A Winning Strategy: Is Walmart Right To ‘Delayer’? (A Guest Author Post by IACCM’s CEO Tim Cummins)

At first glance, Walmart’s new strategy of ‘delayering the supply chain’ appears to be a reversal of the cost saving device of consolidating spend and reducing the number of suppliers. Are they mimicking others, who are saying ‘if we get rid of the prime contractors, we can get better deals from working with each sub’. Might this be another case of Procurement simply moving on to the next consultant-inspired ‘great idea’, or have they found a new and better way of managing relationship costs? For example, does today’s technology mean that having a smaller number of suppliers is no longer so relevant?

A couple of years ago, I remember speaking with a Chief Procurement Officer at one of the major technology companies. We were discussing the need to build better relationships with suppliers. He was a strong advocate of such change, but observed, rather woefully: “The more we talk about partnership with our suppliers, the more their margins seem to fall.”

There has been so much talk about collaboration and partnering in recent years. Most experts agree that collaborative relationships have greater potential for value delivery, especially in situations where the risks are high, or there is a potential dividend from innovation or continuous improvement. They also agree that adversarial, price-based relationships ultimately damage performance.

Programs such as Supplier Relationship Management were supposed to cement partnerships with key suppliers. Yet the evidence of truly successful programs appears very thin on the ground. Most examples remain anecdotal, built around a specific success on a particular project or relationship. Does this imply that collaborative relationships are not in fact replicable – that they depend on individual leaders and a lucky confluence of organizational interests? Might this suggest that maintaining close, but adversarial, relationships with suppliers to enable more monitoring and control remains the best way to extract value?

Expediency Versus Trust

I believe the answer to these questions is no – but success in shifting to more collaborative approaches will depend on a far more devoted effort by senior management. At present, executive demands and expectations are often contradictory. They want instant savings, but they also want long-term value. They want partnering, but they also want their trading partners to carry all the risks. They want long-term, stable relationships, but they also want freedom to move with the needs of the market.

The embedded capabilities of most organizations tend towards instant savings, risk allocation and short-term expedients. These attitudes are built into the psyche of most Procurement and Legal groups. Indeed, in a recent study on ‘why projects fail’ the International Centre for Complex Project Management found seven core issues that tie directly to purchasing and legal practices:

• unaccommodated / misaligned stakeholder views of ’success’ – an alignment that the sponsor and the commercial team should together be ensuring
• tension between product success and project success (product versus outcome) – a key problem for traditional purchasing groups
• lack of understanding of non-technical risks – because they tend to be suppressed and handled through risk allocation terms and confrontation
• use of competition as a weapon – again, a procurement technique that often is not appropriate for complex projects where teaming is essential
• institutionalized procurement practices – their words, not mine!
• current tools and decision processes are unsuitable for analyzing uncertainty – contracts rarely deal well with uncertainty
• inevitability of scope creep (cost and schedule) especially if the contract is entered into too early- or perhaps if the governance process did not anticipate and enable required changes to be undertaken in an open and disciplined form

The report’s observations about Procurement follow an era in which consolidation, commoditization and compliance have been the watchwords of the consulting profession and many sourcing groups have gained internal power, but at the expense of business judgment. The investment in tools and systems has enabled oversight of every area of spend – but little insight to value or the cost of poor relationships.

The situation became worse during the recession, when short-term expedients to cut costs became an imperative. This resulted in unilateral, ‘take it or leave it’ contract renegotiations, the imposition of arbitrary price cuts and the introduction of new terms and conditions, such as extended payment periods. While understandable, this process had an ironic knock-on effect, because every customer is someone else’s supplier, in the end everyone suffered … but perhaps the biggest casualty was trust and any underlying belief that relationships could be collaborative.

Walmart’s New Direction

So is Walmart’s recent announcement of a plan to “delayer their supply chain and go direct to manufacturers to take out cost“ and the fact that they “have re-organized to do so” the final nail in the coffin for collaborative customer / supplier relationships?

Again, I think the answer is no. The Walmart decision must be seen in part as characteristic of their industry – and the new forces of competition within it – and in part as representative of some wider trends affecting supply management.

Looking briefly at each of these, let’s start with the retail industry.

Retail has an image of being highly confrontational in its procurement and supplier practices. Indeed, in the UK it has been felt necessary to introduce a Government sponsored Ombudsman to protect suppliers from the aggression and bullying tactics of the major retailers. There are complex factors behind this. One is the fact that retail deals directly with consumers. It is not constrained by the limits that business to business relationships typically impose on other sectors. Consumers want low prices and good quality; they are not directly impacted by the retailer’s procurement practices. Delivering those low prices and high quality is challenging, especially in areas where shelf time is short and sales opportunities therefore limited.

The practice among retailers – especially in the US – was to deal with intermediaries who would warehouse and distribute goods. These relationships offered efficiencies in terms of the number of suppliers to be managed and the oversight of rush orders or supply problems. It was also consistent with a cross-industry trend that began in the mid-90s to cut the number of supply relationships, where necessary appointing prime contractors or distributors to oversee smaller or non-strategic suppliers. This approach was part of the effort to cut costs and drive efficiency. It was accompanied by broader efforts at spend consolidation, aimed at maximizing negotiated discounts.

Fifteen years on, Walmart has the benefit of more technology (so the cost advantage of a smaller supply base is no longer so evident), but more importantly it faces new competition. Today, the big retail battle appears to be between Walmart and Amazon – two very different retail models with very different fixed costs. For some time, the overlap between these two global giants was limited. But recently, the gloves have come off and they are clearly engaged in a battle for supremacy. Amazon is focused on rapid and reliable supply and outstanding on-line customer support. It is investing in more and bigger warehouses and fast, efficient distribution. It has built a myriad of suppliers operating under the Amazon banner. It is the consolidator and maintains a multitude of direct supply relationships.

Walmart depends on people wanting to go to stores and requiring instant gratification. It knows that it must have goods available and they must be at a low price. Therefore its need to maintain relentless pressure on suppliers has increased. It clearly believes that globalizing and disintermediating its supply chain will give it greater control. It has calculated that the cost advantages of delayering outweigh the cost increases of managing multiple relationships.

Trends In Supply Management

And this brings us to the third factor, the wider trends affecting supply management. Retail is not alone in re-thinking the consolidation of the supply base. Wherever you look, there are many distribution and prime contract relationships being unwound. The mega providers of recruitment services, the mega outsourcing deals, the mega IT distributors have all seen erosion in the last year or two, as corporate wisdom swings to the idea that direct relationships will eliminate mark-ups and allow greater control and influence. In the word’s of the US Government, relationships become ‘too cozy’; they need the abrasion of a new and more disciplined approach.

So are these trends inconsistent with greater collaboration and partnering? I do not think that in themselves they are. But the challenges of becoming more collaborative remain. Unless executive management is persuaded that it should focus on longer term value, relationships will continue to be driven by short-term cost and risk decisions. Usually it takes strong competitive pressures to change these attitudes; sometimes they do not change until it is too late. The most common driver for change is because aggressive, ‘unfair’ practices steadily erode supplier loyalty. For as long as suppliers have no choice (perhaps the customer is the only show in town, or all potential customers behave the same way), the consequences of this loss of loyalty remain hidden. But as the US automotive manufacturers discovered, when a collaborative competitor appears, being disliked by your suppliers can carry heavy penalties.

Walmart has been an amazing success story, but on the way it has failed to make many friends. Its size will certainly protect it for some time, even if it does decide to embark on a new wave of pressure on its suppliers. But it will be smart to think about the strategy of its new, on-line competitors, and the extent to which their behavior may be generating a ‘preferred customer’ status among its supply base. Equally, suppliers must themselves take responsibility for changing their customers’ views. If all you offer is a commodity, and you are easy to replace, then there is no reason why your customer will care too much about how they treat you. In any industry, if you want to be viewed as special, you must do something special – innovate, offer services that reduce your customer’s risks or raise their margins. Winning strategies depend on a readiness by both sides to contribute and think differently.

Tim Cummins is CEO of The International Association for Contract & Commercial Management (www.iaccm.com).

Tim spent many years as a commercial manager and executive, working in the banking, automotive, aerospace and technology industries. His work has taken him to more than 40 countries and he has lived inthe UK, France and the United States. Tim’s career included a period on the Chairman’s staff at IBM Corporation, in a group studying the business impacts of globalization and options for corporate restructuring; he then led the reeingineering of IBM’s worldwide contracts and contracting organization. Tim was the founder of IACCM and has led its development since incorporation in 1999. In this role, he acts as an ambassador for change in the way that trading relationships are structured and managed, and provides advice to member companies and public sector agencies on how to improve contract and relationship outcomes.

While Tim has been a guest on shows such as the PI Window on Business on Blog Talk Radio, IACCM has received extensive industry coverage including appearances by Vice-Chair Tim McCarthy as a guest panelist on the two-part segment (Is The Traditional Association Model Dead? Part 1) – Air Date, April 9th, 2009 & (Is The Traditional Association Model Dead? Part 2) – Air Date, May 21st, 2009.

NOTE: Check out other interesting posts on the Essential Connections Blog.

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