Walmart – An Easy Target?

By Savita Gill, Michelle Leung, and Annie Xu

In January 2012, 150 workers at Foxconn threatened mass suicide in protest of their poor working conditions (Moore, 2012). In November 2012, over 112 workers died in fire at a factory operated by Tazreen Fashions Ltd. In Dhaka, Bangladesh (The Associated Press, 2012). What did these two incidents have in common? The companies involved were both suppliers to large and powerful American companies. Foxconn was a supplier to Apple, whereas Tazreen was a garment supplier to Walmart. Both Apple and Walmart were and continue to be heavily criticized for not taking a larger and more active role in ensuring the quality and safety of the working conditions at their suppliers, but is it really their responsibility? As the largest company by revenue in the world, Walmart is an easy target. In this blog post, we shall argue that Walmart should not be held responsible or accountable for what happens at its tens of thousands of suppliers.

The local government shall be held fully responsible for the working conditions and safety of its people and factories. The Rana Plaza tragedy in Bangladesh is one example where the government should have enforced its laws and regulations to protect its factory workers. The collapse of the building that took over 1100 lives was due to the extra two floors that were illegally added to the building. If government regulation and inspection were tightly in place, the tragedy would not have happened. Some argue that corporations such as Loblaws, Wal-Mart and JC Penny should be held accountable for the conditions and safety of the factories such as the Rana Plaza; but the truth is that this would never be possible as multiple layers of contractors are in place disconnecting the North American corporations from its source of goods. In addition, corporations cannot uphold their own laws and regulations in another country. Wal-Mart’s clothing line supplier contracts the production of the garment to a clothing company where it then contracts to a Bangladeshi manufacturer who then contracts to a local shop that makes clothes for multiple North American corporations. With so many levels of sub-contracting and the factories being half way around the world, Wal-Mart does not have the ability to have a say on how its clothing are made, nor could Wal-Mart walk into Bangladesh and start giving orders on how things should be done even if Wal-Mart wanted to. To make the change of safe working conditions to happen, it takes the local government, business alliances and pressure from the media. In 2002, China passed the bill on Child labour law after much criticism from the West and threads to move factories elsewhere. Now with local government enforcement, the condition has improved, children’s rights are being protected and maltreatment of children is prohibited. In 2001, US government and Cambodia government came into agreement that US would open more opportunities to Cambodia if the Cambodian factory working condition improves. It’s been 14 years since the founding of “Better Factories Cambodia”, both the government and the foundation are still working hard to ensure the factories comply with the rules and regulations of international labour standards. Local government intervention is absolutely necessary for the working conditions and safety to improve.

Secondly, international coherence on core labor standards is an issue much beyond the realm of Wal-Mart. Placing a developing country under the same lens as an economically developed country can be seen as a protectionist measure. It will impact country’s competitive advantage and hence net export and hence economic development. In addition, every Fortune 500 Company is leveraging low-cost manufacturing to improve bottom line. Wal-Mart is just one player in this ecosystem. So, nations and business communities across the world need to address these hard questions and balance diverse interests. WTO (World Trade Organization) has deferred negotiation of work standards to the International Labour Organization (ILO). WTO points that “it is not easy for member governments to agree on these issues and the question of international enforcement is a minefield” (WTO, 2015). If governments themselves are reluctant to protect their citizens then Wal-Mart faces an uphill task. As a publically listed company with multiple stakeholders, Wal-Mart has taken steps in the right direction with an alliance for Bangladesh and “Responsible Sourcing program”. Wal-Mart should continue to have dialogues around sustainability and better working conditions but cannot be hold accountable if something slips out.

There is no dispute that Walmart has the power to coerce their suppliers to comply with whatever conditions they demand, however, it should not be Walmart’s responsibility to govern the operations and policies of its suppliers. In the end, it is simply a basic business transaction. If Walmart becomes aware of illegal practices and unsafe conditions at its suppliers, they should terminate the relationship if the supplier is not willing to comply with the local laws and regulations. They should not be interfering with how another business operates. Walmart has taken steps to be socially responsible through various initiatives such as participation in the Alliance for Bangladesh Worker Safety. It is now up to local governments and pressure from the world stage to ensure the necessary laws and regulations are in place to guarantee the safety and well being of workers around the world.

References
Moore, M. (2012, January 11). ‘Mass suicide’ protest at Apple manufacturer Foxconn factory. Retrieved January 25, 2015, from The Telegraph: http://www.telegraph.co.uk/news/worldnews/asia/china/9006988/Mass-suicide-protest-at-Apple-manufacturer-Foxconn-factory.html

The Associated Press. (2012, November 25). Bangladesh fire kills 112 at Wal-Mart supplier. Retrieved January 25, 2015, from CBC News: http://www.cbc.ca/news/world/bangladesh-fire-kills-112-at-wal-mart-supplier-1.1179644

WTO. (2015). http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey5_e.htm. Retrieved from http://www.wto.org/: http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey5_e.htm

BFC. (2015). http://betterfactories.org/?page_id=25. Retrieved January 25, 2015, from http://betterfactories.org/: http://betterfactories.org/?page_id=25

Bangladesh Worker Safety Org. (2015) http://www.bangladeshworkersafety.org/. Retrieved January 25, 2015, from: http://www.bangladeshworkersafety.org/

ILO. (2015). http://www.ilo.org/dyn/natlex/docs/WEBTEXT/63806/65269/E02CHN01.htm. Retrieved January 25, 2015, from: http://www.ilo.org/dyn/natlex/docs/WEBTEXT/63806/65269/E02CHN01.htm

Library of Congress. (2015). http://www.loc.gov/law/help/child-rights/china.php. Retrieved January 25, 2015, from: http://www.loc.gov/law/help/child-rights/china.php

Tyson, L. (2014, February 7). The Chalenges ofRunning Responsible Supply Chain. Retrieved January 25, 2015, from Econmix: http://economix.blogs.nytimes.com/2014/02/07/the-challenges-of-running-responsible-supply-chains/?_r=0

Charlie visits Wal-Mart in the year 2020

By Peng Li, Alexander Melamed and Ali Yousaf

As Charlie Fisher walks into Walmart, he glares around what is a revolutionized shopping world. People no longer buy items such as lawnmowers, snow blowers, and microwaves at Walmart, they rent them. Everyone has the opportunity to have a life of better standard than they did in 2015 and everyone carries possessions of high quality and more sustainable than in the past. Charlie himself has come to rent products that he could only have dreamed to possess in the past. The market value of his new lawnmower, for instance is 3 times the lawnmower than he owned in the past, but thanks to Walmart’s “Easy to Rent” program, he is able to afford a premium lawnmower without paying too much extra in the long run (The table below shows what Charlie’s payments would look like)

Walmart has enticed its customers with the option of making smaller payments over longer periods of time and it is a strategy that has worked wonders for the company, allowing it to retain its spot as the top retailer on the planet.

Does this fictitious futuristic story sound completely absurd? Consider for a few moments, what will the future of retail need to look like in order to endure in the era of mobile internet, e-retail, global warming and the ever changing preferences of consumers ? What creative destructions do giants like Wal-Mart face today and how drastically do they need to adapt in order to stay in the game?

Wal-Mart made an astounding revenue of 483.79B billion in 2014. Consider the magnitude of this number. If Wal-Mart was a country it would be the 25^th largest country by GDP surpassing 157 other countries including Norway and many other advanced nations. They have grown to this size by leveraging a carefully crafted activity system of inter-operating capabilities that mutually reinforce one another to source, transport and sell more efficiently than any other retailer in history. The 4 pillars of this strategy are: (1) Wal-Mart’s iconic Every Day Low Prices Strategy which helps them win over the competition, motivate their employees, and keep their logistics smooth and efficient; ( 2) Their supply chain is highly optimized to reduce inventory and transportation costs. (3) Their IT system optimizes their supply chain, store operations and helps control their suppliers. (4) They can successfully leverage their size and economies of scope to negotiate favorable deals with suppliers and their host communities for prime real estate.

However, as powerful as they may seem today, the world is changing and they face changing consumer preferences, increasing pressures to reduce environmental impact and competition from even leaner discount retailers that dominate the online retail space such as Amazon and Alibaba.

In order to stay competitive Wal-Mart must offer value beyond low prices, because e-retail will continue to undercut their prices. At the same time Wal-Mart will need to improve their environmental impact and find ways to offer products that meet consumer demands.

Let’s revisit the idea of Wal-Mart as a rental service. In this new model, Wal-Mart’s current operation will support product rental on select products.

First lets consider the key stakeholders. For consumers this will mean that they can pay even less for the products they desire, access to higher quality products, and only pay per use. For Suppliers this would mean that they can optimize their products for durability, they will require less raw materials and they will need to develop the capability to refurbish their products before putting them back in circulation. The net effect will be a net value creation for communities by increasing utilization of products and reducing landfills.

Next let’s consider why Wal-Mart is the most likely to succeed in this strategy.

Wal-Mart is the expert in supply chain logistics. They can transform their existing system to supports more two ways transfers of goods between suppliers and stores and vice versa for returns. Products can be directed via Wal-Mart’s hub and spoke system to locations where they will be in demand. Higher inventory costs would be prohibitive for most competitors, but Wal-Mart can leverage their transportation network and IT system to forecasting and optimizing the supply and demand of rentable goods and minimize these costs. Wal-Mart can leverage their size to increase demand for higher quality goods at affordable prices. Demand for higher quality will also motivate Suppliers to produce more durable products that can be serviced and reused instead of recycled.

Finally, this strategy will give Wal-Mart several key differentiations that will be difficult for competitors to match. Wal-Mart can offer unmatched variety of high quality products for rent or to buy. For suppliers, Wal-Mart can differentiate by providing loans against the goods circulating in the rental pool and they can count on receiving a predictable revenue stream from the operations of the rental platform. Once a product has reached useful rental life, they can be sold at a discount.

Creative destruction is the process through which new companies emerge and overtake large incumbents that are too slow or blind to the changing environment. Wal-Mart is facing fierce competition from online retail, they are struggling to stay relevant in the face of changing consumer preferences and they find themselves in the mids of environmental controversies as the world’s most influential companies. In order to stay competitive Wal-Mart must offer value beyond low prices, they must do so responsibly and they must leverage their existing strengths. There are many ways that they might choose to reinvent their strategy. The future of the company rests on the decisions of management over the next several years.

Buying vs Renting

The table below shows what a world of renting products from Walmart may look like for Charlie and how it compares against the traditional buying world of today. In essence, by spending slightly more money over a 3 year period, Charlie is able to purchase products of much higher quality and ones that are more sustainable in the long run. A rental program also ties Charlie’s loyalty to Walmart, leading to more repeat business.

The future of consumerism: Walmart is printing its way to success

By Julian Carrasco and Aristotle Solomon

In recent years, as Wal-Mart’s sales growth stagnates, one wonders whether it will continue to drive the future of consumerism as it has in the past. As Charles Fishman, the author of The Wal-Mart Effect stated, “in the future there is going to be a fundamental shift in the way products are manufactured, which will radically change consumption”. The emergence of 3D-printing can radically change the future of consumption, and it “presents both a threat and opportunity for Wal-Mart”[i]. However, it appears that Wal-Mart is poised to print its way to success in driving the future of consumerism.

What is 3D Printing?

“3D-printing manufactures three dimensional solid objects from a digital file. A digital file is created in a 3D modeling program for printing. When the file is uploaded in a 3D-printer, the printer creates the object layer by layer. The 3D-printer proceeds to create the object by blending each layer together, resulting in one final three dimensional object”[ii]. Advocates of 3D-printing believe that it will change consumerism, because consumers will be able to do their own manufacturing rather than purchasing products from retailers, such as Wal-Mart. From “auto parts, to vacuum accessories, shower heads, light switch plates, holiday ornaments, phone cases, fishing gear and housewares, there is a lot that can be 3D-printed and the technology is evolving fast”[iii].

Is it the End of Wal-Mart and Every Day Low Prices?

Many would like to think that 3D-printing will sound the death knell for Wal-Mart. However, 3D-printing appears to be quite an opportunity. As current Wal-Mart CEO Doug McMillan stated “3D printing is interesting to me”[iv]. By 2017, the 3D-printing market is expected to total ~$6B in revenues, with the consumer market accounting for ~$1.5B[v], and “Wal-Mart could sell them at a colossal scale”[vi]. This technology could enhance Wal-Mart’s online strategy while reducing manufacturing and shrinkage costs. All of which could add up significantly to Wal-Mart’s bottom line.

 What Does 3D-Printing Mean for Wal-Mart’s Business?

E-Commerce

3D-printing can increase Wal-Mart’s online business not only through 3D-printer sales (which Wal-Mart currently does), but also through services. A 3D-printing service would require a web-based system to manage uploads, products, sales, deliveries and tracking. While some products could be ordered through the store, other products can be ordered online. Wal-Mart already has the e-commerce infrastructure in place, where consumers can order items online and have them delivered to their homes or pick them up at its “Grab & Go” lockers. 3D printing services will further enhance the consumers’ omni-channel experience with Wal-Mart to better compete against the likes of Amazon. As apps and games continue to flourish, “Wal-Mart would have the opportunity to integrate its services. For example, the “Lets Create! Pottery” app from Infinite Dreams allows users to design a piece of pottery and submit the design for 3D-printing[vii]. The opportunities are endless, and partnerships between Wal-Mart and app developers are a win-win situation.

Manufacturing   

Although 3D-printing may not completely eliminate manufacturing, the list of products that can be manufactured digitally is growing. Wal-Mart can leverage 3D-printing to manufacture products digitally at the introduction and decline stages of the product lifecycle[viii]. When products are in the growth and maturity stages Wal-Mart has the option of either stocking cheap, mass-produced versions or even utilizing 3D-printing. Leveraging 3D-printing in this way will allow Wal-Mart to further strengthen its strategic advantages in logistics, distribution and inventory management. Sustainability can improve if Wal-Mart creates a recycling policy where consumers return products which can be converted and reused into raw material input for printing future items. As indicated in their “2014 Global Responsibility Report” Wal-Mart is committed to improving their sustainability index, and a 3D-printing recycling program would be looked upon favourably.

Shrinkage

In his book “Made in America”, Sam Walton stated that “Shrinkage, or unaccounted-for inventory loss—theft, in other words—is one of the biggest enemies of profitability in the retail business”. In 2007, Wal-Mart’s estimated shrinkage cost was in excess of $3B[ix]. By leveraging 3D-printing, a product would only be produced and printed when ordered. Therefore many of the causes of shrinkage (e.g. employee theft, shoplifting and vendor fraud) would be greatly reduced or eliminated entirely.

Do the Numbers Make Sense?

The 3D-printing market is forecasted to be ~$10.8B by 2020[x]. About 80% of 3D-printing is forecasted to be for consumer use[xi]. Taken together, the consumer market is expected to be ~$8.6B. Currently, Wal-Mart gets 8% of every dollar spent in the US[xii]. Applying 8% to the consumer 3D-printing market would result in ~$700M in sales, which contributes significantly to Wal-Mart’s topline. It is reasonable to assume that the effect of online sales, 3D-printing services and collaborations with app developers will further increase sales in excess of $700M.

Challenges

3D-printing is still in its infancy, and has yet to be considered a part of mainstream consumerism. However, Wal-Mart needs to act now to reap the benefits of first mover advantage as Amazon, Best Buy, Home Depot, Staples and Dell are also taking similar steps. 3D-printing will further exacerbate Wal-Mart’s handling of returned merchandise. It is difficult for a retailer to track whether a mass-produced product was sold by it or someone else. Therefore security features will need to be incorporated to allow unique identification of a product to its respective retailer.

The Path to the Future

Doug McMillon recently stated that acquiring a 3D company might be the best solution. “Wal-Mart would likely acquire a company that builds printers capable of producing end use auto, or home repair parts. Having such machines at Wal-Mart’s disposal could reduce the need for costly shipments and give consumers the ability to order parts and pick them up after they are completed”[xiii]. The fact that Doug McMillon envisions 3D-printing in Wal-Mart’s future is promising. It might be the key to Wal-Mart printing its way to success in the future of consumerism.

References:

[i] Womack, B. (2014). Wal-Mart CEO Says Retailer May Consider Buying 3-D Printer Maker. [online] Bloomberg. Available at: http://www.bloomberg.com/news/2014-05-28/wal-mart-ceo-says-retailer-may-consider-buying-3-d-printer-maker.html [Accessed 17 Jan. 2015].

[ii] 3D Printing, (2015). What is 3D printing? How does 3D printing work?. [online] Available at: http://3dprinting.com/what-is-3d-printing/ [Accessed 17 Jan. 2015].

[iii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[iv] Womack, B. (2014). Wal-Mart CEO Says Retailer May Consider Buying 3-D Printer Maker. [online] Bloomberg. Available at: http://www.bloomberg.com/news/2014-05-28/wal-mart-ceo-says-retailer-may-consider-buying-3-d-printer-maker.html [Accessed 20 Jan. 2015].

[v] Columbus, L. (2014). Roundup Of 3D Printing Market Forecasts And Estimates, 2014. [online] Forbes. Available at: http://www.forbes.com/sites/louiscolumbus/2014/08/09/roundup-of-3d-printing-market-forecasts-and-estimates-2014/ [Accessed 20 Jan. 2015].

[vi] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[vii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[viii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[ix] Archive.azcentral.com, (2015). Wal-Mart losing $3 billion a year from thefts. [online] Available at: http://archive.azcentral.com/business/consumer/articles/0613biz-walmarttheft13-ON.html [Accessed 22 Jan. 2015].

[x] Columbus, L. (2014). Roundup Of 3D Printing Market Forecasts And Estimates, 2014. [online] Forbes. Available at: http://www.forbes.com/sites/louiscolumbus/2014/08/09/roundup-of-3d-printing-market-forecasts-and-estimates-2014/ [Accessed 20 Jan. 2015].

[xi] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[xii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[xiii] Engineering.com, (2015). Walmart CEO Says Retail Giant May Buy 3D Printer Company > ENGINEERING.com. [online] Available at: http://www.engineering.com/3DPrinting/3DPrintingArticles/ArticleID/7659/Walmart-CEO-Says-Retail-Giant-May-Buy-3D-Printer-Company.aspx [Accessed 22 Jan. 2015].

Is Walmart Improving Working Conditions Today for Jobs It Will Destroy Tomorrow?

By Ian Cummins, Ron French and Soumik Sen

Following the April 2013 garment factory disaster in Bangladesh that killed over 1,200 workers, the International Labor Organization (ILO) brokered an Accord on Fire and Building Safety that has been signed by over 170 international retailers and brands, as well as prominent trade unions [i]. The Agreement will implement reasonable health and safety measures in the ready-made garment industry, monitored by independent inspectors, over a five-year period.

The signature of one retailer was conspicuously absent from this ambitious agreement: Walmart. The retail giant has also refused to contribute to an ILO compensation fund created to help the victims of the tragedy [ii]. Instead, the retail giant announced in 2013 that it was joining the Alliance for Bangladesh Worker Safety, along with 25 other North American retailers [iii].

Despite its stated commitment to ethical sourcing, Walmart’s refusal to join a multilateral initiative with government and not-for-profit partners speaks volumes about the company’s lack of commitment towards the communities where it sources goods. The ILO Accord was intended to affirm that retailers, suppliers, governments, trade unions and civil society groups have a joint obligation to create safe working conditions for all garment workers. By opting instead for a business-led initiative, Walmart has signaled that it views itself as being accountable only to its shareholders and consumers.

Underlying these decisions is Walmart’s desire to preserve its ability to source goods at the lowest cost possible and to provide consumers with Everyday Low Prices (EDLP). While the company has committed to ensuring its suppliers in Bangladesh meet basic safety conditions, it has made no commitments to a long-term sourcing relationship with the country’s garment industry. If efforts to improve working conditions increase costs for suppliers, Walmart’s history of prioritizing cost suggests the company would simply shift production to the next low cost destination.

Indeed, the growth of Bangladesh’s large garment industry has been fuelled by the increased costs of producing goods in Southern China, which has been partly driven by worker demands for higher salaries and better working conditions [iv]. A 2013 survey of Chief Purchasing Officers (CPOs) for 29 apparel retailers revealed that 77% were planning to reduce their share of goods sourced from China [v]. The CPOs cited rising labour expenses as the main driver of their increased sourcing costs, particularly in China where labour costs are estimated to be growing roughly 20% per year [vi].

Granted, this survey also reveals that Walmart is not alone in basing its sourcing decisions primarily on cost. However, given its size, scale and powerful leverage over suppliers, Walmart has a unique capacity to play a leadership role with respect to ethical sourcing, a reality acknowledged by CEO Doug McMillon in the company’s most recent Global Sustainability Reportvii. Walmart could use its supplier leverage to help bring about meaningful improvements for Bangladeshi workers simply by committing not to exit the country as it is taking concrete steps to strengthen working conditions. Sadly, by not signing the ILO Accord, the company has sent its suppliers and workers a clear signal that it is not willing to make any direct commitments to Bangladeshi governments, labour unions or civil groups.

There may be consequences for Bangladeshi workers sooner rather than later. Following the garment factory tragedy, the Bangladeshi government took steps to raise the monthly minimum wage for garment workers by 77% (approximately $68) [viii]. This type of policy change should be welcomed as it creates a level playing field for workers, suppliers and retailers without seriously affecting the country’s low cost advantage relative to other middle to high-income countries. However, this type of change will more likely push Walmart to begin its search for the next low-cost destination for sourcing goods. Indeed, there are signals this process may already be underway.

In 2012, Walmart increased its presence in Africa through the acquisition of South African retailer Massmart [ix]. The company’s expansion plans for the continent include countries that offer significantly worse legal protections for workers than either China or Bangladesh. For example, Nigeria, cited by Walmart as a “priority market”, has been rated by the International Trade Union Confederation as one of the world’s worst places for workers [x][xi]. The country also scores among the worst countries in the world on indexes measuring democracy, human rights protection and corruption [xii]. While it remains to be seen whether sub-Saharan African countries will ever replace Bangladesh or China as global sourcing destinations, the simple fact that Walmart has prioritized growth in a country like Nigeria where there is a risk of even greater abuses demonstrates that ethical sourcing considerations remain marginal when the company is making business decisions.

The signatures of over 170 retailers and brands on the ILO Accord suggest there are companies that disagree with Walmart’s approach. These companies may be betting that building longer term partnerships with suppliers, governments, trade unions and civil society groups in order to collectively improve working conditions will pay dividends by increasing productivity, building a loyal customer bases in emerging markets and reducing the risk of future tragedies that have given discount retailers such a bad image. Given Walmart International’s poor performance recently, it might be time for the company to reconsider its approach [xiii].

i Accord on Fire and Building Safety in Bangladesh. http://bangladeshaccord.org/ (Accessed October 31, 2014).
ii “U.S. Retailers Decline to Aid Factory Victims in Bangladesh.” New York Times. Nov 22, 2103. http://www.nytimes.com/2013/11/23/business/international/us-retailers-decline-to-aid-factory-victims-in- bangladesh.html?pagewanted=all&_r=0
iii Alliance for Bangladesh Worker Safety. http://www.bangladeshworkersafety.org/. (Accessed October 31, 2014).
iv “Exporters Leave China But Find Rising Costs Elsewhere.” Bloomberg Businessweek. January 9, 2014. http://www.businessweek.com/articles/2014-01-09/exporters-leave-china-but-find-rising-costs-elsewhere
v McKinsey and Company. “The Global Sourcing Map – Balancing Cost, Compliance and Capacity.” October 2013. Pg 3
vi Ibid. Pgs 2-3.
vii Walmart. 2014 Global Responsibility Report. Pg 3.
viii “Bangladesh Raises Minimum Wage for Garment Workers After Unrest.” Bloomberg. November 14, 2013. http://www.bloomberg.com/news/2013-11-13/bangladesh-garment-factories-to-stay-shut-amid-worker- protests.html .
ix Walmart acquired a majority stake in Massmart Holdings Ltd. in 2011. Massmart operates more than 350 stores in South Africa and 11 other sub-Saharan countries. See: http://corporate.walmart.com/our-story/our- business/international/africa.
x As a condition for approving the acquisition, the South African government required Walmart to contribute to a fund to help local suppliers adjust to Walmart’s new sourcing requirements. The court that approved the acquisition lowered the amount of the fund, arguing that integrating local African suppliers into Walmart’s supply chain was a more critical policy objective. See: “Walmart-Massmart Commercializes the Local Supply Chain.” Consultancy Africa Intelligence. http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1244:walmart- massmart-commercialises-the-local-supply-chain-a-step-in-the-right-direction-&catid=82:african-industry-a- business&Itemid=266.
xi International Trade Union Confederation. “2014 ITUC Global Rights Index: The World’s Worst Countries for Workers.” http://www.ituc-csi.org/IMG/pdf/survey_ra_2014_eng_v2.pdf. Pgs 38-39
xii International Human Rights Rank Indicator. http://www.ihrri.com/index.php?iso=NG
xiii “Why Walmart is Failing in Emerging Markets.” The Motley Fool. http://www.fool.com/investing/general/2014/04/28/why-is-wal-mart-failing-in-emerging-markets.aspx.

Photo Credit: James Strock, Serve to Lead.

Wal-Mart’s commitment to American jobs: A Pebble or a Rock?

By Tanner Erickson, Isac Lima and Steven Zhao

People will remember the 2010s as the decade when the middle class collapsed. The zeitgeist is perfectly captured by the frustration and criticism towards mega corporations that have relocated their manufacturing elsewhere. To gain public favor, Wal-Mart has announced in 2013 of its commitment to “American renewal”, publicly   stating their support to creating more American jobs through domestic manufacturing [1], [2]. With what seemed like an immaterial effort against a major economic tide, the past year has proven that economic shifts, efforts of the government, and actions taken by Wal-Mart have been able to sway jobs back inland. A recent example of Kent International, Inc. shows us that success is very possible when all three of these forces unite.

The tides are turning in the manufacturing world: With rising costs in China, many manufacturers are looking to find new supply sources. Though China used to be a haven for low-cost manufacturing, alarm bells have been ringing for quite some time in the offices of North American companies reliant on their cheap manufactured goods. In the past 3-5 years the Chinese government has realized the vulnerability of its economy due to its dependence on the overseas market demand and the poor health of its working population. As a result, it has raised minimum wages and reduced its currency manipulation practices [3]. The consequence for companies that rely on China has been massive – with rising real estate and energy costs, and labor costs rising by over 20% per year, overall manufacturing costs have skyrocketed [4].

A prime example of a North American manufacturer that has been impacted by these trends is Kent International Inc., a company based in New Jersey. Since 1958 Kent has been producing bicycles, but eventually it started purchasing them fully-assembled from China to save costs. However, with their supplier now paying $600-800 per worker per month, compared to the $30-40 they paid in 1987, the passed-on costs have driven Kent’s bicycle business to the brink of bankruptcy [5]. Like other firms in similar circumstances, they were hesitant to build a manufacturing facility back in the United States due to large capital requirements and risk of insufficient demand. Luckily for Kent, the efforts of the domestic government and Wal-Mart have contributed towards a successful reentry into the U.S.

At the State level, the U.S. Government has been extremely responsive to American companies seeking to relocate their manufacturing domestically with a number of States wooing manufacturers with tax breaks, subsidies, and other incentives. For example, General Electric, Airbus, and Hyundai have all received state subsidies to either relocate or expand their domestic operations [6]. Kent was similarly courted by South Carolina ultimately with a deal to get a natural gas line extended to the proposed plant site [5]. With an uncertain demand for their product however, Kent still held reservations with building a new factory. In the words of Arnold Kamler, Kent’s CEO, “The biggest problem a new factory has is not having any orders” [5]. Solving the issue once and for all, Wal-Mart stepped in to seal the deal.

Giant retailers like Wal-Mart are able to remove the risks that the small to mid-sized companies have with their expected demand through stabilizing both volumes and prices. Without such stabilization, many of these companies are doomed. Four years ago crib maker Stanley Furniture Co. made a gamble by moving its production from China to North Carolina. However, unexpected cost increases specific to North America, unexpected variations in demand, and unwillingness of their customers to pay a premium, left them with no other option but to shut down their plant and lay off its workers [7]. For Kent, Wal-Mart served as its saving grace. With a 6-month supply contract with Wal-Mart, Kent has been able to invest in a $4.5 million plant over the next three years. This plant will provide jobs for 175 workers who will churn out roughly 500,000 bikers per year [4], all in thanks to Wal-Mart’s 2013 commitment to “American Renewal”. The renewal program, aimed at creating more domestic jobs through supporting American manufacturing, came with a commitment to buy an additional $50 billion in U.S. products over the next 10 years (on top of the $200 billion that it already spends) and re-shore the manufacturing of goods they currently buy. Kent is not the only recipient of Wal-Mart’s efforts, as over the past year they have been making significant moves to support their goal. Wal-Mart committed to purchase light bulbs from General Electric that are exclusively made in the U.S. (creating 150 domestic jobs), enabled Element Electronics Corp. to open a new TV assembly facility in South Carolina (500 jobs), and committed to source from Elan-Polo’s new footwear plant in Georgia (250 jobs), to name a few [7].

There are some caveats to the trinity of forces, of course. Reshoring production to the U.S. may be hampered by other low-cost alternatives such as Cambodia or Vietnam, however those countries face the same challenges with skills and productivity, and upward trends for worker wages [8] . Finding enough skilled labour may also be a challenge given the long drought of manufacturing in the U.S. and especially if the desired skills are highly specialized. The skills gap is certainly a paradoxical challenge as skills and training follows demand, but no demand will be brought back if there is insufficient supply of skills. According to an A.T. Kearney report, the skills gap could potentially be met in the short term through strategically choosing reshoring locations and investing in training and standard operating practices by manufacturers [9].

Wal-Mart has had immense success with its “American Renewal” program. While $25 Billion a year may be just a ripple now, it may create momentum to tip a wave. There are no projects without pilots, and adopters without innovators. Together with the forces of economics and government, Wal-Mart may promise companies like Kent a fighting chance at staying afloat and finally coming home.

References 

[1] Wal-Mart Stores, Inc., “U.S. Manufacturing,” [Online]. Available: http://corporate.walmart.com/global-responsibility/us-manufacturing. [Accessed 28 October 2014].
[2] Walmart Stores Inc., “Walmart U.S. Manufacturing Announcements,” 2014. [Online]. Available: http://cdn.corporate.walmart.com/b9/b1/495da24343059514800599b5dbfb/us-manufacturing-commitments-list.S.%20Manufacturing%20Announcements%20List.pdf. [Accessed 28 October 2014].
[3] China Briefing, “China’s Rising Manufacturing Costs: Challenges and Opportunities,” 8 July 2014. [Online]. Available: http://www.china-briefing.com/news/2014/07/08/chinas-rising-manufacturing-costs-challenges-opportunities.html. [Accessed 28 October 2014].
[4] The Economist, “The end of cheap China,” 10 March 2012. [Online]. Available: http://www.economist.com/node/21549956. [Accessed 28 October 2014].
[5] R. Behre, “Manning S.C. beats out China for bike factory,” The Post and Courier, 14 October 2014. [Online]. Available: http://www.postandcourier.com/article/20141014/PC1610/141019640. [Accessed 28 October 2014].
[6] S. Caminiti, “States lure manufacturers and shore up jobs,” CNBC, 29 June 2014. [Online]. Available: http://www.cnbc.com/id/101795323#. [Accessed 28 October 2014].
[7] S. Poynter, “Stanley Furniture,” Wall Street Journal, 2014. [Online]. Available: http://online.wsj.com/articles/bringing-jobs-back-to-u-s-is-bruising-task-1403746208http://online.wsj.com/articles/bringing-jobs-back-to-u-s-is-bruising-task-1403746208. [Accessed 29 October 2014].
[8] T. Economist, “The Economist,” 19 January 2013. [Online]. Available: http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united. [Accessed 31 10 2014].
[9] P. V. d. Bossche, “Solving the Reshoring Dilemma,” Supply Chain Management Review, January 2014. [Online]. Available: http://www.atkearney.com/documents/10192/4059261/Solving+the+Reshoring+Dilemma.pdf/29edad5b-8327-46e4-bc67-edabfcc64af6. [Accessed 31 10 2014].
[10] C. BELLEGO, “Enterp,” March 2014. [Online]. Available: http://www.entreprises.gouv.fr/files/files/directions_services/etudes-et-statistiques/4_pages_Dgcis/2014-03-4p30-EN.pdf. [Accessed 31 10 2014].