A recent article in the Financial Times by Jonathan Birchall titled "Walmart looks to cut billions from supply costs" has spurred a few connected posts by some of my favorite bloggers: Bob at Supply Chain Matters, Steve at Enterprise Resilience Management, and Tom at his personal weblog.
Most people are familiar with Wal-Mart in one way or another, and from different perspectives and experiences. For management professionals, Wal-Mart has been under constant study for its supply chain prowess, analysed backwards and forwards to understand what works and what doesn't. However, few would argue that Wal-Mart does not possess tremendous strength in high-performance supply chain management. Due to its size and incredibly large financial turnover, when Wal-Mart launches new supply chain initiatives and / or programs, people from a wide range of disciplines and interests take instant notice.
Mr. Birchall outlines the program Wal-Mart is launching and the opportunity at hand:
"Walmart intends a drive this year to cut billions of dollars of costs from its supply chain by combining its store purchasing across national frontiers in a fresh stage of the globalisation of its business. The effort forms part of plans by the world's largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than by third-party procurement companies or suppliers.
"Eduardo Castro-Wright, head of Walmart's US stores, has said the retailer sees the opportunity to consolidate global sourcing as "a major source of leverage for the company in years to come."
"With annual sales of more than $400bn (£247bn), Walmart is famously tough in negotiating with its suppliers, exploiting the scale of its buying to gain discounts.
"It spends about $100bn on purchasing private label products such as its Faded Glory and George brand clothing, or its Great Value food and home products. But it acquires less than a fifth of these goods directly from the manufacturers, and has generally made its purchases on a country-by-country basis. Mr Castro-Wright has estimated that a shift to direct purchasing could reduce costs by 5-15 per cent across the supply chain within five years - suggesting potential savings of $4bn-$12bn if the retailer were to meet its long-term goal of shifting to sourcing about 80 per cent of purchases directly."
This type of program is launched based on a large amount of supply chain analysis targeting both internal and external aspects of Wal-Marts extended supply chains across the world. It likely involves a coordinated use of information technology deployed to enable greater purchasing capabilities against data collected on SKU volume and velocity across all of its global hubs and distribution centers.
Stepping back into a strategic viewpoint, executives like Mr. Castro-Wright have the ability to leverage the full breadth of supply chain architectures that make up a high-performance supply chain:
Due to the sophisticated level to which Wal-Mart has built its architectures, it has a greater ability to execute the strategies and programs deployed across its supply chains, as well as spur innovation in the development of new initiatives. Of course, when drilling down regionally and locally, it is likely that some of these architectures start to break down and face challenges that Wal-Mart has yet to solve (the Seiyu venture in Japan over the past few years comes to mind). For this exact reason, this move by Wal-Mart could help reduce the breadth of focus locally and regionally and allow on-the-ground managers to concentrate on the procurement of those goods that bring the most value to local consumers and communities. Overall, as Dr. Barnett notes, "Locals will naturally decry the death of middlemen, who add nothing but cost and waste and complexity, but this sort of manufacturer-to-retailer bonding will define the next great wave of globalization's tightening up."
Steve DeAngelis makes some additional comments around the increasingly dynamic compliance systems that will be required, while Bob Ferrari poses questions about supply chain risk, especially in regards to fresh food procurement. I encourage everyone to read their full posts.