Wal-Mart Revamps Procurement System

February 5, 2008

While we have been writing a great deal about Tesco, its much larger American rival, Wal-Mart, has been busy revolutionizing its procurement system.

It seems much larger than produce or perishables but a tsunami set to roll through the company to change the way the company buys and merchandises with substantial impact on vendors and possibly even consumption of produce in America.

For many years, Wal-Mart’s produce procurement worked on a distribution center assignment system. Individual vendors would be given the opportunity and responsibility for solely supplying a specific distribution center or series of distribution centers with the product or products that were in its designated assignment — stone fruit, grapes, etc.

Many vendors thrived under this system. Vendors valued the predictability of business that came with a DC assignment and also valued the fact that exclusive DC assignments allowed for easy comparison with other vendors. So if a vendor invested in producing a superior product, then that DC would show less shrink, more repeat purchases, etc., then — dream come true for quality vendors — Wal-Mart would pay a premium to get that premium product.

In contrast, the traditional produce procurement model used in most supermarkets called for an intermingling of product from different shippers, bought on a spot basis, in a given DC. In that environment, it was virtually impossible to even know if one shipper’s product had lower shrink than another shipper’s product — so it was rare to get a premium for producing premium product.

In early 2007, things started to change, and we ran 10 pieces focusing on Wal-Mart’s evolution in procurement:

Now we know that this was all only prologue, and a new corporate-level initiative will lead to a revamp of procurement in which the old unified divisions that handled both procurement and merchandising will be dissolved and a new four-pronged approach will take its place.

There will be separate teams set up to separately do each of four things:

1. Negotiate Prices with Vendors

This team will have nothing to do with merchandising, marketing or anything except getting the lowest price possible.

2. Establish Retail Sales Price

They won’t determine where things go in the store, size of display or anything like that — solely set the retail price.

3. Financial Planning

These are the financial wizards who are supposed to make sure they make money.

4. Category Management

This team will determine how much space each product gets and where it gets the space in the department.

Simultaneous with this switch, which will roll out over a few months across the Wal-Mart empire, massive staff reductions are expected. Perhaps a third of all buyers will be reassigned elsewhere in the company.

Although we have indications that produce industry stalwarts, such as Steve Tursi and Mike Agostini, will have a place in this new organization, we have not been able to determine what exactly that will be. We have been able to learn nothing about how or if Ron McCormick will fit into this new arrangement.

On the face of it, the reorganization is not necessarily good or bad for the vendor community. The $64,000 question is how will these four areas interact?

Typically in produce, close coordination between procurement, setting the retail price and merchandising is essential to effective performance. If you know supplies of a product are tight (procurement), you raise the price (setting retails), and move the product to a less visible location (merchandising). This brings supply and demand into balance.

If all these areas really function independently, Wal-Mart will wind up pushing sales of items it can’t get. It also won’t sell enough of the high profit items to maintain its margins or dollar profits.

One wonders if this corporate initiative has really been thought through with regard to perishables and produce where supplies and prices fluctuate dramatically and quickly.

The idea of a department dedicated to just getting the lowest price is a bit scary for the vendor community. However, if Wal-Mart reduces its number of buyers substantially, those buyers really won’t have time to focus on much but the very largest commodities. And there, Wal-Mart’s leverage cuts both ways.

Friends in the banana business tell us that Wal-Mart is up to procuring around three boats of bananas each week. Although that certainly gives Wal-Mart enormous bargaining power, it is also true that this kind of volume is not replaced with the snap of a finger and vendors can only be pushed so far. The Fresh Produce Journal in London reported this:

Del Monte is re-evaluating its position in the UK after “walking away” from Asda’s banana business.

UK md Peter Miller told FPJ: “We decided that it was no longer the right proposition for us to continue supplying Asda with bananas.

“We walked away from the Asda tender because we didn’t like the money, but we still have 80 per cent of their pineapple business, a significant and developing share of their melon business and a massive proportion of their fresh-cut fruit business.”

There is no question that Wal-Mart will find people to sell it produce to keep the shelves filled. But the best growers have options, and one wonders if a department single-mindedly driven to get the best price won’t wind up chasing the best growers away.

We have many friends scattered throughout Wal-Mart as well as many friends in the vendor community. This looks like a big change. We hope it is for the best.

We wish Wal-Mart good fortune in integrating these four efforts. We wish that the people who work at Wal-Mart should find good opportunities in this new organization and we wish for the vendor community…that someone at Wal-Mart should remember that only a profitable supply base can invest in the continuous improvement of product and process that Wal-Mart will require if it is to continue to grow and prosper.