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Commercial Competence: Will Walmart Lead The Way?

January 5, 2010

So Walmart is embarking on a fresh round of globalization ‘to cut billions from supply costs’ (Financial Times, January 4th, 2010).

The plan is to consolidate purchasing across national borders and increasingly to deal direct with manufacturers, eliminating third parties. The expectation is that costs will be cut by 5 – 15%.

In many ways, the most surprising element of this news is that it has taken so long in coming. Buying cross-border is certainly not new, nor is direct sourcing (though interestingly the FT observes that direct sourcing is today far more common in Europe than it is in the US).

So why have Walmart managemet waited so long to make this move? The answer is most likely because of the organizational disruption that it involves and the challenge it represents to existing skill sets. Walmart simply lacked the imbedded commercial competence to oversee global supply chains.

An article in the current edition of Industry Week (From Managing The Supply Chain To Orchestrating A Global Operational Network) co-incidentally sums up the challenge – by no means unique to Walmart: “Rather than managing the supply chain, companies need to deftly ‘orchestrate’ its many interconnected resources and participants. The classic concept of the supply chain is fast becoming obsolete … a far better image for the 21st century is a global operational web or network.”

This is a concept that IACCM has been arguing for several years, along with leading academics such as Professor Rob Handfield, head of the supply chain program at NCSU. But success will depend on a number of key attributes. Among these are:

  • An holistic approach to market management.  
  • An ability to understand and manage relationships.
  • Integrated supply chain technology.

Traditional Procurement behavior and metrics will not address these issues. Successful management of global supply chains demands the ability to understand and respond fast to shifting market needs and competitive actions (so a strong connection to the market). Developing loyal, responsive and innovative suppliers demands a readiness to understand values beyond the lowest price and to factor relationship cost into the buying decision. And global operations demand sophisticated applications that links supply and demand with excellent performance management.

Developing capabilities such as these requires major investment in systems and skills. Industry Week summarizes seven success factors:

  1. Involving partners early
  2. Transparency via technology
  3. Networking across the network
  4.  Modeling for momentum (business intelligence)
  5. Relationships really matter
  6. An adaptive infrastructure
  7. Global product lifecycle management

 There is perhaps an eighth characteristic that will be critical for Walmart – and that is to find suppliers capable of matching its commercial design.

Once more, this story illustrates how developing and managing the right commercial model is key to business success. Our community should be watching Walmart to observe whether it truly has developed the systems and skills that will enable ‘orchestration of a global operational network’ – or in other words, the emergence of true commercial competence that embraces both buy-side and sell-side operations?

As a footnote, if Walmart’s primary objective is to leverage spend purely to drive down prices, it should beware of growing political resistance. For example, the UK’s Office of Fair Trading has recommended the creation of an Ombudsman to oversee abuses by major supermarket retailers – and it appears probable that Government action will be taken to put this in place.

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