Wednesday, September 24, 2014
Walmart’s approach to Strategic Sourcing
In 2010, Walmart announced a big change in their sourcing strategy. They saved billions of dollars by consolidating their global procurement functions and reducing the use of intermediaries in their sourcing process. Till 2010, Walmart which is world’s largest importer, relied on intermediaries for bulk of its global sourcing activities, instead of buying it directly from the offshore suppliers. They bought hardly 20% of goods directly from the suppliers. Also the mode of operation was highly decentralized across all the 15 countries where it has its stores.
Eduardo Castro-Wright, the then Vice President of Walmart set a goal for the company to change its sourcing strategy in order to buy 80% of the goods from the manufacturers directly. Also he planned to make the global sourcing process more centralized. By doing this, he intended to eliminate the middlemen in the transaction, thereby avoiding the 5-15% markup introduced by them. The elimination of the markup introduced by the middlemen, helped reduce the cost leading to billions of dollars of savings for Walmart.
To start with, this strategy was implemented for merchandising. They centralized the process by setting up four global merchandising centers for general goods and clothing. Following this they started purchasing fruits and vegetables on a global scale and eliminated the import companies and the agents. One of the milestones in implementing the change in Walmart’s sourcing strategy was the acquisition of Asda, the grocery chain in UK by Walmart. Asda had expertise in direct sourcing and Walmart leveraged this expertise across the globe.
This strategy of direct sourcing not only helped Walmart reduce the cost, but also helped in other supply chain activities by improving the efficiency throughout the process. They could now better manage and consolidate the incoming shipments and also gained a better visibility through the entire product lifecycle.
Some of the sourcing strategies that worked for Walmart:
Strategic Vendor Partnerships
Walmart selected the suppliers, who could meet the demand and at the same time offer them the best price for the goods. They then developed strategic relationships with these vendors, by offering them long term and high volume purchases in exchange for lowest possible prices. Furthermore, Walmart constructed communication and relationship networks with their suppliers to improve the material flow. Collaboration was the key to their success.
Walmart’s sourcing strategy is centered around a key inventory tactic called Cross docking. It transfers products directly from inbound trucks to outbound trucks. This saves the storage costs. Suppliers deliver products to Walmart’s distribution centers, where those are cross docked and then delivered to the Walmart stores. This process of cross docking lowers the inventory transportation costs and eliminates inefficiencies. This results in savings for the company which are then passed on to the customers in the form of competitive prices.
Walmart embraced technology to track its inventory and restock the shelves. Technology plays an important role in Walmart’s supply chain. It helps them accurately forecast demand, track inventory and manage customer relationships and service response logistics. They were the first ones to implement the bar codes through which store level information was collected and analyzed easily.
As seen above, Walmart has proved to be a leader in strategizing its global sourcing. But the question that arises over here is, does centralizing the procurement process globally, help indeed or does it introduce hidden overheads in the process as a whole?