Wal-Mart to Reduce Supply Chain Costs Systemwide

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January 5, 2010

One of Wal-Mart's major strategic initiatives this year is to drive billions of dollars in costs from its supply chain by leveraging the global power of all its divisions and retail brands.

The plan calls for combining store purchasing across brands and national boarders, which will increase the proportion of products it buys directly from manufacturers and reduce the number of third-party procurement companies used, according to a report in the Financial Times.

Wal-Mart views consolidated global sourcing as "a major source of leverage for the company in years to come," according to Eduardo Castro-Wright, the head of Wal-Mart's U.S. stores

Although Wal-Mart is renowned for its tough supplier negotiations and ability to leverage its scale for discounts, of the $100 billion it spends on store brand apparel and Great Value goods less than 20 percent is purchased directly from manufacturers, according to the report. In the past, the company - which operates in 15 countries -- has procured products country by country, which is slated to change.

The move to direct manufacturer purchasing could take between 5 and 15 percent of costs out of the supply chain within five years, according to Castro-Wright, which translates into a $4 billion to $12 billion savings for Wal-Mart with sales of more than $400 billion worldwide, according to the report.

The new strategic focus on direct purchasing expands on a European practice utilized by heavily by Asda, Wal-Mart's U.K. subsidiary.

Initially, Wal-Mart is tackling produce, apparel and bed and bath supplies, and will expand the program to other categories including seafood, frozen food and dry packaged grocery.

SBD Views:  This move provides further evidence that Wal-Mart is taking steps with its supply chain to ensure capacity for its ambitious store brand growth goals. Moving into direct sourcing may actually take them one step closer to vertical integration. It would not surprise me to see this evolve to direct manufacturing capacity down the line similar to what Kroger has done for years. Here’s the bigger point, while the rationale of cost savings behind this move is obvious, it also begs the question, “What will be done with the cost savings?” In my view these savings will be used to increase gross margin and, more importantly,  provide investment  for store brand marketing and new product development. These investment funds will allow Wal-Mart to expand marketing, advertising and promotional activity behind its store brands while maintaining a retail price gap versus national brands.  If national brands think they have it tough now, just wait until material marketing muscle is leveraged behind Wal-Mart’s store brands.

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