Coping With the Wal-Mart Syndrome
Wal-Mart was on the minds of speakers at our magazine's recent Resin Outlook Conference. Nexant Inc.'s Bob Bauman noted that Wal-Mart's drive to lower costs has largely come at the expense of resin su...
Wal-Mart was on the minds of speakers at our magazine’s recent Resin Outlook Conference. Nexant Inc.’s Bob Bauman noted that Wal-Mart’s drive to lower costs has largely come at the expense of resin suppliers. Dow Chemical’s Peter Sykes urged processors in attendance not to give in to the pricing demands of large retailers, such as you-know-who.
Mr. Sykes’ call-to-arms has a certain hard-hitting appeal. Don’t all companies have a right, within a properly functioning market, to make a reasonable return on their sales? But how realistic is it for a supplier to adopt such a stance? Big Box stores such as Wal-Mart, a $224-billion-a year-retailer, with global purchasing reach are holding all the cards when it comes to negotiations about price, and they can and will play them.
During a break at the conference, an attendee told me a story that illustrates Wal-Mart’s approach to purchasing from suppliers. The supplier, in this case, was attempting to supply Wal-Mart with a largely plastic card table costing in the range of $25. After months of phone calls and paperwork, the supplier’s president had finally arranged a meeting with a top-level purchasing manager at Wal-Mart headquarters. When he arrived he was led into a room where a number of tables, similar to his, were on display. A few minutes later, the purchasing manager strode briskly into the room, pointed to the first table, and told the supplier that it had been made in China for $10. If the supplier could tell him how he could bring down the cost of his table to $10 they could talk, otherwise the meeting was over.
Certainly there is no one in our industry who is not familiar, to one degree or another, with the cost-is-king approach. Wal-Mart did not invent it, nor does it have a monopoly on it. But Wal-Mart has pushed and will continue to push this approach to unprecedented levels, demanding ever newer, harsher price conciliation. Ten years from now, one can imagine Wal-Mart’s China-based suppliers being supplanted by suppliers in Sri Lanka or Nigeria, with still lower cost structure.
To Wal-Mart’s credit, its goal of taking out cost hasn’t solely come from the hide of its suppliers. It has also lowered its costs by a state-of-the-art supply chain management system linking suppliers, distributors and individual retail outlets. Inventory replenishment is accomplished using the method of “cross docking” in which goods are delivered to warehouses and immediately dispatched to stores without ever sitting in inventory.
Still, the price points on commodity items Wal-Mart is asking of its suppliers are often way below the break even mark for most North American manufacturers. Ultimately, a supplier’s only negotiating position with the Wal-Marts of the world is innovation, and his only ally is the market. If you’re supplying something no else is making, or can make, you’re standing on level ground with the purchasing manager before you walk into the meeting. Almost. In truth the average Wal-Mart customer does buy on price. Be ready to provide the manager with hard evidence that consumers want your product. Be prepared to battle the perception, fostered in part by Wal-Mart, that consumers no longer have any discernment of quality.
But start with innovation.
Michael LeGault, editor e-mail: email@example.com