Economy

Just Out of Time

By Ryan McGreal
Published August 16, 2005

High oil prices are just starting to catch up to the big box economy.

The Times UK reports that Wal-Mart's profit growth slowed for the second quarter of this year, due in large part to an extra $130 million (US) in energy costs ($30 million for fuel and $100 million for utilities on its properties). This is only a taste of things to come, as escalating oil costs erode the business model on which Wal-Mart and its many pretenders depend.

The secret to Wal-Mart's success is not just its Third World sweatshops or even its ubiquitous grinning people greeters, but its incredibly sophisticated just-in-time logistics system. Complex algorithms track continuous, real-time sales feedback from every store and plot stock depletion rates so they can arrange new deliveries just as existing supplies are about to run out.

This model applies at every stop from the factory to the store shelf, and cuts out intermediates (the dreaded "middleman") wherever possible, so that Wal-Mart buys directly from suppliers. Due to its size, Wal-Mart has the market clout to enforce standards on its suppliers so it can better manage supplies.

As a result, Wal-Mart avoids both inventory costs (for warehousing extra goods) and lost sales due to absent stocks.

Just-in-time was first developed by Toyota Motor Corporation in the 1950s in response to Japan's chronic undersupply of real estate. Toyota engineers overcame the lack of lot space by standardizing parts and tools and arranging for components to arrive on manufacturing lines 'just in time' to be assembled.

Wal-Mart has applied the just-in-time model to its commercial inventory system so that products reach store shelves 'just in time' to be purchased with no real estate wasted on stocking goods. However, it requires a vast fleet of transport trucks to make micro-deliveries of required merchandise to thousands of individual stores on an ongoing basis.

Essentially, Wal-Mart has replaced static warehouses with dynamic warehouses on wheels. Eventually, the cost of keeping those warehouses rolling will swallow the savings from not stocking goods in stores.

Most companies have tried with varying degrees of success to emulate this model. Just-in-time supply chain management has become the norm across nearly every market for physical goods. Wal-Mart is the world's biggest corporation not because it follows just-in-time, but because the company does it better than the competition.

Of course, the supplies move along their 17,000 kilometre supply chains in ships and trucks that run on cheap fuel. Rising fuel prices are sure to erode the competitive advantage of just-in-time logistics. Fuel shortages and chokepoints will disrupt delivery, and high prices will punish a system of frequent deliveries to a multitude of destinations.

Without cheap energy, the "freedom" of transport trucks criss-crossing the continent on a multifarious spiderweb of highways wll grind to a halt.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By mikeaitken (registered) | Posted August 20, 2005 at 12:01:48

On one hand peak oil can't come soon enough, on hte other we are in for some very difficult times. I wish there was some way to make Wal Mart and commuting impossibly while still preserving our neighbourhoods and some semblance of an economy.

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By Ryan (registered) - website | Posted August 31, 2005 at 08:03:09

mikeaitken wrote "I wish there was some way to make Wal Mart and commuting impossibly while still preserving our neighbourhoods and some semblance of an economy."

If we manage the post-peak decline in oil production sensibly, we can accomplish just that.

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By BabyPeanut (registered) | Posted September 05, 2005 at 06:19:00

This issue is more relevent than ever now with the transportation sector impact from Katrina.

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By marketing whiz (anonymous) | Posted February 19, 2009 at 13:44:06

Third world sweatshops? What an ignorant ass you are.

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By Ryan (registered) - website | Posted February 19, 2009 at 14:30:10

By marketing whiz What an ignorant ass you are.

Marketing: you're doing it wrong.

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