Operations Management: Wal-Mart

Operations of production and delivery. As a retailer, Wal-Mart applies the most widespread first model of these operations. Its advantage for the production lies in the fact that it maximizes the efficiency of the production process, as in accordance with this model, the supply of products is guaranteed and stores of products are created, so there is no need to respond quickly to the changes in consumer demand. In this case, stocks “isolate” the production from the faults of both supply and demand (Galloway, 2004). This model is always applied in the field of retail distribution, where the stock of goods is kept in a warehouse, brought to the shelves when needed, and kept there again in the form of a stock until sold out. Using stock for the isolation of the different stages from each other greatly facilitates the management work, but at the same time brings along its own limitations and inconveniences. The most obvious problem is the cost of storing the stocks. This model can be applied only in conditions where there is a demand for a certain range of products. In case of the pre-ordered production the stock of finished products should not be created under any circumstances.

At the same time, the high costs of storage of stocks have forced many organizations to reduce or even abandon the stock of raw materials, arranging the supplies so that they precisely match the demand of the production. Production now finds itself in a critical dependence on the reliability of the supplier, and this reliability is usually achieved by increasing the supplier’s stock. The management of the supply process in this case should be well organized, since due to mistakes in communication the shortage or, on the contrary, the over-stock of products in a production organization is inevitable. Moreover, in general, storage costs are not being reduced as they now pass over to the supplier, who will naturally include them in the price of its products (Lichtenstein, 2010). Nevertheless, the model 2 is still applied by Wal-Mart, for example, in the processing of perishable materials which are simply impossible to keep in stock for a long time. For example, peas should be frozen immediately after harvest as after a few hours it will lose its tradable qualities. Therefore, model 2 is used in many industries related to food.

In addition, Wal-Mart incorporates the theory of constraints in purchasing and distribution. The TOC (Theory of Constraints) represents itself a practical method of controlling complex systems, which was first described by by Eliyahu M. Goldratt (2004) in his book “The Goal: A Process of Ongoing Improvement”. Nowadays, this method is recognized by the Association of American producers as the most effective method of, manufacturing, procurement, distribution and project management.

This management decision is factually aimed at adjusting the processes, at optimal connection of incongruent parts of eh organization into a single system which is subordinated to the common goal of organization, as well as at the transition to the process of permanent improvement (Goldratt, 2004). Being implemented, this solution allows Wal-Mart to reduce the stores by an average of 25-50%, increase their sales for an average of 10-50%, increase the turnover by 3 times or even more, and thus, raise profitability by two or more times (Fishman, 2006).

Transport and service operations are distinguished from the supply and production by the two important aspects: first of all, the customer contributes to the process itself, and second of all, the services cannot be stored (Galloway, 2004). In order to cope with the fluctuations in demand, companies have to either hold excess capacities, or possess “margin buyers” (in other words, to create a queue). Neither one nor the other can be the absolutely effective solution, because a company cannot apply its extra capacities today to meet the increased demand of tomorrow, as well as buyers are inclined to leave the queue, if they are forced to wait too long.

The queue of buyers usually takes the physical shape, like at a cashier’s at the supermarket. Entering the mass market, Wal-Mart can’t implement the first model which is specific for elite services. So it applies Model 2 which is typical for low-cost services: the resources get fully utilized, hence, the company obtains better performance, but the customers still have to wait (Heizer & Render, 2008).

However, Wal-Mart tried to avoid the disadvantages of this model. Until the end of the 1980s, most Americans had not seen any Wal-Mart advertising, not to mention the store itself. Avoiding advertising, the leadership focused its efforts not on the marketing but on the improvement of the efficiency of retail networks. Walton invested tens of millions of dollars in the computer system, which connected together the cash registers with the central office and will thus enabled fast restocking of the sold out items. He also spent quite a large amount to create a truck fleet and distribution centers around which retail shops were placed. All these measures allowed him to both increase the control level and significantly reduce costs (Jacques, 2003).

The Wal-Mart Company was awarded for the satellite network, which was first introduced into action in 1987. This network supports data, including audio and video, provides information about the commodity stocks, and also allows running e-commerce in real time. Wal-Mart’s electronic data exchange enacted in 1990 provides the receipt of electronic purchase orders and invoices from all almost Wal-Mart vendors (Lichtenstein, 2010).

Wal-Mart’s retailer communication line, introduced into force in 1991, allows the providers to obtain direct access in real time to the data from the Point-To-Sale (POS). This enables suppliers to make reliable predictions, and better manage inventory. Such data come directly from the store cash registers, so they reflect the situation in real time. For correspondence within the supply chain, i.e. for scheduling, payments, etc., e-mail facilities are used (Wrigley, 2005).

Using such a system and the data from the point-to-sale, it is possible to convince the major suppliers to make decisions about purchases through the Wal-Mart company. They have direct access to the data from the point-to-sale and form their purchase orders. Wal-Mart is trying to use the EDI method at the international level, however there has been little progress achieved in this direction so far.

A complex system of distribution and accounting of goods used by Wal-Mart was so effective, that buyers have almost never faced a problem of the lack of any product and have not lost time waiting for the cashiers to countercheck their check.

Due to the wise decisions of operations management, Wal-Mart reached its high status of the retail market and is now the world’s largest retail chain, which includes (by the end of 2010) 8838 stores in 15 countries.

Conclusion

In this paper, we’ve managed to consider the concept of operational function and briefly discuss its connection with other functional areas of the company on the example of Wal-Mart, Inc. Considering the case of Wal-Mart, we have covered the basic elements of the consistent operational strategy and studied the components of corporate and market strategies which affect the operations, and the possibility of forming an operational strategy basing on them.
The results of the study show that the success of the enterprise entirely depends on the compliance of the plan, organization and control over the operations to the main functions of the organization, and further on ensuring its effective operation. Thus, effectiveness and rationality of operations management depend on the correct choice of operating strategy. If the operating function has no clear, achievable and coherent aims, there is no doubt that it will soon cease to meet the expectations, as the operating function is the key to successful competition on the market. Effectively and rationally organized operational function helps the organization to retain its leadership in the market; otherwise a company will lose in price, quality or speed of delivery, or most likely – in all the three parameters.

References:
Fishman, C. (2006). The Wal-Mart Effect: How the World’s Most Powerful Company Really Works–and How It’s Transforming the American Economy. Penguin.
Galloway, L., Rowbotham, F., & Azhashemi, M. (2007). Operations Management in Context. 2nd edn. Butterworth-Heinemann.
Goldratt, E.M. (2004). The Goal: A Process of Ongoing Improvement. 3rd edn. North River Press.
Heizer, J., & Render, B. (2008). Principles of Operations Management. 8th edn. Prentice Hall.
Jacques, P., Thomas, R., Foster, D., McCann, J., & Tunno, M. (2003). Wal-Mart or World-Mart? A Teaching Case Study. Review of Radical Political Economics, 35 (4), pp. 513-533.
Lichtenstein, N. (2010). The Retail Revolution. Picador.
Stevenson, W.J. (2008). Operations Management. 10th edn. McGraw-Hill/Irwin.
Wrigley, N., Coe, N. M., & Currah, A. (2005). Globalizing retail: conceptualizing the distribution-based transnational corporation (TNC). Progress in Human Geography, 29 (4), pp. 437-457.