The Bully of Bentonville

by Anthony Bianco

  Back in Celina, meanwhile, a developer turned Huffy’s old factory site—once a landmark of American industrial prowess—into a symbol of the nation’s future as a low-wage, service-based economy: He built a Wal-Mart Supercenter. The city fathers of Celina went to great lengths to accommodate a company that—indirectly, at least—had killed the town’s biggest employer, enacting zoning concessions and absorbing the cost of widening a road and of improving water and sewer service at the store site. “We simply couldn’t afford to lose Wal-Mart,” Mayor Paul Arnold said. 5 When the Supercenter opened in May 2005 amid the usual hoopla, Senator Byron L. Dorgan of North Dakota marked the occasion by noting sourly, “Workers who got laid off from the Huffy plant can go and purchase a Chinese-made Huffy bike.” 6

  Long before “the China price” became the key measure of competitiveness in consumer products manufacturing, Wal-Mart succeeded in using its access to cheap foreign-made goods to gain pricing leverage over its domestic suppliers, including many that were a lot bigger than Huffy ever was. By the mid-1980s, nearly half of the merchandise on Wal-Mart’s shelves was imported, and many U.S. consumer goods makers had grudgingly come to accept Bentonville’s everyday low price business model. To accommodate the demands of Wal-Mart, Kmart, Target, and other burgeoning big-box retailers, U.S. manufacturers of clothing, toys, shoes, and many other products shifted an increasing portion of their production to low-wage factories in Third World countries. By 1985, more than 40 percent of the apparel sold in America was imported. 7

  Sam Walton returned from a swing through Central America in 1984 worried that the outsourcing trend had gotten out of hand. He was still pondering what to do about it when he got a call from Bill Clinton, then the governor of Arkansas, requesting Wal-Mart’s help in rescuing Farris Fashions, a flannel shirt maker struggling to remain solvent after losing one of its biggest customers to a factory in China. Clinton’s distress call inspired Walton to come up with Wal-Mart’s famous “Buy America” program (officially dubbed “Bring It Home to the U.S.A.”), which was launched in 1985 by giving a $612,000 contract to Farris Fashions for 240,000 Arkansas-made flannel shirts.

  With his customary flair, Walton extracted full promotional value from the Buy America initiative. In every Wal-Mart store, red, white, and blue banners proclaiming, “Keep America Working and Strong” were hung, along with dozens of smaller signs that read: “This item, formerly imported, is now being purchased by Wal-Mart in the U.S.A. and is creating—or retaining—jobs for Americans!” Wal-Mart featured the Buy America theme in national television commercials, and plainspoken testimonials from grateful American factory workers became a highlight of its annual meetings.

  Buy America was the greatest PR triumph in Wal-Mart history (and would not be eclipsed until the company’s star turn during Hurricane Katrina in 2005), but it was much more than a publicity campaign. After analyzing the economics of its foreign sourcing much more thoroughly than it ever had before, Wal-Mart management concluded that it had overlooked a host of hidden costs, including far longer lead times for placing orders and more onerous inventory financing requirements. “We had fallen into a pattern of knee-jerk import buying without really examining possible alternatives,” Walton admitted. “In the past, 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.’” 8

  Under the Buy America program, Wal-Mart made this pledge to its domestic suppliers: If a “true apple-to-apple cost comparison,” as Walton described it, puts you no more than 5 percent above the import price, then Wal-Mart will accept the smaller markup and go with the American product. From 1985 through 1991, Wal-Mart placed $5 billion worth of orders under its Buy America program with dozens of U.S. vendors large and small. The merchandise it purchased included candles, ladies’ sweaters, men’s knit shirts, beach towels, film, furniture, toys, and, last but not least, bicycles—made in Celine, Ohio, by Huffy Manufacturing.

  But just because American companies got new Wal-Mart orders didn’t mean that they made any money filling them. The fact was, the great majority of its U.S. vendors could not come within 5 percent of Wal-Mart’s import price and have a prayer of turning a profit without making significant cuts in their operating costs. Buy America wasn’t a scam exactly; in redirecting $5 billion worth of business, Wal-Mart did put a dent in the U.S. trade deficit. And the company often went beyond merely placing an order with an ailing American manufacturer and helped it obtain raw materials on favorable terms and participated in product design and distribution. In the end, though, Buy America in essence was a star-spangled Trojan horse that the company used to inveigle its U.S. and overseas suppliers alike into making further price concessions.

  Consider the sorry fate of Frazier Engineering, a Morristown, Indiana, furniture manufacturer that Walton touted as a particularly worthy beneficiary of Buy America. Wal-Mart pulled a contract it had placed with a Chinese factory to make wire patio chairs for $4.98 apiece after Frazier agreed to supply the same chair at just $3.50. “The folks in the Orient heard about it…and you know what happened? They lowered their price. So it works both ways,” Walton said triumphantly, hastening to add that Wal-Mart was sticking with Frazier Engineering nonetheless. 9 But not for long, it turned out. The Indiana company lost so much money selling cut-rate chairs to Wal-Mart that it went bankrupt within a year of landing the Buy America contract.

  In its stores, Wal-Mart proudly posted a running tally of the value of contracts awarded and U.S. jobs saved under Buy America, but the company was not nearly as forthcoming with import data. The statistics it did make available strongly suggested that imports continued to account for a rising percentage of Wal-Mart’s sales throughout the 1980s. For a company that remained as obsessive as ever about providing customers the lowest possible price at the highest possible profit to itself, the economics of Third World production were just too favorable to resist, “hidden cost factors” or no.

  In late 1992, not long after Walton’s death, David Glass was humiliated on camera in a Dateline NBC interview that tarnished Wal-Mart’s Buy America patina beyond repair. In Wal-Mart stores in Georgia and Florida, Dateline had discovered rack after rack of clothes that were advertised as “Made in the USA” but in reality had been imported from Bangladesh, Korea, and China. As Glass squirmed on his hot seat, the program rolled footage of correspondent Brian Ross’s visit to a notorious factory in Bangladesh where children as young as nine were locked in overnight to crank out apparel for Wal-Mart. After Ross handed Glass some photographs of twenty-five children who had perished in a fire at the factory not long before Wal-Mart had placed its first order, the CEO cut the interview short and stormed from the studio.

  Within a day or two of the disastrous interview, Bentonville issued an urgent communiqué to all store managers. “We had to…pull every ‘Buy America’ sign, every ‘Made in the U.S.A.’ sign, everything that was red, white, and blue that was hanging on the walls. We even had permanent signs that were liquid-nailed to the cement walls, concrete walls, that we had to rip down,” recalled Jon Lehman, who then was running a Supercenter in Indiana. All of this had to be done on a tight deadline. “If you didn’t do it, your job was on the line,” Lehman added. “It was an emergency situation.” 10

  Even so, Wal-Mart never officially terminated Buy America. As recently as 1994, it still was touting it as “both a commitment and a partnership” in promotional material. As a practical matter, though, Buy America quietly expired in the mid-1990s and was buried under an avalanche of low-cost, high-profit imports from China and elsewhere.

  The leverage that Wal-Mart exercises over its suppliers is grounded as much in its masterful use of technology as its brandishing of the club of foreign sourcing. From the introduction of bar codes and scanning devices to the innovations of electronic data interchange and Radio Frequency Identification (RFID) tagging, Wal-Mart has blazed the way in using the power of information technology to remake the entire consumer prod
ucts supply chain over the last three decades. Tens of billions of dollars of capital investment by Wal-Mart and by other big retail chains has enthroned “just-in-time” or “lean retailing” as the regulator of the U.S. consumer economy.

  When manufacturers held dominion over the economy, they would adjust their production runs based on their own, often imprecise assessment of market demand and then offload merchandise onto retailers on their own terms and at their convenience. Led by Wal-Mart, the big-box chains gradually reversed this power dynamic by using the latest computer technology to obtain a far-more-detailed and up-to-date reading of consumer preferences than even the most sophisticated manufacturers could manage on their own. As a result, it is now the retailer that calls the shots. That is, “The retailer tracks consumer behavior with meticulous care and then transmits consumer preferences down the supply chain. Replenishment is put in motion almost immediately, with the supplier required to make more frequent deliveries of smaller lots.” 11

  The triumph of lean retailing combined with Wal-Mart’s cherished insularity to turn Bentonville into “Vendorville.” Virtually all 500 of Wal-Mart’s largest suppliers have chosen to open an office in northwest Arkansas. Most are staffed by no more than ten to fifteen people and are clustered together in nondescript office parks near a highway interchange within a few miles of the home office. Although Wal-Mart does not require its vendors to rent space locally, it does demand a high level of attentiveness from them that simply cannot be provided by telephone or e-mail. The consensus among suppliers is that living just down the street is a better way than racking up frequent-flyer miles to keep their largest customer happy.

  The largest of Vendorville’s corporate embassies is home to the 400 members of the Procter & Gamble Co.’s “Wal-Mart team.” Cincinnati-based Procter & Gamble, the world’s largest consumer product manufacturer, owns many of America’s most famous and durable brands—Tide, Folgers, Crest, and Charmin among them. It was essential to its pioneering of lean retailing that Wal-Mart not only gain the upper hand over P & G, a notorious corporate bully in its own right, but that it do so by transforming what long had been an adversarial relationship into a close, collaborative one.

  The breakthrough came in 1987, when Walton was persuaded to join his tennis-playing buddy George Billingsley on an Ozarks canoe trip with Lou Pritchett, a longtime friend of Billingsley’s who was a vice president of P & G. On the waters of the Spring River, Walton and Pritchett worked through the mutual animosity that kept their companies apart to reach agreement over the root problem. Both companies were “focused on the end-user—the customer—but each did it independently of the other,” Pritchett recalled later. “No sharing of information, no planning together, no systems coordination. We were simply two giant entities going our separate ways, oblivious to the excess costs created by this obsolete system.” 12

  Soon after, P & G CEO John Smale called Walton and invited him to Cincinnati for a summit conference of sorts. Walton was annoyed that no officer of P & G had ever called on Wal-Mart in its history, but he swallowed his pride and agreed to fly to Cincinnati at the head of a small entourage that included David Glass and Don Soderquist. A few days before the meeting, Walton called Smale and said he couldn’t come after all because the hotel rooms that P & G had booked for him and his colleagues were more than $100 a night. Walton did not commit to the meeting until Smale called back and said that he talked the hotel into knocking its price down to $59. “In truth,” Soderquist recalled, “P & G had picked up the other half of the bill.” 13

  Over the next few months, Wal-Mart and P & G established the protocols—both human and technological—of a broader, more interactive relationship. For years, the only point of contact between the companies had been Wal-Mart buyers and P & G salespeople. Now “cross-functional” teams were created that paired the logistics, technology, and finance specialists from one side to their counterparts on the other. This, in turn, led to the fashioning of intercompany computer links that largely eliminated the costly and contentious human factor from order-taking and order-filling. The result was a highly automated system of “continuous replenishment” that resulted in huge cost savings for both companies by reducing the amount of inventory each had to carry and the number of Wal-Mart buyers and P & G salespeople needed to interact with one another. Or, as Pritchett put it, “We broke new ground by using information technology to manage our business together, instead of just to audit it.” 14

  Wal-Mart’s relationship with P & G became the template around which it recast and computerized its dealings with all its major suppliers. Walton was enthralled with the bottom-line benefits, but was as reluctant as ever to invest as heavily in new technology as his operations people wanted. Glass, a digital true believer, succeeded Walton as CEO in 1988 but shrewdly waited until illness had forced his predecessor to the sidelines in 1991 to launch what was one of the boldest and, at a total cost of $4 billion, unquestionably the priciest technology project in Wal-Mart history: Retail Link.

  Eight times a day, the details of every sale in every Wal-Mart store are fed through the Retail Link computer system into a vast data warehouse in the David Glass Technology Center in Bentonville. Through their own computers, Wal-Mart’s vendors can tap into Retail Link and retrieve information pertinent to their products. P & G can keep close tabs on how each of its products carried by Wal-Mart—all 1,200 of them—has sold in a particular store, city, county, state, region, or the whole country for any period of time from the current day back through the last two years. This information is continuously computer-massaged to match supply and demand as precisely as possible, with the aim of reducing the likelihood that any Wal-Mart store will run short of items or, conversely, that it will be stuck with excess inventories.

  Retail Link orchestrates this intricate merchandise ballet with minimal human input. According to Soderquist, the computer “determines the anticipated demand on discretionary items for each store based on that store’s sales history, checks the inventory of the item in that store daily, and then automatically creates an order and immediately transmits it to the nearest distribution center.” 15 The computer also monitors inventory levels at each distribution center, automatically transmitting purchase orders to suppliers when the time is right. From their perch in the Glass Center, Information Systems technicians monitor the computer-to-computer interplay using software that enables them to anticipate glitches, or “exceptions,” as they’re known in digitese, and intervene to prevent them from occurring. “We are pretty near real time. We can tell people that they need to go do something and we are within hours, depending on the event,” said Linda Dillman, who, as Wal-Mart’s chief information officer, runs the Glass Center. 16

  During a tour of Wal-Mart’s Bentonville distribution center in 2003, I was amazed by how fast the merchandise moves through the cloverleaf of conveyor belts that snake through the cavernous building. Craig Ridgeway, the DC’s general manager, said that the goods were hurtling past us at about the same rate that this mix of stuff was selling in the 127 stores supplied by the DC. In other words, Wal-Mart’s distribution system had achieved a perfect equilibrium between input and output—or something close to it, anyway. For Wal-Mart as a whole, turnover is so rapid that 70 percent of its merchandise is rung up at the registers before the company has paid for it, saving the company huge sums for financing and storing inventory.

  Wal-Mart has amassed more data about what it sells and about the buying habits of its customers than any other retailer. The company also takes an encyclopedic interest in the geographic market served by each of its stores, collecting information across some 10,000 categories ranging from racial and ethnic demographics to local sports team preferences and weather patterns. Information Systems staffers combine this data with the point-of-sale information gathered by Retail Link to project sales trends for each Wal-Mart store and localize their product mix.

  This is called micro-merchandising, and Hurricane Frances provided a parti
cularly dramatic, if trivial, example of its effectiveness in August 2004. Just a month earlier, Hurricane Charley had roared through the same swath of central Florida now menaced by Frances. Analysts safely ensconced in the Glass Center “mined” the pre-hurricane sales data from the Wal-Mart stores in Charley’s path and used it to predict what would happen as Frances made land. Soon, Wal-Mart trucks were racing down I-94 with extra supplies, including thousands of cases of beer and strawberry Pop-Tarts, sales of which had jumped sevenfold pre-Charley. 17

  Wal-Mart and its vendors also collaborate to create new products to satisfy demand they try to predict by crunching Retail Link data. In hopes of selling food to the many hunters who frequented the sporting goods sections of its stores, Wal-Mart asked Hormel Foods, the maker of Spam, to invent a snack that it could mix in with the rifles and fishing rods. Within weeks, “Spamoflage”—Spam in camouflage cans—was selling like crazy in most of the 760 rural Wal-Marts that carried it. Meanwhile, Pennzoil tapped into Retail Link to guide the creation of forty-five new display variations of its motor oil. 18

  For suppliers, doing business with Bentonville is a Faustian bargain. Plugging into the world’s highest-powered consumer selling machine allows manufacturers to move vast quantities of merchandise with minimal advertising and promotional outlays. If all goes well, a vendor can add handsomely to its market share and more than make up in volume what it likely loses in profit margin to Wal-Mart’s “Every Day Low Prices.” But what Bentonville demands in return is little short of vassalage. The company not only determines the price at which it will sell an item but also the price it pays for it—and under its “Plus One” principle mandates that its suppliers must either lower the price or improve the quality of every single product every year. Manufacturers who fail to tailor a product to Wal-Mart’s specifications or who fail to deliver the specified amount of merchandise to a distribution center at precisely the right time face draconian penalties. “Everyone from the forklift driver on up to me, the CEO, knew we had to deliver on time. Not ten minutes later. And not forty-five minutes early, either,” said Robin Prever, the longtime CEO of Saratoga Beverage Group. “The message came through clearly: You have this thirty-second delivery window. Either you’re there, or you’re out.” 19