BUSI 514 Operation Management Professor Kipley Alfie(ZHEN) Zhang Wal-Mart Case study Background Sustainability standards for supplier Wal-Mart disclosed its sustainability standard to all Wal-Mart suppliers in the world in 2008. It requires Wal-Mart Supplier take more environmental and social responsibilities. To do so, in order to maintain its competitive quality image of Wal-Mart products. With growth slows down in U. S, Wal-Mart focus on expansion in the world, especially in China. Executive Summery Wal-Mart Company Strategy “Save people money so they live better” In 2008, Wal-Mart has new senior management team change.
The new team is facing the challenge of expansion in China in a sustainable way. This case study provides challenges, opportunities analysis and solution to Wal-Mart’s current situation. Wal-Mart is facing sustainable Challenges in main three areas: low price versus high sustainable cost, un-sustainable local suppliers, and distributions. In Chinese culture, they concern more about the future so they tent to spend less and save more. It brings out the first challenge of Wal-Mart that How to keep competitive price in China. Second, Wal-Mart Chinese suppliers are mostly local small and median business.
It increase the difficulty of meeting the needs of consumer and low quality control. Most importantly, the owners are now education with sustainable development thinking. It is hard for Wal-Mart to push sustainable strategy to its product on the shelf. The last difficulty is Chinese un-sustainable logistics. Due to the lack of the domestic infrastructure, the cost of inland logistic is too high for Wal-Mart. Wal-Mart has to outsource its truck fleets to Chinese logistic companies. It is difficult for Wal-Mart to push better fuel usage during the distribution, keep the delivery to super store on time, and decrease the distribution cost.
On the other hand, China is full of possibility to Wal-Mart. First, China is the second largest economic power in the world. The Chinese economy is facing, a reform that it changes from depending on foreign direct investment to domestically consumption. In 2025, the domestic consumption will be 50% of its GDP in 2025. It opens up huge market for Wal-Mart. Second, the Chinese middle class is increasing. They are more educated and willing to pay more for higher quality and sustainable products. Because the purchasing power and geographic spread out, Chinese middle class could be the next profit generator for Wal-Mart.
At last, this case study provides solutions to Wal-Mart China. The First solution is to improve Chinese government and Wal-Mart cooperation in restriction and legalization process. Wal-Mart should work with government to push more environment regulations to reduce the usage of plastic bags. This move could turn Wal-Mart’s high sustainable cost into its competitive advantage and build up Wal-Mart’s positive image in Chinese environmental protection. Second, Wal-Mart should consolidate Chinese suppliers into larger size. It copies the successful experience in U.
S that larger supplier could reduce Wal-Mart management cost and logistic cost, provide better product quality, and have the capability to develop sustainable production. Third, Wal-Mart should develop its own internal infrastructure that it should digitalize the management process and invest in employee educations. Sustainability challenges in Chinese market Low price consumer preference VS sustainability high cost Wal-Mart established its low price reputation throughout the world, but it is facing higher challenges of even lower price in Chinese market.
The Chinese consumers are like to compare the price in local grocery stores. They will visit grocery stores constantly as a leisure activity to find out the lowest price. Compared to other local competitors, Wal-Mart, as an American company with all those higher standards and higher quality company strategies, are not price competitive at all in the Chinese market. Competition is crude in China with less customers’ loyalty. Customers will leave Wal-Mart if it doesn’t offer the lowest or same price in the market. Less regulation of government, Wal-Mart’s competitors are not doing the same thing.
They provides low quality product that most of them are not sustainable and harm to the environment, especially plastic bags. In China, plastic bag usage covers all aspects of Chinese consumers’ life. It only costs 1000 bags for 3 Chinese Yuan which equals to one sustainable bag that Wal-Mart uses. From this plastic bags competition, Wal-Mart increases its cost dramatically. Also, consumer may forget to bring sustainable bags to Wal-Mart or even they have to buy more than three bags for large amount of groceries. Sustainable bags make consumer life un-convenient and reduce the consumer preference to Wal-Mart.
When Chinese local market competitors don’t concern about the sustainability, it is hard for Wal-Mart to make the decision of sustainability and survival in China. The challenge of Chinese market is that it is not mutual and needs to be developed. Difficulty with local suppliers Compared to U. S daily grocery suppliers, most of Chinese local grocery suppliers for fresh food are small business or individuals. It leads to the problem of higher supplier cost and difficulty of quality control. Individuals have to deliver to Wal-Mart every day, ..
Because of business size, it is difficult for them to meet the Wal-Mart needs in one or several suppliers and Wal-Mart has to order from lots of different suppliers for one item. It increases Wal-Mart’s management cost and lowers the Wal-Mart’s efficiency. For these individual suppliers, most of them have less education level so that it is hard for Wal-Mart to push the sustainable environment thinking to them. They are those local suppliers that Wal-Mart depends on. Distribution difficulty Due to lack of the transportation of infrastructure, it takes from 2 days to 4 days from Shen Zhen Distribution center to other major cities.
It makes Wal-Mart react slowly to consumer demand and its own possible shortage. It puts more damage risk when products are on the road. Since lack of productivity of Wal-Mart’s suppliers, any loss of products on the road will cost short period supply shortage in Wal-Mart retail stores. Wal-Mart sub-contract out its distribution to Chinese local logistic companies. In China, logistic industry is highly competitive that most of the trucks are over-loaded. Not alike California, the freeway maintenance and usage fees are include in state sale tax, Chinese have to pay for the highway system when trucks get on the freeway.
It cost proximately 100 dollar per 1000 miles. It limits Wal-Mart trucks fleets’ coverage range. Also, truck fleets vehicles have a high age and low technology level, and it leads higher air pollution Since Wal-Mart has “90 days no question return policy” and high return rate of Chinese suppliers, almost 200 pallets per week of return products put pressure on Wal-Mart’s inventory and distribution center. Opportunities in China According to McKinsey Global institute, China’s consumption will increase to 50% of its GDP by year 2025.
It shows that government has established consistent domestic policies to stimulate consumption. Also, 15% increase on average Chinese household income. Moreover, Chinese household tend to consume more due to household saving percentage drops. Chinese market shows its potential to Wal-Mart. Government is also pushing new policies to improve consumption infrastructure which makes Chinese consumers purchase a wider range of products and services easier. (KGI,2009) Raising middle class in China With 30 years liberation, middle class is growing and becoming the most powerful consumer group in China.
They are professionals and small or median business owners who earn more than 100,000 Chinese Yuan per year (about $12,500). (KGI,2009) (KGI,2009) All of Chinese middle class concentrate in the urban big cities. According to McKinsey, this complex segment is 270 million people with 500 billion RMB (nearly 100 billion USD) disposable incomes. They are looking for high quality and they are willing to pay more for better quality. Moreover, most of the high income middle class are educated and they concern about the Chinese living environment and they are looking for sustainable products.
They are perfect consumer segment for Wal-Mart global sustainable development. (KGI,2009) Solutions Shape the Chinese market Work with the Chinese government official, and meet the requirement of local and central government and work with the government to set up an environment standard for the whole industry. Wal-Mart should actively push local Chinese government to pass more regulation and standards for the retail industry. It is crucial to use government agency tool to shape the industry with higher standard to achieve the goal that there is no defective products in the market.
Especially, the environment regulation and restrictions, Wal-Mart should push less usage of plastic bags in China. So that Wal-Mart could shape the competition and increase the cost of competitors. Since Wal-Mart has invested into sustainable technology for a long time so that it turns current disadvantages of Wal-Mart into its competitive advantage. Wal-Mart should involve into legalization of the recycle of high efficiency light bulbs and set up the Global environment standard of mercury. Wal-Mart could invest in the recycle industry which has the technology to recycle mercury or other pollution.
It creates new market and diversifies Wal-Mart China’s financial portfolio. Most importantly, it increase Chinese acceptance of Wal-Mart. It builds a positive image of Wal-Mart that it comes into China not just for Chinese Yuan. How to influence the Government Wal-Mart could use large local suppliers as a bridge to build better relationship with local government. Wal-Mart could use their existing network to influence government decisions. In China, business negotiations are based on relationship as well-known as “Guanxi”.
With relationship, everything is possible and both sides could figure out a way to get round of the policies. Without relationships, it is extremely difficult to earn the trust of government. Relationship is difficult to build. Once it achieved, it will empower and enforce the cooperation. Normally, local successful suppliers have already built good relationship with the officials in order to survive. So that better cooperation of suppliers could lead to a success relationship with government. Wal-Mart could share more information with Chinese government to improve transparence and understanding as well.
Consolidation of Local Suppliers To influence the local supplier, one of the alternatives is to offer supplier sustainable technologies to improve their business with fairly lower price or program subsidies with Wal-Mart. So that Wal-Mart could improve energy efficiency of its suppliers to meet the sustainable goal. Also the Wal-Mart China should develop standard audit process for its Chinese local suppliers. Due to the lack of standard audit process and small size of the local suppliers, Wal-Mart should education its local supplier or provides them free audit service.
Moreover, Wal-Mart could target median size local suppliers, offer them chance to move forward one more step of cooperation with Wal-Mart. Wal-Mart use its global business experience and consulting group to influence median size suppliers growth to larger size even to a global scale. This move will motivate local suppliers to reach the Wal-Mart’s standard. It will benefit Wal-Mart by lower product cost, better quality control, less supplier management cost, more effective and efficient logistic management.
Wal-Mart could use its strong financial ability to do Joint venture partnership with its suppliers, purchasing supplier companies stock or even directly acquire small size suppliers. It could consolidate the small size suppliers into one larger size supplier with Wal-Mart its own management. Wal-Mart could apply its success experience in US that it consolidates the fresh vegetables, eggs, daily bread and food suppliers into one under its own management. As a result, Wal-Mart could control quality of the product, lower the product cost with massive production and push more sustainable alternative with lower cost.
Company internal infrastructure Wal-Mart should improve digitalize movement internally, so that Wal-Mart could reduce the paper usage. Due to employee’s lack of education and long years Chinese business habit, it seems to be hard for Wal-Mart to make its employee to get use to sustainable ways. Education investment on its own employees could solve problem, increase employee productivity and company loyalty. Works Cited (2006). From” Made in China” to ” Sold in China” the raise of Chinese urban consumer. McKinsey Global institute. J. Woetzel, L. Mendonca, & Devan, J. (2009). Preparing for China’s urban billion. McKinsey Global Institute.