Walmart Looks to Cut Billions from Supply Costs
Thursday, January 7, 2010 12:08
Walmart intends a drive this year to cut billions of dollars of cost from its supply chain by combining its store purchasing across national frontiers in a fresh stage of the globalization of its business.
The effort forms part of plans by the world’s largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than by third-party procurement companies or suppliers. Eduardo Castro-Wright, head of Walmart’s US store, has said the retailer sees the opportunity to consolidate global sourcing as “a major source of leverage for the company in years to come”.
With annual sales of more than $400bn, Walmart is famously tough in negotiating with its suppliers, exploiting the sale of its buying to gain discounts. It spends about $100bn on purchasing private label products such as its Faded Glory and George brand clothing, or its Great Value food and home products. But it acquires less than a fifth of these goods directly from the manufacturers, and has generally made its purchases on a country-by-country basis.
Mr. Castro-Wright has estimated that a shift to direct purchasing could reduce costs by 5-15% across the supply chain within five years, suggesting potential savings of $4bn to $12bn if the retailer were to meet its long-term goal of shifting to souring about 80% of purchases directly.
As part of its effort to combine purchasing for the 15 countries in which it operates, Walmart has established four global merchandising centers for general goods and clothing, including a centre in Mexico City focused on emerging markets, and a centre in the UK to serve its George brand. It is also shifting to direct purchasing of its fresh fruit and vegetables on a global basis, rather than working through supplier companies.
By the end of this year, the retailer intends to be directly purchasing sheets and towel for its stores in the US, Canada and Mexico, as well as its clothing for its Faded Glory line and for licensed Disney character clothing. It also plans to expand initial combined purchasing of fresh fruit and vegetables for its stores in the US, Canada and Mexico, after an initial pilot test with apples that it says led to a 10% reduction in purchasing costs.
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