Wal-Mart maximises its competitive advantage through
supply chain management practices
This paper looks at Wal-Mart, a giant in retail industry. It is specified towards analysing the
supply-chain management practices that claim to make Wal-Mart ranking top in fortune 500
companies for fiscal year 2001-2002. The paper has been structured on different theory of
economics such as Mercantilisim, Heckscher-Ohlin trade theory, Leontief Paradox, Diamond
Model of Michael Porter for the competitive advantage of Nations. Wal-Mart’s supply chain
management practices are now industry best practices and adapted by many retailers
globally.
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Essay topic: How a company maximizes its competitive advantage by controlling
its own national supply chain by using and applying the international trade
theories
This essay looks at the strategic approach of Wal-Mart to maximize and intensify its
competitive advantage through controlling and strengthening its supply-chain
management practices. In order to analyze the objective, it is important to create a
context of economic theories around which the content has been analyzed.
The objective behind this analysis is to recognize the practices that devised the
competitive advantage of Wal-Mart ranking it on the top of global fortune 500
companies for financial year 2001-2002 with revenue of $219.81 bn. According to
experts, Wal-Mart’s efficient supply-chain management practices are its competitive
advantage. For this purpose, data from two case studies have been accumulated and
then analyzed. The case study titled ‘Wal-Mart’s Supply Chain Management
Practices’ written and ‘Wal-Mart's Supply Chain Management Practices (B): Using
IT/Internet to Manage the Supply Chain’ were accessed for the purpose.
Initializing with the core concept of’ why countries trade’; simply put countries trade
to provide commodities to its nationals. Varied countries have varied resources that
would meet certain needs only. However, peoples’ needs vary too. In a simple world
where we are ignoring trade barriers and any complexities of trading for a while, a
country that possesses a wealth of oil couldn’t produce fruits. It would then trade oil
with fruits with a country that can produce fruits. Similarly, a fruit producer could
produce oil, hence it trade fruits with oil.
The real world trading that is complex and couldn’t trade as simply as illustrated
above, introduces two things; absolute advantage and comparative advantage.
Absolute advantage: A country, in a world of economics is said to have an absolute
advantage, when it posses all the resources including skills to produce certain product
at a lower cost per unit than any other country. As an example, the country that can
produce oil has all the resources to produce oil at lower cost per unit, refine it and
then sell it to other countries that are willing to buy it.
A country that has an absolute advantage over a product reduces the cost of producing
it and raises profits when traded.
Comparative advantage: Similarly, taking the above concept further, a country that
produces oil has sufficient available resources so that it could trade it with other
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countries has a lower opportunity cost than a country who also sell oil but has fewer
resources to trade it. Lesser resources could be less reserves of oil, higher cost of
refining it etc. Therefore the country having sufficient resources of oil to trade it, has
a ‘comparative advantage’ over the country that has fewer resources to do so.
In the same context, Mercantilism is a theory of economics that suggests countries to
encourage their exports and discourage their imports. According to the theory, this
would increase countries’ wealth. This theory was believed and practiced till 18th
century, but is no more supported.
Since the aforementioned theory, lost its credibility with shift in times, further
theories emerged. One of them was Heckscher-Ohlin trade theory. This theory
explains the existence and pattern of international trade based on comparative
advantage between two countries producing different goods.
According to this theory, comparative advantage exists because the country endows
certain resource over which this comparative advantage is earned.
Nevertheless, in contrast to this theory, was presented another trade theory by
Leontief, called as Leontief Paradox. The economist examined United States’ foreign
trade and determined that although US was rich of capital, its exports were labor
intensive and imports were capital intensive.
The reason these two theories contradict is that according to Leontief Paradox
although US is capital rich, still its imports demand capital whereas Heckscher-Ohlin
trade theory says that a country’s comparative advantage is because of its resources.
These theories were devised in the last century. Shifting paradigm evolved
‘globalization’. Globalization is a phenomenon that advanced as a result of
governments adopting free-market economic systems, cutting down trade barriers,
exploring and grasping opportunities in foreign markets, advent of information
technology and so on. This phenomenon shapes up the modern industrial and business
infrastructure. Identifying a correlation between globalization and the economic and
trade theories discussed here, is arguably difficult as of the changing trends and way
of trading these days.
Therefore, analyzing the ‘supply-demand’ theory of economics where two vital
elements are supply and demand. Simplifying the theory, it explains the relationship
between products accessibility provided by a producer buyer’s interest in buying the
product at the specified price. Globalization, conversely sits on the platform provide
by this theory to certain extents. Having said that, supply-demand theory ignores the
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factors such as competitive markets that may affect the supply schedules,
globalization still excels on the facts behind the theory. This idea is illustrated as
follows: The emerging markets like India and China offer cheap labor because it is in
demand globally or these markets also offer their land to western countries to
establish their factories because of cheap labor and low cost of doing business.
Ultimately both markets are supplying what is in demand.
An interesting establishment of globalization is ‘economies of scale’ or putting it in
other words, ‘economies of scale’ is established as a solution to globalization and
intense competition. Economies of scale is said to be achieved by a company when
larger units are produced on larger scale with relatively lower costs. Or when a
company is big enough to buy or produce the products/services in bulk using
discounted price on buying larger volumes, it can cut down the cost of its input/
resources and produce lager units.
Further looking into current trade patterns, the oil industry though displays its rising
demands globally, also shows fluctuation in different respects. With known reserves
of over 3 trillion barrels of oil which would be consumed by the world in 50 years
according to experts, world rich nations have been desperate for buying oil in bulk
before it runs out. This had laid an adverse effect on petrol prices, thus reflecting its
respective economy. The world is seeing a shift in trading patterns again. The oil-rich
countries are aware of its low oil reserves in accordance to world’s demand, therefore
they are now investing in educating their youth (which wasn’t the case before as they
always relied on their oil for trading) to run their economy once they would be out of
oil reserves in next 30-50 years. High carbon economy is urging for a solution too.
Environmentalists are screaming for low-carbon economy that imposes carbon- foot
printing on businesses and subsequently on countries. This means lesser oil
consumption and producing energy from dark-green sources or natural resources such
as water, sun. If pursued massively, this would also effect the oil-trading and world
would witness yet another shift in trading patterns.
In order to trade distinctly, companies need to create there competitive advantage so
that they are the preferred choice as a producer/ supplier. Globalization had surely
raised competition. If we take the same concept to a much broader level that is
‘trading internationally’, countries also need the same edge i.e. competitive advantage
to be the preferred choice of producer/supplier. For instance, country ‘A’ supplies oil
and country ‘B’ also supplies oil. Country ‘C’ demands oil. Now country ‘C’ has two
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choices of suppliers who could meet his demand. The competitive advantage of
country ‘A’ i.e. low price, good reputation in the oil market, distinctive quality of oil
it supplies would make Country ‘A’ the preferred choice of supplier of oil for country
‘C’.
Taking the same concept and correlating it to ‘Diamond Model of Michael Porter for
the competitive advantage of Nations’ farther, this model identifies competitive
advantage countries/ nations could devise to identify how they could build their
competitive advantage which may not be the abundant factors/ resources such as land,
labor, location etc. countries posses. The competitive advantage is in fact created by
the following four factors:
•
The strategy, structure and rivalry of firms
•
Demand conditions
•
Relating supporting industries
•
Factor conditions
This model suggests that the nations/ countries devise its competitive advantage as a
result of advanced factors and activities in and between companies operating in
clusters. A cluster is created in a specific field/ industry with companies, specialized
suppliers, and service providers and associated institutions. Clusters cultivates on
geographic locations with sufficient resources and competencies that are accumulated
there acquiring a significant position in its proximity
The diamond model would be the baseline for the analyzing how Wal-Mart
maximizes its competitive advantage by controlling its own national and international
supply-chain.
Another interesting controversial concept of trading that should be discussed along
with the theories is ‘protectionism’. Protectionism believes to limit the open-market
policy of a country so as to contemplate on the benefit of domestic economy. The
ideology is to protect local businesses and jobs from global competition. Needless to
say, this ideology contradicts globalization, hence raises conflicts. The classical
methodology hired to support protectionism is import tariffs (tax imposed on goods
when they cross country), quotas (restrictive amount of goods to cross boundaries of a
country, as import goods) and so forth. Protectionism is hired to support domestic
economy, but raises a signification question that whilst protecting he domestic
economy wouldn’t it be liquefying the economy rather than solidifying it, which is the
scream of the times.
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For a better understanding of aforementioned theories, the supply chain management
practices of Wal-Mart are analyzed below.
The company makes itself top retailer through buying in bulks, hence playing with
volumes. It establishes economies of scale and enjoys its share in respective markets.
Wal-Mart manages its supply chain through following practices:
•
Procurement and distribution: Wal-Mart only procures products, once
confident that the goods aren’t available at cheaper price from other sources.
This would make pricing for products available at Wal-Mart competitive. It
also invests in understanding the cost structure of its suppliers, who are
preferably local and would build on a long-term relationship with them. This
is quite important for a giant such a Wal-Mart as it keeps educating and
customizing its suppliers as it needs demand. The company also has its
distribution centers distributed geographically all over the United States.
These distribution centers are sufficiently and constantly stocked to maintain a
flow of products to feed its stores. The remarkable practice here is
empowering an employee with the real-time information about the inventory
levels of the product so that he could identify the demand of a specific product
and place an order for its delivery in the store. This saves tremendous amount
of management efforts and mishaps lay in placing orders, expected delivery
time, date and resources. The distribution centers are facilitated with shower
bath and fitness centers for workers.
•
Logistics management: This is done through a fleet of trucks owned by the
company. This ensures availability and eliminates all the uncontrolled factors
of staff shortage, drivers’ misconduct ion of company’s policies, high turnover etc. The drivers are educated by the company of its ethics, policies and
procedures as a result of which they understand the importance of customer
service and customer driven business they work for. The stores where to
deliver the inventory is called ‘customers’ by the distribution centers. Another
practice opted by the company is known as ‘cross-docking’.
This technique practically reduces cost of handling, operation and cut down
the storage of the inventory too. Wal-Mart implied this technique by taking the
orders placed by the stores and forwarding them to respective manufacturers
who would agree upon their services or refuse because of non-availability of
goods in a specified time period. The goods were then delivered to a ‘staging
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area’ where they are packed and sent to respective stores or customers. The
benefits realized out of cross-docking are phenomenal as it eradicates
warehousing process, operates on ‘demand-chain’ rather than on ‘supplychain’, de-centralizes the inventory management system. As analysts put it,
the success of Wal-Mart lies behind 85% of its goods supplied to stores
through cross-docking technique which reduces its cost of sales by least 2%
consequently offering lower prices to end user.
•
Inventory management: The success of inventory management was
strengthened through IT enabled technologies implemented with in the
company’s system. The system helped in tracking and monitoring sales and
merchandise stocks level on the store shelves. The technology would also
forecast the precise information about the delivery of stocks such as either
stock is on its way to be delivered or leaving distribution centre. The inventory
is managed through constant monitoring and tracking to ensure meeting
demands of the customers.
When it comes to create a competitive advantage over the competitors, the trading
theories may or may not work according to changing trends in trading. Arguably,
some theories may work to some extents and may fail beyond. A company on a small
scale and a county on a larger scale may adapt a hybrid approach to experiment its
success. Innovation and accepting and responding to changes have always been keys
to success. Wal-Mart adapted the same ideology of innovation, a proactive approach
towards customers need, ensuring to share its success with its customers by cutting
down prices, expansion into foreign markets, challenging trade barriers by offering
highly competitive prices and opportunities, customizing services to local markets,
sharing its success with local business through collaboration and acquisitions. The
focus through competent supply chain management was on reducing the cost of doing
business, simplifying its process, automating processes where required to cut down
the labor cost that enhances cutting down the price of goods replenished on its
shelves.
Getting back to diamond model, Wal-Mart is a classical example of when Porter
explains that the abundance of resources could weaken the domestic economic and
scarcity of resources would actually encourage innovation and challenges that creates
competition, giving a company and or a country its competitive advantage. The
demand conditions are pursued by the companies to meet the sophisticated demands
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of the consumer which permeates cross-border too, hence elevating competition. An
industry where Wal-Mart operates is quite mature and highly competitive which hires
technology as its drivers and innovation as its critical success factor. Sure
competition, Wal-Mart faces competition and raises competition at the same time, by
beating the competition hence acquiring competitive advantage over the rivals.
Conclusion
Globalization opens up immense opportunities for countries and global economy.
Although several factors such as regulatory requirements, restrictions on trading laws,
cross-border/ cross-cultural obligations etc. fade away the opportunities for many, still
they are unlimited as far as supply and demand needs are addressed strategically.
Wal-Mart owes its success to adhering to the needs of demands and facing the
completion. While competing, it has reached a threshold where it offers high
competition to rivals/ new entrants, keeping the completion in a cyclical pattern. As
stated earlier, its competitive advantage is its best supply-demand practices, which is
now considered industry best practices to compete in respective markets where WalMart operates.
References
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