Introduction
One of the most fundamental, yet critical elements of effective business strategy is to continually facilitate organisational growth and expansion. In fact, the general consensus among business professionals is that a firm that is not growing is actually shrinking due to the prevailing ferocity of the competitive marketplace and continuous economic development of the international business landscape. As such, today’s organisations have had to place tremendous focus on promoting and facilitating business expansion in order to ensure firm survival. For smaller firms, the prospect of seeking organisational expansion may not seem so difficult. In particular, smaller firms have a great deal more room in which to grow and expand within the marketplace, as their market presence is usually limited to a small region or metropolitan area within one country. Larger firms, however, often encounter difficulty in consistently seeking organisational growth through expansion activities.
One such firm that has encountered this problem is Walmart, which has already grown into a multi-billion dollar multinational organisation with a deeply entrenched and widespread brand presence throughout the United States and abroad. In recent year, a possible solution to Walmart’s growth and expansion woes has emerged that has could provide the firm with access to the largest consumer market on the planet. In particular, the last decade has been very good to the Republic of China from the perspective of economic development. Additionally, China has moved to relax its economic policies to promote a more free-trade oriented market, which has served as a major contributor to China’s recent economic growth and development. The favorable economic conditions that have been brewing in China have led many larger corporations and multinational firms to tap into China’s massive consumer market as a means of facilitating organisational expansion and maximizing revenue growth. Walmart is one such organisation that has begun to examine the potential benefits of expansion into China.
There are a number of factors that need to be explored and analyzed in order to ensure such entry would be lucrative for Walmart, while also ensuring that shareholder value was maximized. Several issues in particular require extensive scrutiny so as to determine the overall sustainability of Walmart if it were to enter China. Some of these key issues will be examined here within the sections that follow. Specifically, in order to better understand the feasibility and potential behind Walmart’s possible expansion into China, the following report will discuss what sustainability would mean to Walmart, China, and potential customers within China’s consumer market. In addition, distinguishing features of Walmart’s distribution system and operations in China will be identified and examined. Next, the process of selecting and evaluating supplier/vendors will be scrutinized with particular emphasis on the level of sustainability should be incorporated into such processes. Finally, this exploration will conclude with a brief discussion of how sustainability could be improved and/or enhanced within Walmart’s current distribution and retail operations.
What Sustainability Means
One of Walmart’s most basic and popular attributes is its reputation as a low cost retailer. In particular, Walmart prides itself as a low price leader by offering a wide variety of products at incredibly low prices compared to its most fervent competitors. It is Walmart’s dedication to its low price strategy that has become one of the retailer’s most valuable keys to success within the developed market of the United States where the firm was born. Despite the significant economic growth and development that China has experienced in recent years, it is important to remember that the average household income of Chinese consumers are far lower than those among American consumers. In fact, a large portion of China’s population live in rampant poverty compared to American standards, and as such, are not even able to afford a dollar bottle of shampoo. As a result, even Walmart’s incredibly low prices can be too high for many Chinese consumers, which implies the existence of a conundrum for the firm as they seek to expand into the Chinese market and hold true to their low price strategy. Ultimately, this means that Walmart will need to find a feasible way to offer products to Chinese consumers that are prices low enough for Chinese consumers to afford. Sustainability with regard to Walmart in China refers to the firm’s ability to maintain adequate profits to sustain its retail operations in China, cover its opportunity costs, support further organisational growth, and meet the expectations of the firm’s stockholders. Due to the fact that the average household disposable income of Chinese consumers is much lower than that of American consumers, Walmart must be able to find a way to price its products low enough so that Chinese customers can afford them, while also ensuring that it will generate enough profit to meet its financial obligations and stockholder expectations.
According to research, Chinese consumers develop loyalty to a particular retailer based on customer satisfaction. Walmart has done well in China to focus on high customer satisfaction, which has helped the firm to establish a large and loyal following among China’s consumer market. In addition, consumers in China have lived in a communist society for a number of decades. As such, the average Chinese consumer is used to having only a very limited selection of consumer products to choose from when they shop, and a vast majority of these products were made domestically. With Walmart’s entrance into the Chinese market, China’s consumers have been exposed to a far greater variety of products from all over the world, which has enabled them to buy products that more closely suited their needs, as well as products that were previously not available to them at all. What is important to note, however, is that Walmart’s target market among Chinese consumers falls more within the middle class, whereas in the United States, the firm’s most prominent target market is the lower to lower-middle class. This difference effectively emphasizes the different economic makeup of the United States and China, as well as the price point of Walmart’s operations in either nation. As far as sustainability is concerned, Walmart has had to establish an operational framework that ensures the firm is able to perpetuate itself in China, despite the significant income disparity from its domestic market. The firm’s efforts to maximize efficiency to minimize costs can only go so far in China as Walmart must be able to generate a profit in an economy where household incomes are a fraction of what they are in the United States. To target China’s consumers in lower socioeconomic classes would require prices too low for the firm to remain sustainable as it is simply impossible for an organisation of Walmart’s size and stature to minimize costs enough to offer a bottle of shampoo that retails to US customers for $1 a bottle to Chinese customers for a few pennies. This more than anything else illustrates the conundrum that Walmart faces with regard to ensuring sustainability within its retail operations in China.
Walmart in China: Distribution System and Operations
A close examination of Walmart’s operations in China reveal that they differ in some ways to the way the firm operates in the United States and other markets that are economically developed. Perhaps the most prominent difference of note involves the ratio of supercenters to distribution centers. In particular, Walmart has been able to enjoy very liberal trade policies in its home country of the United States, where it established an extensive network of supercenters in most rural areas. In addition, Walmart’s operational strategy led to the firm establishing distribution centers that were optimally placed among its various supercenters in order to ensure maximum operational efficiency. Ultimately, this operational efficiency was achieved at a ratio of 100+ supercenters per distribution center. In China, Walmart has yet to achieve the same operational efficiency as the current ratio of supercenter to distribution center is closer to 50 to 1. A number of problems have plagued Walmart in achieving the same efficiency in China as it has in the United States, many of which involving the differences in market and trade policy that exist between the two nations.
Sustainability in Supplier/Vendor Selection
The critical importance of sustainability to Walmart’s operations in China cannot be understated as the firm seeks to expand and grow in the somewhat rigid Chinese marketplace. Conventional wisdom indicates that there are a number of key factors that impact a firm’s sustainability within a marketplace, and this is certainly true for Walmart in China. Some of these key factors are within the control of Walmart, such as the various components comprising the firm’s supply chain. In particular, Walmart can take decisive and strategic action in order to establish an integrated supply chain structure that promotes sustainability through efficiency and careful supply/vendor selection.
As indicated previously Walmart has provided Chinese consumers with a wide variety of products far beyond what these consumers have been accustomed to in the past. The sheer volume of the variety and selection that Walmart offers its customers has been considered one of its most popular attributes among Chinese consumers. In order to provide this vast selection of products, Walmart must be able to establish a comprehensive supply chain that is comprised of firms who supply the various products to the retailer for sale. Further, in order to ensure continued sustainability, Walmart must ensure that its supply chain is comprised of suppliers and vendors that meet the firm’s stringent needs, which include reliability, low cost, and high quality. At a minimum, it is these criteria that Walmart must incorporate into its selection of supplier/vendors in order to ensure that its primary objective of sustainability is met.
Perhaps the most important of the above criterion involve the low cost factor. In particular, a key component of Walmart’s sustainability strategy is to sell products at a low enough price to make them affordable to Chinese consumers, while at the same time, pricing them high enough for the firm to successfully generate adequate profits to achieve sustainability. An essential part of this equation is to find suppliers whose prices are low enough to support Walmart’s sustainability strategy. As such, tremendous emphasis is placed on the cost of utilizing a particular supplier as a mechanism to purchase stock to be sold in Walmart’s stores in China. Traditionally, Walmart has established supplier relationships with supplier/vendors that offer the firm special rates based on economies of scale that are lower than wholesale rates. In addition, Walmart has been known to charge for shelf space, requiring suppliers to pay for the privilege of having their particular product sold at Walmart due to the massive market exposure that Walmart has been able to achieve. Based on this, incorporating sustainability into the selection process of suppliers within the firm’s supply chain in China should require Walmart to seek out suppliers that enable the retailer to achieve economies of scale through significant discounted prices based on bulk orders. In addition, based on the massive market presence that Walmart has, both in China and throughout the world, Walmart should select suppliers that are willing to pay shelving fees. A very prominent firm that has been known to pay considerable shelving fees to Walmart is Procter & Gamble, as P&G is widely known for having one of the largest portfolios of consumer products in the world.
In addition to finding low cost suppliers, Walmart should also seek suppliers that are reliable that provide high quality goods. Reliability in this context refers to the firm’s inherent ability to deliver the goods that Walmart orders consistently and in a timely manner. The delivery of high quality goods is also critically important as poor quality can take a toll on Walmart’s bottom line in the form of returns, poor customer satisfaction, increased defects, and an elevated risk for lawsuits from faulty products that cause physical harm or damage to property. Facilitating sustainability through the supply chain requires the coordinated effort of suppliers and Walmart as they all work toward the same goal of earning a profit, while at the same time, ensuring that the products are prices low enough to meet or exceed the customer’s perceived value. It is always important to remember that this value is not always merely quantified in dollars and cents as it call also be quantified in money lost by lawsuits, shrinkage, diminished brand value and reduced customer satisfaction. All of these things have the potential to negatively influence Walmart’s profits, and thusly, its sustainability within the Chinese market.
Improving Sustainability in China
According to prevailing data, Walmart has already done a great deal to promote sustainability within its retail operations in China. In addition, sustainability is not by any means a new concept to Walmart as the firm has maintained comprehensive sustainability frameworks to support its operations in all the markets it serves, beginning in the United States and then later moving abroad. Regardless, despite Walmart’s diligent efforts to promote sustainability within its retail operations in China, there are certainly a number of ways in which the firm could improve in this regard. When identifying ways that such a well-established multinational firm can improve sustainability within its distribution and retail operations, it can be particularly helpful to consider cost savings and innovation as key mechanisms to facilitate effective ideas.
Based on available data, cost savings can be achieved within Walmart’s distribution network in one key way. In particular, within the firm’s domestic operations, Walmart has been able to achieve a high supercenter to distribution center ratio, with over 100 supercenters to each distribution center. Based upon the rigid laws and political red tape that Walmart has encountered in China while establishing its brand presence, the firm has only managed to achieve half this ratio with little over 50 super centers to one distribution center. Ultimately, the more supercenters that each distribution center services equates to higher operational efficiencies, and thusly, lower overall operation and overhead costs. Based on this, Walmart needs to focus on opening more supercenters in China in order to improve this ratio and reduce its operation costs.
Another prominent way that Walmart can improve its sustainability is through the implementation of a comprehensive continuous process improvement program that draws on efficiency based doctrine such as lean thinking, six sigma, theory of constraints, and ISO in order to eliminate waste, reduce defects, eliminate constraints, and maximize quality. Continuous process improvement has become increasingly popular among today’s largest organisations, regardless of industry. The primary objective of a continuous process improvement program is to improve organisational processes in order to either maximize value generation or eliminate operational waste. It is important to remember that waste of any kind within business operations will directly equate to profit loss. Simply put, waste is bad for sustainability. As a result, in order to improve sustainability within Walmart’s distribution and retail operations in China, the firm should focus on eliminating waste from within its operations, through the establishment of waste eliminating programs, such as lean thinking. Doing so will help the firm to eliminate the waste that has previously been present yet undetected, and ultimately eating away at the firm’s revenues and profits.
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