The best way to get a taste of Wal-Mart’s power as a global flattener is to visit Japan.
Commodore Matthew Calbraith Perry opened a largely closed Japanese society to the Western world on July 8, 1853, when he arrived in Edo (Tokyo) Bay with four big black steamships bristling with guns. According to the Naval Historical Center Web site, the Japanese, not knowing that steamships even existed, were shocked by the sight of them and thought they were “giant dragons puffing smoke.” Commodore Perry returned a year later, and on March 31, 1854, concluded the Treaty of Kanagawa with the Japanese authorities, gaining U.S. vessels access to the ports of Shimoda and Hakodate and opening a U.S. consulate in Shimoda. This treaty led to an explosion of trade between Japan and the United States, helped open Japan to the Western world generally, and is widely credited with triggering the modernization of the Japanese state, as the Japanese realized how far behind they were and rushed to catch up. And catch up they did. In so many areas, from automobiles to consumer electronics to machine tools, from the Sony Walkman to the Lexus, the Japanese learned every lesson they could from Western nations and then proceeded to beat us at our own game—except one: retailing, especially discount retailing. Japan could make those Sonys like nobody else, but when it came to selling them at a discount, well, that was another matter.
So almost exactly 150 years after Commodore Perry signed that treaty, another lesser-known treaty was signed, actually a business partnership. Call it the Seiyu–Wal-Mart Treaty of 2003. Unlike Commodore Perry, Wal-Mart did not have to muscle its way into Japan with warships. Its reputation preceded it, which is why it was invited in by Seiyu, a struggling Japanese retail chain desperate to adapt the Wal-Mart formula in Japan, a country notorious for resisting big-box discount stores. As I traveled on the bullet train from Tokyo to Numazu, Japan, site of the first p. 140 Seiyu store that was using the Wal-Mart methods, the New York Times translator pointed out that this store was located about one hundred miles from Shimoda and that first U.S. consulate. Commodore Perry probably would have loved shopping in the new Seiyu store, where all the music piped in consists of Western tunes designed to lull shoppers into filling their carts, and where you can buy a man’s suit—made in China—for $65 and a white shirt to go with it for $5. That’s what they call around Wal-Mart EDLP—Every Day Low Prices—and it was one of the first phrases Wal-Mart folks learned to say in Japanese.
Wal-Mart’s flattening effects are fully on display in the Seiyu store in Numazu—not just the everyday low prices, but the wide aisles, the big pallets of household goods, the huge signs displaying the lowest prices in each category, and the Wal-Mart supply-chain computer system so that store managers can quickly adjust stock.
I asked Seiyu’s CEO, Masao Kiuchi, why he had turned to Wal-Mart. “The first time I knew about Wal-Mart was about fifteen years ago,” explained Kiuchi. “I went to Dallas to see the Wal-Mart stores, and I thought this was a very rational method. It was two things: One was the signage showing the prices. It was very easy for us to understand.” The second, he said, was that the Japanese thought a discount store meant that you sold cheap products at cheap prices. What he realized from shopping at Wal-Mart, and seeing everything from plasma TVs to top-brand pet products, was that Wal-Mart sold quality products at low prices.
“At the store in Dallas, I took pictures, and I brought those pictures to my colleagues in Seiyu and said, ‘Look, we have to see what Wal-Mart is doing on the other side of the planet.’ But showing pictures was not good enough, because how can you understand by just looking at pictures?” recalled Kiuchi. Eventually, Kiuchi approached Wal-Mart, and they signed a partnership on December 31, 2003. Wal-Mart bought a piece of Seiyu; in return, Wal-Mart agreed to teach Seiyu its unique form of collaboration: global supply-chaining to bring consumers the best goods at the lowest prices.
There was one big thing, though, that Seiyu had to teach Wal-Mart, Kiuchi told me: how to sell raw fish. Japanese discounters and department stores all have grocery sections, and they all carry fish for very disp. 141criminating Japanese consumers. Seiyu will discount fish several times during each day, as the freshness declines.
“Wal-Mart doesn’t understand raw fish,” said Kiuchi. “We are expecting their help with general merchandising.”
Give Wal-Mart time. I expect that in the not-too-distant future we will see Wal-Mart sushi.
Somebody had better warn the tuna.
Flattener #8: Insourcing
What the Guys in Funny Brown Shorts Are Really Doing
One of the most enjoyable things about researching this book has been discovering all sorts of things happening in the world around me of which I had no clue. Nothing was more surprisingly interesting than pulling the curtain back on UPS, United Parcel Service. Yes, those folks, the ones who wear the homely brown shorts and drive those ugly brown trucks. Turns out that while I was sleeping, stodgy old UPS became a huge force flattening the world.
Once again, it was one of my Indian tutors, Nandan Nilekani, the Infosys CEO, who tipped me off to this. “FedEx and UPS should be one of your flatteners. They’re not just delivering packages, they are doing logistics,” he told me on the phone from Bangalore one day. Naturally, I filed the thought away, making a note to check it out, without having any clue what he was getting at. A few months later I went to China, and while there I was afflicted with jet lag one night and was watching CNN International to pass the wee hours of the morning. At one point, a commercial came on for UPS, and its tag line was UPS’s new slogan: “Your World Synchronized.”
The thought occurred to me: That must be what Nandan was talking p. 142 about! UPS, I learned, was not just delivering packages anymore; it was synchronizing global supply chains for companies large and small. The next day I made an appointment to visit UPS headquarters in Atlanta. I later toured the UPS Worldport distribution hub adjacent to the Louisville International Airport, which at night is basically taken over by the UPS fleet of cargo jets, as packages are flown in from all over the world, sorted, and flown back out again a few hours later. (The UPS fleet of 270 aircraft is the eleventh largest airline in the world.) What I discovered on these visits was that this is not your father’s UPS. Yes, UPS still pulls in most of its $36 billion in sales by shipping more than 13.5 million packages a day from point A to point B. But behind that innocuous façade, the company founded in Seattle in 1907 as a messenger service has reinvented itself as a dynamic supply-chain manager.
Consider this: If you own a Toshiba laptop computer that is under warranty and it breaks and you call Toshiba to have it repaired, Toshiba will tell you to drop it off at a UPS store and have it shipped to Toshiba, and it will get repaired and then be shipped back to you. But here’s what they don’t tell you: UPS doesn’t just pick up and deliver your Toshiba laptop. UPS actually repairs the computer in its own UPS-run workshop dedicated to computer and printer repairs at its Louisville hub. I went to tour that hub expecting to see only packages moving around, and instead I found myself dressed in a blue smock, in a special clean room, watching UPS employees replacing motherboards in broken Toshiba laptops. Toshiba had developed an image problem several years ago, with some customers concluding that its repair process for broken machines took too long. So Toshiba came to UPS and asked it to design a better system. UPS said, “Look, instead of us picking up the machine from your customers, bringing it to our hub, then flying it from our hub to your repair facility and then flying it back to our hub and then from our hub to your customer’s house, let’s cut out all the middle steps. We, UPS, will pick it up, repair it ourselves, and send it right back to your customer.” It is now possible to send your Toshiba laptop in one day, get it repaired the next, and have it back the third day. The UPS repairmen and -women were all certified by Toshiba, and its customer complaints went down dramatically.
p. 143 But this is just a sliver of what UPS does today. Eaten a Papa John’s pizza lately? If you see the branded Papa John’s supply truck go by, ask who’s dispatching th
e drivers and scheduling the pickups of supplies, like tomatoes, pizza sauce, and onions. Answer: UPS. UPS comes inside a lot of companies now and takes over their branded vehicles to assure on-time delivery, which in the case of Papa John’s includes getting the pizza dough from bakeries to outlets at exactly the right times each day. Tired of shopping for tennis shoes at the mall? Go online and order a pair of Nikes from its Web site, Nike.com. The order, though, is actually routed to UPS, and a UPS employee picks, inspects, packs, and delivers your shoes for Nike online from a warehouse in Kentucky managed by UPS. Ditto if you order some underwear from Jockey.com. UPS employees, who manage Jockey products at a UPS warehouse, will actually fill the order, bag it, label it, and deliver it to you. Your HP printer breaks in Europe or Latin America? The field service repairman who comes to your door to fix it works for UPS, which manages the replacement parts and repairs divisions for HP in those markets. Order some tropical fish from Segrest Farms in Florida to be delivered to your door in Canada by UPS? UPS worked with the company to develop a special packaging for the fish so they would not be injured as they traveled through UPS’s sorting systems. The fish are even mildly sedated for safe travel (like kids on Dramamine). “We wanted them to have a pleasant ride,” said UPS spokesman Steve Holmes.
What is going on here? It’s a process that has come to be called “in-sourcing”—a whole new form of collaboration and creating value horizontally, made possible by the flat world and flattening it even more. In the previous section I discussed why supply-chaining is so important in the flat world. But not every company, indeed very few companies, can afford to develop and support a complex global supply chain of the scale and scope that Wal-Mart has developed. That is what gave birth to insourcing. Insourcing came about because once the world went flat, the small could act big—small companies could suddenly see around the world. Once they did, they saw a lot of places where they could sell their goods, manufacture their goods, or buy their raw materials in a more efp. 144ficient manner. But many of them either didn’t know how to pull all this off or couldn’t afford to manage a complex global supply chain on their own. Many big companies didn’t want to manage this complexity, which they felt was not part of their core competency. Nike would rather spend its cash and energy designing better tennis shoes, not supply chains.
This created a whole new global business opportunity for traditional package delivery firms like UPS. In 1996, UPS went into the business of “synchronized commerce solutions.” It has spent $1 billion since then to buy twenty-five different global logistics and freight-forwarding firms so that it could service virtually any supply chain from one corner of the flat earth to the other. The business took off right around 2000. I like the term “insourcing” because UPS engineers come right inside your company; analyze its manufacturing, packaging, and delivery processes; and then design, redesign, and manage your whole global supply chain. And, if necessary, they’ll even finance parts of it, such as receivables and COD payments. There are companies today (many of them don’t want their names mentioned) that never touch their own products anymore. UPS oversees the whole journey from factory to warehouse to customer to repair. It even collects the money from customers if need be. This form of deep collaboration, which involves a huge amount of trust and intimacy among UPS, its client, and its client’s customers, is a uniquely new flattener.
“You know who the majority of our customers and partners are? Small businesses,” said UPS chairman and CEO Mike Eskew. “That’s right . . . They are asking us to take them global. We help these companies achieve parity with the bigger guys.”
Indeed, when you are a small business or individual working at home, and you can plug into UPS and have it become your global supply-chain manager, you can pretend you are a lot bigger than you are. When the small can act big, it levels the competitive playing field even more. UPS bought Mail Boxes, Etc. (now “The UPS Store” in the United States) so that it could offer individuals and small businesses the power of its global supply-chain services. But UPS also helps the big to act small. When you are a huge conglomerate, like HP, and you can get p. 145 packages delivered or goods repaired quickly anywhere in the world, you can act really small.
In addition, by making the delivery of goods and services around the world superefficient and superfast—and in huge volumes—UPS is helping to level customs barriers and harmonize trade by getting more and more people to adopt the same rules and labels and tracking systems for transporting goods. UPS has a smart label on all its packages so that package can be tracked and traced anywhere in its network.
Working with the U.S. Customs Service, UPS designed a software program that allows customs to say to UPS, “I want to see any package moving through your Worldport hub that was sent from Cali, Colombia, to Miami by someone named Carlos.” Or, “I want to see any package sent from Germany to the United States by someone named Osama.” When the package arrives for sorting, the UPS computers will then automatically route that package to a customs officer in the UPS hub. A computerized arm will literally slide it off the conveyor belt and dump it into a bin for a closer look. It makes the inspection process more efficient and does not interrupt the general flow of packages. These efficiencies of time and scale save UPS’s clients money, enabling them to recycle their capital and fund more innovation. But the level of collaboration it requires between UPS and its clients is unusual.
Plow & Hearth is a large national catalog and Internet retailer specializing in “Products for Country Living.” P&H came to UPS one day and said that too many of its furniture deliveries were coming to customers with a piece broken. Did UPS have any ideas? UPS sent its “package engineers” over and conducted a packaging seminar for the P&H procurement group. UPS also provided guidelines for them to use in the selection of their suppliers. The objective was to help P&H understand that its purchase decisions from its suppliers should be influenced not only by the quality of the products being offered but also by how those products were being packaged and delivered. UPS couldn’t help its customer P&H without looking deep inside its business and then into its suppliers’ businesses—what boxes and packing materials they were using. That is insourcing.
p. 146 Consider the collaboration today among eBay sellers, UPS, PayPal, and eBay buyers. Say I offer to sell a golf club on eBay and you decide to buy it. I e-mail you a PayPal invoice, which has your name and mailing address on it. At the same time, eBay offers me an icon on its Web site to print out a UPS mailing label to you. When I print that mailing label on my own printer, it comes out with a UPS tracking bar code on it. At the same time, UPS, through its computer system, creates a tracking number that corresponds to that label, which automatically gets e-mailed to you—the person who bought my golf club—so you can track the package by yourself, online, on a regular basis and know exactly when it will reach you.
If UPS had not gone into this business, someone would have had to invent it. With so many more people working through horizontal global supply chains far from home, somebody had to fill in the inevitable holes and tighten the weak links. Said Kurt Kuehn, UPS’s senior vice president for sales and marketing, “The Texas machine parts guy is worried that the customer in Malaysia is a credit risk. We step in as a trusted broker. If we have control of that package, we can collect funds subject to acceptance and eliminate letters of credit. Trust can be created through personal relations or through systems and controls. If you don’t have trust, you can rely on a shipper who does not turn [your package] over until he is paid. We have more ability than a bank to manage this, because we have the package and the ongoing relationship with the customer as collateral, so we have two points of leverage.”
More than sixty companies have moved operations closer to the UPS hub in Louisville since 1997, so they can make things and ship them straight from the hub, without having to warehouse them. But it is not just the little guys who benefit from the better logistics and more efficient supply chains that insourcing can provide. In 2001, For
d Motor Co. turned over its snarled and slow distribution network to UPS, allowing UPS to come deep inside Ford to figure out what its problems were and smooth out its supply chain.
“For years, the bane of most Ford dealers was the auto maker’s Rube Goldberg–like system for getting cars from factory to showroom,” BusinessWeek reported in its July 19, 2004, issue. “Cars could take as p. 147 long as a month to arrive—that is, when they weren’t lost along the way. And Ford Motor Co. was not always able to tell its dealers exactly what was coming, or even what was in inventory at the nearest rail yards. ‘We’d lose track of whole trainloads of cars,’ recalls Jerry Reynolds, owner of Prestige Ford in Garland, Tex. ‘It was crazy.’ ” But after UPS got under Ford’s hood, “UPS engineers . . . redesigned Ford’s entire North American delivery network, streamlining everything from the route cars take from the factory to how they’re processed at regional sorting hubs”—including pasting bar codes on the windshields of the 4 million cars coming out of Ford’s U.S. plants so they could be tracked just like packages. As a result, UPS cut the time it takes autos to arrive at dealer lots by 40 percent, to ten days on average. BusinessWeek reported: “That saves Ford millions in working capital each year and makes it easy for its 6,500 dealers to track down the models most in demand . . . ‘It was the most amazing transformation I had ever seen,’ marvels Reynolds. ‘My last comment to UPS was: ‘Can you get us spare parts like this?’ ”
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