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Chapter 14 Expanding the Circles
  "Distribution and transportation have been so successful at Wal-Mart because senior management viewsthis part of the company as a competitive advantage, not as some afterthought or necessary evil. Andthey support it with capital investment. A lot of companies don't want to spend any money on distributionunless they have to. Ours spends because we continually demonstrate that it lowers our costs. This is avery important strategic point in understanding Wal-Mart."JOE HARDIN,executive vice president, logistics and personnelSome of our guys around here find it amusing that I get so much credit for Wal-Mart's reputation as aworld leader in retailing and distribution technology. It's not because we're not on the cutting edge. Weare. They're amused because, as I told you, ever since I went to that IBM school in 1966, I've put up apretty good fight every time somebody wants to buy some new system for this, that, or the other. I wantthem to think hard about how they're going to justify the expense before they even come to me with it.

But there's no question about it: one of the main reasons we've been able to roll this company outnationally was all the pressure put on me by guys like David Glass and, earlier, Jack Shewmaker andRon Mayer, to invest so heavily in technology. Yes, I argued and resisted, but I eventually signed thechecks. And we have been able to move way out front of the industry in both communications anddistribution. During that period in the late seventies when Kmart's management had such a strongresistance to any kind of change, that resistance included investment in systems. At the same time, ourfellows were just absolutely convinced that computers were essential to managing growth and keepingdown our cost structure. Today, of course, they've been proven so right that they look like geniuses. Iwould go so far as to say, in fact, that the efficiencies and economies of scale we realize from ourdistribution system give us one of our greatest competitive advantages.

Many people have contributed over the years, but David Glass has to get the lion's share of the creditfor where we are today in distribution. David had a vision for automated distribution centerslinked bycomputer both to our stores and to our suppliersand he set about building such a system, beginning in1978 at Searcy, Arkansas.

DAVID GLASS:

"Searcy probably was built about two years later than we needed it, so there was a lot of pressure on usto get it up and running. The big knock on Wal-Mart was that we weren't going to be able to expandmuch beyond the 350-mile ring around our distribution center in Bentonville. Because of that logisticalproblem, our disbelievers said we would always be a medium-sized regional retailer confined to this area.

I pushed hard for Searcy as the solution. It was a real ambitious plan: our first remote, mechanizeddistribution center. Unfortunately, we needed it so badly that we had to rush it into service, and thecrunch turned it into a disastermy disaster. It was as bad as Sam's opening at Harrison, only moreserious.

"We were shipping freight out of there before we had a roof on the building, and nothingnot even thetoiletsworked like it was supposed to. We had guys like Glenn Habern, our data processing manager,and Paul Carter down there driving forkliftsuntil Habern tore down a rack and spilled Listerine all overthe place. Working conditions were terrible, and the next thing you know the union was down thereorganizing.

"It was such a nightmare that Sam began to question the whole idea of mechanized distribution. He reallywasn't sure it worked at all. Fortunately, he hired Don Soderquist from Ben Franklin around that time,and Don came in as a big supporter of what we were trying to do. He believed in mechanized distributionall the way, and he eventually took over distribution from me in 1980. He went on to do a great jobexpanding it, helping introduce a lot of innovation, including a badly needed new inventory managementsystem.

"Fortunately, we turned Searcy around and made it work because it saved our neck after we took on allthose Kuhn's stores. We had to figure out how to supply them, and our arrangement with a third-partydistributor turned into a nightmare. So we built an addition at Searcy to service them, and it solved theproblem. Searcywhich is one of our best-performing distribution centers todayreally was the key to ourwhole distribution system. After we proved it would work, we were able to duplicate the modelanywhere, and that's what we've done."I think it's fair to say that our distribution system today is the envy certainly of everyone in our industry,and in a lot of others as well. We now have twenty of these centers placed strategically in our trade areasaround the countrystill mostly within a day's drive, or about 350 miles, of the stores they serve.

Combined, they account for more than 18 million square feet of distribution space. We stock over80,000 items in our stores, and our warehouses directly replenish almost 85 percent of their inventory,compared to only about 50 to 65 percent for our competition. As a result, the gap from the time ourin-store merchants place their computer orders until they receive replenishment averages only about twodays. That probably compares to five or more days for a lot of our competitors, which don't ship asmuch merchandise through their own network.

The time savings and flexibility are great, but the cost savings alone would make the investmentworthwhile. Our costs run less than 3 percent to ship goods to our stores, while it probably costs ourcompetitors between 4  to 5 percent to get those same goods to their stores. The math is pretty simple:

if we both sell the same goods for the same price at retail, we'll earn 2  percent more profit than they willright there.

Joe hardin:

"When you own and manage your distribution and logistics channel, you have a great competitiveadvantage over companies that rely on third-party suppliers. It automatically shortens your lead times, butalso you can constantly look for ways to improve your operation and try to make it more efficient. Younever have to rely on what's going on in somebody else's shop. In our case, we generally know wherethings are in relationship to when we want them to arrive, so we can schedule and plan to move goodsinto the stores at the right time. That maximizes our in-stock positions, which is vital. You can't generatesales unless you have the product there when the customer wants it."Not only do we stock more of our merchandise in our own distribution centers, we also rely on our ownprivate truck fleet to a much greater degree than our competitors do. Our private fleet is one of thenation's largest, maybethe largest. Last year, David asked Lee Scott, our vice president who overseestransportation, to try and locate every truck and trailer in the fleet on a single day just to show that wecould do it. Of course he did, and at last count, Lee says we have more than two thousandover-the-road tractors and more than eleven thousand trailers. Unlike both Kmart and Target, whichcontract out with third parties to deliver a lot of freight from their distribution centers, we've always feltthat we needed our own fleet.

To have the kind of flexibility we wantthat ability to respond above and beyond what we could asksome outsider to do for uswe need drivers who are part of our team, drivers who are as dedicated toserving our customers as the associates in the stores. And, man, do we ever have them. When you're outon the highway and you pass by a Wal-Mart truck, you can bet your bottom dollar that the guy behindthe wheel is a true professional. He's not just driving a truck. He's dedicated to servicing those stores,and he knows he's an ambassador of Wal-Mart and everything we stand for out on the road. I'll just sayit: we have the best damned truck drivers in America, and their loyalty and their can-do attitude havemade a huge difference to this company.

LEE SCOTT:

"Our drivers really are extremely loyal to their mission, which is to serve the stores. They report back toWal-Mart continually on things like merchandise thrown out behind the store that looked like it wasgood, attitude and morale problems in the stores. For a long, long time, Sam would show up regularly inthe drivers' break room at 4a.m. with a bunch of doughnuts and just sit there for a couple of hours talkingto them.

"He grilled them. 'What are you seeing at the stores' 'Have you been to that store lately' 'How do thepeople act there' 'Is it getting better' It makes sense. The drivers see more stores every week thananybody else in this company. And I think what Sam likes about them is that they're not like a lot ofmanagers. They don't care who you are. They'll tell you what they really think."Of course, the only thing that makes the whole distribution system work so well is the dedication of thepeople all across it. The technology and hardware are just tools. The people in the system believe, just asfirmly as the associates in the stores, that their primary job is to take care of the customer. Except in theircase, the customer is the Wal-Mart store or Sam's Club they're supplying.

With that idea at the root of everything, we've developed a unique ability to customize what we do tomeet the needs of our stores. Until recently, for example, we bragged that we were making deliveriesevery day to 97 percent of our stores. Then we discovered that wasn't necessarily the best thing for all ofour stores, particularly the smaller ones. So now we've gone into a customized delivery program in whichstores can pick one of four different delivery plans. Every six months, each store decides which plan itprefers. And we also have a plan called accelerated delivery, designed for stores located within a certaindistance of a distribution center. A store in that plan can order merchandise on Monday night and get iton Tuesday night. Nobody else in the business can deliver like that on any kind of widespread basis.

When all this comes together at one of our distribution centers, it's really a sight to behold. You reallyhave to see one of these places in action to appreciate them, and sometimes I can hardly believe themmyself. But I'll try to describe the activity at one. Start with a building of around 1.1 million square feet,which is about as much floor space as twenty-three football fields, sitting out somewhere on some 150acres. Fill it high to the roof with every kind of merchandise you can imagine, from toothpaste to TV's,toilet paper to toys, bicycles to barbecue grills. Everything in it is bar-coded, and a computer tracks thelocation and movement of every case of merchandise, while it's stored and when it's shipped out. Somesix hundred to eight hundred associates staff the place, which runs around the clock, twenty-four hours aday. On one side of the building is a shipping dock with loading doors for around thirty trucks at atimeusually full. On the other side is the receiving dock, which may have as many as 135 doors forunloading merchandise.

These goods move in and out of the warehouse on some 8  miles of laser-guided conveyor belts, whichmeans that the lasers read the bar codes on the cases and then direct them to whatever truck is filling theorder placed by one of the stores it's servicing that night. On a heavy day, those belts might handle up to200,000 cases of goods. When the thing is running full speed, it's just a blur of boxes and crates flyingdown those belts, red lasers flashing everywhere, directing this box to that truck, or that box to this truck.

Out in the parking lot, whole packs of Wal-Mart trucks rumble in and out all day. I get tremendouslyexcited going out to these centers, talking with our associates and drinking coffee with them and the truckdrivers. It's amazing to me how many ideas they always have for fine-tuning the system. If you get theidea that I'm awfully proud of what we've managed to do in distribution, you're right.

To get the whole picture, though, it's important to realize that the same thing is happening simultaneouslyat nineteen other almost identical distribution centers every day. Not only that, for us to continueexpanding the way we do, we have to constantly plan the construction and staffing of more and more ofthese giant mechanized warehouses, and that's no small task for Joe Hardin and his folks. We'll probablyhave thirty in operation in just the next few years. They're already on the drawing boards.

From the time David Glass came on board in 1976, he's been pushing me to invest and invest and investin that system, and thank goodness he managed to be so persuasive. At the same time, he and JackShewmaker were also pushing hard for heavy investment in more and more, better and better computersystems, so that we could track sales and merchandise and inventories across the companyespeciallyin-store transactions. When Jack became our president and chief operating officer in 1978, he workedreally hard at getting me to invest in bar coding and SKU item control, which is a computerizedstockkeeping unit inventory system. Jack also was heavily involved in the creation of our satellite system,which turned out to be another one of our tremendous competitive advantages.

JACK SHEWMAKER:

"Glenn Habern was our data processing manager, and he and I had this dream of an interactivecommunications system on which you could communicate back and forth between all the stores and thedistribution centers and the general office. Glenn came up with the idea of using the satellite, and I said,'Let's pursue it without asking anybody.' So we got it to the point where we were ready to make aproposal, and we told Sam. He just listened. He didn't necessarily discourage me. But he didn'tencourage me either. Sam never gets excited about systems.

"The technology didn't really exist to do this for a retailer in the early eighties. But we got together withthe Macom & Hughes Corporation, and worked out a contract, and eventually we committed $24million to build it. We launched it in 1983, and I mean, Sam liked to killed me the first two years. It wasnot an immediate success. But we got it working, and now, of course, everybody has one."The satellite turned out to be absolutely necessary because, once we had those scanners in the stores,we had all this data pouring into Bentonville over phone lines. Those lines have a limited capacity, so aswe added more and more stores, we had a real logjam of stuff coming in from the field. As you know, Ilike my numbers as quickly as I can get them. The quicker we get that information, the quicker we canact on it. The system has been a great tool for us, and our technical people have done a terrific job offiguring out how to use it to our best advantage.

Jack is absolutely right about me and systems, though. I rarely get excited about them. A few years ago,we built this huge building right next to our main officesaround 135,000 square feetjust to house thecomputers, and everyone at the time told me how much room we'd have to grow. I mean it was reallyempty in there just two or three years ago. Well, already it's completely full of computer equipment. Andwhen I look back, it's no wonder. We've spent almost $700 million building up the current computer andsatellite systems we have. I'm told it's the largest civilian data base of its kind in the worldeven biggerthan AT&T's.

None of that matters to me. What I like about it is the kind of information we can pull out of it on amoment's noticeall those numbers. For one thing, we keep a sixty-five-week rolling history of everysingle item we stock in Wal-Mart or Sam's. That means I can pick anything, say a little combinationTV/VCR like I use here in my office, and tell you exactly how many of them we've bought over the lastyear and a quarter, and exactly how many of them we've sold. Not only overall, but in any or everyregion, every district, every store. It makes it tough for a vendor to know more about how his product isdoing in our stores than we do. I guess we've always known that information gives you a certain power,but the degree to which we can retrieve it in our computer really does give us the power of competitiveadvantage.

I can walk in that satellite room, where our technicians sit in front of their computer screens talking onthe phone to any stores that might be having a problem with the system, and just looking over theirshoulder for a minute or two will tell me a lot about how a particular day is going. Up on the screen I cansee the total of the day's bank credit card sales adding up as they occur. I can see how many stolen bankcards we've retrieved that day. I can tell if our seven-second credit card approval system is working as itshould be and monitor the number of transactions we've conducted that day. If we have something reallyimportant or urgent to communicate to the stores and distribution centerssomething important enough towarrant a personal visitI, or any other Wal-Mart executive, can walk back to our TV studio and get onthat satellite transmission and get it right out there. And, as I told you earlier, I can go in every Saturdaymorning around three, look over those printouts, and know precisely what kind of week we've had.

So you see, technology and distributionare every bit as important to Wal-Mart's ability to grow andmaintain control as you may have heard or read over the years. But when you see all those satellite dishesoutside our building, or hear about all the computers inside it, or look at some videotape of ourlaser-guided distribution centers, don't let anybody kid you. Without the right managers, and thededicated associates and truck drivers all across the system, all that stuff is totally worthless.


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