Walmart's supply chain management and cost reduction strategies

Wal-Mart and Its Global Supply Chain

Over the last several years Wal-Mart has had a major effect on what is happening around the globe. This is because the company is the largest purchaser and retailer of a variety of products ranging from: toys to consumer goods. Where, their key to success is to be able to offer the lowest prices around. This formula has proven to be so successful that the company has rapidly expanded opening a number of Supercenters around the globe. These are stores that contain a variety of products to include: groceries and prescription drugs. (Goldman, 2003) Then, the company also has the Sam's Club Supercenters. These are large discount volume stores that sell the same items as the Wal-Mart Supercenters, the only difference is: these stores offer larger discounts. This is because the only people, who are allowed to shop at the store, are those who purchase a membership from the location. These memberships can be used at the different Sam's Clubs around the country. ("Sam's Club Facts," 2010) This model of offering lower prices to consumers has proven to be so successful that the company was able to grow from a small five and dime store in Arkansas, to the largest retailer in the world. One of the biggest reasons why the company has been so successful is because it was able to revolutionize supply chain management. Where, they were able to introduce new techniques that would dramatically lower their overall costs and increase their profit margins. At which point, they would continue to expand into different locations and regions around the globe. To fully understand how the supply chain has helped turn the company into one of the most successful retailers requires examining how the supply chain works and what the company is doing to improve it. Together, these two elements will provide the greatest insights as to how the company was able to become so successful in a little over 50 years.

The Supply Chain of Wal-Mart and Sam's Club

Since Wal-Mart owns Sam's Club, they share the same basic philosophy / principals when it comes to logistics and negotiating with suppliers, which is to receive the lowest cost possible. Yet, when you look beyond this obvious point, it is clear that there are a number of different elements that help support the objective of achieving the lowest cost. This is because every single aspect of the company's supply chain plays an integral part in reaching and maintaining this low cost structure over the course of many years. What happens is: Wal-Mart's supply chain is focused on achieving the lowest prices possible from all suppliers. At first the company, would negotiate with regional suppliers on receiving the large volume discounts that it was looking for. Then, as the company began to grow, they continued this relationship of demanding the absolute lowest prices. Over the course of time, these tough negotiating tactics would provide the basic ingredient in keeping costs low. (Chandran, 2002)

However, the company would face a number of issues that would force them to create a supply chain that would support the long-term objective of: bringing substantial value to consumers. What happened was Wal-Mart was mainly focused on building its stores in small to medium sized towns that were in rural areas. This idea of bringing substantial value to consumers in rural areas was a huge success, as it would allow the company to rapidly expand between the 1960s and 1980s. With the founder Sam Walton saying, "When we arrived in these small towns offering low prices everyday, customer satisfaction guaranteed and hours that were realistic for the way people wanted to shop, we passed right by that old variety store competition with it 45% markups, limited selection and limited hours." (Chandran, 2002) This is important because it highlights how the company was able to be so successful.

How is Wal-Mart Improving its Supply Chain

To continually provide consumers with the lowest prices requires maintaining an attitude of vigilance, when it comes to the supply chain. Where, managers must seek out new and innovative ways to reduce costs as much as possible. Recently, the company has been looking for ways to lower its costs dramatically, by purchasing more of their products directly from the manufacturer. What is happening is Wal-Mart used to purchase many of their products from third party distributors. As the company grew larger, they were able to have more influence on the manufacturer of various products, who would sell directly to the company. This changed the relationship with its manufacturers; which meant that the company saved billions of dollars a year. Currently, Wal-Mart purchases 80% of their products directly from the manufacturers. Over the next five years, they are working on increasing this amount to as close to: 100% as possible. With the company estimating that such a move would cut logistics costs between $4 billion to $12 billion, over the course of 5 to 15 years. (Cassidy, 2010) This is significant because it shows that the ability of Wal-Mart to seek out ways to reduce logistics costs, are helping to improve the overall cost structure of the company. At which point, this allows their profit margins to increase and they can begin expanding into other areas.

Clearly, one of the biggest elements that contribute to the overall success of Wal-Mart is their ability to control costs associated with their supply chain. This is important because it underscores how Wal-Mart was able to maintain it low cost structure, despite expanding rapidly in size. Where, the elements of: the company owning / operating their own warehouses, using the supply chain to serve a stop gap for local stores, implementing technology to improve the overall management of the supply chain and they are continually seeking out ways to improve; all highlight how the supply chain was able to make the company one of the most successful in the world.