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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- Sept. 24, 2012 -

 
Supply Chain News: Walmart is Changing its Global Sourcing Strategies to go More Direct – or Maybe It Isn't

 

Conflicting Reports over Changes to Walmart's Relationship to Trading Giant Li & Fung

 

SDigest Editorial Staff 

 

There were reports and speculation last week that Walmart was scaling back its relationship for global sourcing with a special business unit of trading company giant Li & Fung, but this week Li & Fung's CEO disputed that news.

Li & Fung announced in a securities filing last week that Walmart will not be executing its option to buy a global sourcing business set up by Li & Fung just two years ago to solely support Walmart's international retail sourcing operations. That led many to say Walmart once again is hoping to cut out the sourcing middleman.

SCDigest Says:

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We also wonder if Li & Fung's claim that Direct Spourcing Group will be "very profitable" in 2013 wouldn't lead some at Walmart to wonder if the spread between buy and sell is getting too big.

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Hong Kong-based Li &Fung is more than a century old, but the business really took off over the past two decades as US and European companies, especially in the beginning in the apparel business, looked offshore to China and other parts of Asia seeking lower cost goods. Li & Fung has relationships with thousands of Asian suppliers, and manages the contracts, financial transactions, quality assurance and more for its customers. It has sales of something like $20 billion annually, making it one of the largest trading firms in the world.

In 2010, Walmart & Li & Fung announced a new sourcing relationship for Walmart's international operations and some US stores procurement. The sheer scale of that operation, as well as other factors, led to the formation by Li & Fung of a new company called Direct Sourcing Group that would be focus solely on supporting Walmart.

It now turns out that as part of the arrangement, Walmart had the right to buy the new company from Li & Fung through 2016 – but Walmart has now told Li & Fung that it is not going to pursue such a deal, the company disclosed last Thursday in a filing with the Hong Kong Stock Exchange.

Further, The Wall Street Journal reported last week that Li & Fung told employees in August that it was losing the sourcing business for much of Wal-Mart's international stores.

Given it is only 2012, that Walmart is already terminating that option is interesting, and would seem to indicate two things: (1) that Walmart is going to cut back on its need for middlemen for global sourcing for its international operations just as it had done two and a half years ago for its domestic stores; (2) it believes it can develop that capability internally at lower total cost than the costs associated with acquiring Direct Sourcing Group.

When the news first broke, a Li & Fung spokesperson would not specifically address any changes to the program, saying that said "the substantive terms" and "nature" of the partnership "remains essentially unchanged." Li & Fung also said it would continue to do global sourcing for the Walmart's Sam's Club chain and certain categories of products for Walmart US and international stores, no doubt product categories Walmart finds complex to manage.

However, as Li & Fung's stock price dropped on the news, and earlier reports came out again that Direct Sourcing Group had not hit its target of $2 billion in revenue in its first 12 months of operation (reaching $1.7 billion instead) and that it has lost money in 2011, Li & Fung CEO Bruce Rockowitz came out swinging late last week.

(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

 


Rockowitz said that that Direct Sourcing Group's business is growing and will be profitable in 2012, and that the relationship with Walmart is"better than ever," and that the WSJ report what Walmart will be buying more products direct from suppliers is "not true."

"The size of the business and profitability of the business is growing, and better now than ever," Rockowitz said. The subsidiary broke even in the first half, will make a profit in the second and be "very profitable" in 2013, he added.

"They [Walmart] thought they needed a call option -- just in case it doesn't go well they can buy it back," Rockowitz said. "They were comfortable after the first year that they don't need it anymore.

At about the same time, Scott Price, head of Wal-Mart's Asia operations, said "We have a good relationship [with Direct Sourcing Group] and there are still opportunities for business."

Rockowitz said Li & Fung that will continue to be a primary supplier for Sam's Club in the US through Direct Sourcing Group and provide buying-agency services to Wal-Mart's US operations and in some of its international markets. The new agreement is for five years with an option for a two-year extension and beyond.

Rockowitz also said the new agreement allows for Li & Fung to provide higher-margin design and replenishment services to Walmart, which sounds in part like Walmart will be outsourcing some of its global logistics functions to Li & Fung, if true.

There is no way to know at this point for sure, but sounds to SCDigest that something has clearly changed in the relationship, and especially note the comment by Walmart's Scott Price that "there are still opportunities for business." That clearly sounds like some business is being taken away from Direct Sourcing Group.

A few other Li & Fung retail customers, such as Gymboree and Carter's, have also recently announced plans for more direct sourcing strategies.

In early 2010, Walmart announced it was in the midst of sweeping plan to consolidate its global procurement functions and reduce the use of intermediaries in its global sourcing processes, leading to 5-15% per item and generating savings of billions of dollars per year.

It turned out that before the program started, it was procuring directly only 20% or so of goods procured offshore directly. In details that aren't completely clear, the new arrangement with Li & Fung was part of that strategy. See Walmart to Centralize Global Sourcing, Reduce Use of Middlemen.). This is confusing, because it isn't clear why you would launch a new program with a middleman when your are saying you are going more direct. A strategy of consolidating middlemen first could be the answer.

 

We also wonder if Li & Fung's claim that Direct Spourcing Group will be "very profitable" in 2013 wouldn't lead some at Walmart to wonder if the spread between buy and sell is getting too big.

What do you see is happening in this new strategy? Is Walmart going to go mire direct and cut out the middleman? What are the pros and cons of such a move? Let us know your thoughts at the Feedback section below.




Recent Feedback

Using an integrated middleman such as " Li & Fung's" is gaining more control over the source of product and making the supply chain cleaner. Also there is only momentum in Asia markets, not European markets or other parts of the world. This makes me think because Walmart is trying to expnad the market in Asia by working with a Hong Kong based company, will this help Walmart penetrate the market a bit more just because Li & Pung's backround & cultures?

On the other hand, when buying & selling and starting to make profits, it's a confusing message for me to understand.



HUIJUN JING
Procurement & Logistic Mgr
BYD Motors, Inc.
Jun, 26 2015
 
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