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to the mother ship. Indeed, the area is known as "Vendorville." The amazing thing

about Wal-Mart's headquarters is that it is so, well, Wal-Mart. The corporate offices

are crammed into a reconfigured warehouse. As we passed a large building made of

corrugated metal, I figured it was the maintenance shed. "Those are our international

offices," said my host, spokesman William Wertz. The corporate suites are housed in

offices that are one notch below those of the principal, vice principal, and head

counselor at my daughter's public junior high school-before it was remodeled. When

you pass through the lobby,

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you see these little cubicles where potential suppliers are pitching their products

to Wal-Mart buyers. One has sewing machines all over the table, another has dolls,

another has women's shirts. It feels like a cross between Sam's Club and the covered

bazaar of Damascus. Attention Wal-Mart shareholders: The company is definitely not

wasting your money on frills.

But how did so much innovative thinking-thinking that has reshaped the world's

business landscape inmany ways-come out of such a Li'l Abner backwater? It is actually

a classic example of a phenomenon I point to often in this book: the coefficient of

flatness. The fewer natural resources your country or company has, the more you will

dig inside yourself for innovations in order to survive. Wal-Mart became the biggest

retailer in the world because it drove a hard bargain with everyone it came in contact

with. But make no mistake about one thing: Wal-Mart also became number one because

this littlehick companyfrom northwest Arkansas was smarter and faster about adopting

new technology than any of its competitors. And it still is.

David Glass, the company's CEO from 1988 to 2000, oversaw many of the innovations

that made Wal-Mart the biggest and most profitable retailer on the planet. Fortune

magazine once dubbed him "the most underrated CEO ever" for the quiet way he built

on Sam Walton's vision. David Glass is to supply-chaining what Bill Gates is to word

processing. When Wal-Mart was just getting started in northern Arkansas in the 1960s,

explained Glass, it wanted to be a discounter. But in those days, every five-and-dime

got its goods from the same wholesalers, so there was no way to get an edge on your

competitors. The only way Wal-Mart could see to get an edge, he said, was for it to

buy its goods in volume directly from the manufacturers. But it wasn't efficient for

manufacturers to ship to multiple Wal-Mart stores spread all over, so Wal-Mart set

up a distribution center to which all the manufacturers could ship their merchandise,

and then Wal-Mart got its own trucks to distribute these goods itself to its stores.

The math worked like this: It cost

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roughly 3 percent more on average for Wal-Mart to maintain its own distribution center.

But it turned out, said Glass, that cutting out the wholesalers and buying direct

from the manufacturers saved on average 5 percent, so that allowed Wal-Mart to cut

costs on average 2 percent and then make it up on volume.

Once it established that basic method of buying directly from manufacturers to get

the deepest discounts possible, Wal-Mart focused relentlessly on three things. The

first was working with the manufacturers to get them to cut their costs as much as

possible. The second was working on its supply chain from those manufacturers,

wherever they were in the world, to Wal-Mart's distribution centers, to make it as

low-cost andfric-tionless aspossible. The third was constantly improving Wal-Mart's

information systems, so it knew exactly what its customers were buying and could feed

that information to all the manufacturers, so the shelves would always be stocked

with the right items at the right time.

Wal-Mart quickly realized that if it could save money by buying directly from the

manufacturers, by constantly innovating to cut the cost of running its supply chain,

and by keeping its inventories low by learning more about its customers, it could

beat its competitors on price every time. Sitting in Bentonville, Arkansas, it didn't

have much choice.

"The reason we built all our own logistics and systems is because we are in the middle

of nowhere," said Jay Allen, Wal-Mart's senior vice president of corporate affairs.

"It really was a small town. If you wanted to go to a third party for logistics, it

was impossible. It was pure survival. Now with all the attention we are getting there

is an assumption that our low prices derive from our size or because we're getting

stuff from China or being able to dictate to suppliers. The fact is the low prices

are derived from efficiencies Wal-Mart has invested in-the system and the culture.

It is a very low-cost culture." Added Glass, "I wish that I could say we were brilliant

and visionary, [but] it was all born out of necessity."

The more that supply chain grew, the more Walton and Glass understood that scale and

efficiency were the keys to their whole business. Put simply, the more scale and scope

their supply chain had, the more things they sold for less to more customers, the

more leverage they had

with suppliers to drive prices down even more, the more they sold to more customers,

the more scale and scope their supply chain had, the more profit they reaped for their

shareholders. . .

Sam Walton was the father of that culture, but necessity was its mother, and its

offspring has turned out to be a lean, mean supply-chain machine. In 2004, Wal-Mart

purchased roughly $260 billion worth of merchandise and ran it through a supply chain

consisting of 108 distribution centers around the United States, serving the some

3,000 Wal-Mart stores in America.

In the early years, "we were small-we were 4 or 5 percent of Sears and Kmart," said

Glass. "If you are that small, you are vulnerable, so what we wanted to do more than

anything else was grow market share. We had to undersell others. If I could reduce

from 3 percent to 2 percent the cost of running my distribution centers, I could reduce

retail prices and grow my market share and then not be vulnerable to anyone. So any

efficiency we generated we passed on to the consumer."

For instance, after the manufacturers dropped off their goods at the Wal-Mart

distribution center, Wal-Mart needed to deliver those goods in small bunches to each

of its stores. Itmeant that Wal-Marthad trucks going all over America. Walton quickly

realized if he connected his drivers by radios and satellites, after they dropped

off at a certain Wal-Mart store, they could go a few miles down the road and pick

up goods from a manufacturer so they wouldn't come back empty and so Wal-Mart could

save the delivery charges from that manufacturer. A few pennies here, a few pennies

there, and the result is more volume, scope, and scale.

In improving its supply chain, Wal-Mart leaves no link untouched. While I was touring

the Wal-Mart distribution center in Bentonville, I noticed that some boxes were too

big to go on the conveyor belts and were being moved around on pallets by Wal-Mart

employees driving special minilift trucks with headphones on. A computer tracks how

many pallets each employee is plucking every hour to put onto trucks for different

stores, and a computerized voice tells each of them whether he is ahead of schedule

or behind schedule. "You can choose whether you want your computer voice to be a man

or a woman, and you can choose

English or Spanish," explained Rollin Ford, Wal-Mart's executive vice president, who

oversees the supply chain and was giving me my tour.

A few years ago, these pallet drivers would get written instructions for where to

pluck a certain pallet and what truck to take it to, but Wal-Mart discovered that

by giving them headphones with a soothing computer voice to instruct them, drivers

could use both hands and not have to carry pieces of paper. And by having the voice

constantly reminding them whether they were behind or ahead of expectations, "we got

a boost in productivity," said Ford. It is a million tiny operational innovations

like this that differentiate Wal-Mart's supply chain.

But the real breakthrough, said Glass, was when Wal-Mart realized that while it had

to be a tough bargainer with its manufacturers on price, at the same time the two

had to collaborate to create value for each other horizontally if Wal-Mart was going

to keep driving down costs. Wal-Mart was one of the first companies to introduce

computers to track store sales and inventory and was the first to develop a

computerized network in order to share this information with suppliers. Wal-Mart's

theory was that the more information everyone had about what customers were pulling

off the shelves, the more efficient Wal-Mart's buying would be, the quicker its

suppliers could adapt to changing market demand.

In 1983, Wal-Mart invested in point-of-sale terminals, which simultaneously rang up

sales and tracked inventory deductions for rapid resup-ply. Four years later, it

installed a large-scale satellite system linking all of the stores to company

headquarters, giving Wal-Mart's central computer system real-time inventory data and

paving the way for a supply chain greased by information and humming down to the last

atom of efficiency. A major supplier can now tap into Wal-Mart's Retail Link private

extranet system to see exactly how its products are selling and when it might need

to up its production.

"Opening its sales and inventory databases to suppliers is what made Wal-Mart the

powerhouse it is today, says Rena Granofsky, a senior partner at J. C. Williams Group

Ltd., a Toronto-based retail consulting firm," in the 2002 Computerworld article on

Wal-Mart. "While its competition guarded sales information, Wal-Mart approached its

suppliers as if they were partners, not adversaries, says Granofsky. By implementing

a col-

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laborative planning, forecasting, and replenishment (CPFR) program, Wal-Mart began

a just-in-time inventory program that reduced carrying costs for both the retailer

and its suppliers. 'There's a lot less excess inventory in the supply chain because

of it/ Granofsky says." Thanks to the efficiency of its supply chain alone, Wal-Mart's

cost of goods is estimated to be 5 to 10 percent less than that of most of its

competitors.

Now Wal-Mart, in its latest supply-chain innovation, has introduced RFID-radio

frequency identification microchips, attached to each pallet and merchandise box that

comes into Wal-Mart, to replace bar codes, which have to be scanned individually and

can get ripped orsoiled. In June 2003, Wal-Martinformed its top one hundred suppliers

that by January 1, 2005, all pallets and boxes that they ship to Wal-Mart distribution

centers have to come equipped with RFID tags. (According to the RFID Journal, "RFID

is a generic term for technologies that use radio waves to automatically identify

people or objects. There are several methods of identification, but the most common

is to store a serial number that identifies a person or object, and perhaps other

information, on a microchip that is attached to an antenna-the chip and the antenna

together are called an RFID transponder or an RFID tag. The antenna enables the chip

to transmit the identification information to a reader. The reader converts the radio

waves reflected back from theRFID tag into digital information that can then be passed

on to computers that can make use of it.") RFID will allow Wal-Mart to track any pallet

or box at each stage in its supply chain and know exactly what product from which

manufacturer is inside, with what expiration date. If a grocery item has to be stored

at a certain temperature, the RFID tag will tell Wal-Mart when the temperature is

too high or too low. Because each of these tags costs around 200, Wal-Mart is reserving

them now for big boxes and pallets, not individual items. But this is clearly the

wave of the future.

"When you have RFID," said Rollin Ford, the Wal-Mart logistics vice president, "you

have more insights." You can tell even faster which stores sell more of which shampoo

on Fridays and which ones on Sundays, and whether Hispanics prefer to shop more on

Saturday nights rather than Mondays in the stores in their neighborhoods. "When all

this information is fed into our demand models, we can become more efficient on

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when we produce [a product] and when we ship it and then put it on the trucks in exactly

the right place inside the trucks so it can flow more efficiently," added Ford. "We

used to have to count each piece, and scanning it at [the receiving end] was a

bottleneck. Now [with RFID], we just scan the whole pallet under a bubble, and it

says you have all thirty items you ordered and each box tells you, 'This is what I

am and this is how I am feeling, this is what color I am, and am I in good shape'-so

it makes receiving hugely easier." Procter & Gamble spokesperson Jeannie Tharrington

talked to Salon.com (September 20, 2004) about Wal-Mart's move to RFID: "We see this

as beneficial to the entire supply chain. Right now our out-of-stock levels are higher

than we'd like and certainly higher than t

he consumer would like, and we think this technology can help us to keep the products

on the shelf more often." RFID will also allow for quicker remixing of the supply

chain in response to events.

During hurricanes, Wal-Mart officials told me, Wal-Mart knows that people eat more

things like Pop-Tarts-easy-to-store, nonperishable items-and that their stores also

sell a lot of kids' games that don't require electricity and can substitute for TV.

It also knows that when hurricanes are coming, people tend to drink more beer. So

the minute Wal-Mart's meteorologists tell headquarters a hurricane is bearing down