Is Wal-Mart Foolish
For Focusing On Small Savings?
Jim Prevor’s Perishable Pundit, October 30, 2007
Our piece, Wal-Mart’s Global Procurement Division Gets Special Pass On Quality, was the latest in a series of articles dealing with Wal-Mart’s procurement practices.
We launched this discussion with our piece, High Lettuce Prices Strain Supplier Relations With Wal-Mart, and then followed up with an article we called, Wal-Mart Tightens Quality Specs.
We then heard from a Wal-Mart vendor and used his letter in a piece we called, 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.
We’ve received many letters in response to the piece on Global Procurement, including this thoughtful missive:
In an effort to ‘cut cost’, the concept of ‘adding value’ can get lost, especially with imported items that arrive to North America from great distances like Chile, Argentina, South Africa, or Australia.
Fully 70% (or more) of the total value of any produce product, even by sea shipment, involves cost inputs to deliver the actual produce to the market in salable condition. The actual fruit is most often the ‘cheapest input’ in the delivered product, and yet if its condition is compromised, all the other cost inputs may be ‘lost’. There is no ‘cost savings’ if the produce item is compromised in transit from a far away port of embarkation.
Importers who have all of the resources and skills to clear customs, inspect fruit to assure its suitability for buyer delivery, arrange domestic transportation to the buyer’s final destination, are really ‘adding value’.
The expression ‘pennywise, pound foolish’ comes to mind.
Some forget that there are two ways to improve an item’s value. One is to cut cost, but a more important way often is to find a way to ‘add value’.
— Rick Eastes
Director of Special Projects
Ballantine Produce Inc.
The general issue of direct importing by retailers is somewhat problematic. Among the obvious challenges:
Producers often produce large ranges of sizes, grades, varieties and items. Retailers typically want only certain sizes and grades. Although they may be able to get what they want by paying for it, importers who have a diverse customer base and can accept a range of product will often get preference — and a cheaper price. Clever importers with ranges of customers can often pay less for product than retailers who are restricted in what they can buy.
It is very difficult to buy produce in foreign countries with guaranteed good delivery to distant distribution centers. Inevitably a retailer importing directly will have many containers that have to be sold outside the retailer’s own channel. The ability to maximize returns in this environment is typically not an area of expertise held by the employees of retailers.
The “just in time” inventory systems common in the produce industry are typically not compatible with distant transit times, congested port and border conditions and delays due to customs, APHIS and what not. So Global Procurement operations either will not meet delivery dates or they will over-import to have excess stock available to cover for late arrivals.
If the goal is to import 100% of a retailer’s needs, in light of the long supply chain, the tendency is to over-order. This means more shrink and product that is less fresh for the consumer.
If the chain doesn’t import 100% of its needs, it will still depend on importers. Now, however, instead of being the favored customer of the importer, the chain is viewed as a quasi competitor. It will get less favorable pricing, find its orders unfulfilled in tight markets and, in general, not be treated as well as it would be if it bought all its imported product from importers.
In the specific case of Wal-Mart, you are dealing with a situation in which for 15 years the company encouraged companies to become importers, the better to provide Wal-Mart with 52-week-a-year service.
Regardless of who encouraged who, the real question is, ‘Are there any savings by importing independently of that system?’ The problem is that if a company has a building and 50 people dedicated to the Wal-Mart account and all the sudden gets a “time out” because of a Global Sourcing initiative (or, by the way, a Local Buying initiative), the salary and the rent, etc., still have to be covered. Because it is typically not possible to suddenly get other business that will soon be dropped, Wal-Mart, through the prices it pays, winds up covering those people and facilities.
In effect, you could say that Wal-Mart will pay twice for people and facilities at that time, hiring its own while sustaining the “eco-system” of domestic Wal-Mart vendors.
Beyond the issue of cost savings, Rick Eastes, who has worked with both Sunkist and Oppenheimer, points to the foolishness of focusing on small savings — when one should be focused on the large benefits of maintaining quality.
This requires expertise, and one wonders if retail salary structures will allow for the chains to maintain these top-notch people — or if the people won’t be wooed away by more lucrative opportunities.
Very often the thirst to eliminate a “middleman” and the supposed “excess cost” he represents stumbles over a surprise — the value that intermediaries can often provide.
This whole situation reminds us a bit of another occasion in which retailers thought themselves best served by doing everything “direct.” We dealt with that in an article that ran in Pundit sister publication PRODUCE BUSINESS, entitled Broker is Not a Dirty Word.
Many thanks to Rick Eastes for reminding us that a balance sheet must contain both credits and debits.