Outsourcing is the utilization of a third-party provider who is specialized in the area to perform functions or manufacture products that are considered non-core to the business and previously handled in-house. The benefits of outsourcing are saving costs, improving quality with concentrating core business, enhancing knowledge and capacity for innovation, and accessing to talented and expertise workforce.
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Under cost pressures, firms review their core competencies and outsourced more activities such as warehousing, accounting, human resources, data processing, security, and logistics for distribution, transportation, stock control. As businesses are more globalized, companies realize in-house operations are not efficient to emerging markets anymore because of costs and different organization systems as well.
Outsourcing could backfire when service quality, staff turnover, productivity, information security matters are not met each other.
2. Background and nature of the business
1) Type of product and service
Wal-Mart Stores, Inc.. was found by Sam Walton in 1962 and currently 8,416 stores and club locations in US and 14 countries employ more than 2.1 million associates, serving more than 176 million customers a year.
The Group’s principal activity is the operation of retail stores in various formats organized into three divisions: Wal-Mart Stores U.S. consisted of Discount Stores, Supercenters, and Neighborhood Markets, Wal-Mart.com, Sam’s Club a chain of warehouse clubs which sell groceries and general merchandise), and Wal-Mart International.
They sell a wide variety of general merchandise from apparels, groceries, electronics, household supplies, automotive products and more at low prices and offer customer-oriented services at stores.
2) Customer requirement
As the advertising slogans “Low prices everyday” and “Saving people money so they can live better lives”, the most important reason to do shopping at Wal-Mart for customers is low prices. But the customers are now diversified so only low prices can not satisfy the customers’ needs.
The requirements of customers can be characterized as below four.
â€¢ Customers want to be treated properly
– Creating a fun and friendly shopping environment with kind and helpful employees
â€¢ Customers want to buy what they need at cheaper price with good quality
– Keeping prices as low as possible and down the costs of operations
â€¢ Customers want to find what they need at the store
– Display diverse items as many as possible
â€¢ Customers want to save time to get what they need
– Check frequently all items are stayed in stock.
3) Business culture
Their business culture has made Wal-Mart one of the most prosperous retailers in the world and it has been developed out of three core beliefs as below.
â€¢ We treat everyone with respect and dignity : A culture of respect
– They call employees as Associates and treat people as sources of new ideas.
â€¢ We are in business to satisfy our customers : A culture of customer satisfaction
-They work hard to make every customer feel welcome and add value to what the customer gets.
â€¢ We strive for excellence in all that we do : A culture of continuous improvement
– They keep focused on making improvement and never be satisfied with present.
The famous Wal-Mart cheer represents the culture as a main symbol and is a constant reminder to associates of the fact that the customer is the reason they do the business.
10 Foot rule for greeting and helping customers within 10 foot and Sundown rule to give same-day customer service are also good examples of showing how they value the customers.
(1) Everyday low price
Low costs are essential to its overall marketing strategy and it is the core competency to be successful.
Wal-Mart is committed to buying direct and very watchful for the whole procedures from wholesaling, marketing, transportation, and supply-chain management to reduce costs.
(2) The family store and wide assortment of merchandise
They supply the everyday needs of every member of the family and carry most of the items needed for household especially on consumable items primarily on basics not high priced lines with offering quality to customers. In average Wal-Mart store, there are more than eighty thousand individual items and it gives customers the diversity to shop and convenience of one stop shopping.
(3) Private label merchandise
In 1991, Wal-Mart first launched its own brand Sam’s Choice and Great Value two years later. The sales of its private label brands are now around 40 percent of total sales. Store brands have become a crucial part of Wal-Mart’s global expansion strategy.
(4) Automated systems for distribution and inventory
Wal-Mart was one of the first retailers to use electronic scanners for point-of-sale (POS) at cash register and accepted Universal Product Code (UPC) for merchandise processing. They used EDI (Electronic Data Interchange) for transmitting orders and receiving invoices with manufacturers electronically as the first retailer in the industry.
Now Wal-Mart uses radio frequency identification (RFID) microchips that replace bar codes and security tags with a combination technology that costs less money.
< Productivity loop >
Integrity : No Lie, cheat, steal, to be faithful,
Respect : All employees should be respected no matter their positions, genders, races and religion
Teamwork: Depend and cooperate together
Communication: listening and talking in both directions
Excellence: strive to improve and change to be better
Accountability: Responsible for personal actions
Trust: act in a manner to engender the trust with customers, suppliers, fellow associates.
6) Current industry challenges
(1) Competitors – Specialty Big box stores
Big retailers including Home Depot, Costco, Target, Kmart, and others in US have risen and they are growing fast and closing the gap between them and Wal Mart is still by far the largest operator. Some of them are featured as specialty retailers such as Home Depot for home improvement, Best buy for Consumer Electronics, Staples for office supplies. Toys R Us and Petsmart are also followed as the trends and needs of narrowed and specialized market.
(2) Controlling foreign supply chains in international management
Cheap imports from Asia shifted the power balance between discounters and domestic suppliers in US. After successful entry into grocery retailing in domestic market, Wal Mart turned their directions to international expansion in late 1990s.
(3) The change of customers’ needs
The core customers of Wal-Mart shop for staples on a budget, however, its customers want more than the lowest prices. Particularly apparel, home furnishing, and consumer electronics don’t attract customers because customers want trendier design and better quality for these items. It is critical to liven up these product lines which have higher profit margins compared with grocery through product innovation with suppliers.
7) Other vital areas (why the OR choose outsourcing as a strategy)
(1) IT outsourcing to India
Wal-Mart’s motto is to cut out the middle man, and his profit margin, and go direct and until recent years refused to use packaged applications instead of home-grown apps for IT part. Yet it was reported evaluating a business process outsourcing (BPO) contract in India potentially worth up to $500 million over next few years for procurement, logistics and inventory, payroll, and more in 2009.
Tesco in UK and Home Depot in US have been outsourcing projects to third party service providers in India to support its existing IT systems and develop new applications. Tesco saves over $60 million every year through outsourcing its IT projects to India.
(2) Manufacturing outsourcing in China
Because of affluent manpower and high efficiency, Wal-Mart has searched suppliers in China who can give cheaper prices. Compared with US manufactured products, it is cheaper and Wal-Mart chose to manufacture their private label products in China. More than 70% of its products are Made in China and Wal-Mart has planned to increase the import the products from their Chinese suppliers to achieve its strategic goal saving people money.
3. Process flow chart of Wal-Mart operations on the trend of outsourcing, competitive edge, process activities, and responsibilities in supply chain outsourcing.
1) Wal-Mart US and suppliers in China
Wal-Mart has approximately 6,000 suppliers and 80% of them are from China.
TCL, a Chinese company, is the largest producer of television in the world and almost all of their US exports go to Wal-Mart and Black & Decker a power tool maker and one of suppliers to Wal-Mart no longer operates any factories in the US and have plants in Mexico, the Czech Republic, and China.
Below process flow is an example of operations process between suppliers in China and Wal-Mart US.
Chinese Sub supplier
Chinese Sub supplier
Chinese Sub supplier
Consolidator in China
Distribution center in US
US supplier in US
consolidator in US
Order, replenishment, QC, product, design info
Consumer response check
Order, replenishment, QC, product, design info
Receive orders from Wal-Mart US, manufacture products, schedule production
US supplier in China
Receive orders from Wal-Mart US, check inventory with sub suppliers, schedule production
US supplier in US
Receive orders from Wal-Mart US, manufacture products and send it to distribution center
Manage transportation and shipment
Shipping and delivery
Distribution center in US
Check and stock all item in from suppliers, send requested items to stores, inform inventory status to Wal-Mart US.
Receive, stock, and display items. Check quality, Sales and marketing, Request a purchase to Wal-Mart US, Customer service. Quality management
Plan and forecast demands, source and contact suppliers for placing orders, Manage whole flow and information of items from suppliers to customers
Information management, Procurement
< Operations process between suppliers in China and Wal-Mart US>
2) IT for supply chain outsourcing
Wal-Mart has an extensive database for determining merchandise sales trends, managing the replenishment of each store’s inventory called Retail Link own developed database system. It allows suppliers to access and share data about sales and items in stock.
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For managing and controlling the freight flow and inventory from the entire supply chain, they use RFID (Radio Frequency Identification) technology for saving shipping time and costs. Below example shows how RFID is used for tagged items in supply chain flow during delivering products.
Loaded on drayage
Loaded on ship
Unloaded from drayageship
Loaded on truck
Unloaded from truck
Loaded on truck
Taken off shelves
Moved to shelf
Putaway to backstore
Unloaded from truck
Wal-Mart contact each supplier directly for placing orders to save time and costs so it is accurate and fast to have response for placing orders. Especially the suppliers in China offers lower prices than local manufacturers so it also contributes to its efficient supply chain management.
Its distribution centers are famous for efficient inventory management using RFID and RetailLink database so Wal-Mart minimizes related cost of holding and shortage. RFID technology help Wal-Mart to find the location of a product from when it is manufactured to when it is stocked at a distribution center and it is useful for control the flow and even forecast demands.
4. Challenges faced of Wal-Mart in supply chain outsourcing
Backfire of Lower price strategy
Wal-Mart’s low price leadership has been faced with quality problems because some Chinese suppliers make inferior products only to meet lower prices. The issues have come to the front in US and China that Chinese manufacturers are pushed to the corner to keep costs bottom and many quality claims of unsafe items found in US store.
Wal-Mart is a huge company and its small action can affect to economic situation of one or more countries and there are many complaints that its supply chain incurs the loss of American jobs to low-wage countries such as China.
Following are some facts which show how Wal-Mart has done for outsourcing in China.2)
Wal-Mart imports $22 billion of Chinese goods, making Wal-Mart the #1 importer of Chinese goods
Wal-Mart, if it were its own country, would be China’s sixth largest trading partner
Wal-Mart ships American jobs overseas, both directly and by pressuring American suppliers to move offshore
Wal-Mart lobbies for free-trade agreements that make it easier for companies to ship American jobs overseas
Because of the growing trade deficit with China, the U.S. has lost an estimated 1.8 million jobs since 2000
5. Suggestions for Wal-Mart supply chain outsourcing to overcome the faced challenges.
1) Costs, quality and customers – Quality management
Wal-Mart has obeyed its goal Lower prices since its establishment faithfully for customer satisfaction.
Yet, they forget the most important thing for their business, the customer.
The present Wal-Mart just stacks the products from China needed a close quality check and concentrates on saving costs at every procedure until selling.
Customer will be fully satisfied with the product of good quality and low cost not only low cost and the trends of Wal-Mart customers are changed to more sophisticated for fine designed items and less concern about costs. 3)
Good product quality makes a company remain competitive and profitable in the long run and gives following benefits.
lower marketing costs
Increased profitability in the long term
Less costs for solving quality problems -> Lower costs
The quality problems can be settled with applying principles of Total Quality Management.
Top management holds a principal responsibility for product quality
Top management give first priority on Quality not Costs
Quality of a Product must be based on the customers’ expectations
Listen to customers and improve customer services
The production systems and methodologies must be synchronized with high quality standards
Reset high quality standards for all suppliers to observe
Quality requires employee involvement and is the responsibility of all employees at all levels of the organization
All suppliers and employees are needed to take more responsibilities for quality
Every employee must strive to “get it right the first time.”
Timeliness and accuracy for quality should be emphasized
Quality must be constantly monitored so that all problems can be quickly identified and solved.
Consistent quality management should be executed
All functions of the organization must emphasize on continuous quality improvement to accomplish strategic goals
Quality improvement should be connected with strategic goals
Companies must ensure high quality inputs by collaborating with suppliers with TQM programs
A company and suppliers need to understand TQM precisely and cooperate.
2) Controlling suppliers – Supply chain management
Outsourcing has many advantages, however, it has disadvantages such as inferior quality as well because it is out of organization and sometimes hard to control.
Chinese suppliers of Wal-Mart have produced quality problems and it could be improved within supply chain management after renewing Quality principles.
To make efficient supply chain activities, information sharing and exact communication are important.
Wal-Mart uses Radio Frequency Identification (RFID) and implement a collaborative planning, forecasting, and replenishment (CPFR) program, beginning a Just-In-Time Inventory Program at all aspects in supply chain within Wal-Mart. These technologies should be more about data sharing on a global basis and it will allow suppliers to reduce their overall costs and offers efficiency in supply chain.
For better quality and performance, multi-sourcing for same product in different countries can be an option. If the problems are not improved, sourcing new supplier is inevitable and it will save time for finding reliable one. Outsourcing in countries which have similar culture or no language barriers will be easier to control.
6. Determine the necessary resources needed to implement the changes in Wal-Mart
1) HR resources
Intense competitions among other big box retailers makes Wal-Mart focus on lower price to be competitive in the market. But their primary goal is not for customer but themselves to make more profits. Top management changed their eyes to their financial status from customer satisfaction. To survive in the industry is crucial for a company but it is not correct in terms of long run business. They have to go back to basic to satisfy customers with good quality products and enjoy them with pleasant shopping. The original philosophy is not observed, the future of company is not bright any more. Top management should realize the importance of long term partnership and strategic alliances with suppliers for making goods met customers’ demands together.
2) IT structure
When suppliers are not close to a company, they need to find a way to communicate frequently.
Advanced technology helps outsourcing to be rapid and accurate in supply chain and Wal-Mart is a leading retailer of using cutting edge technology in their business.
But except for logistics, inventory, replenishment planning for sales, they need to develop new system for communication for improving quality, variety, customization of products, worker involvement, a flexibility in work processes. The system also can be outsourced to professional IT providers for more objectivity and sustainability.
7. Expected positive results to be achieved with the changes made in Wal-Mart
Wal-Mart is one of the best supply chain operators at the moment which using a supply chain management system progressively against its competitors and they don’t even stop evolving. They have very reliable system to do the business.
Now Wal-Mart needs to decide to change for next step and it doesn’t mean to give up “everyday low price” strategy their core competency. They have to find their own way to appeal to customers again with their visions and business goals.
If Wal-Mart focus on customer satisfaction to solve current problems about quality and costs, the big box stores will benefit customers, workers, even the economy with their innovated management.
Following are expected results when the changes have made from six aspects; Inside of organization, within supply chain, company and supply chain, outside of organization, products and customer.
Inside of organization
Within supply chain
Company and supply chain
A flexible organizational culture
Innovative leadership style
Continuous improvement for customer satisfaction
Constant development of technology
Frequent communication for improving product quality
Rapid and accurate supply chain flow
Long term reliable and cooperative relationship
Better output by regular performance check
Controlled manufacturing procedures based on mutually agreed standards
Outside of organization
Enhanced competitiveness in the industry
Competitive advantages in
Good quality of products with low costs
Environment friendly products
Satisfied with prices and quality
Comfortable with value-added customer services
Purchase more products
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