Pundit’s Mailbag — Wal-Mart’s RPC Decision Is Part Of Its Bargain-Hunting Produce Procurement Strategy
Jim Prevor’s Perishable Pundit, September 12, 2011
The Pundit was recently asked his opinion on an important development at Wal-Mart by a well respected industry veteran:
Richard is a respected consultant having worked at A&P and Fleming, and served as Supervalu’s Director of Transportation, Director of the St. Joseph’s University Center for Food Marketing and was the CEO at Brooks Provisions, among many other food industry activities, so we are flattered to be asked our opinion on this issue.
Interestingly enough, we have been weighing in on this in another capacity for some time. In addition to our work in the produce industry, we manage to keep the Jr. Pundits in sneakers by doing a little consulting for big consulting companies such as McKinsey & Co. and Bain & Co., as well as investment bankers, hedge fund managers, private equity groups etc.
Last year the fund that owns most of IFCO was contemplating a secondary offering, mostly in Europe, and so the Pundit hotline lit up with investment funds wanting to know the prospects for the RPC industry. We identified many great advantages to RPCs and many trends in favor of RPCs including the sustainability trend that Richard Kochersperger mentions.
We earned our seemingly outrageous fees that week, though, as we also cautioned that our analysis of what was going on at Wal-Mart led inevitably to the idea that Wal-Mart would deemphasize or eliminate RPCs.
We happen to think this is a mistake on the part of Wal-Mart. Leaving aside all issues of efficiency and sustainability, we believe that demanding produce in a container that was not used by most wound up getting Wal-Mart better produce than it paid for. After all, a rejection by Wal-Mart was a very serious matter, leaving a shipper with product not easy to sell elsewhere.
Yet it seemed to us inevitable that Wal-Mart would move away from RPCs. What our writing on Wal-Mart has shown is a journey in which Wal-Mart has moved away from the sophisticated consideration of many variables in procurement to a single-minded focus on price.
This is the key reason why Wal-Mart abandoned its dedicated distribution center procurement model, in which individual vendors were given 52-week responsibility for securing supplies and multiple responsibilities involved in vendor-managed replenishment.
Wal-Mart wanted to get the lowest price, and the way to do that, at least in the short term, was to avoid constraining its supply chain. By not demanding special capabilities such as the ability to supply year-round, Wal-Mart could open the bidding to more suppliers and get a cheaper price.
Of course, the logic here leads to an abandonment of all non-standard requirements. Just as it doesn’t want to constrain the Wal-Mart supply chain to avoid vendors who can’t supply 52-weeks a year, Wal-Mart also doesn’t want to constrain its product supply to only that packed to its specific requirements.
Wal-Mart wants everyone to bid for its business and it wants the special offers if someone is stuck with a warehouse of packed product. Anything that constrains the supply chain is out, and anything that broadens it is in.
Wal-Mart’s commitment to sustainability has always been of a certain type. It endorsed sustainability for PR reasons and it tried to abandon conventional definitions of sustainability that included social, environmental and economic components. Instead it is focusing solely on those attributes of sustainability that could save Wal-Mart money.
So the moment Wal-Mart executives decided that RPCs were costing Wal-Mart money by constraining its supply chain, the days of RPCs at Wal-Mart were numbered.