February 19, 2014
thought leaders | The DC Velocity Q & A

A logistician turned CEO: interview with Lee Scott

A logistician turned CEO: interview with Lee Scott

Former Walmart CEO Lee Scott looks back on how logistics helped turn his company into a megaretailer.

By Mitch Mac Donald

Lee Scott served as Walmart's third president and CEO from 2000-2009, succeeding company founder Sam Walton and David Glass. He is widely credited with reinvigorating Walmart's mission and transforming the retailer into a respected corporate leader. During his tenure, the company emerged as the world's largest retailer with more than 2.1 million associates and 7,390 retail operations in 16 markets around the world. It ranked No. 1 on the Fortune 500 six times between 1998 and 2008 and reported sales of more than $405 billion in 2009.

Scott joined Walmart in 1979 as assistant director of the private truck fleet in the logistics division, rising through the ranks to executive vice president of logistics in 1993 and executive vice president of merchandise in 1995. He became president and chief executive officer (CEO) of the Walmart U.S. division in 1998, chief operating officer and vice chairman for the corporation in 1999, and president and CEO in 2000.

During Scott's tenure as president and CEO, he oversaw a 243-percent increase in Walmart's global sales, to $401 billion from $165 billion, and a 277-percent increase in earnings, to $3.35 per share from $1.21. He expanded Walmart's operations from 10 to 16 countries, including India, Japan, and Chile. Profits also rose 249 percent to over $13 billion. During his last year as CEO, Walmart's was the best-performing stock in the Dow Jones industrial average.

Building on the foundation of values Sam Walton put in place, Scott made people a priority. Under his leadership, Walmart assembled a strong management team who transformed the business to thrive in a more complex global environment while hewing to the company's mission of "saving people money so they can live better."

Walmart is now recognized for its leadership in tackling pressing economic and social challenges, like health-care costs, employee benefits, and social and environmental responsibility. The retailer emerged as a leader in sustainable practices, leveraging its global reach in the key areas of renewable energy, energy efficiency, waste, and sustainability. The company also worked to bring health-care costs down with its $4 generic prescription program and set aggressive goals to work with suppliers in building a more responsible global supply chain. Today, 93 percent of Walmart's direct sourcing merchandise is produced in top-rated factories.

A native of Baxter Springs, Kansas, Scott received his Bachelor of Science degree in business from Pittsburg State in Pittsburg, Kan., and in 1995, was named an outstanding alumnus by the university. He has also completed executive development programs at Penn State and Columbia. He is currently a senior adviser and advisory board member of Solamere Capital and the chairman of the business advisory board for BDT Capital.

He met recently with DC Velocity Group Editorial Director Mitch Mac Donald to discuss his career, lessons learned from his tenure at Walmart, and the trends he sees reshaping logistics operations in the years ahead.

Lee Scott Q: The concept of leveraging logistics to gain a competitive edge was introduced in the 1980s by a consultant named Jim Morehouse from A.T. Kearney. The most often cited example of a company that does that is Walmart. What led the company to embrace that strategy?
A: Sam Walton viewed what is now called "logistics" as a necessity because he wasn't satisfied with the service that was available in the small towns where he was building his stores. As he went along in the late '70s and early '80s, he came to appreciate the fact that it was a competitive advantage in places like Jonesboro and Harrison, Ark., or Muskogee, Okla., to be able to service those stores yourself and service them quickly.

Q: In most people's eyes, what differentiates Walmart from the pack is its low prices. What's the connection between that and logistics?
A: Think about logistics at Walmart in two ways. One is availability. Are you running a program that results in your stores' having a higher in-stock level than your competitors do? Second, are you running it in a way that gives you a price advantage? Walmart has grown on only about a 5-percent price differential among discount chains.

Sam was really focused on how to best service the customer across health and beauty aids, household chemicals, and household paper goods. Those are categories where high margins were being taken in grocery stores. Through the use of logistics, we moved high volumes of those products into the stores very efficiently and very quickly, and focused on not having to carry inventory weeks on end in a store. It seems normal today, but it wasn't normal back then to us. That strategy allowed us to take costs out of the system. We were able to pay suppliers very quickly and build a really good reputation with them. As a result, we could get the best possible price and be extraordinarily competitive. And that really is how the company was built. Logistics played a very big part.

Q: A lot of folks point to you as a sort of poster child for logistics career success—someone who started out in logistics and worked his way up to become CEO of the world's largest retailer. How do you feel about that?
A: I like it. I am proud of it. My career started as a management trainee at Yellow Freight System and then at Walmart as assistant manager for the private fleet in 1979. We logisticians as a group tend to be very pragmatic, very common sense-oriented, and very hard working. It is not a glamour job. It doesn't suffer big egos. If you are going to walk the floor of a warehouse and deal with the people who are doing all the work, you're going to find they don't have much tolerance for oversized egos.

Q: Indeed.
A: Walmart has been very fortunate in that both my successor, Mike Duke, and I came out of logistics. I am proud of that. It serves the company well because that background in dealing with the Walmart truck drivers and the warehouse people brings a certain sense of humility and appreciation for the hard work those people do.

Q: Is it fair to say a background in logistics gives a rising executive a nice, broad generalist look at a lot of different aspects of the company?
A: Having an understanding of logistics—not just an appreciation of it, because I think most CEOs appreciate it—is a competitive advantage for a CEO. Folks say that a number of a company's most important functions are touched by logistics. I would say that almost every function that really creates value in a company is touched by logistics.

Q: Looking back on your time managing logistics for what has become the world's largest retailer, what were some of the challenges you faced in running an operation of such a massive global scale?
A: Any time a company grows to the size that Walmart is today, the number one challenge is how to get the kind of people you need to move your organization forward, and how you can be sure that the DCs all over the world are operating in the same ethical manner that you want to see across the entire company, with the same kind of culture and with the same commitment to customers. Without a doubt, that is the most difficult thing to ensure. Within the construct of what you are doing, how do you ensure that a distribution center, a trucking operation, or a maintenance shop reflects the values that you as a company hold regardless of which country or state they are in? To me, that's the greatest challenge.

The flip side of that is that once you get big, you actually have more options. You can run out and try a conveyor sorter. You can try tray sorters. You can try a lift truck with fuel cells or you can test out natural gas. You can try this kind of truck or that kind of trailer. You can do all of these things because you can experiment with 50 or 100 trucks when you have a fleet of 8,000 and not hurt yourself, whereas the guy who is running five trucks at one DC can't afford to make a mistake. Once you have scale, if you don't play defensively, if you are on the offensive, you actually can lead your organization ahead much faster than you might think.

I know it's not always good to use football analogies, but in this year's college championship football game, when Florida State ran a fake punt and made a first down, it changed the entire game. That's the kind of thing we, as logisticians, need to make sure we are thinking about. We can call plays that turn the tide for our companies if we are willing to take a risk.

Q: So your approach, then, was to focus more on the opportunities presented by the operation's size and scale than on the challenges?
A: Yes, and that is a development that came out of Katrina. Around the time the disaster struck, Walmart was just being creamed in the press with ongoing attacks, mostly from organized labor. We were in a very defensive mode. Then Katrina hit. We had people who did things that were just extraordinary. There's one picture I recall of all these Walmart trucks lined up outside New Orleans, all of them carrying water, boots, first aid supplies, and other necessities. This happened within hours—before FEMA or anybody else got there.

So the question became, how can we be that Walmart? The Walmart we were during Katrina. How can we be that Walmart all the time? Where can we use size and scale as an advantage, rather than have it always feel like a disadvantage? And that was the mindset that changed our approach to the environment, to social responsibility.

Q: There is a current industry initiative called the Roadmap for Material Handling & Logistics that MHI is spearheading. Its aim is to identify some of the key trends and issues that will affect the logistics and supply chain professions between now and 2025. Drawing on your background both in logistics and as a CEO, what do you see as some of the key challenges for the years ahead, especially as they relate to human resources and talent development?
A: I've seen the report, and while I am generally not a fan of this kind of thing, it was extremely well done and very thought provoking. It is educational and interesting at the same time, which is not always easy to do.

To me, one of the greatest challenges is about the systems—you think about the speed, you think about the requirements of near perfection. Then you think about what has happened with education levels in the United States. You have to ask yourself: Who is going to be running a distribution center in 2025 that is significantly more sophisticated than today's operations? How are you going to staff that with people who are able to handle that level of sophistication? What are you going to do about creating the educational programs in your own DC so that these people are prepared to do these things? To me, that is going to be the greatest challenge of all. The world is becoming much more sophisticated. And the educational level and reading level and those kinds of things are really suffering across many public schools in America. It is a horrible challenge.

Q: Are you are saying there's going to be shift in the needed skill sets—that the folks working on the DC floor have to be more adept at a keyboard than with the handle of a hand truck?
A: Yes. It is a shift in education level. It's unlikely that you'll get to a point where systems and computers and material handling equipment do everything for you. In fact, the more these systems do for you, the more sophisticated the people who work with those systems have to be.

You may need fewer people to stand on the dock putting a box on a pallet or removing a box from a pallet and placing it on a truck. But you are going to really need an upgrade in talent and in pay and in education and in commitment.

Q: One of the other topics addressed in the roadmap is the issue of e-commerce. Although you are five years removed from your career at Walmart, do you see anything changing in the company's logistics operations due to the differing demands of e-commerce fulfillment?
A: Oh, yes. It changes everything for everyone ultimately. For instance, Walmart has announced additional distribution centers for handling online orders. I think the expectation for speed will take hold across the board—the concept of service will simply reach a new standard. It is going to be about delivering everything faster and faster and faster.

Here we are now, thinking that next day is phenomenal. But at some point, somebody is going to say, "I can't believe that people were satisfied with next-day delivery."

The other thing that will change the game—and I just watched a demonstration of it—is 3-D printing.

Q: Isn't it amazing?
A: Yes. It is unbelievable. As 3-D printing gains traction, the question will become where all these machines are going to be. Is it possible somebody will 3-D-print a Little Tyke Ride-On Car? The only thing that is warehoused are the axles because the tires and the body can be printed. All you really have to do is put on some decals and the axles, and you can ride it. You don't have any of the logistics costs that you have today bringing it in from Asia. Anyway, it changes what we as people in logistics thought was standard.

Years ago, when I came into Walmart and took over responsibility for the warehousing side, we had a service standard that said we couldn't have any trailers that were more than three days out. As long as the trailer had been alerted within three days of getting to the dock, we were within our level of service. So I was talking to one of the warehouse managers, and I said, "Well, we are at the three-days level of service every day. We haven't varied a day in almost the entire year." He agreed that was true. I said, "Well, let's go to a one-day level of service." He said, "We can't because we can't unload that many trailers." I said, "All you have to do is catch up one time because if you can do three days out, you can do one day out. You still have to unload the same number of trailers."

Q: He must have loved being confronted with that logic.
A: Yes. Anyway, so we went to the one-day level of service and caught up and have stayed at the one-day level ever since. But for the people who were there at the time, it was just unimaginable that you could go to one day. I think that is all going to happen in the future.

Q: Sustainable or green business practices are also gaining a lot of traction these days and everyone seems to expect it will continue. You and Walmart were pioneers in that regard. I think soon after you became CEO in 2000, you set some long-term goals to have the company supplied almost entirely by renewable energy, to bring waste levels down to zero, and to offer consumers products that were more environmentally friendly. What led you to set those goals?
A: It was really one of the first things to come up when we began to ask ourselves how we could use our size and scale to do good. It soon became apparent that Walmart has such a large environmental footprint that if we did some small things, it would have a big impact. The first thing that happened was that our toy buyer took the private-label toys and changed the packaging on a number of the items. One example was road cars. In the past, we'd bundle seven cars together in a big package to give the impression of great value. Well, it turned out we could get by with just 60 percent of the total packaging, so you cut 40 percent of it out. We were able to save something like the equivalent of 200 containers' worth of material by changing out the packaging on all these private-label toys.

It worked because it wasn't a market ploy. Walmart was helping the environment by using less packaging. We also spent less money on shipping because we had 200 fewer containers coming in. And it wasn't the kind of practice we'd back off from the next time the economy began to slide. In fact, it was the kind of thing you'd want to do more of in those circumstances because you needed to save more money. Those are the kinds of things that we tried to do.

Q: It seems that almost every day, we see extraordinary advances in logistics and supply chain management made possible by some enabling technologies. Do you see any particular technologies that hold promise for even further gains in the future?
A: There will be tremendous changes in technology. I think what is going to happen with big data is that companies are going to learn how to use big data to actually change what they do and how they operate. Right now, I think much of the focus is simply on getting a few people to look at it and try to discern what it means, but I think it's going to be used more to anticipate what's going to happen. For example, if it is raining in a particular town, I guarantee you by 2025 the system will already know that it needs to increase the order for umbrellas for stores in the area before the stores themselves have a chance to do it.

If a winter storm is sweeping across the United States, this system will automatically ship salt pellets to stores before anybody intercedes. Right now, 90 percent of the stores do it right and they get ready for it—whether it be a Home Depot, a Lowe's, a Walmart, a Target, or a Kroger. But in the future, it has got to be a system that is fully integrated. The whole thing will be integrated. The forecast will handle information. I will give you an example. When the Challenger space shuttle exploded, Walmart's business immediately dropped.

Q: Was it simply an instance of folks staying home and watching the news rather than going shopping?
A: Yes. What will happen in cases like that is that systems are going to make assumptions based on events. They are going to "know" that business will be down the next day, and they are going to be able to make adjustments on what happens with labor, what happens in the store, what happens in the DC—all of it based upon that kind of real-time information and real-time flow. It is not going to be up to a store manager or DC manager to make those decisions.

Q: What advice would you offer a young person about to begin his or her career journey?
A: The most important thing is to build your career on a foundation of integrity. And regardless of the short-term cost, there's no substitute for that. You can't justify anything other than having integrity. I think when you have that, it makes you comfortable with yourself and it makes it so much easier both to do the right thing and to develop a sense of direction that guides your career. You will know which company is right for you and which company is wrong, which boss you want to follow and which boss you want to stay away from. That sense of self and that sense of integrity are the most critical things.

Q: If you could offer just one piece of advice to DCV's readers in general, what would it be?
A: Because I don't believe in reincarnation, you are only going to do this once. I just think there is no excuse to not do it to the absolute best of your ability. It doesn't matter if you are talking about work, if you are talking about parenting, if you are talking about whatever. There is just no reason. The fact that the person down the road is a better manager than you, most of the time you think it is based on the fact that God gave that person better skill sets than you or that they are somehow advantaged. But it is choices that you make that cause you to either be one of the best managers in an operation or one of the poorest. I just think it is incumbent on you to absolutely be involved and do the best you can. So I guess that would be my advice.

When you go back to the office, do something. Make a difference. Don't just show up on Monday morning. Make a difference because in a world that is becoming more competitive, in a world that is becoming more sophisticated and more complex, in order for your company to be what it can be and for you to have the career you want to have, you have to move ahead. You cannot just be average.

Q: You have to make it a choice rather than leaving it to chance to do the best you can.
A: That is exactly right.

About the Author

Mitch Mac Donald
Group Editorial Director
Mitch Mac Donald has more than 30 years of experience in both the newspaper and magazine businesses. He has covered the logistics and supply chain fields since 1988. Twice named one of the Top 10 Business Journalists in the U.S., he has served in a multitude of editorial and publishing roles. The leading force behind the launch of Supply Chain Management Review, he was that brand's founding publisher and editorial director from 1997 to 2000. Additionally, he has served as news editor, chief editor, publisher and editorial director of Logistics Management, as well as publisher of Modern Materials Handling. Mitch is also the president and CEO of Agile Business Media, LLC, the parent company of DC VELOCITY and CSCMP's Supply Chain Quarterly.

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