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Wal-Mart Produce Procurement
‘Set Up For Devastating End’

Jim Prevor’s Perishable Pundit, January 28, 2010

We have written a great deal about Wal-Mart. Recently our focus has been on the effectiveness — or lack thereof — of a procurement model Wal-Mart has been testing in Washington State on apples. We’ve written three pieces on this subject:

SPECIAL EDITION: Wal-Mart’s Global Food Sourcing Initiative Closes The Peterson Era And Threatens Sustainability Of Agricultural Base

Flaws In Wal-Mart’s Produce-Procurement Thinking

Wal-Mart’s Blind And Costly Focus On FOBs

Now we received this letter from a knowledgeable observer:

I have to commend you. These articles have been on point from start to finish.

I first would like to point out that the Wal-Mart executives, by turning their backs on the many suppliers that have supplied them with their required 32% — 35% maintained margins, have effectively set Wal-Mart up for a devastating end in regards to the apple commodity.

You caught the indirect effect of a change in procurement systems in your most recent piece when you wrote the following:

When Wal-Mart was under contract, its vendors had an obligation to meet volume requirements week in and week out at the agreed price. Sometimes, although the contract may have been based on a particular grade, say US Extra Fancy, the shippers wound up delivering better grades, say Washington Extra Fancy, to meet their obligations.

Now the shippers can pick and choose when to bid for the Wal-Mart business; that won’t happen very much.

So the consequence of Wal-Mart’s switch is that its shoppers will have lower quality produce than they did before. What is the long-term cost to Wal-Mart of handling a lower quality package — even if it meets minimum Wal-Mart specs.

As you pointed out where suppliers were formally contractually obligated to insure they met volume requirements set forth at the agreed-upon price, they are now free to pick and choose when they are willing to “bid” for Wal-Mart business.

Often times the contract pricing was for a particular grade, but due to contract volumes, suppliers had no choice but to provide higher grades to Wal-Mart at the agreed-upon price. Wal-Mart will be hard pressed to get the same quality of produce that they have been gifted in the past. I have to believe the consumer will notice.

Second, the 10% figure that Wal-Mart boasts is at the very least an exaggeration. The letter from Dan Sutton in the most recent article detailed a few of the issues.

Third, the key point, however, as I’m sure you, as well as all your business savvy readers, are aware, is that statistics are only representative of the data that is analyzed. Anyone competent at working with the numbers can make GM look like a profitable company if they are aware of which data to analysis.

Ask any of the men or women who have worked as a business analyst on the Wal-Mart account for one of Wal-Mart’s suppliers, and virtually all of them, if familiar with the situation, will say with total conviction that Wal-Mart is losing far more money than Wal-Mart executives are willing to look at. Wal-Mart, as well as all other retailers, lose money at the POS level every time that the shelves aren’t supplied for the end consumer to make a purchase.

By dedicating just a small handful of people to replenish product for multiple distribution centers and relying on an automated replenishment system that is at the mercy of the produce manager who likely was over stocked for one week and has now over-rode the system and shut off orders, Wal-Mart is taking outs on a regular basis.

They have, in effect, simply deemed that the business analyst is an un-needed position, which results in there not being anyone held accountable to look at the outs. You said it point-blank:

…Wal-Mart didn’t just buy apples and transport… it bought a range of services that fall under a category of business analysis. Just a tiny shift here can result in thousands of incidents of being out of stock. Under the old system, if Wal-Mart was out of stock, that counted against the vendor and would affect its being awarded future business.

Who does it count against now? Nobody. Which means out-of-stocks will zoom. This means that even if they are successful in reducing procurement costs — the whole procedure will still cost Wal-Mart a fortune.

In the past, these are things that strategic suppliers were scored against and had a direct correlation to the amount of business they were awarded. Now nobody gets paid to keep these things in line.

It may not show up in a two week snapshot or by analyzing the maintained margins, but it is simply guaranteed that quarterly sales will suffer dramatically.

Considering that Wal-Mart stood to make a conservative $.08 per apple (average over all varieties), take into account that they are likely taking thousands of outs per day per Distribution Center and it is quickly obvious that there is a lot of money being left on the table. Now, Wal-Mart didn’t cut any in-house staff to my knowledge (they have actually gained bodies with the replenishment staff) and it doesn’t take a genius to see that equals a loss.

One last point I’d like to make is how all of this impacts on food safety to the consumer. I am very vocal about pointing out that the likelihood of someone getting sick due to an outbreak caused from eating apples is far less likely then you or I winning the lotto tomorrow, and based on the fact that I don’t buy lotto tickets, I have to say that it seems like a long shot at best.

BUT, consider the devastating effects of Wal-Mart pushing this model into more vulnerable produce commodities — leafy greens, melons, berries, herbs, tomatoes, etc.

Apple warehouses each fork out hundreds of thousands of dollars each year on a product that was unlikely to ever pose a risk. This has (and will continue to be) a cost of doing business in the modern world we live in.

But Wal-Mart, even when in good times with its suppliers, had no qualms about “buying local” from some guy with five acres in Minnesota that was willing to field pack it into a tote bin and drop it off at the local DC.

If they ever do realize the losses Wal-Mart is incurring due to empty shelf space, are we suppose to believe for a second that they wouldn’t heighten their efforts to source product from anyone willing to cut them the deal of the day? And just as these local guys have received a free “food safety pass”, the same will go to the vendor that has never had the big boys breathing down his throat to be in compliance but has a bargain price.

I am not opposed to local growers benefiting from big business, but without a strategic supplier who’s held accountable for insuring that a legitimate food safety program is in place, this has “worst case scenario” written all over it.

I would like to thank you for allowing me to get on my soap box and for serving the industry with your coverage and analysis of this issue. Keep up the good work.

We appreciate the letter. What is unfortunate is that there is this juggernaut at Wal-Mart, and they are going to do this no matter the consequences. Some vendors hold out hope that as the losses become obvious, Wal-Mart may make a U-turn and reexamine a once very profitable system.

Alas, we suspect that Wal-Mart is more likely to do a Margaret Thatcher: “the Lady’s not for turning”:

As much as this is a story about apples and about issues surrounding procurement and about Wal-Mart, it is also a story of big business and human motivations.

There will probably never be a day in which it becomes obvious to executives at Wal-Mart that the procurement system is a mistake. With different people working on procurement, merchandising, marketing, etc., and no controlled test having been done, it will be easy enough to see what someone wants to see and to blame someone who one wants to blame.

Besides there is too much at stake. Too many people who hope to climb the ladder of success are vested in this program. For them it is personally better to simply declare victory and get a promotion than to do what will maximize wealth for their shareholders.

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