Wal-Mart’s Global Procurement Division
Gets Special Pass On Quality
Jim Prevor’s Perishable Pundit, October 26, 2007
Wal-Mart suppliers in the U.S. are now objecting to new plans for how Wal-Mart will receive, handle and evaluate at least some products supplied by Wal-Mart’s global procurement effort.
We’ve been running a series of pieces on Wal-Mart focused on the fact that it has toughened up procurement standards, although the real problem is store-level execution.
We launched this series with our piece, High Lettuce Prices Strain Supplier Relations With Wal-Mart, and then followed up with an article entitled, Wal-Mart Tightens Quality Specs.
In response to a letter from a Wal-Mart vendor, we ran Pundit’s Mailbag — Wal-Mart’s Path of Decreased Store-Level Execution. All of these pieces built on a series we ran a few months ago that concluded with an article entitled, Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company.
Many vendors have no problem with higher quality specs; in fact, the best vendors tend to see them as a competitive advantage. What is more of a concern is uneven application of the standards.
On a spot basis, this can always happen because, despite objective measurement systems, people still play favorites.
But with Global Procurement, there is a sense that an institutional favorite is being selected.
The problem is this: Wal-Mart is moving to a system in which, on at least some products, Wal-Mart stores will accept and receive imported product from Global Procurement at a specific DC or port of entry.
So, many Mexican imports, for example, will be received, evaluated for quality and accepted or rejected in Nogales.
Aye but here is the rub: Nogales may be 2,000 miles from the DC that product will wind up in.
So, whereas a Wal-Mart vendor is responsible for meeting specs at the actual DC where the product is being delivered, Global Procurement gets off the hook at port of entry.
It is kind of like putting a thumb on the scale to favor Global Procurement over outside vendors — at the cost of allowing lower quality product directly into the DCs without having to meet each DC’s quality specifications.
Wal-Mart is a big believer in global procurement and for good reason. A company such as Wal-Mart, with vast geopolitical interests, feels that it needs to be seen as the actual buyer all around the world.
It causes a lot of problems, though, and can raise costs as domestic vendors, especially those who build repacking and other facilities right near Wal-Mart DCs to handle the business, can suddenly be left with unused or underutilized facilities and staff for weeks or months at a time. In many cases, it would behoove Wal-Mart to find ways to run that directly imported product through its incumbent vendors’ systems.
It is also notable that Global Procurement isn’t easy. Supervalu, which was the leader in a direct import program from Chile, eventually gave up.
The tough thing for a retailer is what do you do with sub-standard product? If you buy produce in Mexico or Chile or wherever, by the time it gets to a DC in Connecticut, a certain percentage won’t be acceptable for use.
The Pundit once made a fair living on the Hunts Point Market selling imported items retailers had brought in and rejected. The retailers generally lost money on this produce. But that is part of the overall cost of running an import program.
Another big cost of an import program is loss of timeliness. What if product is held up in a port and the retailer needs to buy in product to keep the stores full? Then when the imported product is released, it may not be needed or be too short of shelf life. An importer knows how to match each box with the right client — a retailer only has itself as a client.
As long as Wal-Mart and other retailers that want to directly import treat the imports as being done by a separate company and hold this fictional company to exactly the same quality specs and treat late delivery from this company in exactly the same manner as they would any other vendor, Wal-Mart and other directly importing retailers can actually judge the cost and benefit of the global procurement effort.
The minute they start giving their own operation special privileges — such as allowing them to make delivery at a port of entry — they all lose the ability to evaluate the success or failure of such an effort and alienate suppliers who feel they could win in a fair fight.