Wal-Mart Explores New Way to Cut Costs
Wal-Mart Stores is always looking for ways to cut costs
and the company’s head of purchasing thinks he has a solution that will work
for the retailer and its suppliers.
According to a Bloomberg Businessweek article,
Hernan Muntaner, who has the official title of vice-president for international
purchase leverage, wants to team with large suppliers to jointly purchase raw
materials at prices that neither party could get on their own.
"Around the world, we found we were buying the same raw materials" Mr.
Muntaner said. "When you put the volume together of what we bought and
what [suppliers] bought, and buy from just one supplier, you can reduce the
cost."
Wal-Mart, according to the report, has teamed with a supplier in
Chile to buy paper. The result has been a 2.5 percent decrease in its
paper costs.
Mr. Muntaner sees PepsiCo as a potential partner and believes the
companies could work together to buy items such as potatoes, although the owner
of Frito-Lay has yet to commit.
"Sometimes it’s very hard with a big company to have conversations like
this," Muntaner told Bloomberg Businessweek. "That is the
main reason why we don’t have Pepsi yet."
Discussion Questions: Do you see Wal-Mart being successful recruiting brand
manufacturers to jointly purchase raw materials? What do you see as the pros
and cons of this approach?
The short answer is, “Why Not?”
The “pros” are obvious–reduced supply chain cost, improved margins, etc.
The “cons” are more subtle. Do manufacturers need more ways to get their businesses tied to Wal-Mart? What happens to supply chain savings if Wal-Mart gets upset?
If I were a manufacturer, this is what would keep me up at night.
If Wal-Mart doesn’t already rule the marketplace today, it surely would with deep involvement in raw material purchases. Is there no end to W-M’s attempts to be a strangling octopus and become a governing monopoly? One wonders.
Buying for less based on volume. That is at the core of the Walmart model. Conceptually this makes a lot of sense, however, there is undoubtedly some devil in the detail. Key questions include operationalizing the “consolidation” of demand across multiple partners, ownership, and what happens when supply and demand are not equal (sudden shortage etc). Will be interesting to see how this one plays out.
On the surface this seems like a great idea. But upon further review I think the unintended consequences could be a problem for the manufacturers. Traditionally, manufacturers cut costs to plush profits and/or gain a competitive price advantage. In the case of a partnership with Walmart, those savings will flow through to Walmart and may in fact end up costing the manufacturer through some compliance documentation requirement. In the end I think keeping a healthy distance between manufacturers and retailers is the best idea for all parties.
Why doesn’t Walmart just stop the charade and start contracting with the lowest cost providers for everything they sell and put their brand on it? Many of their “partners” have already cut corners to meet the price demands to a such degree that the brands have lost all differentiation. This continuous downward pressure on price is forcing companies not only to compromise product quality, but also to cut staff, reduce benefits and ultimately will drive them out of business since they can’t operate a business on the ever shrinking margins.
If I’m a manufacturer and I enter this deal with Wal-Mart, what about other retailers who buy from me? Do they get hurt by still-lower shelf prices at Walmart? How are they going to like that, with Wal-mart carrying the same national brands even more cheaply than they do now? (Let’s hear it for SKU rationalization, and everyone carrying the same items!) Wouldn’t this also diminish the raw material supplier base, and hinder competition?
I see lots of red flags here, but then, the laws of the land are selectively enforced and often in a ludicrous fashion. So this will probably happen. Perhaps next the feds can outsource the military to Walmart. (Or is it Wal-Mart? I can never get it straight anymore.)
Let me see if I have this right? The 800 lb. Gorilla says to the vendor you are going to partner with me to purchase this or I will partner with someone else. What can the vendor say but yes?
Then the 800 lb. Gorilla says to the supplier you are going to sell to us at a lower price or we will purchase elsewhere. What can the supplier say but yes?
Now what is there to stop the 600 lb. Gorilla (Target) from doing the same thing. I am beginning to feel bad for the suppliers.
The title of “VP of International Purchase Leverage” says much of what we need to know.
Even though Wal-Mart may have lost a small amount of the dominance it enjoyed in the past decade, the fact remains it represents 50% or more of many CPG companies’ total sales. That means what Wal-Mart wants, Wal-Mart gets. Remember when Wal-Mart essentially placed the cost of its RFID mandate on its suppliers’ shoulders? They should be happy this time Wal-Mart is sharing some of the cost.
I’m not sure about the legal implications here, but it would seem only fair that if a supplier agreed to pursue this with Wal-Mart than all others it sells product to would be invited to participate, as well. Otherwise the CPG manufacturer would be materially involved in providing Wal-Mart with an unfair competitive advantage.
I have been reading a number of case studies on quality and central buying. In a number of these cases central buying resulted in an overall decreased quality of product. Most of this was due to strict rules and control by the central buyer. The local production facility would identify quality issues with raw materials. But the local facility had no input in the selection of the raw materials. The worst cases were bids to lowest cost suppliers. This sometimes resulted in lower raw material cost but higher overall costs due to rework and rejects.
Something to think about; how will Wal-Mart protect quality while lowering costs? A brand that wishes to remain a brand and not a commodity should consider this issue carefully.
Walmart’s sourcing strategy has long been to ‘partner’ with their suppliers, and on the surface it sounds like a win-win, but experience has taught that Walmart’s conception of partnership is that they reap all the benefits while their ‘partner’ assumes all the risk. I think their branded suppliers will be wise enough to proceed with extreme caution on this one.
But give Walmart their due. In our first discussion today, we were talking about pricing, and pricing of commodities in particular. Walmart deals in commodities, where low price wins, and their take-no-prisoners strategy is to continually push the envelop on costs and prices, whatever it takes, period.
I agree that there can be more quality control issues when using one central buyer, but if Walmart is talking about creating a true partnership with suppliers of equal size (e.g., P&G, Pepsico, etc.) then both partners will have to invest in maintaining and exceeding the current quality requirements. If they don’t, then everyone, including the consumer, loses.
While not being a lawyer, and not knowing the full details makes it hard to comment intelligently, I see anti-trust problems here: WM would become a defacto partner with the suppliers to its competitors (assuming WM will have any competitors left, of course). And while I can see this “common purchase” excuse …er rationale being used for paper, how exactly does it work for potatoes? What “normal course of business” requires WM to need potatoes?