Production and Costs

Part I: Milestone Two

Production and Costs

Sholanda Green

MBA-502-Q5273-16TW5

Production and Costs

        Walmart modeled its new automotive service department after quick oil change industry leader Jiffy Lube (Jiffy Lube, 2016). The quick oil change industry includes 1) hassle-free oil and filter replacement service; 2) vehicle maintenance and prevention service; 4) free visual inspection plus vital fluids top off service; 5) tire installation and rotation service and; 6) battery service (Walmart, 2016).      

The quick oil change business is in a perfectly competitive market.  Perfect competition is vulnerable to price elasticity or decreasing demand for products and services when the price increases (Markgraf, 2016).  Perfect competition is also represented by individual firms not setting prices.  Instead firms in perfect competition are considered price takers (Boundless, 2016).  Price takers charge consumers a price represented by an intersection of demand and supply (Boundless, 2016).  

Exhibit I[pic 1]

[pic 2] Exhibit 2

The goal in a perfectly competitive market is maximizing profits.  This is accomplished when the optimal level of output is when marginal cost equals market price (Markgraf, 2016).

Inputs

Walmart Auto has an “overhead” also known as the cost to operate a business (Wilkinson, 2013).  These costs are either fixed or variable.  Fixed costs include utilities, rent/lease/mortgage, equipment, payroll, insurance and supplies (Wilkinson, 2013).  Fixed cost don’t change and represent bills and necessities already paid for.  Variable costs to operate a quick oil change facility include some utilities and some supplies, labor and amended payroll, human capital, marketing and advertisement, coupons and discounts (Economics Online, 2016).  

Engine Oil

The first input which is crucial to Walmart Auto business model is engine oil or lubricant. Walmart will be using up to 5 quarts of lubricant for the majority of customers and cars coming into their shops.  There are many other lubricants Walmart may need to use to service a car during a routine visit (Halron, 2016). Walmart Auto and other quick oil change businesses use oligopolies like Halron Lubricants Inc. for their supply of lubricants.  Halron does business with oil processors including Warren Oil, Inc. another firm working in an oligopoly market (Warren Oil, 2016).  Warren Oil Inc. buys oil from one of the hand full of oil extractors working in an oligopoly market, descendants of monopolies (Standard Oil) including Exxon Mobile and British Petroleum (Exxon Mobile, 2016).  

[pic 3]
Exhibit 3

The above graphic demonstrates how many industries are dependent upon the economics surrounding a barrel of crude oil, including Walmart Auto (Schwartzberg, 2012). While Walmart Auto is vulnerable to the price of oil increasing or decreasing, so are all of Walmart quick oil change competitors due to the fact they are operating in perfect competition (Markgraf, 2016).  I consider lubricant to be a fixed cost with the potential to become a variable if Walmart runs out of lubricant which they purchased and store at a Walmart location.

Labor and Human Capital

        The next input Walmart Auto must plan for includes labor and human capital.  Human capital is the economic value of the employee’s skill set (Investopedia, 2016).  Walmart can keep their overhead under control by hiring and training optimum performers, mechanics who work efficiently.  Mitchell’s standardized table gives an estimate of long it should take a mechanic to fix a car model (Provost, 2016).  Qualified technicians who work fast and hard allowing shop to profit from Mitchell standardized labor rates.  If Walmart auto technicians who earn $15/hour and work faster than the competitions this will help Walmart Auto maximize profits in the long run.  The apparent goal of quick oil change franchise owners is to make a profit in the long run (Schwartzberg, 2012).  Investing in employees through certification and paid trainings is calculated as a marginal cost (Boundless, 2016).  Labor and human capital is considered a variable cost because a firm cannot necessarily plan ahead or pay ahead for meetings, trainings and overtime which come up within a month’s notice.  

[pic 4]Exhibit 4

Exhibit 4: Reflects the cost of a typical Walmart Auto shop.  The fixed costs include rent and products Walmart already owns outright, on premises, and utilities that don’t increase or decrease intermittently.  Average variable costs are added on top of the firm’s fixed costs (Markgraf, 2016).  It will be crucial for Walmart HR and Payroll to keep an eye on the costs of overtime and paid training making sure to stick within the margins that don’t take put the company into the red (Schwartzberg, 2012).  

Material: Tires

        The third input Walmart Auto has to concentrate on is their supply of quality tires (Walmart, 2016).  According to industry insiders, “shops don’t make money off of labor but rather selling marked up parts (Provost, 2016)” Walmart is the world’s larger retailer with a phenomenal supply and product distribution chain of command in effect (Walmart, 2016).  Walmart carries the top major tire brands including Goodyear, Michelin, BF Goodrich, Dunlop and many others (Walmart, 2016).   Walmart sells auto tires in their superstores, online and most recently through their quick oil change auto shops offering tire installation and rotation service (Walmart, 2016).  Walmart is known for everyday low prices.  Hence Walmart tires are less expensive than tires sold elsewhere (Walmart, 2016).  Subsequently Walmart cannot overcharge their customers for “parts.”  Subsequently Walmart has been able to do something not often noticed or gotten away with in a perfect competition (Walmart, 2016).  Walmart sells and promote their products and services in a low cost manner and Walmart’s prices are always less than Jiffy Lube’s (Walmart, 2016).