Walmart Inc.’s Supply Chain Evaluation in China

Executive Summary

Walmart Inc. made a successful entry into the Chinese market as one of the ways of expanding its market share. Although this firm has registered financial success in the market, its supply chain management has weaknesses that may affect the sustainability of its operations in China. In this report, the purpose was to investigate the current supply management strategies that it uses in China and propose ways of addressing the identified weaknesses. The findings show that the management has already identified the major issues with the current system and is taking steps to address them. The report concludes with recommendations that the management of this company should consider to improve its entire supply chain in China.

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Demand Forecasting

Walmart China is one of the most important overseas branches of Walmart Inc. in its international operations. The ability of the company to achieve success in this foreign market depends on its effectiveness in forecasting the demand and ensuring that the necessary products are made available in convenient stores. Christopher (2016) explains that poor forecasting may result in a situation where the firm has less or excess products in its stores. When the retail outlets are under-stocked, they would be displeased by a situation where they cannot get products they need from the firm (Wang, Gunasekaran, Ngai, & Papadopoulos, 2016). Constant disappointment would convince them to consider other alternative shops, a move that would have a devastating impact on the firm.

When the firm has excess stocks, it will cost it more to store them for a long period. Constant handling may damage some of the products. When handling perishable products, they may decay before they can be sold to customers. Such losses may have a significant impact on the profitability of the firm. As Christopher (2016) observes, the success of a firm in the market depends on its ability to forecast the demand to understand the right quantity of products that should be made available within a given period. In this section of the report, the focus is to assess the supply and demand at Walmart China based on the case study presented to understand the most appropriate way of stocking.

Evaluation

When Walmart started its operations, the management was not certain about the most appropriate warehousing strategy to embrace. It was keen on avoiding mistakes it had made in other foreign markets, and as such, it did not replicate the model used in the United States. As a way of cutting down its cost of operation, the firm embraced a direct-to store delivery model (Johnson, 2015). In this model, suppliers are required to deliver products to individual outlets based on their demand. The problem with this strategy was that each store would make small orders that could not be delivered by large manufacturers. As such, the firm relied on small distributors as its main suppliers. Although the strategy was meant to lower the cost of handling these products, it increased the cost of acquiring inventories. Instead of dealing with a single supplier (the manufacturer), the firm had to deal with numerous suppliers with limited ability to define quality of products delivered. The strategy was changed in 2015 when Walmart introduced Distribution Centers (DC) as a way of overcoming the problem. It meant that the system was centralized and instead of each store making individual orders, the firm would make large orders that would be delivered in these centers for distribution.

The number of suppliers was reduced from 2,658 to 820. One of the main criteria that the management took before selecting specific suppliers was their ability to meet the demand of customers both during peak operations and in steady state. The management opted to deal directly with manufacturers and farmers in case of fresh produce. It eliminated the intermediaries who lacked the capacity to regulate the supply or define quality of products delivered. The management assessed the effectiveness of each of its suppliers’ inventory reorder points. For example, most of the 820 suppliers had automated systems that would help in coordinating its ordering system. When the stock at the retail stores are below a given point, the suppliers’ management unit would make another order to ensure there is a continuous supply of products. Such an alignment would help lower the cost of inventory management.

The supply chain management at Walmart faces a number of demand forecasting challenges that may affect its ability to replenish its stock in time. One of the main challenges is the distance between the distribution centers and retail stores. The management has identified 11 distribution centers responsible for receiving large orders from major suppliers and distributing them to individual retail stores based on their demand. The problem is that sometimes it takes long for an inventory to be moved from the distribution centers to the retail outlets, causing shortage. Another issue is the incomparability of products with shipping or storage facilities. Some of the perishable products require special containers that regulate temperature and air flow to ensure that they remain fresh during transportation. It means that sometimes moving these perishable products in small quantities may be cost ineffective to the firm. Employees of this firm in China are also trying to learn how to operate under the new centralized system. These issues significantly reduce the ability of Walmart to meet the demand of its customers during steady state and peak operations. The firm had common cases where shelves were empty at a time when customers needed various products.

Recommendations

The management of Walmart China has a responsibility of ensuring that the new centralized system of managing inventories based on the market demand is a success. The case study identifies various issues that this firm should address to improve efficiency in its supply chain system and lower costs of operation. The management of this company should consider the following recommendations:

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  • Employees’ training should be given priority every time the firm makes the decision of changing from one system of operation to the other. Employees within this department should understand how they could operate under the centralized system.
  • The distribution centers should be strategically located in a way that reduces or eliminates the need to move long distances to deliver suppliers to retail outlets.
  • It is necessary for this firm to have special carriages of different capacities to help in the delivery of perishable products from the DCs to the outlets within the shortest period possible.

Sourcing

The sourcing network that a firm uses defines the efficiency in the inventory availability at the store and the profit margins that a company enjoys. Christopher (2016) explains that large corporations with significantly strong bargaining power can negotiate good deals that would leave it with attractive profits by the end of the deal. The decision of Walmart China to centralize its delivery system was influenced by the desire to enjoy the economies of scale. In this section, the focus will be to evaluate the network sourcing strategy that this company uses and identify areas that need improvement as the firm continuous with its expansion strategies in the Chinese market.

Evaluation

The case study shows that until 2011, Walmart had 29 autonomous purchasing offices in China, with each having a serviceable dry network of five DCs (Johnson, 2015). The logistics department charged suppliers and buyers a warehousing fee whenever they used the company’s network. To avoid these charges, buyers and suppliers would avoid the network, which in turn affected the availability of inventory in the company’s stores. The 29 buying offices did not have to coordinate their activities because they operated autonomously. During this period, Walmart had more than 20,000 suppliers, and most of them were distributors. The case identified an example of a manufacturer who produced 18 items stocked by Walmart China. Given the fact that the company was not purchasing the items in large bulks as stipulated by the manufacturer, the primary supplier would then sell the 18 items to 144 distributors who would finally sell to Walmart. The long supply chain was not an optimal mix for operation because it not only increased the overall cost of operation but also led to value loss, especially when handling perishable products. The quantity of products needed would be met under this strategy, but it is clear the approach failed to take into consideration the need to ensure that cost of sourcing was low.

The decision by the top management unit to centralize its sourcing networks made it possible to address most of the weaknesses identified in the previous system. The current suppliers working under the new centralized system are able to meet steady state and peak demand to a larger extent than was the case before. The centralized distribution centers have close communication with inventory management units at individual retail outlets within different regions across the country. It means that the firm can monitor the flow of the stock and make orders for replenishment within the right time to avoid cases of empty shelves. The new strategy has enabled Walmart to access the products that meet its quality standard from suppliers because it is directly engaging them. As a large organizational buyer, the company can engage the suppliers and specify the quality and quantity of products it desires. For example, when the company moved from the direct-to-store strategy to the centralized system, it became possible for the firm to engage directly with some of its fresh produce suppliers. The company is now capable of explaining to these farmers the most appropriate way of packaging their fresh produce to extend their shelf life.

Recommendations

  • Lesley Smith, who is currently the vice president of supply chain management at Walmart China, and her team in this department have a role to play to optimize the sourcing network to improve efficiency. As explained in the case study, buyers and suppliers have often avoided using the company’s network because of the associated cost. The management can consider eliminating these costs, improving its warehousing, and logistics system as a way of improving the relevance of the network. The network should be capable of meeting the current needs without compromising on its capacity to address future demands.
  • The supply chain unit should redefine its standard procedure for vetting suppliers based on specific criteria. It is advisable for this company to narrow down the number of its suppliers even further to improve efficiency. As such, the vetting should be based on the capacity of the supplier to deliver quality products within the right time in a reliable manner. The current strategy means that the firm has to assess the quality of the products once they are delivered at the DCs. This strategy should be changed, especially when handling fresh produce. The company should visit farmers supplying different products and ensure that they meet the set criteria.
  • The management should automate its system and have it linked to that of the primary suppliers. It should set a standard practice where if the stock at the DCs is below 25%, an automatic ordering system should be triggered to ensure that new stocks arrive in time, especially during peak operations. It means that new inventories should arrive at individual retail outlet once the stock goes below the 25% limit.

Transportation

The strategy that Walmart China uses has a direct impact on its supply chain management, the overall profitability, and ability to maintain sustainable operations in the market. According to Phillips and Rozworski (2019), different companies employ different transport strategies depending on different factors such as their size, location of their retail outlets, availability, and cost of using logistics services of other companies, and approaches used by rival companies. Christopher (2016) believes that critical factors that a company must consider are the efficiency of the chosen strategy and the associated cost. In this section of the report, the researcher will analyze the current transport strategies that the firm has embraced in the Chinese market and possible weaknesses, and then recommend ways of overcoming the challenges.

Evaluation

When the management introduced a new system of DCs instead of direct-to-store delivery, one of the areas of operation that had to be redefined was transportation. In the previous system, the suppliers were expected to deliver their products directly to various stores across the country. However, the new system meant that they had to deliver products in large quantities at the distribution centers. The new system required this firm to have its own transport mechanism to deliver the products to the retail stores. The company opted to outsource this service to third-party logistics service providers, 3PLs. The strategy is a classic demonstration of the inability of Walmart to have its own logistics system that can meet its internal operational needs. The outsourced companies used their own transport equipment and operated under the agreed upon terms and conditions of engagement.

One of the constraints within the transportation network was the lack of independence of Walmart to exert full control in activities conducted by the outsourced companies. As long as terms of agreement are met, the top management unit could not force the logistics companies to use modern and more effective means of carriage, especially when handling perishable products. Sometimes the contracted company may have its own internal challenges such as failure to pay its employees in time. For example, when these employees have a go-slow because of lack of timely payment, the primary casualty will be Walmart even if this company is not to blame. It is also not economically viable for Walmart to take the employees of the outsourced company through costly trainings to equip them with new skills because they can easily work for the rival company when the contract ends. The case study also shows that the capacity of these 3PLs to meet the needs of Walmart would be compromised by the end of 2018 financial year. As the firm continues to grow in the Chinese market, these 3PLs would have to increase their capacity to ensure that products are delivered to the relevant stores across the country at the right time. The management must find ways of addressing the gap that will be created by the reduced capacity of the current logistics services suppliers.

The current modes of transportation, which are being used at the company, are based on time, cost, and quantity that can be delivered. However, the main problem with the current mode is that efficiency is still defined by the third parties. For instance, emerging technologies and improved transport infrastructure can help lower the overall cost of transport. However, it is evident that Walmart cannot benefit from such opportunities in the external environment. The firm cannot force the third party logistics service providers to lower their fees because of such improvements before the end of the contract. If the contract was signed to last for 3 years, the management of this company may have little control over the cost, efficiency, and timeliness of the delivery beyond terms and conditions set in the agreement. It means that the management of this company would need to redefine its transportation network as a way of improving efficiency in its supply chain management.

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Recommendations

The case study shows that Walmart may need to reconsider its reliance on third party logistics service providers as it seeks to expand its operations in China. The analysis of the current approach that the company uses has identified major weaknesses that the management cannot ignore. The following recommendations can help this firm to overcome issues identified in the case study:

  • Walmart China needs to introduce the use of its large delivery tracks such as those that it uses in the United States to help in supplying inventory from the DCs to various retail stores. Figure 1 below shows examples of trucks that this firm should introduce in the market. This strategy of using its own trucks means that it will have full control of its transport system and can define how to lower costs while increasing efficiency. The trucks should be capable of meeting transport needs during the steady state periods.
  • The company should consider taking its workers in the transport department through training to enable them operate effectively using technology-based systems.
  • The company should have a pool of reliable third party logistics service providers that should be contracted during peak periods. During the short peak periods, these outsourced firms will help meet the additional transport needs.
  • It may be appropriate to use the rail system where applicable, especially when delivering large volumes of cargo over long distances. As Phillips and Rozworski (2019) note, rail transport in China is relatively cheap compared to other means of transport. It is a quicker means of moving goods than road transport, especially when electric standard gauge railway (SGR) is used.
Walmart trucks.
Walmart trucks (Phillips & Rozworski, 2019, P. 78).

Warehousing

Warehousing as an aspect of supply chain management has a significant bearing on the success of a firm. Once the inventory is made available from the suppliers, Christopher (2016) explains that they should be kept safely and in a way that minimizes handling to reduce cases of damages. Perishable products should be kept at the right temperatures or in the right containers to prolong their shelf life. The management of Walmart must ensure that operational costs at its warehouses in China are kept as low as possible. This section will focus on investigating the warehousing strategies that Walmart is currently using in China, major weaknesses, and recommendations on how to improve efficiency.

Evaluation

When Walmart entered the Chinese market, it was keen on embracing best practices in the local market instead of using operational strategies common in the home market back in the United States. It developed stock keeping units (SKUs) in the retail stores to help hold the inventory before they could be put on shelves. However, it realized that this warehousing approach was ineffective. As such, it adopted the concept of distribution centers to help in purchasing supplies in bulk before breaking it into units that had to be transported to individual stores in different regions. By 2015, the company had 9 dry distribution centers and 11 perishable distribution centers across the country. The management had to put the right infrastructure to support the new warehousing strategy. The perishable DCs were equipped with cooling systems and classified onto three categories. They included frozen, where frozen goods were kept at temperatures below -8 degrees Celsius, chill, where products were kept under a temperature of 0-10 degrees Celsius, and normal, where temperatures were maintained at temperatures ranging from 12 to 18 degrees Celsius (Johnson, 2015).

In the dry DCs, the company constructed large warehouses to ensure that non-perishable products would be kept safely and away from physical damage or extreme weather conditions such as direct sunlight or rainfall. The first perishable distribution center was constructed in Dongguan, and started operations in 2018. The facilities are expected to support the operations of Walmart in Guangzhou and Shenzhen where it was projected that the 3PLs would run out of capacity (Johnson, 2015). The strategy of spreading the warehousing network across the country and in geographic locations where they can serve all the retail outlets has made it possible to meet storage needs. It is important to note that as the firm continues to experience market growth, it would need to have expansion plans to meet the expected needs. It may be necessary to consider putting up new distribution centers in the country. The main constraints in the expansion effort have been identified to be high costs and determining appropriate design for these warehouses. However, the management has put in place measures to overcome these challenges.

Walmart, just like many other retail outlets in China, sell hazardous materials such as cosmetics, pesticides, detergents, and other chemically reactive items. These products must be stored in proper ways to ensure that they do not contaminate food products or expose people to poisoning. It is clear from the case study that Walmart currently lacks a clear strategy that defines ways of handling these materials. For instance, the current mix of products that Walmart’s supply chain management (SCM) handles include products such as milk, vegetables, and fresh meat, which can easily be contaminated by cosmetics or pesticides. As such, there should be a special and separate system of managing these hazardous materials in the entire supply chain system.

Recommendations

The warehousing unit at Walmart requires a significant restructuring to meet the current and emerging needs. As the firm moves away from the strategy of using third party logistics services providers to using in-house services, it must invest in infrastructural and capacity development. The management should consider the following recommendations:

  • Walmart China would need to improve its warehousing infrastructure to enable it has a safe storage for both perishable and non-perishable products. The DCs should be strategically located close to all the retail outlets across the country. The stores should be flexible enough to deal with an influx of demand during peak periods. During high seasons, the warehousing unit should have the capacity to process more products to be delivered to various retail stores in different cities within the country. During steady period when the demand drops, the unit should be capable of adjusting its operational system to reflect existing scenario.
  • The company will need a design for the warehouses that will minimize movements between functions. The appropriate design is to automate and mechanize the warehouse. It should have two main entry points, the first where inventories are received from suppliers, and the second where they leave to the retail outlets. The design will reduce the need to handle these products while in the warehouse, which would in turn improve the entire network. The facility cost, inventory carrying cost, personnel cost, and equipment cost will be reduced when the system is automated.

Conclusion

Walmart China is one of the most important overseas branches of Walmart Inc. The analysis of the supply chain management at this firm shows that the current management has made significant changes sourcing, transportation, and warehousing strategies in line with its demand forecasting and technological changes in the global society. However, it is apparent that more still needs to be done to enable this company to realize a high level of success in the market. The priority in demand forecasting should be to have information on when and what needs to be made available at the DCs and in the individual retail stores across the country to avoid overstocking and cases of empty shelves in the retail outlets.

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When it comes to sourcing, the focus of this company should be to form a partnership with reliable suppliers, preferably manufacturers, or farmers in case of fresh produce. The suppliers should be capable of meeting the demand even during peak seasons to ensure that customer’s needs are met. Transportation should be an in-house activity that can be controlled by the firm instead of relying on the third parties. The firm should also ensure that its warehouses are fully equipped and automated to meet the current and future needs. It is important to conduct a feasibility analysis of the planned automation of the system. Although the process of automating the ordering and warehousing system at Walmart is expensive, the financial benefits and improved cost makes it a feasible investment.

References

Christopher, M. (2016). Logistics & supply chain management. Harlow, UK: FT Publishing International.

Johnson, F. (2015). Walmart China-supply chain transformation. Richard Ivey School of Business Foundation, 11(26), 1-9.

Phillips, L., & Rozworski, M. (2019). People’s republic of Walmart: How the world’s biggest corporations are laying the foundation for socialism. New York, NY: Verso.

Wang, G., Gunasekaran, A., Ngai, E.T. & Papadopoulos, T. (2016). Big data analytics in logistics and supply chain management: Certain investigations for research and applications. International Journal of Production Economics, 176(1), 98-110.

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