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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



Has Wal-Mart’s Desire To Buy
Cheaper Changed Its Values?

Jim Prevor’s Perishable Pundit, June 1, 2007

We’ve been running a stream of pieces wrestling with the procurement transformation going on at Wal-Mart. We started out addressing the change from DC assignments to dollar-value assignments, along with the growth of “opportunity buys” in our piece Wal-Mart Continues To Change Its Buying Practices.

We then had a lengthy discussion with Ron McCormick, Vice President/Director of Produce and Floral, who expanded on our article and explained Wal-Mart’s new distinction between strategic and tactical vendors. We entitled that article Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization.

Then a sell-side player sent us a note, and we discussed his perspective in an article entitled Wal-Mart’s Changing Treatment Of Suppliers. This led to a lot of phone conversations with vendors, which resulted in Calls On Wal-Mart Point To More Vendor Negativity. This led to lots of industry discussion which compelled us to write ‘Anyone But Wal-Mart’.

Now we have received another letter from a vendor with first-hand experience with Wal-Mart, and he raises a crucial issue:

I was the Wal-Mart account manager for a west coast based “vendor-partner” for several years and ending just recently. One of my co-workers made the observation in 2001 that Wal-Mart was the 800-lb gorilla that one day would wake up. Wal-Mart has gone from the customer that everyone wanted because they were “partners” to the customer everyone HAS to deal with.

One observation recently made in another publication was that vendors who complain about Wal-Mart probably aren’t doing a good job — Baloney! Some vendors have issues but most work their rear ends off for a pat on the head like a puppy followed by, “what are you doing for me today?”

The new “dollar value” commitment agreement (vs. DC assignment) Wal-Mart is honoring sounds fine until you realize that the bulk of Wal-Mart’s loyalty surfaces when supplies are short, which is when production costs vendors more to harvest and ship each unit. Wal-Mart usually then doesn’t proportionally increase their retail price point, thus their demand swells at absolutely the wrong time for a shipper.

This type of occurrence previously was tolerated by vendor/PARTNERS because the shipper knew through the Wal-Mart partnership agreement that when a glut of supply hit, lowering overall cost per unit, Wal-Mart would still have a dedicated amount of units at the contract price going into the Wal-Mart system to offset the volume increases and thus outside opportunity losses from the tight supply period.

Now, with Wal-Mart putting an emphasis on outside opportunity purchases, loyal vendors (please note: no longer partners) either find out after the fact that their DC’s have been hit by cheap product (virtually eliminating demand for a week) or they at best get the opportunity to under bid their own contract to keep their volume moving.

Does this make for unhappy shippers? Yes.

Wal-Mart does have an open door policy for grievances but, take it from someone who walked through that door… exiting is not as easy or as pleasant as they make it sound. I actually did it twice as I was a slow learner, thus I am now a former Wal-Mart account manager. Not per internal Wal-Mart requests (tone of voice or threats of diminished business), of course, by ‘my own choice’ to amend my career path.

Not being mentioned among almost any of these discussions is the question of food safety and traceability. Wal-Mart has very stringent and regulated compliance requirements for existing vendors. The least of which was forcing the RPC footprint into the system and now pressing on bio-testing and RFID. Virtually none of the ‘opportunity buys’ contemplated this summer will meet the minimum expectations placed on regular vendors on a daily basis.

Wal-Mart obviously won’t acknowledge this fact, but it is still the reality of this new policy, which costs the loyal vendor and rewards the opportunistic broker.

Yes, the 800-lb gorilla has woken up and is throwing its weight around.

It strikes us that there are several separate issues here:

  1. The DC assignment vs. dollar-value assignment and its geographical impact.

    If you are Sunkist or a California grape grower, geography really doesn’t matter. Wal-Mart wanting you to supply 10 trailers a week to one DC or a trailer a week to 10 different DCs is a minor trucking issue. In fact, since you are growing the product one place, if this year they want you to supply a DC in Florida and next year a DC in Arizona and the following year one in New England, it all makes no difference.

    But if you grow cantaloupes or tomatoes or greenhouse product, it makes all the difference in the world whether you buy a farm or a repacking facility or build a ripening room or greenhouse in Florida, Texas, Pennsylvania, Canada or California.

    In his interview with us, Ron was clear that he didn’t want anyone to do anything to serve Wal-Mart unless Wal-Mart asked for it in writing. Morally and from a liability standpoint, that position may get Wal-Mart off the hook but it also avoids reality. Every business has to project where its future business will come from. By untethering procurement from geography, companies have to speculate more on where their future business will be. This is likely to lead to inefficiencies and surplus capacity.
  2. The DC assignment vs. dollar-value assignment and its flow of business impact.

    The key question for a vendor in the produce industry is not “how much business will I get,” but, rather, “when will I get the business?” Partly this is the nature of agriculture — how can a grower know when to plant if he doesn’t know when he needs to harvest? How can a vendor know when to contract for product if he doesn’t know when he will need to sell it?

    Partly this is the nature of business. If business is steady and predictable, facilities and staff can be utilized to full capacity. If one has to be staffed and equipped to sell tremendous peaks of business, one will have underutilized staff and capacity that will add costs to the system.

    And, partly, this has to do with the nature of commodity pricing. All commodities fluctuate in price. A “contract” that says someone will buy X amount but doesn’t give a time commitment is often worse than no contract at all. It is basically not so much a procurement contract as a call option, giving the buyer the right to buy up to that quantity whenever the market is favorable for the buyer to do so.
  3. Wal-Mart’s retail price has an enormous impact on consumer demand.

    As a “partner,” one would expect Wal-Mart to handle pricing to manage demand in line with market conditions. But, as our letter-writer explains: “…the bulk of Wal-Mart’s loyalty surfaces when supplies are short, which is when production costs vendors more to harvest and ship each unit. Wal-Mart usually then doesn’t proportionally increase their retail price point thus their demand swells at absolutely the wrong time for a shipper.”
  4. Wal-Mart now is cutting off volume for contract vendors when markets are cheap, saving its “contract” purchases for when they are dear. In the meantime, they offer the same contract vendors — who have unutilized dollars in their dollar commitment — to underbid their own contract: “…with Wal-Mart putting an emphasis on outside opportunity purchases, loyal vendors (please note: no longer partners) either find out after the fact that their DC’s have been hit by cheap product (virtually eliminating demand for a week) or they at best get the opportunity to under bid their own contract to keep their volume moving.”
  5. Wal-Mart’s vaunted grievance procedures don’t work except in the context of a committed relationship. If one’s volume is dependent on a human being making a decision about whether to do “opportunity buys” in this category, then elevating a dispute to a superior is not likely to promote long-term business. Besides, the issue is the new Wal-Mart contract without weekly purchase commitments — any violation is of sotto voce assurances, not typically the contract. We are told, however, of vendors being accused of not fulfilling their contracts to Wal-Mart because Wal-Mart kept postponing purchases and thus the vendor never met its volume commitment.
  6. Perhaps the most interesting and astute insight in the letter is this paragraph:

    Not being mentioned among almost any of these discussions is the question of food safety and traceability. Wal-Mart has very stringent and regulated compliance requirements for existing vendors. The least of which was forcing the RPC footprint into the system and now pressing on bio-testing and RFID. Virtually none of the ‘opportunity buys’ contemplated this summer will meet the minimum expectations placed on regular vendors on a daily basis.

    Wal-Mart obviously won’t acknowledge this fact, but it is still the reality of this new policy which costs the loyal vendor and rewards the opportunistic broker.

In comparing prices from its contracted vendors with contracted quantities to “opportunity buys,” Wal-Mart is comparing apples and oranges. Simply getting a Wal-Mart vendor number is not enough. If Wal-Mart is going to go to vendors and say we want you to do RFID, but then buy from cheaper folks not doing RFID, that will quickly teach vendors not to listen to Wal-Mart.

And what about food safety? These “opportunity buys” are by definition from companies less aligned to Wal-Mart than its contracted vendors. Sometimes, the “opportunity buys” are so non-aligned they don’t have a vendor number, and Wal-Mart asks its strategic vendors to buy the product and resell it for a small brokerage.

But how then can Wal-Mart state unequivocally that it is convinced this product is safe? Did Wal-Mart inspect the fields? Did Wal-Mart audit the packing house? Wal-Mart hasn’t traced this product, which for all its executives know could have taken a side trip to the 7th Street Market.

The unfairness of Wal-Mart having one set of standards for its regular vendors and then another for “opportunity buys” is manifest. Maybe these vendors wouldn’t have so much cheap product to get rid of if they had to meet Wal-Mart’s high standards?

Everything up to this point has been a matter of buyer-seller dealings. Yet, if Wal-Mart is prepared to not insist on identical food safety and traceability standards in order to take advantage of the opportunity to buy cheap product, Wal-Mart may be putting the reputation of the produce industry at large at risk.

Following the departure of Bob DiPiazza from Sam’s Club and Bruce Peterson from Wal-Mart, a woman named Joan Menke-Schaenzer, who had been Vice-President of Quality Assurance, also left Wal-Mart. Joan is well-recognized in food safety. Under Joan’s direction, Wal-Mart was the only retail founder of the Food Safety Leadership Council, which is the group that was pushing the National Restaurant Association to adopt its own produce safety standards.

Joan took a position at ConAgra. How does the world’s largest retailer lose a food safety superstar — to one of its own suppliers no less — in the midst of the biggest food safety concern ever?

During the Taco Bell outbreak, we wrote that the core of the problem was the New Meaning Of A Value Meal: Cultural Change Needed To Factor In Food Safety. We explained that Taco Bell’s focus on its getting costs low enough to sell items on its value meal menu was a cultural inhibition to proper food safety.

As we’ve read about problems in food safety well beyond produce — problems with peanut butter and dog food, problems in China, etc. — we wonder if Wal-Mart’s culture didn’t make Joan Menke-Schaenzer feel like the unheeded conscience of the company?

Suppose she said, “Let’s not buy any food from China, the systems there aren’t really set up yet.” Or what if she said, “Let’s only buy produce on a contract basis from people we’ve had lots of time to send teams to check out and let us only buy product from their dedicated production.”

Would these inputs be valued and respected? Or would she be chastised as making it more difficult to offer “always low prices”?

Maybe it is just coincidence and she left for other reasons, but a person in that position has the opportunity to change the food safety system of the world. We wouldn’t be shocked if she left because the drive to reduce costs was, culturally, becoming more important than the drive for food safety.

Maybe the story behind the story of the changes in Wal-Mart’s procurement model for produce is that the drive to buy cheaper has surpassed all other values.

That would be a problem for the produce industry…and the world.

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