Risky Business

No one can deny that Wal-Mart has been an operational trailblazer for over 25 years. It was the first non-grocery retailer to embrace bar coding, the first to explode the supercenter concept beyond a regional anomaly, first to cobble together software to more effectively interface between departmental silos, and then between buyers and vendors, and first to recognize that squeezing every last skosh of fat out of the pipeline dropped meat to the bottom line.

Where Wal-Mart has led, many others have followed. Many of the operational efficiencies it pioneered have become industry standards.

So as Wal-Mart laid out its five-year plan for the Wall Street crowd last week, it was riveting to hear the retailer describe what role it sees suppliers occupying in the business of bringing product to market.

Suppliers — or “middlemen” in Wal-Mart parlance — will in a few short years be restricted to providing product that is innovative, low in volume and/or high in sales volatility and obsolescence. In other words, where there's maximum risk, the retailer will leave it to someone else.

Wal-Mart plans to handle the rest. It is even looking into buying raw materials (it did a pilot run by contracting an entire organic cotton farm last year), sourcing food (presumably booking crop lots, but that's conjecture) and making direct buys on packaging.

That's massive change on an epochal scale — a modern-day retail version of the Dutch East India Company.

This is a leap ahead that few — if any — other retailers are in a position to attempt. Even a middling hop in that direction could spell trouble if it falls short of the mark. Therein may lie some solace for the middlemen that are destined to drop off the matrix of the world's largest retail account.

But there's a potential danger in this strategy for the non-middlemen, too. Overseas manufacturers (and the U.S. suppliers now investing in overseas production) need only review the history of U.S. manufacturers that built out capacities in the '80s and '90s to service the rapidly ballooning opportunities offered by big boxes, Wal-Mart chief among them.

The account that books a huge chunk of your capacity this year will move on next year if the opportunity is right. And in a world of ever-expanding capacities, there will always be another opportunity. Proclaim all you like about the importance of your customer's objectives. Just be sure to mind your own. Keep it paramount.