Could the Alibaba Model Undo the Wal-Mart Model?

These are questions that arise as a consequence of the digitization of the global/local supply chain in the peer-to-peer model.

Longtime correspondent Bill M. reckoned I missed the longer-term story in my piece on the Alibaba IPO: namely, that the Alibaba Model of makers selling directly to buyers could undo the Wal-Mart Model of super-stores dependent on massive inventory. My essay The China Boom Story: Alibaba and the 40 Thieves addressed the China Boom rather than the Alibaba model, so let’s compare and contrast the Alibaba model and the Wal-Mart model.

We all know the Wal-Mart Model:squeeze suppliers until they’re gasping for air (“sure, you’re losing money on every unit you sell us, but you’ll make it up on volume”) and then transport all this stuff across the Pacific to a vast warehousing and shipping operation that must keep hundreds of sprawling (and costly) superstores stocked with hundreds of different items.

This model gained supremacy because it lowered costs to consumers by outsourcing the production of most of the inventory.Generally built outside of towns, the superstores thrived in an era of low gasoline costs and cheap credit, i.e. the past few decades.

Competition was held at bay by the sheer size of the superstores’ purchasing might: nobody ordering small lots could buy stuff at the same price as someone ordering a million units.

The Alibaba Model is a peer-to-peer system that enables makers/suppliers and buyers to link up supply and demand in real time. Let’s say I want 100 bicycle wheels of various sizes for my bicycle repair shop, to replace all the wheels stolen from unsecured bikes with quick-release hubs.

In the peer-to-peer market (the Alibaba Model), my bid for the 100 bicycle wheels is visible to a universe of makers/suppliers. Maybe some supplier has an overstock, or a manufacturer has piled up some extras or has a slack day to fill on the production line. There are any number of reasons why a maker/supplier might be able to get close to Wal-Mart’s price for a small batch order.

Depending on my own distribution network, the 100 wheels might not even be inventoried in a warehouse: the day they arrive, I might ship them to others who already ordered wheels from me–from individuals to institutions to other repair shops.

The digital overhead of the transaction is near-zero, and managing the logistical supply chain is low-cost as well. There is very little overhead compared to the vast hierarchy of corporate controls and management of the superstore model.

This enables both the maker and the buyer to offer better prices with higher margins than either could get in the Superstore Model. In essence, the profit and overhead skimmed by the Superstore Corporation can be split between buyer and seller.

The Alibaba Model is not limited to China. After reading Shenzhen trip report – visiting the world’s manufacturing ecosystem, Correspondent Mark G. observed: The injection mold making they discuss as a strength in Shenzhen is precisely what Phil Kerner teaches at hisThe Tool And Die Guy website. Resurrecting that supporting skill community ecology is why I regard such teaching materials from Kerner and Tubal Cain on Youtube as so vital: Index of Tubal Cain “Machine Shop Tips” videos on YouTube.

Toss in the ongoing revolution in affordable desktop 3-D fabrication machines, and it’s not too hard to discern the price advantages of the Superstore Model eroding fast, especially if consumers wise up that “low prices” are not low if the quality is so poor the product must soon be replaced.

How much would I pay to avoid the weeks-long shipping delay from Asia? Does that premium enable local shops to compete with Asian workshops, despite the lower wages paid in China, Vietnam, and other emerging economies?

How much would I pay to have the item I want delivered to me rather than have to drive miles to the Superstore? if I add up the maintenance costs, fuel and other expenses of operating my car, and the time wasted in traffic, standing in line, etc., how much cheaper is the Superstore price?

How much would I pay to direct my money went to a local worker/shop owner I know and trust rather than to some supplier in a distant city?

These are questions that arise as a consequence of the digitization of the global/local supply chain in the peer-to-peer model. Just as we have reached Peak Central Planning and Peak Central Banking, we may have reached Peak Centralization not just in government and finance but in the corporate-cartel model of “low quality at high margins.” 

If you have an outside-the-mainstream book-length idea that identifies the business trends of the future and you’re under 35 years of age, you might want to enter a book proposal inThe Bracken Bower Prize competition being sponsored by the Financial Times (FT.com). The winner will receive £15,000 and the winning proposal will also be published on FT.com. The deadline for entries is 5pm (BST) on September 30th 2014. 

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  • Forest_GS

    I kept hearing about this “Alibaba” thing, had no idea what it was about. Was wondering why it was getting so many news articles. Thanks for explaining it.

    • Umi

      They are about to IPO soon, it is going to be the biggest IPO in US history to date. Hence, all the news on it.