Wal-Mart’s Model Everyday Low Prices

Wal-Mart’s Model Everyday Low Prices

Wal-Mart's success is the stuff of legend. But there is no mystique at the core of its mammoth success. Wal-Mart's ability to provide customers with "everyday low prices" and its presence as an economic and political force of gigantic size and influence is the result of a process that was built on some core principles and procedures. Looking at Wal-Mart's history and present operations helps investors understand the methodology that enables this sizeable chain to do what it's known to do best – sell cheap.

Wal-Mart continues to offer very low prices, and this became possible due to the following reasons:

(1) Huge volume of sales due to the spread of its operation and its wide customer base

(2) A supply chain management system that maximizes efficiencies and reduces outlays

(3) Minimization of operational and other overhead costs

(4) Its bargaining power to force suppliers to provide lowest prices

1. Sales volume, scope of operation and wide customer base: Wal-Mart has been able to capture a huge market share by selling almost everything and being almost everywhere. It has endeavoured to meet the demand of various segments of the market, and to present a huge swath of buying opportunities, compressed into single locations. It actually has a multiple-store omnipresence format that extends its market reach and allows it to increase its penetration in customer’s lives and increase the probability of a purchase.

Its individual margins on single items are slimmer than those of its competitors still the large volume of sales enables it to make substantial profits.

2. Supply chain management based on electronic product information, vendor role in distribution, and layout of warehouses: Wal-Mart is a pioneer in getting detailed product information electronically attached to products so that such information could be relayed to its database and could inform its inventory management system. The goal is to master the art of knowing what is needed, how much is needed, and when is needed.

Wal-Mart’s another key strategy is to deal directly with manufacturers. Suppliers are responsible for managing inventory in its warehouses. This results in a smoother flow of inventory, with fewer irregularities. It ensures that products requested by customers have always been available on the shelves.

The centralized database of Wal-Mart has all the information such as point-of-sales data, warehouse inventory as well as real-time sales. This centralized database is shared with suppliers who know when to ship more products.

Also key to the cost-effectiveness of Wal-Mart's supply chain strategy and distribution network is the positioning of its nearly 160 distribution centres, within 130 miles of the stores of the suppliers. It reduced costs for inventory storage and lowered transportation costs.

Wal-Mart followed a backward expansion strategy in its early years. It opened stores in small, rural towns first before entering metropolitan areas. This resulted in lower operating expenses, and ensured that all stores' locations were within just over a hundred miles of their distribution centres. It became cost-prohibitive for competitors. This constituted a barrier to entry.

3. Minimization of operational and other overhead costs: Wal-Mart is expert in keeping its overhead cost low. Its executives fly coach and share hotel rooms with colleagues. It is also accused of demanding hourly workers put in overtime without pay. Wal-Mart staffs are also expected to minimize the costs wherever possible.
4. Bargaining power to force suppliers to lower prices: Wal-Mart saves shoppers at least 15% on a typical cart of groceries. In adhering to a strategy of keeping prices low, Wal-Mart is constantly pushing its suppliers to cut prices.