Sunday, September 7, 2014
Walmart’s decision: the trade-off between quality and cost
Although Walmart has successfully opened over 400 branched since it entered the Chinese retailing industry 18 years ago, the giant enterprise has encountered massive vast amount of scandals especially related to the quality of the goods it supplied. For instance, in 2011, 13 branches in Chongqing were closed for 15days because Walmart had sold less-expensive pork as the more-expensive organic variety and the retailer was fined for 2,690,000 yuan; in 2013, several branches in Beijing sold the sea sedges imported from Korea while they translated the date of expiration written in Korean into the date of manufacture written in Chinese, consequently many consumers bought expired see sedges without being informed; in the branch of Walmart in Jinan was exposed of selling cheap fox as cooked beef and donkey meat.
Recently in august of 2014, one employee of a Walmart branch in Shenzhen claimed that Walmart used overdue oil to produce fried chicken, he also exposed a video of the producing process to the internet.
The previous president and CEO of Walmart, Mike Duke, repeatedly stressed that China is one of the most strategic markets for Walmart, whereas Walmart’s actual performance in China, as listed above, is far from its blueprint. All these quality-related issues are reflections of Walmart’s choice of trade-offs between quality and cost. Obviously, Walmart chose to reduce the cost of production and quality cost in order to increase the benefit and revenue. Specifically, Walmart did reduce the appraisal costs as they denied the required process of testing and inspection of purchased materials and components from suppliers. However, Walmart failed to consider the external failure costs when those poor-quality goods are sold to consumers, once the truth is exposed to the public and media, Walmart may confront serious consequences, from customer’s complaint to distrust, refunding service fees to litigating reputation costs, loss of customer loyalty and goodwill to lost market shares, all of which are extremely to be rebuilt and retrieved.
The tragedy of Walmart may be the outcome of its localization operation, as in China, there exists many regulatory lacunas and light punishments concerning Walmart’s unlawful acts, problems can be easily solved if Walmart accepts the return of goods or gives offsets to consumers, even the most serious solution is to receive the administrative penalty, whose loss is so tiny compared to the size of the giant enterprise.
However, Walmart’s performance in China did reflect some serious problems about its management system, especially the quality management in these cases. As it is conveyed in the core curriculum: Managing Quality, the quality department is responsible for policing the quality of products and services, and intervening in the production process when the quality is unacceptable low. In the case of Walmart, it is its duty to reemphasize the importance of the quality of goods, on which basis can they struggle to maximize the profit, besides, Walmart is expected to optimize internal management system during localization operation.