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Wal-Mart Continues To Change
Its Buying Practices

We’re getting a number of inquiries as a result of a couple of things:

  1. Wal-Mart’s recent announcement of what used to be called DC assignments, but now have been changed to dollar value assignments.
  2. A presentation at the Southeast Produce Council event by Tom Holbert, an “Opportunity Buyer” at Wal-Mart who buys tomatoes, citrus, grapes and tropical items for the four Wal-Mart distribution centers in Florida and Alabama.

The Wal-Mart system was built on an assignment of specific distribution centers to specific vendors. So a carrot vendor would be given responsibility to provide various SKUs of carrots to the four distribution centers in Florida and Alabama. Its primary responsibility was to make sure that Wal-Mart had the carrots it needed 52 weeks a year. The vendor was also expected to meet various metrics in terms of rejections, out of stocks and so on.

In addition, as a part of the Wal-Mart “family,” the vendor was inculcated in the Wal-Mart culture and given access to data that could be used to operate more efficiently and to increase sales. Food safety and other issues were also handled as a “family” matter.

Although there was no legal guarantee, de facto, if a company met its metrics, it would hold onto its DC assignment year after year.

If another vendor wanted to sell carrots to those Wal-Mart distribution centers, it would have to approach the vendor with the DC assignment.

Now there seems to be substantial change. Instead of assigning a DC to one vendor, a vendor is getting a “business commitment” that Wal-Mart will buy a set amount of product.

Say it fast and this seems like a distinction without a difference but, think harder, add in “Special Buys” by “Opportunity Buyers” such as Tom Holbert, and the additional complexity added by Wal-Mart’s Global Sourcing operation, and one sees a dramatic change.

First, although vendors are promised minimum dollar volumes of business — they are no longer going to be guaranteed where that business will come from. So in years past, a vendor could have been supplying grapes to DCs in the Southwest; now he is told to supply the Northeast and that may change.

Second, although minimum dollar volumes of business are guaranteed, the time of delivery is not. So, a vendor promised $10 million of eggplant business will get that but might be told no need to deliver for four weeks because Global Sourcing has a deal and then told take another two weeks off six months later because the Opportunity Buyer got a deal.

Third, there was a great exchange between Tom Holbert and Billy Heller, CEO of PTG Management Company (the Sunripe family of growers including Pacific Tomato Growers, Triple E and Heller Brothers), in which it was established that someone who wants to sell produce to Wal-Mart can just call up these ‘Opportunity Buyers’ and offer directly to Wal-Mart.

There was no mention made of any need to be pre-approved as a Wal-Mart vendor and no need to go sell an existing Wal-Mart supplier. In other words, if a vendor has a good deal to offer on grape tomatoes in Florida, he can call Tom Holbert, who is authorized to buy them.

These are such dramatic changes that they raise many questions:

  • How does Opportunity Buying deal with the food safety implications of buying from such a diverse vendor base? The whole trend in food safety is to “know your supplier.” If “Opportunity Buyers” are open to buying from anyone, how can Wal-Mart possibly ensure safe product?
  • How does the decision to make geography irrelevant affect Wal-Mart’s desire to buy direct from growers? It may not make a major difference to a company such as Sunkist or a California grape grower, which offer products that typically ship from one state anyway — but if you are dealing with a tomato grower in Florida, telling him to deliver to a California DC is problematic as, of course, the California DC will want California or Mexican tomatoes. In effect, the grower has to buy Western tomatoes to sell to California and then try to sell his Florida product to someone else. Which essentially means Wal-Mart isn’t going to buy from growers.
  • Won’t it increase costs if vendors have to be prepared to handle wild swings in volume? If people build facilities and hire people to service the Wal-Mart business, and those facilities and people are idled when Global Produce has a deal or when the Opportunity Buyer has a deal, isn’t that a dead cost put into the system?

It seems that Wal-Mart’s new system is being built on three ideas that are often not true:

IDEA ONE: That geography is irrelevant, when, in fact, for many producers, it is beyond relevant; it is determinative. It determines where the product is grown, where facilities are located and where people are employed. To switch geography is practically to demand the creation of a whole new business.

IDEA TWO: That buying ten trailers a week is the same economically as buying nothing for nine weeks and then 100 trailers in week ten. To keep costs low, businesses need steady business so they can utilize their facilities and people efficiently.

IDEA THREE: Because someone has a PACA license and can legally sell product, you can count on their food safety standards.

Special Buys — which we dealt with here in PRODUCE BUSINESS, the Pundit’s sister publication — have long been an annoyance to vendors working in the Wal-Mart system. But now a team of “Opportunity Buyers” are institutionalizing and ramping up the practice.

Global Procurement, which we also dealt with here, has posed real questions for Wal-Mart’s vendors. Increasingly this is driven by Wal-Mart’s need for political coin around the world. By being a direct buyer, Wal-Mart can walk into government offices and try to use its buying leverage to get help with locations, mergers, unions and other interests.

Basically any domestic company that is selling Wal-Mart imported product should expect to not be doing it in five years.

Yet, Wal-Mart’s primary interest is still making money on its U.S. operations, so executives have to think long and hard about how Opportunity Buys, Global Procurement and business assignment can be done so as to avoid creating inefficiencies. An inefficient Wal-Mart would be giving away its greatest advantage.

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