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on Florida, its supply chain automatically adjusts to a hurricane mix in the Florida

stores-more beer early, more Pop-Tarts later.

Wal-Mart is constantly looking for new ways to collaborate with its customers. Lately,

it has gone into banking. It found that in areas with large Hispanic populations,

many peoplehad no affiliation with a bank and were getting ripped off by check-cashing

outlets. So Wal-Mart offered them payroll check cashing, money orders, money

transfers, and even bill payment services for standard items like electricity

bills-all for very small fees. Wal-Mart had an internal capability to do that for

its own employees and simply turned it into an external business.

TOO MUCH OF A GOOD THING

Unfortunately for Wal-Mart, the same factors that drove its instinct for constant

innovation-its isolation from the world, its need to dig inside

itself, and its need to connect remote locations to a global supply chain- also got

it in trouble. It is hard to exaggerate how isolated Bentonville, Arkansas, is from

the currents of global debate on labor and human rights, and it is easy to see how

this insular company, obsessed with lowering prices, could have gone over the edge

in some of its practices.

Sam Walton bred not only a kind of ruthless quest for efficiency in improving

Wal-Mart's supply chain but also a degree of ruthlessness period. I am talking about

everything from Wal-Mart's recently exposed practice of locking overnight workers

into its stores, to its allowing Wal-Mart's maintenance contractors to use illegal

immigrants as janitors, to its role as defendant in the largest civil-rights

class-action lawsuit in history, to its refusal to stock certain magazines-like

Playboy-on its shelves, even in small towns where Wal-Mart is the only major store.

This is all aside from the fact that some of Wal-Mart's biggest competitors complain

that they have had to cut health-care benefits and create a lower wage tier to compete

with Wal-Mart, which pays less and covers less than most big companies (more on this

later). One can only hope that all the bad publicity Wal-Mart has received in the

last few years will force it to understand that there is a fine line between a

hyperefficient global supply chain that ishelping people save money and improve their

lives and one that has pursued cost cutting and profit margins to such a degree that

whatever social benefits it is offering with one hand, it is taking away with the

other.

Wal-Mart is the China of companies. It has so much leverage that it can grind down

any supplier to the last halfpenny. And it is not at all hesitant about using its

ability to play its foreign and domestic suppliers off against each other.

Some suppliers have found ways to flourish under the pressure and become better at

what they do. If all of Wal-Mart's suppliers were being squeezed dry by Wal-Mart,

Wal-Mart would have no suppliers. So obviously many of them are thriving as Wal-Mart's

partners. But some no doubt have translated Wal-Mart's incessant price pressure into

lower wages and benefits for their employees or watched as their business moved to

China, whence Wal-Mart's supply chain pulled in $18 billion worth of goods in 2004

from five thousand Chinese suppliers. "If Wal-Mart were an individual economy, it

would rank as China's eighth138

biggest trading partner, ahead of Russia, Australia and Canada," Xu Jun, the spokesman

for Wal-Mart China, told the China Business Weekly (November 29, 2004).

The successor generation to Sam Walton's leadership seems to recognize that it has

both an image and a reality to fix. How far Wal-Mart will adjust remains to be seen.

But when I asked Wal-Mart's CEO, H. Lee Scott Jr., directly about all these issues,

he did not duck. In fact, he wanted to talk about it. "What I think I have to do is

institutionalize this sense of obligation to society to the same extent that we have

institutionalized the commitment to the customer," said Scott. "The world has changed

and we have missed that. We believed that good intentions and good stores and good

prices would cause people to forgive what we are not as good at, and we were wrong."

In certain areas, he added, "we are not as good as we should be. We just have to get

better."

One trend that Wal-Mart insists it is not responsible for is the off-shoring of

manufacturing. "We are much better off if we can buy merchandise made in the United

States," said Glass. "I spent two years going around this country tryingto talkpeople

into manufacturing here. We would pay more to buy it here because the manufacturing

facilities in those towns [would create jobs for] all those people who shopped in

our stores. Sanyo had a plant here [in Arkansas] making television sets for Sears,

and Sears cut them off, so they decided they were closing the plant and going to move

part to Mexico and part to Asia. Our governor asked if we would help. We decided we

would buy television sets from Sanyo [if they would keep the plant in Arkansas], and

they didn't want to do it. They wanted to move it, and [the governor] even talked

to the [Japanese owning] family to try to persuade them to stay. Between his efforts

and ours, we persuaded them to do it. They are now the world's largest producer of

televisions. We just bought our fifty millionth set from them. But for the most part

people in this country have just abandoned the manufacturing process. They say, 'I

want to sell to you, but I don't want the responsibility for the buildings and

employees [and health care]. I want to source it somewhere else.' So we were forced

to source merchandise in other places in the world." He added, "One of my concerns

139

is that, with the manufacturing out of this country, one day we'll all be selling

hamburgers to each other."

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 itthe

Seiyu-Wal-Mart Treaty of 2003. Unlike Commodore Perry, Wal-Mart did not have tomuscle

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

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 tolull shoppers

into filling their carts, and where you can buy a man's suit-made in China-for $65

and awhite shirt togo with itfor $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," explainedKiuchi. "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 justlooking 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 dis141

criminating 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

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 facade, 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 it 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,