Wal-Mart Is a Supply Chain-Driven Company Obsessed with Lowering Costs—Is Yours?
CSCMP Comment Newsletter, March/April 2008
By Michael Bergdahl

Last year, I was invited to speak at a business conference in Panama City, Panama, about the Best Practices of the World’s Largest Company—Wal-Mart. While I was there, I visited the Panama Canal. It was just a short drive from the Hotel El Panama to the Miraflores Locks where I had lunch at the café overlooking the Canal. The view was both spectacular and surreal as I watched the heavilyladen container ships moving from the Pacific Ocean to the Atlantic, and vice versa.

I learned that by 2015, Panama plans to widen the canal, allowing the passage of even larger container ships. Currently, the biggest ships that can navigate the canal and locks carry up to 4,000 containers. After the widening is complete, ships carrying more than 11,000 containers will be able to make the trip.

As I watched the container ships passing through the Panama Canal, I thought about the impact that widening it will have on the way Wal-Mart—and its competitors—ships freight into the United States, and for that matter, around the world. Now, most of its containers filled with products bound for American consumers enter the US through the Ports of Los Angeles and Long Beach, California. With their history of labor problems and strikes, however, it’s hard to believe that these two ports still maintain a monopoly on container shipments entering the US.

It’s estimated that two-thirds of the container shipments entering the United States from China and Asia pass through the Long Beach Terminal. In the past, dock-worker strikes at Long Beach have crippled manufacturers and retailers around the world. I heard that during the last strike, container ships were lined up across the Pacific Ocean, all the way up the Yangtze River in China, parked and waiting for the strike to end.

That’s all about to change. As a result of widening the Panama Canal, those bigger container ships will now be able to bypass West Coast ports like Seattle, Portland, and Los Angeles in favor of more business-friendly ports in “right-to-work” states like Texas, Louisiana, Mississippi, and Alabama.

Overnight, Houston, Texas, could become the “New Long Beach!” If you think about it from a rail and trucking standpoint, Houston’s middle-of-the-country location could significantly reduce the amount of diesel fuel consumption, while reducing the time required to deliver containers to customers.

According to Port of Houston chairman, James T. Edmonds, Houston has been a direct “all-water” option for Asia shipments for over five years, ever since the West Coast labor stoppage created a cross-country impact on import trade. Also, as West Coast ports are heavily congested, Houston has seen an increase in container traffic from virtually every country in the world. The Port of Houston Authority has long been recognized as the “third-coast” alternative.”

Shipping containers through Houston is rapidly becoming one of the best alternatives for US importers. Shipments into Texas would also insure that the “product pipeline” is always open and flowing. It’s a big win for manufacturers, suppliers, retailers, and consumers alike as productivity would increase and costs would decrease for moving containers from ship, to rail, to road through Houston. You can bet that the big international shippers from the US and other countries are already gearing up to take advantage of this Texas hospitality.

Since the cost of container shipping is about to come down once again, suppliers and manufacturers for companies like Wal-Mart are probably already planning for the future. There is little doubt that the widening of the Panama Canal will change the supply chain strategies of global retailers and manufacturers. Wal-Mart has already booked passage for its products on the world’s largest container vessel, the Emma Maersk, capable of ferrying 11,000 containers. (The Emma Maersk is the first of a fleet of super-container ships that will be up and running by the time Panama opens its widened canal.) The Port of Houston is anticipating a windfall of new business by preparing its docks and dredging its harbor to handle the parade of mega ships.

There is even talk that Mexico, Nicaragua, and Colombia are considering digging their own canals so that they, too, can tap into the mega-ship bonanza about to unfold. The financial opportunities are huge and the risks are relatively low for Panama because there are more than five-million containers in transit across the globe at any given time, and each year, that number is growing.

The fact that Panama is a logistics driven country is going to change the way that Wal-Mart, a supply chain driven company, ships containers across the world and transports freight throughout North and South America. The widening of the Panama Canal will fit right into Wal-Mart’s logistics strategy, which is about finding ways of reducing or eliminating costs. Low transportation costs allow the company to sell its products at the lowest possible prices, making retail competition with Wal-Mart a nightmare.

Wal-Mart’s low-price strategy is no “dream come true” for many of its large and small suppliers either, as many of them work on very low margins. The big winners in the race to sell at rock-bottom prices are the consumers. It’s estimated that families of four who buy groceries at Wal-Mart save an estimated $2,500 US per year.

These low prices are why 175 million customers flock to Wal-Mart stores every week of the year. Why is Wal-Mart so driven to reduce its costs? One reason is because of the company’s commitment to offering the lowest prices possible to its customers. Another is that even though Wal-Mart is the number-one company in total annual sales in the world, its total profits in 2007 ranked it at only number 12 on FORTUNE’s most profitable companies’ list (in US dollars). Hard as it may be to believe, Wal-Mart’s 2007 annual sales were $350 billion US, but the company only eked out a 3.2% profit. There’s no need for you to feel sorry for the company’s “meager” profits, however, because in real dollars, 3.2% equals $11.2 billion US in profits.

Understanding the Wal-Mart profitability model will help you understand why the company’s leaders are downright fanatical about driving costs out of the supply chain. To them, the widening of the Panama Canal is just another opportunity to lower costs even further to protect their razor-thin profit margins. With almost 7,000 stores, 120 massive distribution centers, and operations expanding into 15 countries, Wal-Mart’s leaders must focus on continuously improving operations, lowering costs, and improving customer service. The ability to manage its supply chain efficiently has always been paramount to the success of its “Everyday Low Price Strategy,” and to achieving success with its low margin business model. It is for this reason that many consider Wal-Mart “a supply chain-driven company that also has retail stores.”

It’s no secret that the Wal-Mart business model would come crashing down immediately without its renowned technology and efficient supply chain. “The Wal-Mart Way” demands that the company stays on the leading edge of logistics, distribution, transportation, and technology; it must then capitalize on every opportunity to improve.

The company’s executives push decision making downward and empower store teams to think like entrepreneurs by making the individual stores’ operations the best they can be through a combination of simplification, superior execution, and legendary service. Through vendor partnerships, Wal-Mart constantly works with world-class manufacturers to implement leading-edge (and bleeding-edge) logistics strategies designed to lower costs, reduce out of stocks, and increase sales. The company isn’t afraid to invest money in sometimes new and controversial supply chain strategies like RFID if its proforma financial analysis predicts future cost savings.

Being “in-stock” at Wal-Mart stores is the goal of all of its logistical efforts; being out-of-stock is tantamount to being out of business. The key to being in-stock is superior technology, a masterful supply chain, and in-store execution. Wal-Mart shuns product storage warehouses in favor of distribution centers (DCs) with cross-docking technology to reduce inventory-carrying costs. Discount retailing demands low prices and it only works with extremely high sales volume. Inventory turns at high velocity backed by automated replenishment insures that Wal-Mart sells 100% of its inventory between 72 hours and 60 days upon taking possession of it from its suppliers.

The bottom line is that Wal-Mart’s low-price strategy is made possible because of offshore private-label manufacturing, containerization, and modern intermodal logistics. Other major retailers like Target and The Home Depot have copied Wal-Mart’s approach, and now use basically the same manufacturing and logistics strategies and tactics for the same reasons.

As I finished my lunch at the Panama Canal that day, I came to the realization that the supply chain paradigm is about to shift once again. The good news is that supply chain experts have time to prepare for the monumental changes about to unfold. The bad news, at least for Wal-Mart’s competitors, is that shipping costs for the world’s largest company will once again come down, putting even more pressure on competitive prices.

For decades, Wal-Mart’s focus on technology, logistics, distribution, and transportation has been its single most important sustainable competitive advantage. And large global retailers and manufacturers will continue to copy its supply chain innovations and best practices in an effort to re-level the playing field.