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R 270513Z JUL 07
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000849 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV PGOV CH
SUBJECT: Wal-Mart Discusses Product Safety on a Global Scale 
 
 
BUSINESS-SENSITIVE 
 
¶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 
countries. 
-- 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 
 
 
"Failed." 
-- 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 
problem. 
 
GOLDBERG