In prior commentaries, Supply Chain Matters has highlighted reports indicating that Wal-Mart had once again focused on its suppliers for sharing the burden of needed higher margins. 
In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. At the time, a Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low. Not all of the 10,000 suppliers would face the higher charges due to existing payment arrangements afforded these suppliers to utilize existing Wal-Mart distribution centers.
Last week, Bloomberg reported that Wal-Mart’s Suppliers Are Finally Fighting Back, indicating that some of the larger suppliers are saying no to these new cost squeezing measures. Some suppliers reported that the new fees are impacting their own bottom lines, while several firms are reportedly hiring attorneys to further pursue matters. The Bloomberg report indicates that two large, unnamed suppliers have refused to accept such terms. A senior vice president at Kantar Retail, which advises some Wal-Mart suppliers, is quoted as indicating: “It looks as though they (Wal-Mart) are trying to have it both ways and trying to pad their own margins where they are facing cost pressure.”
Regarding the report, a Wal-Mart spokesperson indicated to Bloomberg that the global retailer is willing to now negotiate with suppliers and will take into account prior history with a supplier, as well as quality of the products. The spokesperson further indicated that the retailer may encourage some suppliers to seek low-interest loans through an existing financing program, implying that those suppliers that do not agree to new terms may find their Wal-Mart business affected.
The report observes that smaller and even larger suppliers have the most at-stake in their ability to be able to push-back. “A smaller supplier, notified of the fees late last month and given two weeks to accept, said it won’t be able to make a profit on its Wal-Mart business under those terms unless it fires workers or cuts wages and benefits.”
From our Supply Chain Matters lens, these ongoing supplier developments related to Wal-Mart are indeed part of the realities for certain retail industry players who can leverage their sheer scale of buying power. On the other hand, it defeats more positive initiatives.
Wal-Mart’s ongoing initiative to purchase an additional $50 billion in U.S. sourced products over the next ten years could be a casualty of its ongoing supplier management efforts. Many of these newer suppliers will not only need the retailer’s long-term buying agreements and shared distribution facilities, but the ability to make meaningful profit in order to sustain their presence in the U.S.
Wal-Mart stated goals are to simplify supplier relationships and develop a broader U.S. supplier base. However, from our lens, cost-sharing tactics for having it both ways defeats such strategic objectives and places supplier relationships in the context for always on the ready for the next shoe to drop.
I agree with your analysis that Wal-Mart’s actions in pressuring suppliers to dramatically reduce costs do not seem strategic. I think that Wal-Mart must be careful to not inadvertently incentivize suppliers to lower costs by potentially unethical means in order to keep their large Wal-Mart contract. Forcing suppliers to cut prices so drastically within a short period of time could lead to suppliers cutting corners with ethical labor sourcing and environmental policy. Furthermore, Wal-Mart must also realize how this action may harm its relationship with its supply base. In reference to Porter’s Five Forces, Wal-Mart does hold much of the bargaining power in these supplier relationships due to their large volume of contracts and the potential dependence of some suppliers on this relationship. However, Wal-Mart must also consider that placing this undue pressure on its suppliers will inevitably harm these relationships. Whether this harm will financially impact Wal-Mart in the long-term is yet to be determined; however, Wal-Mart must be careful that its major competitors (Costco, Target) don’t approach its suppliers with better contract terms and less pricing pressure. While Wal-Mart may have felt that this action was necessary to keep its costs competitive, I agree that these supplier issues may have long-term consequences that have not yet been realized.
Mariette,
Thanks for sharing some insightful observations.
Forcing suppliers to cut prices under pressure does indeed force such suppliers to seek their own additional means to cut costs in order to hang-on to influential customer contracts.
Indeed, supplier issues often have both short and longer-term consequences.
Bob Ferrari
I really enjoyed reading this analysis, there are so many great points.
It’ll be interesting to see how Walmart’s pressure on their suppliers will affect the large retailer in the long run. Will the suppliers who can’t afford price cuts move on to Walmart’s competitors? Will Walmart lose trusted, long-term suppliers? It’ll be even more interesting to see the result of a large supplier not taking the new financing option. I also agree with Martiette’s comment that suppliers may even begin to start cutting corners and this cost-cutting pressure will do more harm than good. Although Walmart can leverage their buying power, suppliers have their own operational expenses they need to take care of and can only go so far. If one of Walmart’s goals is to simplify supplier relations, I’m not sure cutting costs and ties with long-term suppliers is the right way to do it.