Economies of Scale: Walmart
Economies of scale means a situation where the average cost of a product declines with an increase in volumes; it arises when the marginal costs go below the average costs. For instance, when Walmart buys many shoes from a supplier in bulk, it gets advantages in terms of discounts reduced shipping costs and reduced ordering costs per pair of shoes. As such, Walmart will enjoy economies of scale through cost savings. Walmart premises its business on the concept of volumes as expressed by Hunt, Watts, and Bryant (2018). Through sales and purchases of huge volumes of goods, the company is able to spread its fixed costs over a greater volume of output. Another strategy that reduced prices is an efficient distribution channel. Walmart has ensured efficiency in its distribution channel through having shorter lead times and also a zero tolerance policy on distribution channel inefficiency. Walmart, in its distribution channel, ensures that the channel remains short through purchasing directly from producers. As such, a reduction in the number of agents at the middle ensures reduced propensity for margins to grow. Cumulatively, this ensures that Walmart will not incur holding costs and at the same time, its customers get the latest product possible. The scale and scope of purchasing in Walmart wins it important discounts and bargaining power from their suppliers as mentioned earlier. Due to its cost cutting strategies, Walmart is able to obtain a competitive advantage over its competitors. It is able to attract many customers, an aspect that creates further demand for more products. With more than 5,000 stores globally, it is able to mount significant pressure on its suppliers especially when it comes to prices of products and delivery options. Essentially, Walmart has been a going concern due to economies of scale.
Hunt, I., Watts, A., & Bryant, S. K. (2018). Walmart’s international expansion: successes and miscalculations. Journal of Business Strategy, 39(2), 22-29.
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