Removing Costs That Don’t Add Value: A continuing Wal*Mart competitive advantage

Still Wal*Mart continues to remember one of the keys to how they became the world’s largest retailer and highly profitable as well. Two reasons really:

 

  1. They have been in touch with their customers. (Sam Walton was famous for spending lots of his time in the stores and making his senior execs do the same. I’m not sure if that culture is as strong as it was, but the second secret clearly is.)
  2. They are relentless about removing costs that don’t add value. And that they continue to do. I know many Wal*Mart suppliers complain about Wal*Mart’s ruthless push for cost reductions, and some of that may be justified, but Wal*Mart people are big believers is getting non-value-added costs out of their supply chain.

 

Three examples:

 

  1. Wal*Mart has pushed on suppliers to shrink their packages to fit the contents. Suppliers often like bigger packages for shelf space ownership reasons as well as consumer perception. Wal*Mart sees excess packaging as waste (which it is) and is getting its suppliers to comply.
  2. Cutting out the middleman. Wal*Mart has been famous for this, including their well known penchant for not wanting to deal with manufacturer’s reps. However that is a minor middleman compared to other supply chains. An example is coffee. Apparently, until recently Wal*Mart bought its private label coffee from a supplier, who bought from growers who used a roaster. Now, Wal*Mart buys coffee from a co-op in Brazil cutting out several “middlemen” who apparently weren’t adding any value
  3. In today’s $5/gallon diesel world, truck transportation costs are a more significant contribution to total delivered cost. Wal*Mart has increased their sourcing of food stuffs to local growers. This reduces the cost of transportation. It does increase Wal*Mart’s vendor base, but with computers, that is a trivial cost compared to transportation costs. This is also allowing smaller, local suppliers to sell to Wal*Mart where they could not have done so before.

 

And for those of you who are focused on “green” these initiatives, and others reduce waste which is greener by definition. Think Lean in your supply chain and your demand chain (marketing/sales) and you will gain a competitive advantage.

 

Mitch

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3 Responses to Removing Costs That Don’t Add Value: A continuing Wal*Mart competitive advantage

  1. So wal-mart practices ‘lean’ supply chain management. Can you talk about any other ways that walmart also uses other lean methods? How do they handle inventory? What do they do about defects? What do they do about motor vehicles (like forklifts etc)?

    thanks!

    -James

  2. Additionally, how does walmart factor in ‘customer satisfaction’ into their ‘value equation’?

    thanks

  3. Mitch says:

    James, we are not inside experts on WalMart, but we have found that historically, Sam Walton’s focus for his company was on removing costs that did not add value for his target customers. His goal was to be the best retailer in each town his stores were in. He succeeded well enough that he continued to open stores in more towns and became a VERY large retailer. The fact that his stores are successful and draw customers in good times and bad suggests to us that WalMart meets or exceeds its customer expectations of fair value.

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