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Wal-Mart Pushes Sourcing

Bentonville, Ark. — High thread-count sheets and self-sourced bath towels served as signposts for Wal-Mart’s direction as company executives last week outlined the global retailer’s five-year plan, something Wal-Mart characterizes as a “transition” that will re-invigorate profit growth.

It’s an ambitious plan that includes a vastly increased role for Wal-Mart’s direct sourcing operation (including direct buys of raw materials and packaging), creating more items to boost sales among the retailer’s higher-income customers, reworking merchandising to better present assortments targeting those customers and restructuring the U.S. field operation to ensure managers are spending their time more productively.

“We are ready to increase the pace and the depth of change,” said John Menzer, vice chairman. “We are going to take risks in merchandising. We’re going to take risks in marketing.”

But executives insist Wal-Mart will not abandon its low-price culture and customers.

“Don’t sit here ... and think this whole company is about (up-market apparel introductions) and 400-count sheets,” CEO Lee Scott said during the meeting. “We are continuing to gain share in core consumable businesses. And there will be no reason or tolerance for any slide in that as we add (better merchandise) on.”

Executives also identified the future they see for “middlemen” in soft lines: providing product that is innovative, low in volume and/or high in sales volatility and obsolescence. Much of the rest — including replenishment of opening price point and “better” bed and bath — will increasingly be handled by the Global Procurement division, which employs 1,400 people in 28 offices.

The three-year old division has until now concentrated on sourcing low-volume fast-fashion. Going forward, Global Procurement will grab a bigger slice of the pie, taking on high-volume replenishment basics and fashion basics. The division will identity the value added by traditional suppliers, then position itself as an alternative for Wal-Mart buyers, according to Andrew Tsuei, senior vice president/managing director, Global Procurement.

“It’s up to us to provide a value to the buyers to compete with the middlemen,” he said. “We have a huge opportunity to eliminate the middlemen, increase margin and reduce EDLP for our customers.”

Global Procurement accomplished all three earlier this year when it took on Wal-Mart’s solid color sheet program as a test of the division’s ability to improve value and profitability on a high-volume item. The team boosted thread count from 180 to 250, plumped margin by 10 percent and lowered the everyday price, Tsuei said.

The division has grown its direct sourcing penetration in bed and bath by 40 percent over last year, and expects to take on an additional 30 percent of product development and sourcing over the next few years, he added.

While soft lines are a big area of emphasis for more direct buys, Global Procurement is taking on a variety of hard lines products with dramatic cuts in per-unit cost: recordable CDs, 64 percent cost reduction; blow-out mold table, 32 percent; kitchen tools, 53 percent; four-pack marker set, 80 percent.

Global Procurement has also begun to leverage its buying prowess to command better prices on raw materials and packaging. In another pilot project over the past year, the division bought an organic cotton farm’s entire production, dedicating it to a baby product Wal-Mart developed in-house.

“In the supply pipeline, although it is somewhat intuitive andsimplistic, the impact of this cannot be underestimated,” said David Blackwell, vice president and chief financial officer, Global Procurement. “This is a major strategic advantage.”

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