The Outsourcing Of Walmart Supply Chain In China Management Essay

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.

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, walmart.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 Walmart 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.

• Customers want to be treated properly

– Creating a fun and friendly shopping environment with kind and helpful employees

• 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

• Customers want to find what they need at the store

– Display diverse items as many as possible

• Customers want to save time to get what they need

– Check frequently all items are stayed in stock.

3) Business culture

The unique culture has helped make Walmart one of the world’s most successful companies and it has been developed out of three core beliefs as below.

• We treat everyone with respect and dignity : A culture of respect

– They call employees as Associates and treat people as sources of new ideas.

• 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.

• 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.

4) Strategy

(1) Everyday low price

Low costs are essential to its overall marketing strategy and it is the core competency to be the most successful retailer in the world.

Walmart 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, Walmart 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 Walmart’s global expansion strategy.

(4) Automated systems for distribution and inventory

Walmart 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.

Increase

Sales

Reduce

Costs

Reduce

Retail rices

< Productivity loop >

5) Value

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 Walmart 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.

UK’s Tesco and American specialty retailer Home Depot, have been outsourcing projects to Indian third party service providers to support their existing IT systems and also develop newer applications. Tesco for instance, saves over $60 million every year by outsourcing its IT projects to India.

(2) Manufacturing outsourcing in China

Because of affluent manpower and high efficiency, Walmart has searched suppliers in China who can give cheaper prices. Compared with US manufactured products, it is cheaper and Walmart chose to manufacture their private label products in China. More than 70% of its products are Made in China and Walmart has planned to increase the import the products from their Chinese suppliers to achieve its strategic goal saving people money.

3. A detailed process flow chart of operations on the trend of outsourcing, competitive edge, advancement for supply chain outsourcing. Include Process activities, time taken, roles, responsibilities.

Walmart 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 Walmart and Black & Decker a power tool maker and one of suppliers to Walmart 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 Walmart US.

Chinese Sub supplier

Chinese Sub supplier

Chinese Sub supplier

Walmart US

Consolidator in China

Chinese supplier

US supplier

in China

Distribution center in US

US supplier in US

Retail store

De

consolidator in US

Customer

Order, replenishment, QC, product, design info

Consumer response check

Order, replenishment, QC, product, design info

Inventory check

Supply chain

Activity

Process

Chinese supplier

Producing

Receive orders from Walmart US, manufacture products, schedule production

US supplier in China

Producing

Receive orders from Walmart US, check inventory with sub suppliers, schedule production

US supplier in US

Producing

Receive orders from Walmart US, manufacture products and send it to distribution center

Consolidator and

de-consolidator

Transportation

Manage transportation and shipment

Shipping and delivery

Distribution center in US

Warehousing

Distribution

Check and stock all item in from suppliers, send requested items to stores, inform inventory status to Walmart US.

Inventory management

Retail store

Managing

Acquiring

Receive, stock, and display items. Check quality, Sales and marketing, Request a purchase to Walmart US, Customer service. Quality management

Walmart US

Planning

Managing

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 Walmart US>

Walmart 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.

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.

Manufacturer

Consolidator

Deconsolidator

Distribution Center

Retail Store

Inventory info

Picked

Loaded

on truck

Inland carrier

Unloaded

Loaded on drayage

Ocean carrier

Loaded on ship

Unloadedfrom ship

Unloaded from drayageship

Loaded on truck

Inland carrier

Unloaded from truck

Stored

Picked

Loaded on truck

Inland carrier

Sold

Taken off shelves

Moved to shelf

Putaway to backstore

Unloaded from truck

Walmart 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 Walmart minimizes related cost of holding and shortage. RFID technology help Walmart 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. Determine current problems, weaknesses and challenges faced making reference to current practices. (based on No.2)

1) Backfire of Lower price

Walmart’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.

Walmart 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 Walmart 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. Suggest some changes in operations for supply chain outsourcing to overcome the faced problems, weaknesses and challenges. Suggestion should be justified with sufficient theories and practical examples.

1) Costs, quality and customers – Quality management

Walmart 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 Walmart 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 Walmart 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.

Better competiveness

Better reputation

lower marketing costs

Increased profitability in the long term

Increased sales

Less costs for solving quality problems -> Lower costs

The quality problems can be settled with applying principles of Total Quality Management.

TQM principles

Suggestions

Top management holds 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 Walmart 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.

Walmart 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 Walmart. 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 changes.

1) HR resources

Intense competitions among other big box retailers makes Walmart 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 Walmart 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. State all expected results to be achieved with the changes made.

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 Walmart 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 Walmart 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.

Note

1) Wal-Mart cheer

Someone in front A group in response

“Give me a W” ” W”

“Give me an A” ” A”

“Give me a L ” ” L”

“Give me a squiggly” “squiggly” (means the star between WAL and MART on logo)

“Give me a M” ” M”

“Give me an A” ” A”

“Give me a R” ” R

“Give me a T” ” T”

“What does that spell” “WAL-MART”

“I can’t hear you!” “WAL-MART”

“Whose Wal-Mart is it?” “It’s my WAL-MART”

“Who’s number one?” “The customer! Always! Umph!”

2) http://letters.wakeupwalmart.com/dia/organizationsCOM/wakeup/campaign.jsp?campaign_KEY=1914

3) http://www.msnbc.msn.com/id/7901047/