Case Summary -China, India, and Wal-Mart: Issues of Price, Quality, and Sourcing:

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Case Summary -China, India, and Wal-Mart: Issues of Price, Quality, and Sourcing:

“Sam Walton understood the immense clout of the company he created long before it was the largest retailer in the United States or the largest corporation in the world. In 1985, he launched his Buy American crusade, offering to work with U.S. manufacturers to bring production back to our shores. In his autobiography, Walton acknowledged that ‘we had fallen into a pattern of knee-jerk import buying without really examining possible alternatives.’ For a time, he took great pride in replacing everything from imported stacking chairs to apparel with U.S. products.”[i] However, since Walton’s death in 1992, Wal-Mart’s Buy American crusade has clearly evaporated. Wal-Mart sources everything from apparel to toys to lighting fixtures to electronics in China, representing about 90% of all the company’s imports.[ii]
Critics of Wal-Mart maintain that “the U.S. manufacturing sector is being killed by too-cheap-to-beat Chinese imports.”[iii] A Wal-Mart spokesperson, however, asserts that the retailer still prefers to buy domestically whenever possible but that “some products are simply no longer manufactured in the United States in the volume we need.”[iv] Nonetheless, “one domestic supplier after another has been shut out of Wal-Mart’s system largely in favor of Chinese imports, whether inexpensive plastic products or high-tag consumer electronics.”[v] According to Wal-Mart critic Ken Alley, United States’ manufacturers “cannot afford to make products anymore if they want to sell to Wal-Mart and Wal-Mart’s competitors and still make a profit. Wal-Mart’s directives have dictated that value and quality are second-tier issues when compared to price.”[vi] Another Wal-Mart critic, Rick Carter, Editor-in-Chief of the trade magazine Industrial Maintenance & Plant Operation, asserts that “the only goal of (Wal-Mart’s) buyers is to obtain the lowest possible price, but that buyers have been known to quibble with vendors over one cent of difference.” Carter further states, “ if all America needed were low prices, Wal-Mart might be doing its citizens a service.”[vii]

Lester Thurow, the noted economist and former Dean of the Sloan School of Management at Massachusetts Institute of Technology, makes the point that Wal-Mart is often quick “to junk American suppliers and to replace them with cheaper foreign suppliers.”[viii] Wal-Mart is also much more likely “to pressure U.S. suppliers to do whatever it takes to remain in business with the retailer, even if it means sacrificing their own profit margins, closing down plants, and outsourcing jobs to China. If they don’t, they’re likely to be dumped by Wal-Mart in favor of suppliers who can provide the same goods made by people who make a mere fraction of what U.S. workers earn.”[ix] Asked by Neil Shister, editorial director of World Trade Magazine, to identify the key for doing business in a flat world, Shoshana Cohen, a well-respected consultant at PRTM, immediately responded that “contrary to popular belief, the last factor to consider, after everything else, is labor cost.”[x]
Wal-Mart’s sourcing of products to China because of low cost is taking an increasingly vigorous public thrashing because of product safety and quality concerns. Neil Shister predicts that the summer of 2007 “will be remembered as a pivotal moment when China sourcing was subjected to serious second thoughts. Products manufactured there triggered bans, health alerts, and recalls. Made-in-China fake Viagra, lead-painted toys, toxic toothpaste, and poison dog food entered the global supply chain. Indonesia began testing popular imported products from China and found mercury-laced makeup that turns skin black and dried fruit spiked with industrial chemicals. The Philippines warned of candy contaminated with formaldehyde. In Malaysia, it was fungus-infested nuts.”[xi]

A Minneapolis-based marketing consulting firm, Strategic Name Development, reported some interesting and revealing results from a survey conducted in August 2007. According to that survey, just 40% of respondents said they could trust Wal-Mart to protect them from products made in China, and 39% of respondents indicated they were more fearful of buying products from Wal-Mart (as compared to 22% for Wal-Mart’s retail rival Target). The Strategic Name Development survey also indicates that in the aftermath of numerous recalls of Chinese-manufactured products, many consumers would now rather buy goods manufactured in India. Nonetheless, according to Deloitte Touche Tohmatsu, Wal-Mart is expected to expand its purchases of Chinese goods to as much as $30 billion annually by the end of the 21st century’s first decade.[xii] Of course, companies like Wal-Mart will probably continue to flourish. As Wal-Mart critic Ken Alley asserts that “America must put its foot down and make it more difficult for manufacturers of product lines made outside of the USA to make these record profits. If not, Wal-Mart will continue to grow, more and more manufacturing corporations will close their doors here in the USA, and more bad-quality products will be brought into this country to be handled and potentially ingested by our children.”[xiii]

Case Questions:

1. What are the ethical issues associated with Wal-Mart’s extensive sourcing of low-cost products from China?

2. Based on your experience, does Wal-Mart sacrifice product quality in order to offer customers low prices always?

3. What advice would you give to critics of Wal-Mart in order to enhance their impact on the company? To enhance their impact on governmental and regulatory agencies? To enhance their impact on society in general?

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