Wal-Mart Stores, Inc. (NYSE: WMT) was founded in 1962 by Sam Walton and incorporated in 1969. Walmart has been maintaining its status as the largest grocery retailer in the U.S. The company operates at more than 8,500 retail units under 60 different banners in 15 countries, and reported sales revenue of $405 billion in 2010. The company strives to strongly commit to its promise to the customers; “Every Day Low Prices.” In order to deliver low-priced goods and make the customers’ lives better, the company particularly leverages operating expense and improve its global expertise. From another perspective, Wal-Mart Stores, Inc. is one of the biggest buyers for many suppliers whether they are domestic or international producers, and whether they are of a small scale or a big scale. To reduce the bottom-line costs, the company has been vigorously attempting to reduce product costs and transport costs.
As the company’s business dramatically grew, it created Global Procurement division in 2002 to better manage the international purchasing activities. The division makes decision on and oversees direct business import and factory purchasing from their international suppliers in many different locations around the globe. To name a few, Wal-mart obtains global procurement offices in Bangladesh, Dubai, India, Indonesia, Korea, Pakistan, Shanghai and Shenzen in China. These offices allow international suppliers to apply for direct import program through which they could establish the supplier relationship with Wal-mart, after the thorough examination.
Wal-Mart’s Global Procurement Division
Headquartered in Shenzen, China, the division is responsible for identifying new attractive international suppliers, sourcing new products as necessary, and maintaining good supplier relationships with the existing suppliers. In addition, it manages the global supply chain of Wal-mart’s direct imports. The majority of the staffs are located in Shenzen, China as the company has the greatest supplier base in China. By setting up the Global Procurement division, the company gained better insights into their international suppliers. Through this program, the company could understand the issues of global sourcing and suppliers and work towards solving them in order to assure quality. As a supplier maintenance process, the global procurement offices are also responsible for conducting factory inspections, and provide the workplace standards training that align with the company’s own standards.
International Supplier Selection
Similar to the company’s very thorough domestic supplier selection, the global procurement undergoes the selective process. The greatest advantage that the international direct import brings is reduced costs. Due to high labor costs, many of the U.S. factories cannot offer Wal-mart competitive pricing. As a result, Wal-mart explored its options in Pacific-Asia/Asia. In many Asian countries, manufacturers benefit from relatively low labor costs. Among those international supplier, Chinese suppliers are definitely the company’s biggest supplier base. To ensure the quality of products in addition to lower costs, the global procurement division strives to help them adhere to the standards and make factory inspections/audits. Also, the company has its own ethical standards set for its potential and existing suppliers as an essential requirement. Reliability and trustworthiness are also important criteria to decrease the delivery failure and delay rates. Through the company’s own global supply chain, it manages the transportation of goods from international suppliers to the U.S. warehouses.
Supplier management system
There is no need to tell how far has reached Walmart on the supply chain management. To ensure its customers’ satisfaction is the highest, the biggest worldwide retailing company provides a Supplier Training program. Once a supplier has been accepted and has read the Proposal Packet which introduces the business philosophy and practices, a training program managed by Accenture must be followed. In 2005, Walmart and the Retail Industry Leaders Association (RILA) created an online retail supply chain certification for suppliers. A web-based training program for Chinese factories to audit ratings and productivity is also included. A lot of side businesses like 8th Walton offer services and solutions to support organisations who want to do business with Walmart.
Intertek Group – factories inspection, factory audits
In August 2009, Walmart announced its partnerships with Intertek to ensure the quality of the suppliers’ product. The partner provides the RoHS (Restriction of Hazardous Substance) certification by a cost-effective program to assure the product compliance. The process includes documentation review, process audit and lab testing.
The Local Supplier program was put in place to satisfy local demand for specific products. A complete process has to be completed from the store manager to the Divisional Merchandise Director. Also, a special program for Women owned business and minority businesses. Benefits are present for the chain: “Wal-Mart’s local sourcing strategy has been seen as a move to win the favour of its customers”. Walmart recognized that local suppliers are more aware of national trends, customers’ tastes and local needs. That helps create links with the population as well.
A lot of requirements must be fulfilled by suppliers to be part of the big empire retail system. First, all businesses must adhere to the RetailLink system which is a website to plan execute and analyze the production. Moreover, suppliers must include EDI (Electronic Data Interchange) to their system for real-time delivery of business documents. EDI is part of the Vendor Management Inventory (VMI) which, through the use of sale information, recommends orders to Walmart. “Over the years, EDI has actually proven to be one of the most efficient and effective ways for Wal-Mart to conduct business with its suppliers”. That contributes to oversight the inventory programs of both the supplier and Walmart.
Despite these technical requirements, tests labs might be asked to ensure the highest quality and safety: “we use different independent third party testing labs to provide a safety net test”. Also, there is a total prohibition of any kind of gifts or present to Walmart managers. The company asked for industry knowledge and integrity from its suppliers. Finally, suppliers must meet regulation differentiations among countries with the help of the Office for Regulatory Compliance (ORC).
Some standard have to be reach as well: the compliance with the law, the no-child labor application, hiring and employment practices, compensations (wage), freedom of association and barging, health and safety, environment, conflict-free of interest, anti-corruption and financial integrity. Violations of these standards can be reported in any country confidentially.
A product Commercial General Liability insurance must be purchased by the supplier for a minimum of $ 2 million. An employee’s insurance has to be bought for a minimum of $1 million. An employer’s liability must also be included.
Benefits of Global Sourcing
Cheap Labor & Resrouce Costs
One of the reasons for Walmart pursue international purchasing is there are cheaper labor power available abroad. Looking at hourly compensation cost of the world by United States Department of Labor, one can clearly see that there are numerous nations that provide cheaper labor force than that of the US. Suppliers in nations with cheaper labor are likely to provide cheaper products which would benefit Walmart in cost saving. Walmart is trying to decrease labor costs further by launching programs such as job optimization and regrouping program
Some resources are actually cheaper in certain countries and Walmart could benefit from such difference by purchasing resources from cheaper regions. Moreover, in some cases, due to such differences in cost, there really is no competitive domestic supplier available making it inevitable to purchase internationally.
Diversification of Supplier Base
Also, by purchasing internationally, Walmart can diversify its supply base. By doing this, Walmart not only can purchase various products with cheap price but also ensure sustainable and less volatile supply base. For instance, in recent disaster in Japan, even though Walmart’s business in Japan has taken some damage, it is unlikely to damage overall company as their supply base is diversified. Regarding the issue, Moody’s Investors Service’s Senior Analyst Charles O’Shea said, ‘While Japan may be an important market for Wal-Mart, the company has other international opportunities that have more growth potential over the long term.’ As you can see in the example, Walmart benefits greatly by diversifying its supply base globally. Not only that, Walmartcan improve its bargaining position towards domestic suppliers by diversifying its supply base. As Walmartcanpurchase from suppliers outside the US, it does not depend on domestic suppliers providing it bargaining power to push domestic suppliers to provide contracts better conditions.
Risks of Global Sourcing
Despite benefits mentioned above, international purchasing comes with some risks and costs. To start with, there are transportation costs. As international suppliers have to ship products, it is important to minimize transportation cost. Walmart tries to avoid unnecessary transportation cost by having standards and requirements when selecting supplier. By selecting supplier that fits the standards, Walmart can avoid potential additional cost. Also, Walmart offers supplier information manual which its suppliers are required to follow as stated in contract with Walmart. The contract also states clearly that it is suppliers’responsibility to deliver products timely and in case of delays, compensations are in order. Walmart also tries to prevent such failures by educating its suppliers through supplier training programs.
Reputation and Quality Control
Walmart also has to ensure its reputations are protected when dealing with international suppliers. If products from international suppliers are of incompetent quality or if their suppliers have ethical issues, Walmart’s reputation would be could damaged. To prevent any potential problems, Walmart practices audits to its suppliers. For instance, Walmart carried out unannounced audits to factories of its supplier in China. To Walmart’s surprise, it found out that the factories had unsafe work practices which caused staff injuries. If it were not for these audits, Walmart’s reputation could have been damaged for dealing with unethical supplier.
Corporate social responsibility
As one of the largest world companies, Walmart has no choice to look on the impacts of its actions. But, “because Wal-Mart only directly manufactures 8 percent of everything is sells, the solution lies for the most part with the suppliers”. Walmart asked to its 100,000 suppliers 15 questions for sustainability regarding energy and climate, material efficiency, natural resources and people and community in the goal to transform into a sustainable products rating for customers. Walmart also pursues 3 major environmental goals: to be supplied 100% by renewable energy, to create zero waste and to sell products that sustain people and environment.
Established in 1992, the Ethical Standard Program, a division of the Global Procurement, is responsible to verify if suppliers are in conformance with Walmart standards and local law. The company experienced some troubles in China relatively to management style (“well-run prisons”) and to the labor exploitation.
Child labor and Labor/factory conditions
In 1993, Walmart was accused of its first violation of international labor rights in Bangladesh: “Children in Bangladesh were forced to work for five cents an hour while Wal-Mart falsely indicated that their garments had been “Made in USA” consistent with their 1985 image campaign”. Despite many efforts, in 2006, around 250 children were found working in a factory. Bad treatments, physical, moral and financial were also reported. The fault can be rejected to suppliers, the core problem, and Walmart could stop the abuses by halting its cutting and running. Various violations have been reported on the minimum wage, forced labor, overtime paid, bathroom breaks or rights to independent unions.
Against green initiatives/sustainability
Walmart put in place a Sustainable Value Network to seek solutions for an eco-friendly environment. The company began to see “environmental sustainability as a way to achieve two goals: improve Wal-Mart’s bottom line and its reputation”. Efforts are driven in this direction, but there is still a lot to do. Some say Walmart got engaged in these actions, looking to its bottom line.
Better Supplier Relationship
Walmart has been criticized by general public that it forces its suppliers to cut down costs and processes. While this procedures have helped Walmart to achieve its business motto, ‘Every Day Low Price (EDLP)’, it also resulted in somewhat harming its relationships with its suppliers. For instance, survey by RetailingToday.com showed that Walmart’s current suppliers believe Walmart does not help its suppliers to understand the business and operations nor does it make information and resources open. This kind of data shows that Walmart’s over-compulsive requirements has led to distrusts between it and its suppliers. For Walmart to successfully survive in future market, it is essential to create sustainable relationships with its suppliers.
For similar reasons mentioned above, Walmart has been criticized for not environment friendly. As Walmart pursues cost minimization, it somewhat neglected environmental issues which is damaging its brand image. There are demonstrations and movements that argue to not purchase from Walmart because of it is harming environment. For Walmart to better its brand image, it is important to ‘go green’.
Other issues include ethical problems. It is again related to Walmart’s goal of minimizing cost. To meet with Walmart’s demand of cost minimization, some suppliers from developing countries using child labor. Not only is itself unethical, it is also morally being criticized because Walmart does not actively prevent this. As mentioned above, this is also harming Walmart’s brand image.
Overdependence on Chinese suppliers
Currently, Walmart is depending hugely on supplier from nations with cheap labor and cheap resources like China. However, China is not a nation of infinite resources or will its labor always stay cheap. Ultimately, Chinese labor cost and resource prices will rise. If Walmart stay over-depending on China, potential danger will always remain. To prevent such danger, it needs to more diversify its supplier base.