Walmart Announces Zero-Tolerance Policy, Stricter Standards for Suppliers

By Sondre Solstad

Mar. 7 – Wal-Mart Stores Inc. (Walmart) has announced a “Zero-Tolerance Policy” on unauthorized sub-contracting, affecting all suppliers of Walmart stores and subsidiaries in the United States, United Kingdom and Canada. Effective from March 1, the Zero Tolerance Policy for subcontracting replaces the multinational retail giant’s former three-strike-rule, and indicates that Wal-Mart will terminate the relationship with any supplier found to be engaged in unauthorized sub-contracting.

In a letter to suppliers, Walmart defined unauthorized sub-contracting as any undisclosed production, augmentation or packaging, with or without knowledge on the part of the supplier, by any entity in the supplier’s supply chain.

The new standards also included more stringent rules for adding new facilities. New facilities will now have to pre-qualify with a “Yellow” or “Green” ethical sourcing rating before starting activity as part of a supplier’s matrices. Any supplier found to add facilities without following such pre-qualification procedures will be deemed to be engaged in unauthorized sub-contracting. Walmart will also publish a list of facilities barred from being part of any merchandise sourcing chain linked to the retailer.

The company also announced new fire-safety standards, requiring facilities found to have fire-safety violations to make necessary corrections within a 30-day period.

In order to enforce these new policies, Walmart will require suppliers to have a representative in each country the supplier sources Walmart products from by June 1, 2013 (as allowed by local law and procedures). This representative has to be an employee of the supplier, and “frequent, in-person monitoring of the supplier’s facilities will be considered an essential element for the supplier’s continuation of business with Walmart.” Previous arrangements in which this activity was outsourced to third-party agents will no longer be acceptable.

The policy changes are seen as a response to a November factory fire in Bangladesh, which killed 117 people. Walmart representatives said the company was unaware that its clothing was still being produced at the site. In rules special to Bangladesh, all facilities were required to undergo safety audits by third-party agencies before resuming production.

Overall, the changes require suppliers to be more watchful over their own and their subcontractors’ activities, as unauthorized activity on the part of any entity in the supplier’s matrices may trigger noncompliance with Walmart’s Zero-Tolerance Policy. With no second-chances, this may warrant a closer investigation into the sourcing activities of lower-level suppliers, and create incentives to further educate members of the supplier’s network on rules regarding sub-contracting.

The new requirements also mean companies supplying Walmart who do not yet have employees in all sourcing countries should immediately begin efforts to realize this. To get an employee on the ground in Asia can be a tricky process, and is perhaps best outsourced to an organization specializing in the region, especially considering the tight deadline of June 1. Since legal requirements, taxes and further expansionary opportunities may depend on the type of entity set up in supplying countries, this is a process which should be undertaken with consideration for potential future business opportunities.

The stricter standards for incorporating new facilities into production networks also bring challenges and opportunities to suppliers in Asia. By reducing the mobility of sub-contracting in countries with laxer safety standards, the new requirements may give suppliers choosing to source from higher-standard countries an advantage.

Companies operating primarily out of countries with higher safety standards should therefore stand ready to secure more business, and sub-contractors in these countries should be ready to potentially take advantage of this opportunity. For countries with lower safety standards, suppliers should take care to quickly clarify the status of all their sub-contractors, and identify weak links in their production network, making sure that Walmart-approved alternatives exists.

Finally, with Walmart being the largest retailer in the world, any global supplier should consider the possibility of other large retailers following suit. Clarifying the entirety of production networks should therefore be a priority for any large general-contractor operating out of the region who has not yet done so already. Larger suppliers without contracts with Walmart should also consider setting guidelines for incorporating new facilities into their network structure in line with Walmart standards.

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