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Wal-Mart Prepares for Panama Canal

This article is excerpted from Michael Bergdahl’s longer article entitled “Wal-Mart Is a Supply Chain Driven Company, Obsessed with Lowering Costs … Is Yours?”

Last year I was invited to speak at a business conference in Panama City, Panama, about the “Best Practices of the World’s Largest Company … Wal-Mart.” While I was there I learned that by 2015, Panama plans to widen the canal, allowing the passage of even larger containerships. Currently the biggest ships that can navigate the canal and locks carry up to 4,000 containers. After the widening is complete, ships carrying more than 11,000 containers will be able to make the trip.

As I watched the containerships passing through the Panama Canal, I thought about the impact that widening the canal would have on the way Wal-Mart (and its competitors) ships freight into the United States, and for that matter, around the world.

Those bigger containerships will now be able to bypass West Coast ports like Seattle, Portland and Los Angeles in favor of more business-friendly ports in “right to work” states like Texas, Louisiana, Mississippi and Alabama. Overnight, Houston, Texas, will become the “New Long Beach”! If you think about it from a rail and trucking standpoint, Houston’s middle-of-the-country location will significantly reduce the amount of diesel fuel consumption, while reducing the time required to deliver containers to customers.
According to Port of Houston Chairman James T. Edmonds, “Houston has been a direct ‘all water’ option for Asia shipments for over five years — ever since the West Coast labor stoppage created a cross-country impact to import trade … and because the West Coast ports are heavily congested, Houston has seen an increase in container traffic from virtually every country on the globe. The Port of Houston Authority has long been recognized as the ‘third coast’ alternative.”

Since the cost of container shipping is about to come down once again, you can bet that suppliers and manufacturers for companies like Wal-Mart are already planning for the future. There is little doubt that the widening of the Panama Canal will change the supply chain strategies of retailers and manufacturers around the world.

Wal-Mart has already booked passage for its products on the world’s largest container vessel, the Emma Maersk, capable of ferrying 11,000 containers. The Port of Houston, in turn, is already preparing for a windfall of new business by preparing its docks and dredging its harbor to handle the parade of mega ships. The Emma Maersk is the first of a fleet of super containerships that will be up and running by the time Panama opens their widened canal.

There is even talk that Mexico, Nicaragua and Colombia are all considering digging their own canals so they too can tap into the mega ship bonanza about to unfold. The financial opportunities are huge and the risks are relatively low for Panama, because there are more than five million containers in transit across the globe at any given time, and each year that number is growing.

The fact that Panama is a logistics-driven country is about to change the way Wal-Mart, a supply chain–driven company, ships containers across the world and transports freight throughout North and South America! The widening of the Panama Canal fits right into Wal-Mart’s logistics strategy, which is all about finding ways to reduce and eliminate costs. Low transportation costs allow it to sell its products at the lowest possible prices, which in turn makes retail competition with them a real nightmare.

So why is Wal-Mart so driven to reduce its costs? One answer is because of Wal-Mart’s commitment to offering low prices to its customers. Another answer is that even though Wal-Mart is the No. 1 company in total annual sales in the world, its profit dollars don’t even rank the company in the top 10. It may be hard to believe, but Wal-Mart’s annual sales last year were $350 billion, placing the company on top of the Fortune 500 list, but amazingly, the company ekes out only a 3.2 percent profit! Wal-Mart’s total dollar profits last year ranked the company at only No. 12 on Fortune’s most profitable companies list (in U.S. dollars)! There’s no need for you to feel sorry for Wal-Mart’s “meager” profits, however, because in real dollars, 3.2 percent equals $11.2 billion!

When you understand the Wal-Mart profitability model, it helps you understand why Wal-Mart’s leaders are downright fanatical about driving costs out of the supply chain. To them, the widening of the Panama Canal is just another opportunity to lower costs to protect their razor-thin profit margins!

The bottom line is that Wal-Mart’s low price strategy is made possible because of offshore private label manufacturing, containerization and modern intermodal logistics.

As I finished my lunch at the Panama Canal that day, I came to the realization that the supply chain paradigm is about to shift once again! The good news is, at least this time, supply chain experts have time to prepare for the monumental sea changes (no pun intended) about to unfold. The bad news, for Wal-Mart’s competitors, is that shipping costs for the world’s largest company will once again come down, putting even more pressure on competitive prices.

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