Operation Rollback: Wal-Mart's World of Business
These accidents of geography would have made little difference had Walton not been able to tame the logistical jungle of general retailing and pass along some of the savings to the consumer. Walton faced the same problem as any other storekeeper. He needed to buy merchandise in a quantity large enough to be able to negotiate a discount from the manufacturer. But he also needed to minimize the costs of warehousing merchandise or stocking items that never sell. His solution was simple: minimize the opportunity for merchandise to sit around by eliminating warehouse space. He did not build "warehouses" but regional "distribution centers" with very little capacity to hold products over long periods of time. His employees have no choice but to unload a shipment from a wholesaler and immediately reload it for shipment to individual stores. Nor did he provide those stores with much room to hold products out of sight. Employees would have to unpack boxes and find room for the merchandise on the shelves as soon as possible.
To keep his stores supplied, Walton made early and extensive use of a now ubiquitous piece of technology: the Universal Product Code (UPC), the bar code that automatically identifies a product and, when scanned by a laser, allows a computer to look up its price. Originally designed for supermarket checkout counters, the UPC took a long time to migrate to the rest of the retail world. Walton, Lichtenstein explains, was an early adopter who "demanded that all Wal-Mart vendors slap a bar code on every product they shipped to his stores." Then he invested in a satellite network that fed the computerized sales information of individual stores to a "digital warehouse" in Bentonville. This continuous stream of data allowed the company to track purchases in real time and largely automate the stocking and restocking process--an essential element of the company's just-in-time approach to reordering. The satellite hookup also allowed Walton to broadcast live televised pep talks to the sales teams in his stores until his death in 1992.
Walton and his successors also managed to save money by eschewing high fashion, special sales and creative marketing. From the beginning, the store has focused on offering consumers an "Every Day Low Price," as the strategy was termed, on brand names and off-brand merchandise. This approach was made possible by the company's effective logistics operation: with its inventory managed by computer, it was less likely to overbuy merchandise that it would later have to dump at clearance prices. The "Every Day Low Price" strategy also meant that Wal-Mart did not need to develop exclusive, "must-buy" items or lines of clothing in order to attract customers. Wal-Mart missed out on the home runs that rival Kmart has periodically hit, such as its line of signature houseware endorsed by lifestyle guru Martha Stewart. But unlike his rivals, Walton rarely bet significant company resources on a product with the potential to flop.
Finally, Walton succeeded at cutting out the middleman at every possible transaction. He had little patience for the wholesalers who traditionally stood between manufacturers and his distribution centers, and he bought straight from the source whenever possible. (Walton had even less use for salesmen, and he took their pervasiveness to be a sign of rampant poor management.) But by making the middleman redundant, Lichtenstein argues, Walton helped to change the power relationships between retail stores and manufacturers. As Wal-Mart computerized sales information and automated restocking, it obtained much more extensive knowledge about certain products than the companies that made them. As a result, manufacturers lost control of their product. Wal-Mart still sends buyers around the world to prospect for merchandise it might want to sell, but major consumer brands also have offices in Bentonville, where they meet with Wal-Mart executives, learn what the store wants to sell and try to produce it. Increasingly, the store stocks its aisles with off-brand merchandise manufactured especially for the chain.
The other component of the drive for low prices has been reducing labor costs. Though Walton originally conceived of Wal-Mart as a place where consumers could buy brand-name products at below-average prices, expansion and competition pushed the company to search for more and cheaper alternatives--a quest that took it to Central America and East Asia. The company does not own any factories abroad, but it contracts with numerous suppliers and foreign middlemen in order to obtain a continuous supply of inexpensive wares. Originally, this meant asking a contractor in Taipei or Hong Kong to produce knockoffs of popular items. "We would just take our best-selling U.S.-made items, send them to the Orient, and say, 'See if you can make something like this,'" Sam Walton explained in his autobiography. "We could use 100,000 units of this, or more, if the quality holds up." Today, Wal-Mart's world buying headquarters is in Shenzhen, a bustling industrial city along the Pearl River Delta in Guangdong Province. In 1979 the Chinese government designated Shenzhen a "special economic zone" with low corporate taxes and few environmental regulations. Guangdong now produces a third of China's exports, 10 percent of which end up on a Wal-Mart shelf somewhere in the United States.
According to Lichtenstein, labor costs get reduced further by Wal-Mart's economies of scale. Because Wal-Mart orders are so large, he writes, "the company can demand a lower overall cost per unit than any of its competitors. This generates an excruciating squeeze on all of its suppliers, resulting in a cascade of social pathologies which corrupt and distort every supply chain relationship." The pressure to meet the company's deadline in a hyper-competitive, largely unregulated low-wage environment has led suppliers to cheat their workers and subject them to unsafe factory conditions. Some factories have instituted elaborate fines for absence or spoilage of raw materials; others make young women work eighteen-hour days, or house their workforce in makeshift dormitories above a humming factory. Such arrangements can prove deadly: in at least a half-dozen reported cases, a fire that started on the shop floor killed scores of young women who were sleeping above. Wal-Mart has rarely been singed by these practices. It neither owns nor operates Chinese factories and, for a combination of logistical and public relations purposes, is a step or two removed from the sausage-making process. (It even finds that the wholesalers it tried to cut out of its dealings with US corporations are quite useful in overseas markets.) Because Wal-Mart's goods are largely "interchangeable" off-brand items, the store does not have the same investment in its brand image that has forced Nike, for example, to police its subcontractors better.
Wal-Mart also works hard to squeeze labor costs on the retail end. In its US stores, Wal-Mart "associates," as the company calls its lowest rung of employees, are hired at around the minimum wage and receive health insurance only if they buy into a plan laden with co-payments and deductibles. The company uses automated scheduling software to ensure that nobody is recorded as working more than forty hours per week, and nobody is given overtime. The company has long promoted a paternalistic approach to labor relations. Before his death, low-level employees were expected to call Walton "Mr. Sam," and the home office allowed individual store employees to go over the head of their manager or regional director and petition Bentonville about an issue at their store. Wal-Mart is unrelentingly hostile to labor unions. The company spends significant money on campaigns to discourage unionization; among other things, it suggests that organized labor would undermine the "open door" to headquarters by forcing every complaint through a shop steward. And it has been willing to play hardball--eliminating positions, closing distribution centers--when unions have appeared poised to gain a foothold in its North American operations. Its paternalistic labor policy is a selling point for some customers. "It doesn't matter about the convenience," a born-again Christian from Massachusetts told Discount Store News. "I like Wal-Mart because it's friendly.... They are a different type of people."