To cut supply chain costs—possibly by billions of dollars—Walmart is simply eliminating the middleman. Whereas currently the retail giant conducts most of its purchasing through third-party procurement companies, it hopes to increase its direct purchases from manufacturers to 80 percent of all its buying. Walmart’s private label merchandise purchases are $100 billion, which is one fourth of its annual sales. Currently Walmart purchases less than one-fifth of these goods directly from manufacturers.
Walmart operates in 15 countries and typically makes each country responsible for its own purchases. By consolidating its global sourcing, it instead has established four global procurement offices for general goods and clothing. The office in Mexico City will handle emerging markets; its U.K. office will manage its George brand. Fresh produce offices will be somewhat more numerous, appearing in South Africa, New Zealand, Brazil, and Chile. After setting up these divisions, Walmart plans to expand its new organization to its seafood, frozen food, and dry goods categories.
The expected savings to the company could reach 5 to 15 percent. In a test run of consolidated purchasing—for apples for its U.S., Canadian, and Mexican stores—it attained a 10 percent reduction in purchasing costs. With annual sales of $400 billion, Walmart is known for its buying scale and ability to obtain large discounts. Its purchase consolidation efforts should lead to even greater buying power.
Asda, Walmart’s subsidiary has a mature direct sourcing model from manufacturers that Walmart wants to replicate through the Walmart chain.
- What are the two ways that companies can increase their profits?
2. Which method is Walmart choosing, and why?
Jonathan Birchall, “Walmart Aims to Cut Supply Chain Cost,” Financial Times, January 3, 2010.