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Walmart Squeezes Organization, Boosts Outside Alliances

As it turned out, the Sam's Club initiative to outsource its in-store demonstration program was only the first and in some ways least of several initiatives that Walmart (WMT) decided it was going to announced as January ends, yet the overall goal seems to remain the same, to streamline operations and free up resources to drive growth.

In the latest of what has emerged as a series of notes, including Sam's CEO Brian Cornell's letter to employees announcing the demo moves and a memo from Home Depot (HD) CEO Frank Blake announcing operational consolidation at that retailer, Mike Duke, Walmart's CEO, filed his own dispatch, one that spells out three major initiatives besides the one at the retailer's club chain.

For one thing, Walmart will reconfigure a significant proportion of product acquisition functions into a Global Sourcing organization. In one part of that initiative, it will partner with multi-billion dollar worldwide supply chain manager Li & Fung to make purchasing more cost effective across the planet. In addition, the retailer plans to establish a new structure to help it grow in unexplored markets, to leverage scale for greater efficiency and establish new lines of employee advancement. Finally, Walmart will create a global Internet organization.

In his memo, Duke explained:

At Walmart, looking for ways to operate leaner and strengthen our price leadership has always been a core part of our culture. We've laid out our three priorities to deliver more value for both customers and shareholders: growth, leverage and returns. We're continuing to make a number of changes across the business to ensure that this strategy is driving our structure, and that every part of our business is becoming more global, leveraging our scale and moving closer to the customer.
As for the global part, Morgan Stanley analyst Angela Moh, in a research note, observed of the Li & Fung deal:
Li & Fung announced a global non-exclusive sourcing agreement with Walmart for Walmart U.S., Walmart International, and Sam's Club. Management estimates the size of business could reach U.S. $2 billion in the first 12 months. With Walmart looking to increase the percentage of direct sourcing, Li & Fung believes there is significant growth potential for the business. Li & Fung has been working closely with Walmart via its onshore business, and is confident that its global sourcing platform could help Walmart achieve lower buying costs.
So, Walmart again is turning to an outside partner to help it operate a particular function rather than build that function internally. Such was the case with the demo element at Sam's Club, which now will be operated by Shopper Events.

As with Home Depot and Sam's Club efforts discussed in this blog over the past few days, major retailers are looking to drive costs out of their systems by consolidating operation and so to free up capital they can reinvest in key initiatives designed to boost results in the slow economy. Those initiatives also have been developed to position the retailers for stronger growth as the recovery gathers steam.

To that end, Walmart will combine its realty division with store operations and logistics, and it will eliminate a class of position - referred to as market teams -- in the organization. In his own memo, Bill Simon, executive vp and coo, Walmart U.S., stated:

The most difficult part of this decision is the impact to the market team members whose roles have been eliminated. I would like to thank these associates for their contributions, and reiterate that the elimination of this position is not related to job performance. We expect many of our displaced associates will find open opportunities within the organization.
So, in an economic environment where retailers have reconfigured store and distribution functions to save money, Walmart is looking at internal operations as a place where it still can cut costs, in part by eliminating positions that can be dropped without a direct impact on customers.

Walmart's move to develop a global electronic commerce organization is a potential money saver, too. Building Internet operations is cheaper than building stores, but more on that in an upcoming post.