Purchasing Analysis for Cost Reduction in Wal-Mart

Wal-Mart uses various methods to control the quality levels of its suppliers, including linear averaging and ABC analysis. The company's purchasing analysis focuses on reducing costs and providing best prices in the market. Linear averaging method is used to evaluate suppliers based on performance, quality, delivery time, and cost, while ABC analysis categorizes items into three categories: A (15-20% of inventory value), B (30-35% of inventory products), and C (50% of actual items but only 5% of the inventory value). The company's strategy is to sell more products at less profit, which has helped it grow and become a leading retail brand.

Running head: Purchasing Management 1
Purchasing Management of Wal-Mart

Purchasing Management 2
Contents
Purchasing Management: An introduction......................................................................................3
Supplier selection criteria................................................................................................................3
Appropriate criteria for supplier selection...................................................................................3
Eatables and Safety requirements:...........................................................................................3
Fitness & Wellness Safety Requirements:...............................................................................4
Decision related to suppliers issue...............................................................................................4
ICT for purchasing operations.........................................................................................................4
ICT TOOLS.................................................................................................................................5
Bar Coding...............................................................................................................................5
Enterprise Resource Planning (ERP).......................................................................................5
Material Resource Planning (MRP).........................................................................................5
Distributions Requirements Planning (DRP)...........................................................................5
Improving purchasing operations by ICT....................................................................................6
Purchasing Cost analysis.................................................................................................................6
Categorical method......................................................................................................................6
Cost-Ratio Method.......................................................................................................................6
Linear averaging method.............................................................................................................6
ABC Analysis..............................................................................................................................7
Conclusion.......................................................................................................................................7
List of figures
Figure 1: Cost in overall purchasing................................................................................................6
Figure 2: ABC Analysis...................................................................................................................8

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Purchasing Management: An introduction
Purchasing management refers to a department which takes place in the purchasing
activities. It needs to be taken proper care in an organization like Wal-Mart as they are primarily
concerned on the prices based on the suppliers. The essay would be helpful to understand the
ways in which big retail units like Wal-Mart take care of its pricing and evaluate their suppliers
by different methods of evaluation. This essay would also provide proper understanding and
overview of Wal-Mart. The company is popular in the retail industry along with the cost
leadership strategy in the operating market. Wal-Mart provides various retail products to the
customers that are useful in their daily lives (Quintens, Pauwels & Matthyssens, 2006).
Strategy of the company is to be the cost-leader in the retail industry by providing quality
products to its customers. In terms of purchasing, the suppliers of the company have the low-cost
strategy and selected as the lower returns as the market strategy. There are many other
companies in the retail industry that have effective purchasing strategy. Those companies are
giving tough competition to Wal-Mart. Competitors of Wal-Mart are Amazon, Aldi, Apple Inc,
Best Buy etc.
Supplier selection criteria
Supplier selection criteria for any commodity category can be explained as “cross
functional” group of people presenting different sort of factors in the organization. In case of
Wal-Mart they have suppliers all over the world as per their requirements and need in the
market. Thus all Wal-Mart suppliers need to fulfill few important terms and conditions. These
requirements are based on social and environmental situations in the industry (Yuh-Jen, 2011).\
Appropriate criteria for supplier selection
Eatables and Safety requirements:
Suppliers need to ensure that the necessary process such as labeling and tagging, adding up food
additives. Capable suppliers of Wal-Mart these conditions need to be fulfilled. GFSI (Global
Food Safety Initiative) certification is necessary element for all the vendors working for wall-
mart. Suppliers that import the products from other dealers need to give a check and do the
inspection of the products to ensure safety and security (William, Xiaowei, Prasanta, 2010).

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Fitness & Wellness Safety Requirements:
Products are made up of drugs, vitamins, food supplements; add on to tastes,
preservatives and cosmetics products contain chemical and other ingredients. According to Wal-
Mart all the companies dealing in such kind of industry must ensure the safety of health and
wellness. The supplier must disclose each details of manufacturing its products, packaging,
sorting and label the products. All the goods produces should also be registered with the FDA
(Food Drug Administration).
Decision related to suppliers issue
Wal-Mart has their suppliers all over the world, they are always selecting their suppliers
on different objectives and rules set by them. These criteria are pricing of the commodities, Time
of product delivery, suitability, and methods in purchasing the product. They maintain all form
of legal requirements with the suppliers and expected to follow the given set of instructions.
Wal-Mart has specific set of rules that need to be followed by suppliers. If these requirements are
not fulfilled by them their contract can be eliminated and they will be voided in selling their
products to the company. They also ensure that the supply of the product is time based in case
the order delivery is late or early no such loss is beard by the company. The basic idea is to
deliver customers value by the business operations (Spina, Caniato, Luzzini & Ronchi, 2013).
ICT for purchasing operations
ICT tools helps in supporting the entire human task performed by human’s resources and
to improve buyer activities it helps in performing the task faster it helps in automatic decision
making. ICT tools are really helpful in practice of autonomous decision making processes. Wal-
Mart uses this process to make thing more transparent and have clear transparency with the
stakeholders, Information technology is widely used these days for the service industries like
retailers, transportation companies etc. ICT tools helps to increase efficiency and effectiveness
of the firm. It helps in supporting the human resources organization. ICT brings higher
transparency for the stakeholders, which results in implementing better adoption of fair policy
and effectiveness in the company (Ziggers & Henseler, 2009).

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ICT TOOLS
Bar Coding
Barcode is a readable format of words by a computer, the information is stored as a parallel lines
and spacing between them, these days there are many set off codes like pattern of dots, set of
circles etc. This procedure is easy and automatically fetches the data from the products. Bar-
coding is often used for counting the goods as well as raw material so it help in making proper
data of sales of good in the company and availability of inventory and raw material. Wal-Mart is
using barcodes on its entire product from a washing machine to a small needle. It helps them to
maintain the correct amount of stock details (Trent, 2004).
Enterprise Resource Planning (ERP)
ERP is an important tool in the process of information communication it give the
managers an opportunity to give a check on the functions of all the departments. These systems
are based on different kinds of modules such as management of the supplier, manufacturing of
goods and procurement of funds etc. Wal-Mart has basically designed well maintained ERP
system so that managers can check all the departments, effectively and take the required decision
according to the analysis of these modules (Haag and Cummings, 2010).
Material Resource Planning (MRP)
This system is highly based on tracking the manufacturing of products to the point of its
assembling. Managers can analyze the production activity and can improve the cycle of
production incase if they found any flaw. Wal-Mart effectively used this system to manage the
rush orders, making a coordination among production and purchase of goods. They can also do
sales forecasting, and take the decision if they want to recruit new individuals and making master
budget.
Distributions Requirements Planning (DRP)
Wal-Mart use DRP in order to distribute the inventory and existing stock in the different
distribution points. This tool is really effective in the organizations like Wal-Mart and
supermarkets where there are regional and local distributors for a product so it is highly
important to maintain a regular check on the inventory and its distribution.

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Improving purchasing operations by ICT
ICT tools are important component of every business these days. It helps the managers to
check the operations of procurements, payment of suppliers, distribution of products; sales
forecast and determine the budget of the firm. Efficient use of resources and minimum wastage
of products is the main factor of high growth of Wal-Mart in the market. These tools make the
production and distribution process easy and helps in preparing systematic data on every sale.
Wal-Mart is a big chain in the retail sector thus ICT tools help in the proper communication in
the different departments. Thus Wal-Mart should improve its operations and management by
using better ICT tools and effectively using them.
Purchasing Cost analysis
Purchasing is a complex process in an organization, in traditional belief the ultimate goal
of purchase is to get goods and services in exchange of money. Wal-Mart is using multiple
sources in their company as its working is based on international basis and it cannot be
centralized its suppliers at its original place where its headquarters are located. Thus they use
multiple sourcing to cut the cost 0of transportation (Krichen, Laabidi, & Abdelaziz, 2011).
Figure 1: Cost in overall purchasing
(Source: Fliegner, 2015)
Categorical method
Wal-Mart make category of every buyer associated with it and keep track of all the detail
and analyze them. In the regular meeting, Wal-Mart declares the analysis to the suppliers and

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help to bring down the purchase cost by increasing the competition in the market. This helps the
company in reducing the purchase cost as well as this method is inexpensive.
Cost-Ratio Method
This method helps in evaluation of supplier’s performance in the standard cost analysis.
The total cost of each purchase of product is calculated on its Retail price plus the buyer’s
internal organizational cost associated with the delivery of the products and it standard quality.
Wal-Mart is using this method in its purchase analysis to cut down its cost.
Linear averaging method
Linear method is commonly used in the process of purchase evaluation, specific factors
like performance, quality of products, delivery time and cost is included. The top judgment takes
care of all the performance level this analysis focuses on overall quality of the suppliers. The
results of these factors are added up to get the rating in numerical value for the suppliers. Wal-
Mart uses these weighs as a multipliers and the analysis department give a complete check to the
data provided to them. This method is useful for Wal-Mart has it is in retail industry and getting
best supplier is helpful in long term growth of the company (William, 2009).
ABC Analysis
ABC analysis is an important tool to help the companies in strategic cost management
and to measure the current status of inventory and supplies. "A" Category items basically
represent approx. 15%-20% of an overall inventory by item, but represent 80% of value of an
inventory (Hadi . 2010). “B” Category products interoperate 30%-35% of inventory products by
product category, and about 15% of the value. "C" Category products interoperate 50% of actual
items but only 5% of the inventory value. Many organizations can bear a relatively stable
inventory process surrounding these products (Douissa & Jabeur, 2016).

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Figure 2: ABC Analysis
(Source: Wannenwetsch, 2006)
Wal-Mart item comes in category A and monitored and recorded items as they are
recorded. The items belong to this category are mainly the finished goods or ready to sell goods
at retail outlets. Thus Wal-Mart major actions are influence on Category A. Category B is a
necessity as an infrastructure to the company. However the category C is not that important and
does not affect its transactions (Jack et al, 2010)
Conclusion
Wal-Mart is among the leading brand in retail because it has various methods to control
the quality levels, they follow their own code and regulations in choosing the appropriate
suppliers, fulfilling all the necessary rules and regulations. The company is actively using
information; communication and technology tool in order to make a proper control over
inventories, departments, raw material etc. Effective management is the key to success and helps
in growth prospective. ERP and MRP are the main tools used by the Wal-Mart in relation to ICT.
Purchasing analysis of Wal-Mart informs and details the small decisions taken by the company

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to reduce its purchase cost and provide best and cheapest price in the market. Linear averaging
method is highly suitable for big enterprises like Wal-Mart. Cost ratio method and categorical
method are also used in grading the suppliers, however it does not include over factors of
analyzing.
However there are many different views of experts about these methods according to
them there is no way in which a company can grade their suppliers, because companies like Wal-
Mart have international market and conditions at every place is not same thus they need to focus
on overall scenarios a supplier is facing, in decision of purchasing. As per the analysis of report
Wal-Mart is trying all the necessary actions to reduce the purchase cost and provide best prices
in the markets. Its strategy is to sell more products at less profit. Thus helped the country to
grow manifold times and today it is world leading retail industry.

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