The People's Republic of Walmart

by Leigh Phillips

  “Continuous replenishment” is a bit of a misnomer, as the system actually provides merely very frequent restocking (from the supplier to the distributor and thence the retailer), in which the decision on the amount and the timing of replenishment lies with the supplier, not the retailer. Again, you might be asking, how is this an innovation, and why would it make such a difference? (You might also be asking: Why does it now seem like I’m reading a god-awful, capitalism-fellating airport business book? Suck it up. Socialism is all about logistics, comrade.)

  The technique, a type of vendor-managed inventory, works to minimize what businesses call the “bullwhip effect,” the free market’s kissing cousin to Stalinism’s shortage problem. First identified in 1961, the bullwhip effect describes the phenomenon of increasingly wild swings in mismatched inventories against product demand the further one moves along the supply chain toward the producer, ultimately extending to the company’s extraction of raw materials. Therein, any slight change in customer demand reveals a discord between what the store has and what the customers want, meaning there is either too much stock or too little.

  To illustrate the bullwhip effect, let’s consider the “too-little” case (although the phenomenon works identically in either scenario). The store readjusts its orders from the distributor to meet the increase in customer demand. But by this time, the distributor has already bought a certain amount of supply from the wholesaler, and so it has to readjust its own orders from the wholesaler—and so on, through to the manufacturer and the producer of the raw materials. Because customer demand is often fickle and its prediction involves some inaccuracy, businesses will carry an inventory buffer called “safety stock.” Moving up the chain, each node will observe greater fluctuations, and thus greater requirements for safety stock. One analysis performed in the 1990s assessed the scale of the problem to be considerable: a fluctuation at the customer end of just 5 percent (up or down) will be interpreted by other supply chain participants as a shift in demand of up to 40 percent.

  Just like the wave that travels along an actual bullwhip following a small flick of the wrist, a small change in behavior at one end results in massive swings at the other. Data in the system loses its fidelity to real-world demand, and the further you move away from the consumer, the more unpredictable demand appears to be. This unpredictability in either direction is a major contributing factor to economic crisis as companies struggle (or fail) to cope with situations of overproduction, having produced much more than they predicted would be demanded and being unable to sell what they have produced above its cost. Insufficient stock can be just as disruptive as overstock, leading to panic buying, reduced trustworthiness by customers, contractual penalties, increased costs resulting from training and layoffs (due to unnecessary hiring and firing), and ultimately loss of contracts, which can sink a company. While there is of course a great deal more to economic crisis than the bullwhip effect, the inefficiencies and failures produced by the bullwhip effect can be key causes, rippling throughout the system and producing instability in other sectors. Even with modest cases of the bullwhip effect, preventing such distortions can allow reduced inventory, reduced administration costs, and improved customer service and customer loyalty (“The product you want is right here, ma’am! No need to keep checking other stores! You can always trust us to have what you want. Make sure you come back to us first next time!”), ultimately delivering greater profits.

  But there’s a catch—a big one for those who defend the market as the optimal mechanism for allocation of resources: the bullwhip effect is, in principle, eliminated if all orders match demand perfectly for any period. And the greater the transparency of information throughout the supply chain, the closer this result comes to being achieved. Thus, planning, and above all trust, openness and cooperation along the supply chain—rather than competition—are fundamental to continuous replacement. This is not the “kumbaya” analysis of two socialist writers; even the most hard-hearted commerce researchers and company directors argue that a prerequisite of successful supply chain management is that all participants in the chain recognize that they all will gain more by cooperating as a trusting, information-sharing whole than they will as competitors.

  The seller, for example, is in effect telling the buyer how much he will buy. The retailer has to trust the supplier with restocking decisions. Manufacturers are responsible for managing inventories in Walmart’s warehouses. Walmart and its suppliers have to agree when promotions will happen and by how much, so that increased sales are recognized as an effect of a sale or marketing effort, and not necessarily as a big boost in demand. And all supply chain participants have to implement data-sharing technologies that allow for realtime flow of sales data, distribution center withdrawals and other logistical information so that everyone in the chain can rapidly make adjustments.

  We hear a lot about how Walmart crushes suppliers into delivering at a particular price point, as the company is so vast that it is worth it from the supplier’s persepective to have the product stocked by the store. And this is true: Walmart engages in what it calls “strategic sourcing” to identify who can supply the behemoth at the volume and price needed. But once a supplier is in the club, there are significant advantages. (Or perhaps “in the club” is the wrong phrasing; “once a supplier is assimilated by the Walmart-Borg” might be better.) One is that the company sets in place long-term, high-volume strategic partnerships with most suppliers. The resulting data transparency and cross–supply chain planning decrease expenditures on merchandising, inventory, logistics, and transportation for all participants in the supply chain, not just for Walmart. While there are indeed financial transactions within the supply chain, resource allocation among Walmart’s vast network of global suppliers, warehouses and retail stores is regularly described by business analysts as more akin to behaving like a single firm.

  Flipping all this around, Hau Lee, a Stanford engineering and management science professor, describes how the reverse can happen within a single firm, to deleterious effect. Volvo at one point was stuck with a glut of green cars. So the marketing department came up with an advertising and sales wheeze that was successful in provoking more purchases by consumers and reducing the inventory surplus. But they never told manufacturing, and so seeing the boost in sales, manufacturing thought there had been an increase in demand for green cars and cranked up production of the very thing that sales had been trying to offload.

  The same phenomenon occurs in retail as much as it does manufacturing (and manufacturing is merely another link within the retail supply chain anyway), with Toyota being one of the first firms to implement intra- and inter-firm information visibility through its Walmart-like “Kanban” system, although the origin of this strategy dates as far back as the 1940s. While Walmart was pivotal in development of supply chain management, there are few large companies that have not copied its practices via some form of cross–supply chain visibility and planning, extending the planning that happens within a firm very widely throughout the capitalist “marketplace.”

  Nevertheless, Walmart may just be the most dedicated follower of this “firmification” of supply chains. In the 1980s, the company began dealing directly with manufacturers to reduce the number of links within, and to more efficiently oversee, the supply chain. In 1995, Walmart further ramped up its cooperative supply chain approach under the moniker Collaborative Planning, Forecasting and Replenishment (CPFR), in which all nodes in the chain collaboratively synchronize their forecasts and activities. As technology has advanced, the company has used CPFR to further enhance supply chain cooperation, from being the first to implement company-wide use of universal product bar codes to its more troubled relationship with radio-frequency ID tagging. Its gargantuan, satellite-connected Retail Link database connects demand forecasts with suppliers and distributes real-time sales data from cash registers all along the supply chain. Analysts describe how stockage and manufacture is “pulled,” almost moment-to-moment, by
the consumer, rather than “pushed” by the company onto shelves. All of this hints at how economic planning on a massive scale is being realized in practice with the assistance of technological advance, even as the wrangling of its infinities of data—according to Mises and his co-thinkers in the calculation debate—are supposed to be impossible to overcome.

  Sears’s Randian Dystopia

  It is no small irony that one of Walmart’s main competitors, the venerable, 120-plus-year-old Sears, Roebuck & Company, destroyed itself by embracing the exact opposite of Walmart’s galloping socialization of production and distribution: by instituting an internal market.

  The Sears Holdings Corporation reported losses of some $2 billion in 2016, and some $10.4 billion in total since 2011, the last year that the business turned a profit. In the spring of 2017, it was in the midst of closing another 150 stores, in addition to the 2,125 already shuttered since 2010—more than half its operation—and had publicly acknowledged “substantial doubt” that it would be able to keep any of its doors open for much longer. The stores that remain open, often behind boarded-up windows, have the doleful air of late-Soviet retail desolation: leaking ceilings, inoperative escalators, acres of empty shelves, and aisles shambolically strewn with abandoned cardboard boxes half-filled with merchandise. A solitary brand-new size-9 black sneaker lies lonesome and boxless on the ground, its partner neither on a shelf nor in a storeroom. Such employees as remain have taken to hanging bedsheets as screens to hide derelict sections from customers.

  The company has certainly suffered in the way that many other brick-and-mortar outlets have in the face of the challenge from discounters such as Walmart and from online retailers like Amazon. But the consensus among the business press and dozens of very bitter former executives is that the overriding cause of Sears’s malaise is the disastrous decision by the company’s chairman and CEO, Edward Lampert, to disaggregate the company’s different divisions into competing units: to create an internal market.

  From a capitalist perspective, the move appears to make sense. As business leaders never tire of telling us, the free market is the fount of all wealth in modern society. Competition between private companies is the primary driver of innovation, productivity and growth. Greed is good, per Gordon Gekko’s oft-quoted imperative from Wall Street. So one can be excused for wondering why it is, if the market is indeed as powerfully efficient and productive as they say, that all companies did not long ago adopt the market as an internal model.

  Lampert, libertarian and fan of the laissez-faire egotism of Russian American novelist Ayn Rand, had made his way from working in warehouses as a teenager, via a spell with Goldman Sachs, to managing a $15 billion hedge fund by the age of 41. The wunderkind was hailed as the Steve Jobs of the investment world. In 2003, the fund he managed, ESL Investments, took over the bankrupt discount retail chain Kmart (launched the same year as Walmart). A year later, he parlayed this into a $12 billion buyout of a stagnating (but by no means troubled) Sears.

  At first, the familiar strategy of merciless, life-destroying post-acquisition cost cutting and layoffs did manage to turn around the fortunes of the merged Kmart-Sears, now operating as Sears Holdings. But Lampert’s big wheeze went well beyond the usual corporate raider tales of asset stripping, consolidation and chopping-block use of operations as a vehicle to generate cash for investments elsewhere. Lampert intended to use Sears as a grand free market experiment to show that the invisible hand would outperform the central planning typical of any firm.

  He radically restructured operations, splitting the company into thirty, and later forty, different units that were to compete against each other. Instead of cooperating, as in a normal firm, divisions such as apparel, tools, appliances, human resources, IT and branding were now in essence to operate as autonomous businesses, each with their own president, board of directors, chief marketing officer and statement of profit or loss. An eye-popping 2013 series of interviews by Bloomberg Businessweek investigative journalist Mina Kimes with some forty former executives described Lampert’s Randian calculus: “If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”

  He also believed that the new structure, called Sears Holdings Organization, Actions, and Responsibilities, or SOAR, would improve the quality of internal data, and in so doing that it would give the company an edge akin to statistician Paul Podesta’s use of unconventional metrics at the Oakland Athletics baseball team (made famous by the book, and later film starring Brad Pitt, Moneyball). Lampert would go on to place Podesta on Sears’s board of directors and hire Steven Levitt, coauthor of the pop neoliberal economics bestseller Freakonomics, as a consultant. Lampert was a laissez-faire true believer. He never seems to have got the memo that the story about the omnipotence of the free market was only ever supposed to be a tale told to frighten young children, and not to be taken seriously by any corporate executive.

  And so if the apparel division wanted to use the services of IT or human resources, they had to sign contracts with them, or alternately to use outside contractors if it would improve the financial performance of the unit—regardless of whether it would improve the performance of the company as a whole. Kimes tells the story of how Sears’s widely trusted appliance brand, Kenmore, was divided between the appliance division and the branding division. The former had to pay fees to the latter for any transaction. But selling non-Sears-branded appliances was more profitable to the appliances division, so they began to offer more prominent in-store placement to rivals of Kenmore products, undermining overall profitability. Its in-house tool brand, Craftsman—so ubiquitous an American trademark that it plays a pivotal role in a Neal Stephenson science fiction bestseller, Seveneves, 5,000 years in the future—refused to pay extra royalties to the in-house battery brand DieHard, so they went with an external provider, again indifferent to what this meant for the company’s bottom line as a whole.

  Executives would attach screen protectors to their laptops at meetings to prevent their colleagues from finding out what they were up to. Units would scrap over floor and shelf space for their products. Screaming matches between the chief marketing officers of the different divisions were common at meetings intended to agree on the content of the crucial weekly circular advertising specials. They would fight over key positioning, aiming to optimize their own unit’s profits, even at another unit’s expense, sometimes with grimly hilarious result. Kimes describes screwdrivers being advertised next to lingerie, and how the sporting goods division succeeded in getting the Doodle Bug mini-bike for young boys placed on the cover of the Mothers’ Day edition of the circular. As for different divisions swallowing lower profits, or losses, on discounted goods in order to attract customers for other items, forget about it. One executive quoted in the Bloomberg investigation described the situation as “dysfunctionality at the highest level.”

  As profits collapsed, the divisions grew increasingly vicious toward each other, scrapping over what cash reserves remained. Squeezing profits still further was the duplication in labor, particularly with an increasingly top-heavy repetition of executive function by the now-competing units, which no longer had an interest in sharing costs for shared operations. With no company-wide interest in maintaining store infrastructure, something instead viewed as an externally imposed cost by each division, Sears’s capital expenditure dwindled to less than 1 percent of revenue, a proportion much lower than that of most other retailers.

  Ultimately, the different units decided to simply take care of their own profits, the company as a whole be damned. One former executive, Shaunak Dave, described a culture of “warring tribes,” and an elimination of cooperation and collaboration. One business press wag described Lampert’s regime as “running Sears like the Coliseum.” Kimes, for her part, wrote that if there were any book to which the model conformed, it was less Atlas Shrugged than it was The Hunger Games.

  Thus, many who have aban
doned ship describe the harebrained free market shenanigans of the man they call “Crazy Eddie” as a failed experiment for one reason above all else: the model kills cooperation.

  “Organizations need a holistic strategy,” according to the former head of the DieHard battery unit, Erik Rosenstrauch. Indeed they do. But is not society as a whole an organization? Is this lesson any less true for the global economy than it is for Sears? To take just one example: the continued combustion of coal, oil and gas may be a disaster for our species as a whole, but so long as it remains profitable for some of Eddie’s “divisions,” those responsible for extracting and processing fossil fuels, these will continue to act in a way that serves their particular interests, the rest of the company—or in this case the rest of society—be damned.

  In the face of all this evidence, Lampert is, however, unrepentant, proclaiming, “Decentralised systems and structures work better than centralised ones because they produce better information over time.” For him, the battles between divisions within Sears can only be a good thing. According to spokesman Steve Braithwaite, “Clashes for resources are a product of competition and advocacy, things that were sorely lacking before and are lacking in socialist economies.”

  He and those who are sticking with the plan seem to believe that the conventional model of the firm via planning amounts to communism. They are not entirely wrong.

  Interestingly, the creation of SOAR was not the first time the company had played around with an internal market. Under an earlier leadership, the company had for a short time experimented along similar lines in the 1990s, but it quickly abandoned the disastrous approach after it produced only infighting and consumer confusion. There are a handful of other companies that also favor some version of internal market, but in general, according to former vice president of Sears, Gary Schettino, it “isn’t a management strategy that’s employed in a lot of places.” Thus, the most ardent advocates of the free market—the captains of industry—prefer not to employ market-based allocation within their own organizations.