Wal-Mart Sharpens Direct Sourcing Focus

Teaneck, N.J. — Wal-Mart's global procurement division has adopted a new standard that will determine what products it sources directly from factories. Rather than aiming to source a set percentage of volume, the retailer will focus on direct-sourcing programs that yield the greatest cost reductions.

"You might be doing something that's $10 million in volume but only generating $500,000 in savings vs. something that's $5 million in volume but $1.5 million in savings, so we're going to go for the $1.5 million," said Lawrence Jackson, executive vp, president and ceo of global procurement.

Jackson was among the executives who spoke to analysts last week at Wal-Mart's two-day summit here. He cited packaged and fresh foods as two key areas in which the global procurement team can aggressively push forward, but added that there's more direct sourcing to be done in domestics, toys and consumer electronics, even though his division already has "a large footprint" in those areas.

The new policy is characterized by "subtle shifts" of focus — away from pricing and item suppliers to pre-qualifying factories "behind the suppliers" and emphasizing cost reductions in the supply chain, Jackson said.

Wal-Mart currently does direct business with about 4,400 factories worldwide, with another 40,000 producing for Wal-Mart indirectly via its suppliers. Jackson's remarks suggested that the company will look to exert greater influence at the manufacturing level.

"In many cases, we are not the dominant or most important relationship with those factories. We're trying to shift that … so that [the factories] have a stake in the game and they can make investments behind that," he said.

About 20% of the factories that global procurement deals with directly, make 80% of the division's goods. "The real opportunity here is to focus on those factories that matter, even expand their capabilities somewhat," Jackson said.

At the store level, Wal-Mart has new initiatives aimed at sku reduction and markdown optimization to pump up margin. New software that pinpoints markdown on a store-by-store basis is now rolling out across product categories and should be fully operational next year, according to John Menzer, vice chairman.

In addition, Wal-Mart is looking to boost sales per labor hour and grow inventory at half the rate of sales. In a current test of new software, the retailer found that by paring redundant and slower-moving skus by 13%, it recorded a 6% sales gain.

The home department remains an area that ceo Lee Scott sees as ripe for share-of-market expansion. But, perhaps bruised by the sloppy performance of Wal-Mart's more fashion-forward apparel efforts, Scott said the opportunity in domestics — and apparel — lies in fashion basics. Speaking of pure, trend-forward fashion, Scott added, "That's not who we are. That's not where the money's being made."