Our piece Wal-Mart’s Changing Treatment Of Suppliers brought forth a large number of phone calls from executives at the highest level of sell side organizations.
If Wal-Mart executives care about Wal-Mart’s image in the supply community, the news was pretty bad.
The distinction between Wal-Mart’s “defenders” and those who were on the “attack” basically came down to the strength of the vendor organization.
The key issue at stake really is the timing of the orders. When we reminisced about Bruce Peterson setting up the Wal-Mart produce procurement system over 15 years-ago we pointed out that Bruce had come to a basic viewpoint on what a contract is, as we wrote:
In the end, Bruce had an epiphany. It wasn’t that hard, a contract required two basic things:
1. An agreement to a price
2. An agreement to a minimum quantity
Bruce recognized that this was the only way a grower could gain an advantage in a soft market to make up for opportunities he had foregone in a tight market.
Of course implicit in this kind of thinking was that the vendor would have the business every week. Sure, volume might have normal fluctuations with more product needed for Thanksgiving week than the week after Thanksgiving, but the whole idea, the whole point, was that roughly steady sales would:
- Allow growers to do fine at the contract price with weeks where the contract price was low balanced by weeks where the contract price was high.
- Allow growers and shippers to invest in the “process” — acquiring everything from data analysis capabilities to building repacking facilities near their DC assignments.
- Drive costs out of the system by allowing growers and packers to plan for a high degree of utilization of land, labor, facilities, etc. because of the steady and predictable nature of the orders.
Now, Wal-Mart would like to contract for dollar volumes instead of giving out DC assignments. But here the devil is in the details. Is it an equal dollar volume each week, or is it three dead weeks and then it takes four times the volume?
The basic distinction between the calls we received after our piece appeared was between those vendors who felt that their contracts were being violated by Wal-Mart and those who said that they had resisted signing Wal-Mart’s proposed contracts and eventually had gotten more acceptable agreements.
Our thoughts are that we can leave the legalities to the lawyers. It is doubtful that Wal-Mart is, in a “legal sense,” breaking contracts. After all, it is the largest buyer in the world, it doesn’t have to break any agreements, it just have to ask vendors to go along and if they ask in the right tone — you know that tone that says you really don’t have a choice in this matter if you want our business next year — most vendors will go along because they are still making money on the Wal-Mart business and want to keep it.
It is also important to note that Wal-Mart is a for profit corporation, and it is perfectly entitled to change its procurement systems to maximize its profits. Wal-Mart does not owe suppliers a living.
The question is whether Wal-Mart is actually acting in its own interest by making all the changes we referenced yesterday as well as in our earlier pieces Wal-Mart Continues To Change Its Buying Practices and Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization.
We think it is not. The DC assignment system really did encourage efficiency as it gave vendors regular volume and a geographical reference point. These are the two keys to reducing costs. As a practical matter you can’t both depend on Wal-Mart for a substantial share of business and just be out of the game for two weeks because of an “opportunity buy” or “local buy” or a “global sourcing” buy without putting resources to waste. Inevitably this will raise costs. You also can’t evaluate if you should buy a particular farm or ranch or build a particular repacking facility without knowing where your business is going to be.
Beyond this, Wal-Mart is losing priceless equity with the vending community. The Pundit was but a boy at the knee of his grandfather when he was taught that his family had given the Pundit the most valuable asset of all: A good name. Wal-Mart is allowing this asset to waste away.
This Pundit has always defended Wal-Mart. Most recently right here and here. We have had no patience with the snobbery of those who would keep Wal-Mart from competing in neighborhoods around the world. Wal-Mart is a priceless blessing to millions and a valuable national asset.
Yet there is a sense that Wal-Mart is now a ship without a rudder. You get the feeling merchandising wise that there are no longer core values such as EDLP to reference in making decisions. And you get the sense that procurement decisions are increasingly short-term oriented, all focused on increasing margins this quarter.
In the long-term there will be a substantial price to pay for that line of thinking.
