SCDigest: Wal-Mart to Centralize Global Sourcing, Reduce Use of Middlemen
By Dan Gilmore, Editor-in-Chief, Supply Chain Digest
Through a special arrangement, presented
here for discussion is a summary of a current article from Supply Chain Digest.
Wal-Mart in early January announced a sweeping plan to
consolidate its global procurement functions and reduce the use of intermediaries
in its global sourcing processes, leading to savings of billions of dollars
per year.
It turns out that Wal-Mart, the world’s largest importer,
still relies on the use of sourcing intermediaries for the bulk of its global
sourcing initiatives, buying less than 20 percent of its goods directly from
offshore suppliers. In addition, it often operates in a very decentralized
mode, with each of the 15 countries where it operates buying goods from the
same suppliers, especially for its growing private label brands.
Now, Eduardo Castro-Wright, vice chairman at Wal-Mart,
says the company’s goal is to switch that ratio, so that within a few years
it is buying direct from the manufacturer for 80 percent of its purchases.
If it can do that and gain additional benefits from centralized purchasing,
Mr. Castro-Wright estimates the potential cost reduction from taking out the
middleman mark-up of five to 15 percent, depending on the category, will lead
to billions in savings. (Wal-Mart’s global sales are about $400 billion.)
The move to more direct procurement will be facilitated
by greater centralization of its sourcing operations.
Mr. Castro-Wright says Wal-Mart has established four global
merchandising centers for general goods and clothing, including an office in
Mexico City focused on emerging markets. It is also planning to shift to direct
purchasing of its fresh fruit and vegetables on a global basis, rather than
working through import companies and agents.
The program has already been piloted over the past year.
A test on combining the purchase of fresh apples across the U.S., Mexico and
Canada resulted in savings of 10 percent. As a result, Wal-Mart intends to
accelerate centralized North American procurement for all fresh fruits and
vegetables.
By the end of 2010, Wal-Mart also plans to move to direct
procurement of linens and towels for its North American stores, as well as
its clothing for its Faded Glory line and for licensed Disney character clothing.
It plans to expand the procurement strategy to other categories, including
seafood, frozen food and dry packaged groceries, and to set up direct buying
offices in such countries as Brazil, Chile, South Africa and New Zealand.
In 1999, Wal-Mart acquired the grocery chain Asda in the
U.K., and still operates there under that banner. Mr. Castro-Wright told the Financial
Times that Asda had expertise in direct sourcing, which Wal-Mart was now
planning to leverage across the globe.
The move might not only lead to reduced cost of purchased
goods, but other supply chain efficiencies. It may enable Wal-Mart to better
plans and consolidate incoming shipments through improved visibility to the
entire PO lifecycle.
Discussion
Questions: What do you see as the pros and cons of Wal-Mart’s move
to centralize sourcing operations and increase direct procurement? Are
you surprised it currently does so little global sourcing on a direct model
today?
[Author’s commentary]
At one level, it is surprising that Wal-Mart currently does so little direct
global procurement given its volumes, but on the other hand maybe not. The
company also has a history of studying things for awhile before acting, and
it always keeps overhead low. So, using intermediaries for awhile may have
made perfect sense before moving it more in-house, even if later than many
other retailers.
Wal-Mart has, from its early years, been more about distribution, logistics, and systems than about merchandise. This enabled the company to operate on a completely different cost structure which in turn, enabled lower prices, faster turns, and unparalleled growth.
Increasing the level of control farther upstream into the sourcing function seems a perfectly logical strategy for Wal-Mart. It will definitely lower costs. As long as the strategy is limited to basic commodities and foodstuffs, it should be a significant win.
Wal-Mart has required direct sourcing in the United States for years. They would not work through a broker. The time is right for them to expand this concept around the world. Part of this may be due to their increased store count and volume in their international markets.
Central procurement has significant savings, but there are risks. Every country is different and unless you play by their rules, there will be problems. Simple things like holding the container on the dock a few days so all the produce can rot. The other risk is in item selection. What sells in Mexico may not sell in the United Kingdom or China. We saw this with Food Lion’s expansion into Texas with central procurement in the Carolinas.
Walmart, by the nature of their business, has to deal with tens of thousands of procurement items, significantly more than a manufacturer, such as a General Electric. This task of shifting the percentage of direct purchasing is not likely to be conveniently converted within a year’s time. That shift will take some adjustment time for both the Manufacturers and for Walmart buyers.
In addition, there will be some vendors who will choose to remain loyal to their brokerage teams. Flipping this from 20/80 to 80/20 will not be a simple task.
However, the direct buying pattern will trim Walmart’s costs over time. And, savings of 3% to 5% on their purchasing volumes will contribute mightily to their bottom line. Perhaps more importantly for both Walmart and these new contacts with vendors, if both “listen to each other,” they will find new opportunities that will open up from some innovative thinking between them.
This is yet another way that many missed the point behind Walmart’s revamp of its Great Value private label (and its sustainability index, for that matter). While everyone was weighing in on whether the packaging was too generic, Walmart was pumping up direct sourcing for the program for a number of reasons (see my blog coverage); wringing out supply chain efficiencies/costs being just one. Direct sourcing gives Walmart transparency–complete visibility (or as much as they want to have) into manufacturing processes; it allows Walmart to monitor sustainability on its own terms and to make direct-sourced products completely traceable. If you’re big ol’ Walmart operating in an increasingly risky global supply world, what’s the downside?
So Wal-Mart will probably attain a savings of 10-15% and pass on a savings of 5-10% to the end users. A huge savings, yet I am sure most will hit their bottom line.
Having sold to Wal-Mart in the past, they are not as much concerned about their customer or their vendor, they are concerned about control and Wal-Mart. Caveat Vendor and Emptor.
I can see the benefits of savings and if they pass it on to their customers to continue to keep them as the low priced, go-to retailer, then many will benefit.
But if they keep that savings themselves, and hurt many others who have helped get them to where they are (and now they’re out of a massive amount of income) eventually this could be their downfall.
Lately their pricing has not been as competitive as it used to be, which is why I see them doing this…as well as their ability to have the transparency they need (good idea).
I have been pretty confused about the buying power of Wal-Mart vs. pricing. Their volumes are so high that their pricing should be some of the best in the industry and yet it’s not. Take Aldi’s for instance or Dollar Store, both of whom have better pricing, which is why I see them making this move. So it has to be that they plan to move this savings to their bottom line.
It will only work if they pass it on to the consumer. Otherwise, it will come back to haunt them.
One of the problems with being a middleman is that your client can use you to discover the best vendors, and then that client ends up dealing directly with the vendor. Somehow that doesn’t seem ethical.
Direct buying in the US has been a way of life for decades. Europe is an entirely different animal. It will not be as easy in Europe as it has been in the US. Manufactures in Europe need middlemen to supply the smaller stores that are the predominant business model. Taking away the Wal-Mart piece of the pie will not go over well. Manufacturers may have to make a choice if their current distribution channel decides to play hard ball with them.
Personally, I’m rooting for the middlemen.
I have a tremendous amount of confidence in Wal-Mart’s plan to consolidate its global procurement functions and reduce the use of intermediaries in its global sourcing processes, and I firmly predict that doing so will result in putting Wal-Mart even further ahead of its competition.
Are you surprised it currently does so little global sourcing on a direct model today?
> Absolutely! Everyone is familiar with the stories of mom-and-pop suppliers locked for days in small WM interview rooms without food or water until they relented and agreed to sell at cost…well, OK, maybe an exaggeration, but I’m certainly surprised.
The decline of once great jobbers and wholesale businesses like Marshall Field’s is a story from the beginning of LAST century; that they would have a continued presence in Wal-Mart, of all places, seems almost nostalgic…too bad they (WM) didn’t play up this humanizing angle while they still had a chance.
Wal-Mart has a strict policy of this in the US. Why should the rest of the world be any different? Wal-Mart cannot compete effectively on a global scale, without implementing this procedure. Wal-Mart’s only question to all of its suppliers should be whether or not they are the manufacturer of record for this item. However, it should be noted that it might cost Wal-Mart more than their 5%+ savings on implementing this purchasing procedure in more remote or developing countries.