Wal-Mart Ups The Pace

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Wal-Mart Ups The Pace

Retailer boosts IT spending, expands development staff in effort to get profits growing again

By Bruce Caldwell
Issue date: Dec. 9, 1996

Visitors to the Bentonville, Ark., headquarters of Wal-Mart Stores Inc. are struck by two enduring legacies of the company's late founder, Sam Walton: the speed with which every job function is expected to be carried out, and the control exercised over every detail of the operation. Wall-painted Waltonisms such as "Get it done by sundown" and "Acknowledge any c ustomer within 10 feet" constantly remind employees of the corporate ethic.

The nearly contradictory call to be both fast and in control converge in Wal-Mart's aggressive IT machine as it tries to drive the huge retailer past the inertia that has come with the company's $100 billion girth. Wal-Mart's profit growth was flat last year while net sales were up just 13%--decent numbers by most standards but "not a Wal-Mart year," noted CEO David Glass in the company's 1995 annual report.

Wal-Mart, like many other big companies in an assortment of industries, realizes that future growth will come as much from productivity gains achieved through technology and other innovations as from market-share conquests. That's why Wal-Mart's management boosted the company's IT budget by 10% this year. It's also why the IS division has been given the go-ahead to add 240 people to its 400-strong application development team by August, Wal-Mart's first major IS hiring effort since 1992 ( see st ory , p. 40).

These developers will be charged with writing proprietary code for everything from data mining to transportation systems. Senior VP and CIO Randy Mott aims to halve Wal-Mart's development backlog to 12 months, matching the business planning cycle. Also, having started its year 2000 planning in 1991, Wal-Mart now intends to fix all computer date-field problems in the coming year. It's a big task: Wal-Mart has 30 million lines of proprietary code.

There is nothing particularly flashy about Wal-Mart's approach to IT. The only thing that really matters is return on investment. "Wal-Mart has not originated a lot of unique and original thoughts," says Steve Biciocchi, a partner in the consumer goods and retail practice of Computer Sciences Corp.'s consulting unit. "But they have evaluated new technologies and processes early, made big commitments, and followed and executed on them like no other company has done in terms of thoroughness, quality, and attention to detail."

Competitive Advantage
Wal-Mart insists on speed in all of its operations, as well as in those of its suppliers. Software changes, for instance, are electronically distributed to all 3,017 stores in less than a week, sometimes in less than three hours. "Our only competitive advantage is speed of delivery," says Mott. Still, he refuses to cut corners, eschewing both packaged software and outsourcing. "Most everything we do," Mott says, "we think we can do better through customization."

Wal-Mart now has 350 application development projects in hand--and will complete each, on average, within 90 days--for its stores, distribution centers, and suppliers. Among the more interesting projects piloted by Wal-Mart is a voice-activated unit worn by associates, as the retailer calls all its employees, to replace costly shelf-lighting systems that now guide warehouse workers from item to item. Store Manager Workbench, a proprietary decision-support tool set for rollout in January, will drive merchandise, display, and pric ing decisions by providing store managers with "up-to-the-minute profitability analysis" and what-if scenarios, Mott says.

New for the holidays is Item Locator, an application on handheld computers that lets store clerks look up which nearby stores are still carrying stock items that are sold out in that particular outlet. Item Locator is one of more than 1,000 applications, including proprietary E-mail and Wal-Mart's intranet, that can be accessed by the 90,000 Telxon handhelds linked by radio frequency to the in-store Unix servers that support Wal-Mart's SMART (Store Merchandising through Applied Retail Technology) system. That system alone has more than 12 million lines of proprietary code written in C, C-ESQL, MicroFocus ESQL, and Informix 4GL.

Development continues at a rapid pace as Wal-Mart learns how to flex its data warehouse muscle, now at 7.5 terabytes and expected to grow to 10 terabytes next year. "We're moving from data warehousing to data mining to knowledge discovery," says Rick Dalzel l, VP of application development for merchandising and distribution.

By next spring, Wal-Mart expects it will be able to determine the profit and loss on each of the 65 million shopping baskets consumers wheel up to Wal-Mart checkout counters every week (see story, p. 44). The company can already access the weekend sales, gross margins, payroll, and other profit-and-loss data for every one of its 3,017 stores in seven countries around the world by 6 a.m. Monday, and then slice and dice that data any way it wants.

Cost-consciousness, another legacy of Sam Walton, remains pervasive at Wal-Mart. Offices at the 36-year-old headquarters are spartan--even the small space allotted for executive row. Over the low walls of cubicles that divide offices are bright yellow smiley-face signs, the only accent of color in an otherwise drab environment--reminders to everyone that Wal-Mart's strengths are customer friendliness and EDLP.

That's not a technology acronym. EDLP stands for Every Day Low Prices. It's a s logan that permeates the headquarters, peppers everyone's speech, shows up in the attention to detail, and lurks behind every discussion with a vendor, whether it is a negotiation over Barbie dolls or the Unix servers that are popped into each new store.

Wal-Mart opens about 185 new stores each year, and negotiates with Hewlett-Packard, IBM, and NCR each quarter for the Unix servers it needs in those stores. The frequent negotiations help Wal-Mart get the best price as well as the best and latest technology.

Careful Spending
The penny-pinching mentality born of EDLP also has helped Wal-Mart avoid duplicate operations and other excesses. Its $500 million annual IT budget is just 0.5% of its total sales, while its competitors' IT budgets are 1.0% to 1.4% of sales. Until recently, Wal-Mart had only one data center, a three-story building attached by a hallway to the sprawling headquarters. A backup site was opened 18 months ago in nearby Tulsa, Okla., where security guards are the only staff needed for the highly automated facility.

While the company's 27 regional distribution centers each have an IBM CMOS mainframe and HP 9000 server, everything else is highly centralized. For example, says Mott, "when the PC change began to hit, we kept it as part of the IS budget, so while a lot of companies treated PCs like pencil sharpeners, we treated it as a business decision."

Technology has to pay at Wal-Mart. Senior management expects technology projects to cover development and deployment costs within four months of implementation. "We come back every year and review where we are with payback," Mott explains. "We prepare a report for the business units on expected and actual payback to date, and if we don't get the expected payback, that becomes a point of discussion." Maybe business processes were not changed to take advantage of the technology, or the new system missed a key function that would deliver the payback. Mott conjures up another Waltonism: "Do it, try it, fix it."

If there's a n opportunity to apply new technology to improve employee performance, Wal-Mart explores that opportunity, even if the idea comes from another industry. For example, the voice-activated units being piloted at Wal-Mart's food distribution centers are most commonly used on manufacturing assembly lines. Even time-and-motion studies, also originally applied in manufacturing, are brought to Wal-Mart's check-out counters by cameras hidden behind dark-glass globes on the ceiling. Those checkout studies prompted Wal-Mart to install two NCR bar-code scanners, one horizontal and the other vertical, at each register to reduce the need for cashiers to manipulate items. Every second shaved off 65 million transactions a week adds up to cost savings, reasons Kevin Turner, VP of application development for store systems and finance. "Those processes we can't eliminate, we automate," Turner says.

Wal-Mart's proactive approach to technology doesn't bother the company's technology suppliers. Because hardware prices are decl ining, "the only way up for these hardware suppliers is for people to get innovative," says Mott, "and that is where we get very strategic to some of these people, because they can go to Kmart and Target and others and say, 'Look at what Wal-Mart is doing. You need to do that.'"

While Wal-Mart extracts bargains from vendors by jointly developing new technology that the vendors can later sell with reference to Wal-Mart, it also makes sure that competitors can't immediately latch on to the new technology. For example, a tiny shelf-label printing unit that Wal-Mart developed with Comtec Information Systems Inc. in Cumberland, R.I., can't go on the market for 18 months. Meanwhile, Wal-Mart has deployed more than 60,000 of the units.

Technology industry heavyweights such as IBM CEO Louis Gerstner and Microsoft executive VP Steve Ballmer are always available when Wal-Mart calls. "If you're faint of heart, Wal-Mart is a tough account to deal with," says a spokesman for another technology supplier.

Int ernet Standard
When Wal-Mart supplier Warner-Lambert Co., which makes Listerine, proposed real-time sharing of sales- forecasting data to help improve the link between retail sales and manufacturing planning, Wal-Mart helped assemble funding from IBM, Manugistics, and SAP to develop CFAR (Collaborative Forecasting and Replenishment), an Internet standard designed to cut tens of billions of dollars in inventory costs for the consumer packaged goods and retail industries ( see story , p. 46).

RetailLink, Wal-Mart's electronic data interchange system for connecting to its suppliers, already provides weekly forecasting data to more than 3,500 of the 5,000 vendors from which Wal-Mart buys goods. "But that seems to be difficult to implement consistently within vendor organizations," Mott says, "and marketing plans are not shared well now."

Making RetailLink accessible through a Web browser will help ease implementation among vendors, Mott notes, but there is still a need for increased collaboration. A vendor, for example, might view a Wal-Mart forecast as too optimistic and decide to produce fewer units without telling the company. The goal of CFAR is to make it possible for everyone involved to "work off the same page," Mott says.

CFAR is not the only Web-based technology initiative at Wal-Mart this year. Last spring, Wal-Mart launched an Internet-based catalog of merchandise. The server, overwhelmed by a million hits on its first weekend, has since been upgraded twice. Today, Wal-Mart sells more than 2,500 products from its Web site and plans to expand next spring to more than 80,000 items, some of which can be ordered directly from the manufacturer. In addition, Wal-Mart used Java applets last March to launch CarrierLink, an Internet-based system for improving communications with the retailer's transportation partners for scheduling, training, and other purposes.

Open House
Wal-Mart treats its retail suppliers as partners by giving them access to its data warehouse. But the warehouse can be a double-edged sword--Wal-Mart also uses it to keep tabs on supplier performance. Wal-Mart monitors vendors' ability to meet orders, the lead time required, and the price of their products. "We know what their contribution is to Wal-Mart," notes VP Dalzell.

Some suppliers fear Wal-Mart's leverage. When the retailer uses its massive marketing clout, it can, for instance, ask for and get music CDs and tapes stripped of lyrics it deems offensive. But when it comes to buying technology, the company usually helps its suppliers, observers say. "The supplier relationship that is defined by beating them to death on profit margins is different from forcing someone into the 20th century to reduce costs in the pipeline," says Darryl Landvater, a consultant with Retail Pipeline Integration Inc. in Essex Junction, Vt. "The behavior of great organizations is to focus on getting information on their operations so they can manage it, and that is Wal-Mart's behavior."

Closi ng the loop with everyone that touches the company in some way is a central theme within Wal-Mart IS. Everything is integrated, and whenever a technology or other change is made, everyone knows about it. Wal-Mart has 5,800 computer-based-learning workstations, each with magnetic-optical drives that can be rewritten remotely, that provide multimedia sessions on demand for company associates worldwide.

Nearly 3,000 changes are made every year to the Unix servers in the stores, as well as an average of 24 changes every year at the IBM point-of-sale registers. That, in turn, makes
it necessary for Wal-Mart to retrain some 600,000 cashiers every two weeks, says VP Turner. One recent change was a message prompting cashiers to ask customers for proof of age when certain products, such as inhalants, are scanned at the register, helping to keep the store in compliance with new Drug Enforcement Administration regulations. In addition, thousands of price changes are made each day, keeping associates busy with t heir Telxons and portable label printers.

The Telxon handheld unit, first deployed five years ago, is Wal-Mart's Swiss army knife. Equipped with a keypad, bar-code scanner, a 16-line character display, and radio frequency communications with the in-store servers, it is what is now called a network computer. No modifications have been made since they were first purchased, though Wal-Mart may replace the units with pen-based computers if the return on investment can be demonstrated.

The Telxon is so indispensable that the running joke at Wal-Mart is that no one can go to the bathroom without it, Turner says. While stores have 15 to 35 Telxons each, they have to be shared with anywhere from 100 to 600 associates. The devices are considered so critical to store operations that Wal-Mart contracted with Telxon for overnight replacement of the units when a problem occurs.

But even with the trusty Telxon, price changes for each item can be implemented only three times a day with the current system and pro cesses. Wal-Mart is testing LCD shelf tags from NCR that are powered and controlled by infrared light units on the ceiling and can be changed in real time, concurrent with changes at the point-of-sale registers.

However, the devices still look too expensive for frugal Wal-Mart, where payback in three to four months is the rule. An NCR spokeswoman says the vendor's pricing strategy for the experimental units is now based on a return-on-investment period of 12 to 24 months. Wal-Mart, no doubt, will work on shortening that.

Young At Heart
Wal-Mart's headquarters may show its age, and its long lists of huge numbers may show its size, but its drive has not faded. "Wal-Mart's IT department is extremely proactive," says John Harte, CEO of NeoVista Solutions Inc. in Cupertino, Calif. NeoVista is providing data-mining software to the retailer. "They tend not to think of themselves as a service department in a passive sense. They are very aggressive in evaluating technology and then bringing it to the attention of the business departments."

Dave Carlson, former CIO of Kmart, says Wal-Mart remains the industry leader in logistics technology and is now out front in merchandising systems as well, having caught up to and passed Kmart. Carlson, now a principal of Customer Focused Technology, a retail IT consulting firm in Bloomfield Hills, Mich., notes that Wal-Mart has a "pretty insulated culture in Bentonville, but that hasn't prevented them from making major contributions to the creation and proliferation of standards"--particularly in EDI and point of sale.

Wal-Mart still has tricks up its sleeve, and a nonstop curiosity that is now taking it into markets around the globe, where analysts warn competition can be much tougher and cultures much harder to penetrate with Ozarks-inspired homilies. But by borrowing here, innovating there, and forever counting and crunching numbers, Wal-Mart expects to tackle challenges and change on the fly. Says Mott: "Here at Wal-Mart, the only thing people are comfo rtable with is change."

With additional reporting by John Foley , Marianne Kolbasuk McGee , and Tom Stein

See related story: " Squeezing More Value From Data "

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