Cablegate: Wal-Mart Discusses Product Safety On a Global Scale

DE RUEHGZ #0849/01 2080513
R 270513Z JUL 07




E.O. 12958: N/A
SUBJECT: Wal-Mart Discusses Product Safety on a Global Scale


1. (SBU) SUMMARY AND COMMENT: As part of our series on consumer
product safety, we paid a visit to Wal-Mart's Global Procurement
team to discuss the company's Quality Assurance program and ways in
which its work should assure an increasingly skeptical foreign
market about the firm's ability to monitor the goods it sells.
Besides a rigorous auditing process, Wal-Mart works overtime,
literally, to educate its suppliers about product quality and
safety. The company is confident that its exports from China for
its North American stores meet the standards - and expectations - of
that market. Wal-Mart executives confidently answered questions
regarding the quality and safety of retail products. As further
evidence of its confidence, Wal-Mart's head of global procurement
invited Congenoffs to participate on an upcoming audit of one of its
suppliers. COMMENT: On several occasions, Wal-Mart executives did
speak about large companies that had seen their reputations damaged
by real and perceived lapses in quality and safety. While Wal-Mart
executives reiterated that quality, safety, and ethics were
important to Wal-Mart, it seems just as likely that protecting the
company's business reputation has become as important as its focus
on everyday low prices. END SUMMARY AND COMMENT.

Products for U.S. Stores from Two Procurement Sources
--------------------------------------------- ---------

2. (SBU) The Director of Administration for Global Procurement,
Kenny Chen, told us July 26 that Wal-Mart's supply chain for North
American stores is separate from that of its China stores. North
American stores receive their products from two separate sources.
-- The first is from U.S. importers that do not directly purchase
products on behalf of a certain company, but instead typically
supply large retailers such as Wal-Mart, Target, and K-Mart. Chen
remarked that these products may come from China, or from other
-- The second source is Wal-Mart's 2,500 direct suppliers in China,
which provide a majority of Wal-Mart's products for retail in North
America, Taiwan, and Japan.

Not Made in China: North American Stores Procure
Food Products from Local Importers and Producers
--------------------------------------------- -----

3. (SBU) Market differentiation, which means not only segmenting the
market by consumer income and taste but also by country, is a
guiding business principle for Wal-Mart and directs the company's
procurement strategy. Vice President of Wal-Mart Operations Shawn
Gray pointed out that since Wal-Mart tailors its products to the
market, it regularly procures from local suppliers. These
suppliers, which include food importing companies that sell to major
grocers, allow Wal-Mart flexibility to meet customer demand. To
illustrate his point, Gray provided an example of how perceptions
regarding the "freshness" of food differ between markets. American
consumers put less of a premium on the freshness of their food than
Japanese or Chinese counterparts. When it comes to food, Gray
doubted that Wal-Mart could supply one level of freshness and
quality to all of its markets and remain price competitive. Note:
Wal-Mart does not export foodstuffs from its Chinese suppliers for
sale in the United States. End Note.

Retail Standard or Standard Retail?

4. (SBU) In response to our question about whether Wal-Mart uses a
particular international or industry standard, Chen told us that
Wal-Mart follows the standard in use in each individual market. He
lamented the difficulty of procuring products which required an
understanding and decision with regard to so many different safety
standards and levels of quality, and noted that Wal-Mart is working
with competitors and suppliers to create a common retail standard.
Chen believes this would reduce costs during procurement and raise
quality. Gray interjected to reiterate that high quality and
"Everyday Low Prices" are Sam Walton's two guiding principles.

Doing Business with Wal-Mart

5. (SBU) Wal-Mart employs a rigorous process to screen both regular
and potential suppliers. Chen stated that a Quality Assurance (QA)
engineer will visit a supplier to audit its operations and select a
product sample to be tested. This product is then tested by a
third-party testing company in Hong Kong against Wal-Mart's quality
and product safety standards. These tests are done periodically to
ensure compliance. In each instance, the supplier pays for the
product to be examined; the results are sent by the testing company
directly to Wal-Mart. Wal-Mart then evaluates the test results and
informs the supplier of its ranking.

6. (SBU) Quality Assurance Manager Benny Liu said that Wal-Mart has
four rankings: "Super," "Approved," "Conditionally Approved," and

GUANGZHOU 00000849 002 OF 002

-- The "Super" and "Approved" rankings allow the prospective company
to become a Wal-Mart supplier immediately.
-- A "Conditionally Approved" ranking requires an additional audit
by Wal-Mart after six months. During the six-month period, Wal-Mart
will work with the company to improve quality and safety standards.

-- If the company is unable to meet the "Approved" ranking at the
next audit, the company is not allowed to become a Wal-Mart
supplier. However, the supplier may request another audit after an
additional six months.
-- A "Failed" ranking results in "zero business" with Wal-Mart.

7. (SBU) Quality Manager Benny Liu said that more than 200 QA
auditors conduct random audits of the 2,500 suppliers used for its
global procurement. These QA auditors also work with suppliers to
improve quality and meet safety standards. When an issue arises,
Wal-Mart halts procurement of the product but continues to work with
the supplier to help it meet Wal-Mart quality and safety standards
in the final market.

Working with Suppliers is Key

8. (SBU) Chen and Gray related that working with their suppliers,
especially on QA and product safety, was important to Wal-Mart's
business success and ensures a stable supply chain. Although
Wal-Mart's quarterly training sessions with suppliers are a large
investment in time and money, company executives believe it is more
cost effective than finding and training a new supplier or suffering
a loss in reputation.

Quality Check on Aisle 30, Please

9. (SBU) Checks on product quality and safety continue even after
procurement and shipment. Chen and Quality Assurance Manager Benny
Liu stated that each Wal-Mart store has 30 associates who conduct
spot checks, which include checking dates of products, price,
quality, and safety standards. These associates report to
Merchandising when problems arise. "Spot checkers" also receive
quarterly training through DVDs, video conferencing, and seminars.

Scandal, Schmandal:
Wal-Mart Confident About Supply Chain

10. (SBU) Public Relations Director Jonathan Dong said that he was
unconcerned about recent product safety scandals. Other Wal-Mart
executives also appeared to have confidence in Wal-Mart's supply
chain. Dong acknowledged, however, that Wal-Mart has faced product
safety issues in the past. Gray confirmed this, and recounted that
just the previous day a Chinese customer had fallen ill after eating
a Wal-Mart chicken product. In these instances Wal-Mart accepts
responsibility and pays for the customer's medical bills. Wal-Mart
also investigates the incident to determine the cause of the


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