Wal-Mart Tightens the Chain

Wal-Mart Stores is pursuing new savings in sourcing in ways that could help it wrest more control over inbound freight from its vendors and lower inventory costs.

The world’s largest retailer wants to increase the amount of merchandise it purchases directly from suppliers, reducing its reliance on third-party agents, and to source fewer products country by country, according to The Financial Times.

According to that newspaper, Wal-Mart purchases less than 20 percent of $100 billion in private label merchandise such as its Great Value food and home products directly from suppliers, and its long-term goal is to raise that figure to about 80 percent. Internationally, the company is streamlining purchasing by directing procurement across borders from four global merchandising centers for general goods and clothing, rather than buying goods through separate organizations in each of the 15 countries where it does business. The goal is to shave anywhere from 5 to 15 percent of costs from Wal-Mart’s global supply chain within five years, the report said, or between $4 billion and $12 billion, by cutting the use of third-party procurement providers, known as “3PPs.”

That’s $800 million to $2.4 billion a year in additional savings, on average.

That is a sliver of Wal-Mart’s $400 billion in yearly sales, but even the lower figure would represent a sizable chunk of Wal-Mart’s annual income, which rose 3 percent to $13.25 billion in the fiscal year that ended last Jan. 31.

The shift toward direct purchasing is part of a long-term supply and inventory management strategy at Wal-Mart, where Vice Chairman Eduardo Castro-Wright calls consolidation of global sourcing a major source of “leverage” for the company.

Sustainability, more local sourcing and improved inventory control fuel that strategy. Wal-Mart’s sales rose 6.8 percent last year, but its inventories fell 1.2 percent.

An increase in direct purchasing could indirectly benefit Wal-Mart’s efforts to gain more control over inbound transportation and drive inventory costs down further.