Many people wonder how Wal-Mart is able to charge such low prices and continue to make a profit. There are several factors in their business model that contribute to this ability, but a big one is their ability to adapt to an ever-changing global marketplace. Some criticize Wal-Mart's efforts to deliver to their customers a quality product at low prices, but in reality, Wal-Mart has been able to deliver low prices by being efficient. This efficiency is present in several areas but one of the most important places is how they are able to manufacture products all over the world and get them to retail outlets, which are also all over the world. This ability requires a flawless logistical system that allows product to be shipped anywhere at a moments notice.
One of the keys to Wal-Mart's effective logistical system is the flexibility that it has when choosing suppliers. When Wal-Mart negotiates with suppliers and the suppliers know that Wal-Mart will only pay the most competitive prices. This is because it is very easy for them to find another supplier of that particular material with a lower price and very few logistical problems. This gives Wal-Mart a huge amount of leverage when dealing with suppliers. If a particular supplier knows that a company has found a lower price, it will lower its price accordingly. However, if the supplier also knows that it will be incredibly difficult for the company to make the proper adjustments to ensure a smooth transition to a different supplier, then they will be less inclined to lower their price as much. This is not how existing suppliers deal with Wal-Mart; when they see that Wal-Mart has found a supplier that will give them a lower price, the current suppliers lower their prices accordingly. They know that Wal-Mart's logistical system can handle transition seamlessly and therefore they gain no additional leverage since it won't be difficult or costly for Wal-Mart to choose another supplier.
Another reason that Wal-Mart's prices are so competitive is because they buy in such large quantities that transportation from one end of the supply chain to another is not as costly for additional units. This aspect of the logistical system does not come from skill or expertise it simply comes from the sheer size of the company, but this is still a factor. Wal-Mart buys so many supplies from different places throughout the world, that they have the luxury of using bigger trucks and using less fuel to go back and forth. Also if by chance they have to use shipping services to transport material from one location to another, Wal-Mart will give them so much business that they will get huge discounts.
The logistical system that Wal-Mart uses is so effective because it is so flexible. This is why Wal-Mart is able to offer things much cheaper than other companies can. Wal-Mart has a reputation for being able to offer these things in a cheap manner because of low employee pay and human rights violations but this is simply not the case.Logistics At Wal-Mart
Michael Russell Your Independent guide to Logistics