Wal-Mart Goes Deeper For Savings

Brent Felgner, June 20, 2005

New York — Wal-Mart is finding more ways to jettison cost from its merchandise by reaching deep into its supplier’s businesses — through their production processes, even to the commodity level — as well as getting directly involved in product development and design.

It may soon approach the point where the term “retailer” is no longer an apt description of what Wal-Mart actually does.

Wal-Mart International President John Menzer, who added global procurement responsibilities to his job description last year, said he believes sourcing is now at the point where it will help support international retail growth. He made his comments to investors at the Credit Suisse First Boston Retail Conference last week.

The company is currently working with vendors to develop three-to-five year business plans that encompass the entire sell-through process.

Speaking almost as if his sourcing operations were an outside consultancy, Menzer said: “Our business development teams are working with Wal-Mart and the suppliers to build product development through design right into our store shelves … . That’s never been done before.”

The company’s global supply chains, through 28 sourcing offices, now move goods from 70 countries, albeit some more than others. Still, the impact is sufficient to inoculate Wal-Mart even from expected currency fluctuations in China, all while lowering inventory levels and costs.

Significantly, the sourcing operations are no longer simply about moving goods into the United States, Menzer said. For example, currently Wal-Mart moves apples and pears from the States to Mexico, wine and candy from Germany to Mexico, and crayons and furniture from Brazil to Canada.

True to the merchant’s history, gross margins have risen on the strength of lower merchandise acquisition costs. Long known for sharing data with suppliers, Wal-Mart expects, on the flip side, to have an active involvement in their production, particularly during times of price increases.

“We’ve actually asked our suppliers to come and break down their cost of production to show what that commodity price change is,” Menzer explained. “And we certainly want to be fair by looking at that. Typically, we’ve been doing it (price increases) on a surcharge basis because when it flips the other way we don’t want to be stuck with (the higher price).

“So we’ve been firm with the suppliers, but we also are very challenging. We’ll pay for that piece of the production but no more. And we think that’s fair.”

That also begs the question of Wal-Mart’s ability to suggest more effective commodity sourcing as it further sucks up capacity and becomes directly involved with development and production.

“We’re getting more involved in product design and product development,” Menzer told the investors. “ASDA has shown us how to do fashion. In fact, ASDA is running the Canadaprogram right now. We’re getting a lot of learning that we’re taking into Mexico and Canada and the U.S. is in the middle of that.

“We are constantly playing three dimensional chess with every one of our divisions to get that kind of global leverage."

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