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
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
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.
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
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