In its relentless pursuit for additional cost advantage, Walmart is looking to combine its own spend with that of its suppliers. It raises questions of how much control Walmart can exert over their suppliers, and will other retailers be locked out of that same game?
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Hernan Muntaner, Walmart’s vice-president for international purchase leverage, is on the hunt for ways to reduce costs. Like many retailers, Walmart has a large and growing set of private label products in its stores. They realized that they could have better leverage with suppliers and lower costs by combining the spend with their private label brands. It seems to be working. According to Muntaner, in the U.K. they teamed up with one of their soda manufacturers and are now buying sugar at 14% below their usual costs. In a similar arrangement with a paper supplier in Chile, they are saving 2.5% on printer paper.
Walmart is trying to take that a step further by combining spend with their national brand suppliers as well, but many of them are balking. Teaming up with suppliers to purchase commodities is something the automotive industry has been doing for a while, as well as large electronics manufacturers like HP that sometimes purchase components and materials on behalf of their contract manufacturers. However, combined purchasing power with your suppliers is not a widespread practice in the retail industry so far.
In general, national brand manufacturers tend to be better at buying commodities than retailers (they also happen to be better at forecasting, but that’s another story). As retailers are getting more and more into private label, it makes sense that they would like to leverage the expertise and the aggregate spend of their national brand suppliers as well. However, suppliers are worried about sharing information on their pricing and the ingredients that go into their products. They may also be asking themselves, “Do I really want to enable Walmart’s store brand to be sold at an even lower price?” These may be some of the reasons that PepsiCo, that was approached by Walmart, is refusing to play ball with Walmart on this ‘collaborative sourcing’ initiative, at least for now. Walmart has a way of being persuasive, so don’t count them out on convincing some major brands to cooperate.
The high tech industry went through some similar machinations in their evolution. When they first started outsourcing to contract manufacturers (a.k.a. Electronics Manufacturing Services or EMS firms), part of the value proposition promised by the EMS companies was “We can do a better job of procurement.” However, OEMs were disappointed at the results, and there were more than a few cases where the EMS bought at one price but reported a higher purchase cost to the OEM (not unlike what many home-improvement contractors do when they buy materials for a project at your house). So, OEMs started to demand to look at the books and invoices of the EMSs. Initially there was tremendous resistance from the EMS to open up visibility to their cost structure, but now that practice has become more widespread, as has the OEM stepping back in to do the purchasing themselves on behalf of their contract manufacturers.
It opens up the question, though, of how many retailers a single manufacturer can do this type of program with. Most large manufacturers are already attempting to (or in some cases already do) consolidate spend across their divisions. So, if they also agree to consolidate all of their spend with Walmart, does that shut out other retailers from using the same tactic with that supplier for that commodity? Surely the supplier is not going to slice up their spend into pieces to combine a portion with each retailer’s spend. If Walmart is able to leverage the spend of many of its largest suppliers, and effectively lock other retailers out of doing the same thing with those same suppliers, this will give Walmart yet one more significant cost advantage over other retailers. It’s not a great time to be a competitor of Walmart!
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