chain management. Here where the firm is able to generate great volume, a continuing growth of its large scale and eventually lower cost for its product offerings. The firm is able to establish efficient and advanced inventory management system, and little and not so costly promotion and advertising efforts. Concerning this, it is of great interest to know whether the prevailing concepts and models about the purchasing and supply-chain management reflect on the condition of Wal-Mart at present. Regarding this point, the work at hand tries to critically evaluate the Wal-Mart approach to purchasing and supply-chain management against models and concepts explored in the class. There are many important points to be discussed regarding the above objective, but it is important to consider first the things that Wal-Mart is doing in the industry, primarily in the context of purchasing and supply-chain management. ­­­ It is also of a good foundation of the argument to consider the relevant concept and models linked to purchasing and supply-chain management. This will provide the opportunity to establish the actual comparison between what the Wal-Mart is doing at present with its purchasing and supply-chain management and what the concepts and models are telling. Finally, once the above points are established, the evaluation process is straightforward. All of these considerations are presented in the work at hand. To get started, the first point of consideration is to know the things that Wal-Mart is doing in its industry primarily concerning on its purchasing and supply-chain management. What Wal-Mart is doing? Wal-Mart’s ultimate goal is to achieve a certain level of competitive advantage that is far from other competing firms. This means it has to employ a competitive strategy that will work at its best. This also means that it has to employ a business model that will guarantee a positive working result. One common point that draws a staggering concern among business experts is the firm’s activities regarding its purchasing and supply-chain management. Concerning this point, it is important to consider the actual approach of Wal-Mart to purchasing and supply-chain management. One important observation of the common experts trying to keep their eye on Wal-Mart is regarding the firm’s ability to draw the attention of shoppers because of its inexpensive products that may be imported from other countries at a minimum possible cost, leading it to retail these offerings at a substantially lower price (Hays, 2003). Wal-Mart is using supply chain management to reduce its cost of goods and services and improve its relationship with partner suppliers (Bacon and Pugh, 2004). It is of great interest to know why Wal-Mart has ended to offer its products at lower prices compared to other retailers in its industry. A good way to illustrate this point is to cite an example. For instance, Wal-Mart has the potential to import from countries like China. This country and other related countries have been popular for their lower labour and environmental standards than the US. In this case, Wal-Mart may have eventually grabbed the opportunity to buy from them, consider them potential suppliers as their products are cheaper in price. However, things do not just simply stop here. Wal-Mart is also able to generate a large portion of discounts from its suppliers because of the volume of items it usually offers to buy for its retailing business. As mentioned, Wal-Mart is one of the biggest retailing stores in the United States. As a big store, the firm is able to generate big discounts from suppliers (Haig, 2011). This means having a big discount will benefit the customers because it can lead to low prices of the final products for them. This is one remarkable secret of Wal-Mart in the retailing industry and why it ended up a scale brand. Its scale that is getting even bigger allows it to sustain its competitive advantage in the modern retailing industry. There is an essence of sustainability in this action, because suppliers are gaining too when a large volume will be ordered from them. A large volume of production will always ensure fixed costs will be optimized, which only implies that the manufacturing firms will have to generate a substantial gain even if they will have to offer their products at a certain discount (Garrison and Noreen, 2000; Costa and Addison, 2001; Brigham, 1992). After all, fixed costs have been optimized to the firms’ advantage. Aside from the consideration of cost, Wal-Mart is also active in collaborative planning and coordination with its suppliers (Hays, 2003). As the dominant retailer in the world, Wal-Mart reached out to its suppliers and influenced them to measure the environmental impact of their product offerings (Sullivan, 2010). Aside from the consideration of environmental impact, Wal-Mart also reached out to suppliers of national brands and private label products for the reason to reduce sodium, added sugar and trans fats that are contained in some of its 165 products that it carries for sale (Strom, 2012). However, aside from this focus collaboration with suppliers regarding its products, Wal-Mart also uses category management and supply chain collaboration approaches, which include information sharing (Krafft and Mantrala, 2009). In other words, Wal-Mart is trying to provide higher value for customers because of its ability to be responsive to some important issues that would have other important implications on the other aspects of life, such as the environment and the human health. This action has significant impact on the level of flow of inventory of Wal-Mart, which must be the important reason as to why they have to invest in doing such activities for their daily operations. Speaking of this investment, this makes it more relevant in the case of Wal-Mart to engage into information sharing, because its data-mining activity will further inform them of the prevailing consumer behaviors and what matters most to the customers. It aims to offer superior performance, which is one fundamental basis of differentiation (Schnaars, 1998; Porter, 1998). This therefore means that Wal-Mart is trying to integrate together its ability to provide value for customers and its effective and efficient coordination of flows of inventory, information and cash, all for the goal to reduce cost and provide the customers the satisfaction they deserve. It is clear that Wal-Mart’s collaboration with its suppliers have important implication on each of the component of the marketing mix. This boils down to the consideration of marketing activity, where the need to take price, place, product and promotion into account matters so much. After all, price, products, distributions and promotions, each has important function to play in order to provide high value for customers (Kotler et al., 1999; Boone and Kurtz, 2006). Aside from the ability of Wal-Mart to integrate the concepts in marketing into its purchasing and supply-chain management, the firm is also able to enhance more its flow of inventory, by being able to consider some other related technicalities in providing added convenience to each customer. For effective flow of inventory or stock of Wal-Mart, and providing additional value for customers, store design was made convenient (Rosenbloom, 2009). This means that products that are of special concerns among the customers will have to be placed on the same side of the store so that people will no longer have to trek from one end to another, fresh produced perishable products will be expanded even more, and signs pointing out the low prices of items will be even made more visible (Rosenbloom, 2009). This information only shows how Wal-Mart has become master in its business, especially in the management of its supply chain model. This depicts the actual operation that Wal-Mart is giving a great consideration and how simply it creates a meaningful value for its target customers. In reality, the strategy of Wal-Mart to consider its store design is a practical approach of managing its value chain, because it leads to a significant response from the customers, as far as their convenience is concerned. However, Wal-Mart is not only good at considering its store design to provide convenience and high value for its customer. The firm is also good at looking into the external and wider level of scope. As a gigantic global retailer trying to maximize its opportunity to serve its product offerings to growing major economy in the world, Wal-Mart at some point is keen to assess its opportunity in the US. This paves the way for the firm to consider the growing economy outside the bound of the US to explore more opportunity. With this, it has made some critical decision to buy into biggest retailers in the growing economy to prevent its growth from slowing and stock price slumping (Barboza, 2007). In other words, Wal-Mart is looking ahead of the future, and this does not exempt the possibility for an approach to strengthen its purchasing and supply-chain management. In fact, the bottom line why it has to acquire existing retailing firms outside the US is to be able to get hold of the advantage of having easy access to supplies and resources, which is one important reason for expansion among major firms in many industries (Carpano et al., 2003; Sun et al., 2012; Preble, 2000). For this reason, acquiring local subsidiaries is a major advantage. After all, local subsidiaries have strong control in the value-chain model (Kothari et al., 2013; Klein and Wocke, 2007; Pananond, 2013). Therefore, one sheer advantage in the expansion strategy is the experience to acquire skills and resources and major firms in certain industries try to target this opportunity to maximise their advantage. Wal-Mart is not far from them when it comes to this point of view, but in fact, the firm is one of them as far as the consideration to achieve competitive advantage based on expansion is concerned. Wal-Mart’s expansion without question is an opportunity for this firm to better serve its supply-chain model for the ultimate advantage of the customers. Having this approach will lead to the consistency of its offered lower price for the target customers. Although the bottom line of this is to create a positive outcome for Wal-Mart’s market share and earning, the opportunity to establish effective purchasing capability and supply-chain management on the part of the firm is another remarkable point of consideration. In this section, the work at hand just presented some of the relevant approaches of Wal-Mart concerning its purchasing and value-chain management. Regarding the goal of this paper, another important point is to understand some remarkable concepts and models that are integral components of purchasing and value-chain management. What the concepts and models are saying? Purchasing is an integral component especially among retailing firms that are trying to establish their operation in a sustainable way, so as to obtain their corporate goals and create a sustainable market share in the long run. Purchasing cannot be eliminated, in both the manufacturing firm and other firms especially the retailing firms that have to manage the flow of their inventory, make it efficient, productive and profitable in the end. If this is the case, the supply of their goods and distribution will have to be put to a halt, operation terminated, and thus, they have to seize to exist. Retailing firms will have to constantly look for their suppliers, purchase from them so that they will have items or goods to retail, and their operation will have to flow, and even if the right business model is implemented, it will probably converge to sustainability. However, the retailing firms will continue to exist if demand from customers will continue to exist too. This should be the case so that their inventory will flow and customers’ demand will be addressed. This is the point shown in the illustration below. As discussed in the class, prior to the actual purchasing activity, there must be an existing or potential demand from customers so as there is the right reason for the operation to function and take place. However, one of the most essential point is the thought that purchasing function actually bridges everything concerning on the demand from customers will be addressed (Van Assen et al., 2010; Dunne, 2013). As shown in the illustration below, the purchasing function will have to bridge the operation and suppliers in order to successfully create supply to customers’ existing demand. Thus, without this purchasing function a firm will have to fail meeting the customers’ demand. Figure 1. Illustration showing purchasing is the bridge (Van Assen et al., 2010; Dunne, 2013) Based on the above figure, there is a good point to consider why it is necessary to take closely at the special function of purchasing. However, aside from this function, purchasing also has substantial evolution according to the Reck and Long model (1997). In this evolution, purchasing’s function has certain degree of characteristics that make the former different from the other. The ultimate peak of this evolution is when the firm and its purchasing function focused on best product management methods. There is a methodology in here that will have to combine management of relationships, processes, and outcomes, and each of these are actually certain focus of each of the steps in the prior evolutionary paths. It is a good point of view to consider this because there are many companies nowadays that are not employing ‘product centred’ approach towards purchasing, but many of them are now in the level of implementing either ‘relational’ and ‘performance centred’ depending on their prevailing needs or target corporate goals. Figure 2. The evolution of purchasing: The Reck and Long model (Cousins et al., 2006; Koo, 1996) Now it is of great consideration to move a little bit general in scope and not just within the concepts and models linked to purchasing. Another important concept is the supply chain management. The supply chain management is an activity within an existing firm that deals with the effective and efficient coordination of flows of inventory, information and cash, so as to control the total cost of ownership and maintain it lower (Bacon, 2004; Krafft and Mantrala, 2009). The first thing of great consideration is to look at the entire supply chain management in general. Based on Figure 3, the bottom line foundation of supply chain management concerns about the materials management as bridged by the logistics to the surface level which involves purchasing and supply management and physical distribution management. In other words, this illustration only shows that purchasing is an integral component of supply-chain management. After all, the activities stated in Figure 3 are under the operation prior to successfully addressing the prevailing customers’ demand. Figure 3. The entire supply chain management (Geunes et al., 2006; Agrawal and Smith, 2009; Overbeck, 2009) After a glance at the entire supply chain management, one has to know that Michael Porter has something significant to tell about the value-chain model. According to Porter, the value-chain model comprises two important activities - primary and support. The primary activities can include those that are responsible for direct actions that will have to address the prevailing or existing customers’ demand. One of these activities will have to include operations, logistics, and marketing and sales, and service. In other words, since logistics is part of them, the supply chain management is therefore a primary activity in the value chain if Porter’s model will have to be taken into account. It is also for this reason, that in the case of a retailing firm, supply chain management must be a primary activity because it is here where the need to directly address customers’ existing demand is of great value as an activity. So far, all existing concepts and models presented in this section are consistent in their ideas in giving the significant relationship between purchasing and supply chain management. As a whole, supply chain management comprises purchasing, but at some point, there is a need to take a look at purchasing as a separate entity because of its critical rule to bridge the customers’ existing demand and how to address it. Figure 4. Porter’s value chain model, 1985 (Porter, 1998; Bischoff, 2013; Rakowski et al., 2010) Evaluation of Wal-Mart’s approach The work at hand so far establishes the points concerning what Wal-Mart is doing in its industry and the relevant concepts and models regarding purchasing and supply-chain management. As already stated, purchasing is the bridge, here where Wal-Mart’s point to consider its purchasing strategy makes sense. However, there is something that Wal-Mart does that the model in Figure 1 cannot actually establish. Wal-Mart continues to ignite customers’ demand in order to continue its purchasing function. Therefore, it matters that Wal-Mart continues to lower the price for its product offerings because this will eventually entice customers and increase the demand for their offered items. In other words, the stated model and concept in Figure 1 concerning purchasing has only to be a significant effect of a certain strategy if one has to base it on the case of Wal-Mart. Figure 3 on the other hand just tries to present the remarkable connection between logistics, purchasing and materials management, but they all represent the entire supply-chain management model that eventually lack the other primary activities in the value chain. Clearly, one important idea that the stated models and concepts from Figure 1 to Figure 3 that might have not substantially explained in detail is the concept of marketing activity linking to purchasing and supply-chain management. However, the value-chain model of Porter is quite clear about this point, by establishing the concept that logistics, operations, marketing and sales and service should be the primary activities. The model of Porter however, is not quite clear in presenting the point if there is a link to each of the primary activities, knowing that based on Figure 1 the operation function and purchasing function have primarily important connection, by which the latter has to stand as the bridge to successful delivery of customers’ demand. In other words, Wal-Mart’s idea to combine its marketing activities and other important primary activities stated in Porter’s value-chain model together with its supply-chain management is evolutionary in nature due to the following reasons. If one will base it on the stated concepts and models so far, none of them could exactly present the actual business model that Wal-Mart is trying to establish at present. This will be realised if one has to primarily rely solely on the concept of supply-chain management in general. Wal-Mart is a marketing driven company and as stated on the activities it employed, the justification of this claim is quite evident. Wal-Mart is clearly using its purchasing and supply-chain management as marketing activities in general because they have staggering impact on its ability to affect the price of its offerings. After all, especially in the case of Wal-Mart it is quite clear that the low costs of the supply-chain reflect on the prices/profits that the organisation makes. If there is another model that can substantially explain the prevailing model of Wal-Mart at present aside from Porter’s it must be that in Figure 2, The Reck and Long model. Without any doubt, Wal-Mart has become ‘Performance centred’ when it comes to its purchasing approach. This approach as clearly stated has to ensure best product management methods and even employ and integrated methodology in order to manage relationships, processes and outcomes. This is another relevant justification that Wal-Mart is eventually trying to recreate purchasing and supply-chain management as a marketing tool. Therefore, in this respect, Wal-Mart might have come up another significant model, and that is to include purchasing and supply-chain management as integral components of a general marketing activity, rather than separate entities as Porter suggested in his value-chain model. Conclusion The work at hand just presented the activities that Wal-Mart are trying to employ in order to create its competitive advantage primarily on how it uses its purchasing and supply-chain management for this reason. It was found that there are various activities that Wal-Mart uses in order to make a substantial output in its purchasing and supply-chain management activities, and there is a great area of concern regarding the link of marketing activities to them in order to make a difference. Furthermore, the work at hand presents some remarkable concepts and models pertaining to purchasing and supply-chain management. It was found that none of these models could actually explain in detail the prevailing business model that Wal-Mart employed. However, Porter’s value-chain model and Reck and Long model were found to have closer resemblance to Wal-Mart’s employed model at present. In a nutshell, this report provides the foundation of Wal-Mart’s unique and highly controversial strategies in the retail industry. Primarily, this report showcases the point that a good way to look at it is to understand the firm’s current purchasing and supply-chain management. References Agrawal, N. M., and Smith, S. A. (2009) Retail supply chain management: Quantitative models and empirical studies. New York, NY: Springer. Bacon, T. R., and Pugh, D. G. (2004) The behavioral advantage: What the smartest, most successful companies do differently to win in the b2b arena. New York, NY: AMACOM Div American Management Association. Barboza, D. 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