By and  on January 28, 2010

Sweeping organizational changes are coming to Wal-Mart U.S., from its stores to its apparel sourcing.

In a flurry of developments Thursday, Wal-Mart Stores Inc. said it is realigning its U.S. organization and redefining the way it procures merchandise, which includes consolidating an initial $2 billion of its $300 billion product budget under Hong Kong-based manufacturing giant Li & Fung.

And in another sign the world’s largest retailer is stepping up its attention on fashion, WWD has learned Lisa Rhodes, who was executive vice president and chief merchandising officer of Maurices and left the Duluth, Minn.-based chain last week, has been appointed Wal-Mart’s senior vice president and general merchandise manager of apparel. She’ll report to Dottie Mattison, the company’s senior vice president and general manager of apparel.

The changes at the Bentonville, Ark.-based group consolidate power under two of the company’s rising stars — Bill Simon and John Fleming — and include combining real estate, store operations and logistics into one unit; developing a new merchandise execution organization, and pairing store-planning with customer experience to accelerate the speed with which new retail formats are brought to market and new markets are penetrated.

Deutsche Bank retail analyst Bill Dreher called the moves “the biggest changes at Wal-Mart U.S. since 1995 and the introduction of SuperCenters.”

Between the organizational changes and the Li & Fung news, there are bound to be layoffs, however. Last week, Wal-Mart’s Sam’s Club division said it was closing 10 U.S. units and laying off 11,000 employees. Observers said there could be up to 3,000 layoffs in Bentonville due to the changes in sourcing. The company could not be reached for comment.

Wal-Mart said it created a consolidated global sourcing structure built around new global merchandise centers.

Ed Kolodzieski, president and chief executive officer of Wal-Mart Japan Holdings G.K. and Seiyu was named executive vice president of Wal-Mart’s global sourcing, reporting to Wal-Mart vice chairman Eduardo Castro-Wright. Wal-Mart’s goal of restructuring its relationships with suppliers is cost savings and leveraging its scale. “The core of the company’s overall global sourcing strategy is direct sourcing for the company’s private brands,” said Castro-Wright, noting private label represents more than $100 billion in purchasing annually.

For Li & Fung, the Wal-Mart deal is worth up to $2 billion of business in the first year.

“Obviously that’s a big number for any first year, but in the context of what Wal-Mart’s size is, it’s a good start,” said Bruce Rockowitz, president of Li & Fung (Trading) Ltd. “Our expectation, I think on both sides, is it will continue to grow.”

Rockowitz, the first outsider to run the $14 billion Fung family business in more than 100 years, said 20 to 30 percent, or $400 million to $600 million, of the venture’s first-year sales could be in apparel, with footwear, home goods, toys and other goods making up the balance. The open-ended agreement does not include any volume commitments from the retailer, which can still buy directly from factories.

The arrangement does, however, give Wal-Mart the option to acquire the sourcing arm, dubbed WSG, in 2016.

“We probably won’t start shipping until the end of the first half,” Rockowitz said. “We see plenty of opportunity to bring a global sourcing network to bear right away. From our viewpoint, we’re going to be bringing better quality and prices to the table as well as helping product development.”

Exhibiting the complexity of apparel sourcing, Li & Fung has more than 80 offices globally and sources goods in more than 40 countries. The company will continue its existing wholesale relationship with Wal-Mart.

Rockowitz said Li & Fung would help Wal-Mart keep its prices down.

“We’re headed into an inflationary environment, where all the costs have been taken out of the supply chain over the last years and a big deflationary driver was China, and China is not the low-cost country anymore,” he said. “You need a global sourcing network and, quite frankly, on a direct basis, Wal-Mart wasn’t as global as they could be. We’re going to drive costs down somewhat, or at least hopefully stop the inflationary trend for our customers.”

The deal was generally seen as a good one, especially given the breadth of Li & Fung’s sourcing base.

“They can move production if a natural or political problem occurs like no other,” said one trade expert, who requested anonymity. “It also gives Wal-Mart fewer vendors and reduces their reputation’s potential exposure from bad actors on environmental and labor issues.”

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