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Here is a closer look at how Sam Walton's focus on the "opening price point" and Wal-Mart's successful high-stakes technological bets -- including developing its own distribution network and software system -- revolutionized the relationship between suppliers and retailers.

Wal-Mart founder Sam Walton believed in having an alluring and unbeatable "opening price point" item in each category -- whether TV sets or bathing suits. The low price functioned to catch the consumer's eye and create the perception of value across the higher price points further up the aisle.

"The opening price point is clearly a foundation of who we are and how we interact with our customers," Ray Bracy, Wal-Mart's vice president of international corporate affairs told FRONTLINE.

The focus on low cost also had the effect of forcing Wal-Mart to look inward and find innovative ways to take costs out of the supply chain.

With its roots in Northwest Arkansas and the American Sunbelt, Wal-Mart would seem an unlikely leader in information technology. But it turns out Wal-Mart was often way ahead of the curve.

In the 1960s and '70s, Wal-Mart took its first big bet by building its own infrastructure and distribution network. Before Wal-Mart decided to take charge of its own distribution, retailers traditionally depended on wholesalers, who procured, warehoused and distributed manufactured products. But Walton found that none of the wholesale distributors at the time were interested in giving adequate service to a geographically remote discount retailer. Wholesalers would be shut out of Wal-Mart's business model.

Next, to take on powerful brand-name suppliers, Walton would make a massive bet in information technology. By the early '80s, Wal-Mart was one of the earliest to take advantage of the bar code to increase efficiency at the checkout counter. The aim now was to find a way for technology to help Wal-Mart come up with the right mix of goods for its individual stores, thereby increasing efficiency and lowering the company's inventory costs. The idea was to transmit point-of-sale information in real time to manufacturers. The information then could be used to examine consumer taste trends, gauge demand and eliminate the need for warehousing -- manufacturers would deliver "just in time."

And so, the cornerstone of Wal-Mart's increased efficiency was its trend-forecasting software, which tracked consumer behavior. In 1985, Walton and his chief lieutenant, David Glass, began developing a program called Retail Link. The software, and the hardware that went along with it, took years to perfect, eventually costing $4 billion. This revolutionary system delivered sophisticated information on consumer behavior, drawn from the data imbedded in the barcodes that passed through checkout counters.

Wal-Mart shared this revolutionary software with suppliers at no cost, in order to help them meet the retailer's needs more efficiently. In the early years, many Wal-Mart suppliers were American firms with factories in the U.S., and so sharing the Retail Link system dovetailed with Sam Walton's "Buy American" campaign, which focused on using domestic manufacturers. But Walton also insisted on ruthless efficiency. As he wrote in a letter to his suppliers in 1985, he was committed to buying U.S. goods whenever possible, but they would have to upgrade their operations and improve productivity to "fill our requirements."

At the heart Wal-Mart's offer to share its software program was a Faustian bargain for suppliers: Use our Retail Link program, play by our new rules and we will be your gateway to sales beyond your wildest dreams. Or refuse, and be shut out of America's dominant retail chain. In fact, by sharing Retail Link, Wal-Mart gained command over its suppliers and effectively penetrated their executive decision-making. It drew them into what Sam Walton liked to call a partnership: Wal-Mart was plugged into the supplier and the supplier was plugged into Wal-Mart.

But Wal-Mart had the upper hand: By gaining access to its supplier's books, the company was in a position to virtually dictate the terms of its contracts on price, volume, delivery schedule, packaging, and quality. And it allowed the giant retailer to set the profit margin each supplier would get. It turned the supplier-retailer relationship upside-down.

If vendors wanted their products on Wal-Mart's shelves, they had to implement Wal-Mart's "customized business plans." Each year, the big retailer handed its suppliers detailed "strategic business planning packets." Wal-Mart would grade them on weekly, quarterly and annual report cards. And when it came to discussions of price, there was no real negotiation, even for household brands.

"It was a cultural change between retailers and manufacturers," said Bobby Martin Jr., the Wal-Mart executive who developed and managed the Retail Link software system. "Part of process people went through was fear that Wal-Mart would know their business better and run their business. Some of them were not even as computer literate or capable as Wal-Mart… But the impetus behind it is the low cost commitment. This is divine discontent with cost."

Thus, Wal-Mart used its buying power and its information about consumer buying habits to force vendors into squeezing their costs and keeping their profit margins low. Over time, some suppliers -- especially middle-sized and smaller firms -- were bankrupted; and major firms moved production overseas, and increasingly to China.

 

Sam Hornblower was the production assistant on "Is Wal-Mart Good for America?"

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