Wal-Mart to Centralize Global Sourcing, Reduce Use of Middlemen

Wal-Mart in early January announced a sweeping plan to consolidate its global procurement functions and reduce the use of intermediaries in its global sourcing processes, leading to savings of billions of dollars per year.


It turns out that Wal-Mart, the world's largest importer, still relies on the use of sourcing intermediaries for the bulk of its global sourcing initiatives, buying less than 20 percent of its goods directly from offshore suppliers. In addition, it often operates in a very decentralized mode, with each of the 15 countries where it operates buying goods from the same suppliers, especially for its growing private label brands.

Now, Eduardo Castro-Wright, vice chairman at Wal-Mart, says the company's goal is to switch that ratio, so that within a few years it is buying direct from the manufacturer for 80 percent of its purchases. If it can do that and gain additional benefits from centralized purchasing, Mr. Castro-Wright estimates the potential cost reduction from taking out the middleman mark-up of five to 15 percent, depending on the category, will lead to billions in savings. (Wal-Mart's global sales are about $400 billion.)

The move to more direct procurement will be facilitated by greater centralization of its sourcing operations.

Mr. Castro-Wright says Wal-Mart has established four global merchandising centers for general goods and clothing, including an office in Mexico City focused on emerging markets. It is also planning to shift to direct purchasing of its fresh fruit and vegetables on a global basis, rather than working through import companies and agents.

The program has already been piloted over the past year. A test on combining the purchase of fresh apples across the U.S., Mexico and Canada resulted in savings of 10 percent. As a result, Wal-Mart intends to accelerate centralized North American procurement for all fresh fruits and vegetables.

By the end of 2010, Wal-Mart also plans to move to direct procurement of linens and towels for its North American stores, as well as its clothing for its Faded Glory line and for licensed Disney character clothing. It plans to expand the procurement strategy to other categories, including seafood, frozen food and dry packaged groceries, and to set up direct buying offices in such countries as Brazil, Chile, South Africa and New Zealand.

In 1999, Wal-Mart acquired the grocery chain Asda in the U.K., and still operates there under that banner. Mr. Castro-Wright told the Financial Times that Asda had expertise in direct sourcing, which Wal-Mart was now planning to leverage across the globe.

The move might not only lead to reduced cost of purchased goods, but other supply chain efficiencies. It may enable Wal-Mart to better plans and consolidate incoming shipments through improved visibility to the entire PO lifecycle.
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