Walmart aims to cut supply chain cost

 

By Jonathan Birchall in New York

Published: January 3 2010 22:04 | Last updated: January 3 2010 23:57

With annual sales of more than $400bn, Walmart, which owns Asda in the UK, plans to exploit the scale of its buying power

Walmart is launching 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 new stage in the globalisation of its business.

The effort is part of plans by the world’s largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than through third-party procurement companies or suppliers.

Eduardo Castro-Wright, the head of Walmart’s US stores, has said that 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, 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 shifting 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.

As part of its effort to combine purchasing for the 15 countries in which it operates, Walmart has established four global merchandising centres for general goods and clothing, including a centre in Mexico City focused on emerging markets, and a centre in the UK to serve its George brand.

It is also shifting to direct purchasing of its fresh fruit and vegetables on a global basis, rather than working through supplier companies.

By the end of the year, the retailer plans to be directly purchasing sheets and towels for its stores in the US, Canada and Mexico, as well as its clothing for its Faded Glory line and for licensed Disney character clothing.

It also plans to expand initial combined purchasing of fresh fruit and vegetables for its stores in the US, Canada and Mexico, after an initial pilot test with apples that it says led to a 10 per cent reduction in purchasing costs.

Walmart says it expects to expand the programme through other categories, including seafood, frozen food and dry packaged groceries.

The direct purchasing of fresh produce, using procurement offices in producing countries such as South Africa, New Zealand, Brazil and Chile, builds on the established practices of the company’s Asda subsidiary in the UK, which in turn reflects the higher use of direct sourcing in Europe.

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