Walmart and Suppliers: New Regulations (and Public Shaming)

To any firm with significant brand recognition, preserving the brand name is vital; it can help your your market cap more than lean and efficient operations. Witness one of the greatest brands out there – Disney – and their policy against purchasing any safety-related components from Chinese suppliers for rides in their entertainment parks. Disney's share price place would plummet as quickly as the roller coaster car that jumps off the tracks.

Now Walmart has started to up their game in the Code of Conduct (CoC) area. Not long ago, they made headlines for requiring suppliers to self-assess their sustainability efforts.

In the WSJ yesterday, we can read not only about Walmart's stricter CoC (and what will get suppliers the boot) but also see many examples of refreshing clear action items for compliance.

According to the Journal, the "changes, which begin taking effect March 1, come after Walmart clothing was found at a Bangladesh factory where a fire killed 112 people in November--a factory the company said was no longer supposed to be making its clothes." So, Walmart is taking a local double failure (hazardous conditions, non-approved supplier) and turning this into a company-wide effort to drive improvements throughout its supply chain. We hope their supplier management solution is ready! Speaking of which, you can read more details directly from Walmart.

Specifically, what are they doing? Here's a short list of some of the changes:

Pre-registration information disclosure

  • No unapproved subcontracting – old rule, but raised tone, and sharper trigger break
  • Suppliers must use own employees, not agents, onsite to monitor factories

Enhanced onboarding

  • New factories must undergo a pre-approval audit before suppliers can do business with them
  • Region-specific criteria – e.g. all facilities in Bangladesh must undergo a mandatory electrical and building safety review

Stricter ongoing enforcement

  • From March 1, Walmart will automatically cut suppliers that subcontract without approval. Previously, suppliers had three chances to comply
  • Factories with fire safety violations have 30 days (previously six months to a year) to correct before being terminated. Additionally, Walmart now imposes as semblance of US fire codes in that all floors and buildings must have a secondary exit, preferably an external fire escape route

Public humiliation

  • Walmart will publish a list of factory suppliers that are no longer authorized to use on the retailer's corporate website

Cleanup in aisle 5
That final bullet, around "name'em and shame'em" is something of a supply chain stunner – Spend Matters doesn't know of any other Fortune 500 firm (or any other size for that matter) that publicly discloses vendors that have failed to perform. Considering the magnitude of Walmart's reach, it will be interesting to see how this level of disclosure stands up to libel laws around the world. We think it is a great idea, and bad apples should be thrown out as soon as possible. But we can also see how this can get contentious.

Walmart isn't unilaterally imposing the new requirements without any support. They said, "it is looking into creating a fund or revolving line of credit that factories can tap to make safety improvements."

Wal-Mart also said that suppliers, local governments and other parties must play a role in improving safety conditions – sensible – and this touches on our earlier comment around bringing public code in low cost countries up to par. If two exits out of a factory is seen as revolutionary, well, let's say that we're not impressed with local engineering practices or local code. There's probably no need to go all out and copy California's codebook, but clearly an upgrade is in order.

Sadly, and predictably, many organizations have jumped on this initiative, not to applaud Walmart's efforts, but to complain over wage rates at the suppliers, something Walmart doesn't control. As suppliers and their infrastructure matures, they should be able to command more a premium for their services, which over time will be reflected in the earnings of local workers. Some things just take time.

Final Takeaways

  • Revisit your own policies – registration, CoC, onboarding, site visits, audits
  • Leverage Walmart's initiative – create your own at the same time, politically feasible
  • Educate your buyers – update your total cost of ownership formula with an assessment of what a supplier disaster like the one in Bangladesh would mean for your firm
  • Update your supplier management solution to reflect all of the above – and if you don't have such a solution – go buy one today!!!

- Thomas Kase

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Voices (2)

  1. Pierre Mitchell:

    Great stuff Thomas – and good recommendations. I also agree that while there is much for Wal-Mart to do, it’s still important to applaud their efforts since they do have a ripple effect.
    I also understand some of the skepticism. It seems much of the activities stem from reacting to adverse events rather than proactively driving a vision.

    Speaking of ‘adverse events’, I’ve always wondered why some safety & ethics regulations are multi-tier (e.g., full material disclosure/traceability), while others such as basic safety regulations are only single tier (or now double tier). I read the Wal-Mart letter and can imagine a supplier who wants to skirt the letter of the law (or the law of the letter in this case) sub-contracting to a sourcing services provider who then sources from a sub-contracted facility (i.e., the supplier is not DIRECTLY subbing out to another factory). Sounds crazy right? Yet, consider Wal-Mart’s spend in Logistics services where it spends money with NFI who then spends money with Warestaff who then contracts out to contingent laborers in the warehouse that is in Wal-Mart supply chain (causing a major ruckus and again a reactionary but positive move by Wal-Mart to ensure that its global sourcing standards are applied locally too). Adding more layers in the value chain can be useful for many things (e.g., using tier 1 MWSBE ‘distributors’), but regardless of intent, having strong processes and systems to allow scalable tier-n supplier compliance is a key capability – and tailor made for some of the emerging SxM (x=P,
    L, etc.) tools out in the market.

  2. Thomas Kase:

    Pierre, sshs – you’re revealing the playbook.

    Seriously though, if there’s a will, there’s a way – I doubt there’s a single rule or process that can’t be thwarted if people really want to do so.

    I think the "big data" tools (ref separate article) that are being rolled out now will help us see behind any number of curtains and do so automatically – and that will make it far harder to circumvent via pass-through relationships.

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