Wal-Mart China: Sustainable Operations Strategy

Ankur Vashishta (400807003 ) Manjot Singh (400807015)Arshleen Ahluwalia (501104001) Sumit Gupta (501104022 )Atul Sharma (501104006 )

The China Sustainability Challenge

• Jens-Martin Fertsch, a German expatriate moved to China in late 2005 to take up a merchandizing position at the Wal-Mart China Headquarters in Shenzhen.

• 12 year Wal-Mart veteran.• Appointed to the new position of senior

director for sustainability for Wal-Mart China (retail) and Global Procurement.

• Reporting to both Shawn Gray (VP of operations for Wal-Mart China) and Edwin Keh (COO, Global Procurement).

• Ferstch was preoccupied with ensuring that Wal-Mart China’s five Strategic Value Networks (SVNs) continued to build momentum in ways that would lead to broader acceptance among the various shareholders.

• SVNs were tasked with leading sustainability change within the organization and now directly involving some 140 associates.

• Hundreds of possible projects have been suggested but Ferstch and his SVN leaders needed to cull this to a handful of projects.

• Innovative solutions that could both cut costs as well as lead to more sustainable operations were the need of the hour.

• Projects that could communicate real value within the Chinese context, a market known for its high price sensitivity, had to be selected and cogent case for each project was needed for the Wal-Mart’s first sustainability summit in China.

• The summit was to be presided over by Lee Scott, the global CEO who would address the gathering of 1000 senior representatives from global and domestic partners to discuss the notion of sustainability.

Wal-Mart’s 2005 Sustainabilty Vision• By the fall 2005, Wal-Mart exceeded annual

worldwide revenues of US $280 billion.• From a humble beginning in Bentonville,

Arkansas, Wal-Mart became a retail operation spanning 13 countries with over 7,000 stores, 68000 suppliers and 2 million associates.

• This was achieved in just over 4 decades and was built around an unwavering commitment to low price and great service that comprised the foundation of Wal-Mart’s culture.

Excel

“Our customers are the reason we’re in business, so we should treat them that way. We offer quality merchandise at the lowest prices, and we do it with the best customer

service possible. We look for every opportunity where we can exceed our

customer’s expectations. That’s when we’re at our very best.”

-Sam Walton

• Wal-Mart had been drawing an increasing amount of public criticism and legal battles ranging from contention over low health benefits for its workers to accusations of gender discrimination when it came to internal promotions.

• Company was the largest private user of electricity in the United States.

• Supercenter (SC) electricity consumption averaged 1.5 million kilowatt-hours per year per store.

• Due to massive growth and increasing public concern CEO Lee Scott decide to bring the paradigm shift for the company as well as its stakeholders.

• He felt there was no intrinsic contradiction in reducing the company’s ecological footprint.

• In November 2005, Scott earmarked $500 million towards sustainability projects.

• Scott set the following goals:• Increase the efficiency of its vehicle fleet by

25% over the next 3 years and double efficiency in 10 years.

• Eliminate 30% of the energy used in stores.• Reduce solid waste from U.S. stores by

25% in 3 years.

• Wal-Mart organized its efforts in U.S. into SVNs that included categories such as store operations, electronic products and packaging.

• The company put the networks together by giving top-performing managers the responsibility of integrating the sustainability initiatives alongside their current workload.

• Ideas were categorized in 3 ways:• Quick Wins: Projects that the business and

stakeholders could begin immediately. They could be quickly understood and the project would result in a short-to-immediate payback period.

• Innovation Projects: Projects that were to combine recently available technologies and methodologies that would result in payback periods ranging from 1-3 years.

• Game Changers: Projects that would be pursued on an ongoing basis and were paradigm shifts intended to result in radical departures from traditional business practice.

• By 2007, significant changes had occurred throughout the company.

• Wal-Mart became the largest seller of organic milk and the largest purchaser of organic cotton.

• They partnered with GE to sell over 110 million compact fluorescent lighting (CFL) units in the United States that year, in effect cannibalizing their incandescent product sales.

• Greater efficiencies and longer bulb life meant that Wal-Mart’s customers would save well over $3 billion, conserve 55 billion tons of coal and keep 1.1 billion incandescent light bulbs out of landfills.

• But Wal-Mart China’s stakeholders were a bit different.• These initiatives would not necessarily result in immediate

wins.

An Oriental Mission • First store in the southern city of Shenzhen in 1996

• Initial rate of expansion was slow due to lengthy processes and location restrictions

• Significant strategy changes were necessitated due to new operating environment

Consumer Survey

Industry Average Wal-Mart Carrefour Wu-Mart0

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Product PriceRelative PricePromotionsProduct VarietyProduct Quality

Chinese Consumer Mindset• Highly cost sensitive

• Priority of customer satisfaction contributors: Highly significant- Perceived value, Image, Merchandise and Shopping Environment Less significant- Service, check-out process and store policy Effect of convenience- dubious

Household Disposable Income In China

Y-axis: Cumulative % of Households

China’s Retail Landscape• Location restrictions were very problematic

• Success in China’s smaller cities was uncertain

• Wal-Mart intended to use future WTO agreements to ease location restrictions

Wal-Mart’s China Sustainability Framework

• Sustainability part of Wal-Mart’s DNA

• Original 14 “Strategic Value Networks” (SVNs) were converted into China’s 5 SVNs

1. Sustainable Stores and Operations• Wide Scope

• Goals- higher efficiency and lower cost

• Energy efficient lighting

2. Sustainable Products• 4 primary categories

• Food, Electronics, Textiles and Product Packaging

• Example- Organic Cotton, milk

3. Supply Chain Compliance and Standards• Standards set by Wal-Mart and local

Governments

• Standards related to products and manufacturing processes

• Projection of local standards to worldwide adoption

4. Supply Chain Efficiency• Compliance to standards is not enough

• Overall improvements in terms of efficiency, cost and footprint

• Example- Fleet Management

5. Communication• Implementation of best practices

• Transparency

• Critical test- October 2008 Beijing meeting

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HUB AND SPOKE SYSTEM Under the system, goods were centrally ordered, assembled at a

massive warehouse, known as ‘distribution center’ (hub), from where they were dispatched to the individual stores (spoke).

The hub and spoke system enabled Wal-Mart to achieve significant cost advantages by the centralized purchasing of goods in huge quantities. and distributing them through its own logistics

infrastructure to the retail stores spread across the U.S.

Lowe’s distribution center strategy Set up a network of nine distribution centers for its current 850

stores.

Each distribution center is designed to serve approximately 100 to 125 stores.

The products are scanned by barcode and then placed in a specific location in the warehouse.

There are more than 100 outgoing truck docks per distribution center. Each store the distribution center serves receives from two to eight truckloads of product per week.

Lowe’s says it receives a 5 percent to 10 percent savings on the cost of each product.

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BENEFITS

The small number of routes generally leads to more efficient use of transportation resources. For example, aircraft are more likely to fly at full capacity, and can often fly routes more than once a day.

Complicated operations, such as package sorting and accounting, can be carried out at the hub, rather than at every node.

Spokes are simple, and new ones can be created easily

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DRAWBACKS Because the model is centralized, day-to-day operations may

be relatively Inflexible.

Route scheduling is complicated for the network operator.

The hub constitutes a bottleneck or single point of failure in the network.

Cargo must pass through the hub before reaching its destination, requiring longer journeys than direct point-to-point trips.

Two trips are required to reach most of the destinations.

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Challenges Facing a Foreign Retailer's Supply Chain

Regionalism in China Appropriate technology levels Nontariff trade barriers Financial matters LTL and private, nationwide parcel delivery Perseverance pays off

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Wal-Mart’s Procurement Wal-Mart emphasized the need to reduce purchasing costs and offer the

best price to the customer.

The company directly procured from manufacturers, by passing all intermediaries.

Wal-Mart finalizes a purchase deal only when it is fully confident that the products being bought is not available else where at a lower price.

Wal-Mart spends a significant amount of time meeting vendors and understanding their cost structure.

By making the process transparent, the retailer can be certain that the manufacturers are doing their best to cut down costs.

Merchandizing Operations Chinese law required that companies be licensed for

either import/export or merchandizing operations.

Large Chinese suppliers had yet to test foreign markets.

Mechandising group dint have to involve supply chain group in making decisions.

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DISTRIBUTION CENTER OPERATION New distribution center was specifically designed by

GEZLEY.

Tianjin DC participated in standard sustainability practices such as helping associates conserve fuel.

Only 40% of wal mart china’s sales were supplied by its DC’s.

Outsourced a standardized trucking fleet for all its dc-dc and dc-sc shipments.

Incoming shipments arrived in a diverse range of trucking and and loading configurations.

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Using EDI for Procurement

The computer systems of Wal-Mart were connected to those of its suppliers.

EDI enabled the suppliers to download purchase orders along with store-to-store sales information relating to their products sold.

On receiving information about the sales of various products, the suppliers shipped the required goods to Wal-Mart’s distribution centers.

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Logistics Management An important feature of Wal-Mart’s logistics infrastructure

was its fast and responsive transportation system.

The distribution centers were serviced by more than 3500 company owned trucks.

Wal-Mart believed that it needed drivers who were committed and dedicated to customer service.

The company hired only experienced drivers who had driven more than 300,000 accident-free miles, with no major traffic violation.

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Cross-docking

In this system, the finished goods were directly picked up from the manufacturing plant, sorted out and then directly supplied to the customers.

The system reduced the handling and storage of finished goods, virtually eliminating the role of the distribution centers and stores.

The manufacturer directly forwarded the goods to a place called the “staging area.”

The goods were packed here according to the orders received from different stores and then directly sent to the respective customers.

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Inventory Management Wal-Mart set up its own satellite communication system in

1983.

Wal-Mart was able to reduce unproductive inventory by allowing stores to manage their own stocks, reducing pack sizes across many product categories, and timely price markdowns.

Instead of cutting the inventory across the board, Wal-Mart made full use of its IT capabilities to make more inventories available in the case of items that customers wanted most, while reducing the overall inventory levels.

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Inventory Management… (quick replenishment)

Since the floor area of any Wal-Mart store varied between 40,000 to 200,000 square feet, movement of goods within the store was an important part of logistics operations.

Wal-Mart made significant investments in IT to quickly locate and replenish goods at the stores.

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Inventory Management… (pretty darn quick displays)

The company asked its suppliers to ship goods in store-ready displays called pretty darn quick (PDQ) displays.

Goods were packed in PDQ displays that arrived at the stores ready to be boarded on the racks.

Wal-Mart’s employees could directly replace the empty racks at the stores with fully packed racks, instead of refilling each and every item at the racks.

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Inventory Management… (retail link system)

More than 10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales of their goods at stores and replenish inventories.

Details of daily transactions (~10 million per day) were processed through this system.

Retail Link connected Wal-Mart’s EDI network with an extranet, accessible to Wal-Mart’s thousands of suppliers

The company used Massively Parallel Processor (MPP) computer system to track the movement of goods and stock levels

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Voice-based Order Filling (VOF)

Each person responsible for order picking was provided with a microphone/speaker headset, connected to the portable (VOF) system that could be worn on waist belt.

They were guided by the voice to item locations in the distribution centers.

The VOF system also verified quantities picked, and could respond to a variety of requests such as providing product detail (type, price, barcode number, etc.)

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CPFR In CPFR, Wal-Mart worked together with its key suppliers on

a real-time basis by using the Internet to jointly determine product-wise demand forecast.

CPFR is defined as a business practice for business partners to share forecasts and results data through the Internet, in order to reduce inventory costs while at the same time, enhancing product availability across the supply chain.

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RFID Technology(Radio Frequency Identification)

In efforts to implement new technologies to reduce costs and increase the efficiency, in July 2003, Wal-Mart asked its top 100 suppliers to be RFID compliant by January, 2005.

Wal-Mart planned to replace bar-code technology with RFID technology.

The company believed that this replacement would reduce its supply chain management costs and enhance efficiency.

SUSTAINABILITY

• TO WALMART

To combine value and service of its innovative operational strategies involve 14 SVNS made Wal-mart became the largest organic seller and the largest organic cotton purchaser.

Also through its integration of supply chain and ROHS compliance which including supplier or vendor selected and scored to achieve business sustainable aims.

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• To WAL Mart China

The strategy of sustainable store and operation can help Wal-Mart China reduce cost and decrease Wal-Mart China’s footprint of operations

To develop sustainable products such as food, electronic textiles and product packaging extend its business sustainability supply chain and compliance.

To make a good communication with its stakeholders is another critical issue of its business

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• Current and potential customers

T5 light bulbs can save 20 to 30 percent energy per day in warehouse areas and resting places and to use solar energy and wind power generator can 7,300 kilowatt hours per year.

Wal-Mart China’s merchandizing group still continuing builds sustainability measure tools for supplier selection and some on going evaluation of purchase quantities .

Although the sustainability products price might higher than others, it still have some advantages such as reduce cost of electronic, long time for use and non pollution.

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Competitive advantage

Low cost distributor and merchandiser of basic goods

Highly efficient distribution system

Economies of scale

Non uniform workforce keeps cost lower

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Distinguishing features of distribution system

Sustainable logistics centers.

Outsourced a standardizes trucking fleet.

Centralized management of returning products.

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Sustainability in the process of selection and evaluation

of suppliers/vendors

Enterprise should offer the requests of sustainability, and then try to find the suppliers or vendors who have production techniques of sustainability.

Wal-Mart adopt ROHS regulation standard in some of its operations including supplier selection and product selection.

Wal-mart China also created a initiative sustainable objective which called P2E2 program allowed suppliers to quickly and inexpensively equip their factories with cost saving equipment.

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Improved sustainability in Wal-Mart’s distribution and retail

operations

Energy efficient lighting Less waste of air conditioning and heat recycling system Alternative energy Outsourced third party logistics Reusable shopping bags Offer two energy efficient bulbs Batteries placed Packaging reduction

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CONCLUSION• It is not necessary that cost of sustainability is

always high. Walmart believed that ecologically friendly policies and products would ensure long term loyalty of their customers.

• Communication to the stakeholders is very important especially to the general public at large. In this regard, Wal-Mart has to take care of not committing mistakes of earlier non-compliant and misleading companies.

Recommendation• Try to use appropriate Chinese cultural

heritage and past successes in the communication to the stakeholders. This would lead to an emotional connect with the subject matter of the communication.

• To appease to business oriented mindsets the future prospects of better sustainability can be used. An important example would be in the field of green energy.

• Target domestic and foreign stakeholders attending the summit with dealings suited to attract them in the best possible way.

REFERENCES

www.google.com wikipedia www.wal-martchina.com www.chinabusinessreview.com

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