What FEMA could learn from Wal-Mart. (Not much.)

What FEMA could learn from Wal-Mart. (Not much.)

What FEMA could learn from Wal-Mart. (Not much.)

Moneybox
Commentary about business and finance.
Sept. 23 2005 2:58 PM

What FEMA Could Learn From Wal-Mart

Less than you think.

"Government broke down. Business stepped up," blares Fortune's cover story. Wal-Mart relief trucks reached stricken Gulf Coast areas before the Federal Emergency Management Administration did. Federal Express continued to deliver when the National Guard couldn't. As Kenner, La., Mayor Philip Capitano put it: "The Red Cross and FEMA need to take a master class in logistics and mobilization from Wal-Mart."

With Rita bearing down, it's a good time to ask if the public should really plan to rely on the private sector rather than the government for disaster-relief. Federal Express and Wal-Mart have something to teach us all—FEMA included—about logistics and mobilization. But Wal-Mart and the private sector in general are getting way too much credit for their intermittently impressive relief efforts. In fact, the economic and management trends that Wal-Mart and FedEx typify may have been responsible for some of the post-Katrina suffering.

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Wal-Mart responded well to Katrina. The giant retailer donated $3 million in supplies and $17 million in cash to emergency efforts—$20 million in total, or about the amount of sales it does in about 38 minutes. Wal-Mart and Federal Express were indeed way more organized than FEMA. FEMA was a dumping ground for political hacks. Wal-Mart and Federal Express are highly profitable logistics companies run by seasoned, well-compensated pros. They have made enormous investments in the personnel, technology, and infrastructure necessary to respond to changes in demand and market conditions, and to get goods where they need to go quickly. "That's what we do," Rollin Ford, Wal-Mart's executive vice president of logistics and supply chain, told Fortune. "We move mass volume very efficiently."

Wal-Mart and FedEx are the platonic exemplars of the Just-in-Time economy, which prescribes keeping inventories low, maintaining the precise amount of capacity needed, and building and exploiting hyperefficient supply chains. This set of management practices, which started in manufacturing, has spread to every sector of the economy. Whether you're a bookstore, an auto-parts maker, an oil refiner or a grocer, having more inventory or capacity than you absolutely need ties up capital and imposes storage and handling costs. In the Just-in-Time economy, redundancy is the enemy of efficiency. That's one of the reasons delivery companies like FedEx have grown so much over the years—they're constantly restocking everybody's shelves. The nation's most efficient retailer and its most efficient delivery service were uniquely designed to be able to respond and function in a post-Katrina environment.

But for every Wal-Mart or FedEx—efficient machines doing good in a time of need—there was a major-league screw-up by a large company that didn't have sufficient backup capacity in place. At Tenet Health Care's Memorial Hospital in New Orleans, the backup electric generating system failed. Several patients died.

Katrina also exposed the downside of the Just-in-Time economy. The crucial networks that are the lifeblood of Wal-Mart and FedEx are more virtual than real—trucking and air routes, logistics systems, and software—and survived the hurricane just fine. But companies whose networks were composed of pipes, fiber, and transformers didn't prove as resilient. Several weeks after Katrina, Entergy, the large utility company, is still struggling to restore electric service. BellSouth, the phone company, saw its systems utterly swamped: On Sept. 2, more than half of Louisiana's access lines and about 40 percent of Mississippi's were out of service. It may be October until phone service is restored. Yes, the companies had to cope with unprecedented damage. But these networked Just-in-Time companies didn't have the backup or emergency planning in place to weather the storm and respond with sufficient speed.

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Then there's the massive oil and gas business—the ultimate Just-in-Time business. Refiners don't keep weeks' worth of crude on hand in the event supply is disrupted—that would needlessly tie up capital. Refiners like Valero don't maintain standby refineries ready to kick into gear in case of a disaster. Too expensive. As previously noted in this space, U.S. refineries this spring were running at 94 percent of capacity. Once crude is refined, petroleum courses through pipelines and into delivery trucks. Gas stations take delivery daily, or a few times a week, depending on their volume. The Kwik-E-Mart won't build and fill giant storage tanks to ensure it'll always have a week's worth of supply. Environmentally conscious neighbors wouldn't like it.

In normal times, this efficient energy delivery system keeps our costs down and our tanks full. But it doesn't take all that much to screw things up. In a neat illustration of chaos theory, high winds in the Gulf of Mexico can cause consumers in Chicago to panic-buy gasoline a few days later, and a giant corporation in Minneapolis to file for bankruptcy two weeks later. When Katrina knocked out a healthy chunk of the nation's Just-in-Time refining and oil production capacity, there was no excess capacity available. Almost immediately, the supply of petrol was disrupted on the Atlantic seaboard. Throughout the country, the price of gasoline at the pump shot up rapidly. And the spike in fuel prices may have hastened the bankruptcy filings of giant airlines Northwest Airlines and Delta Airlines.

Oddly, the market price of crude oil fell after Katrina, even though production of crude in the Gulf of Mexico was interrupted. Why? It turns out there was a party that, acting in an economically inefficient manner, had spent billions of dollars to amass a standby supply of a crucial material that could be used on a rainy day. When the crisis came, it acted with a Wal-Martian efficiency. After Katrina, the federal government began to release crude oil from the Strategic Petroleum Reserve. And it came just in time. The move helped lower the price of crude, keep refineries humming, and calm panicky consumers.

There's no doubt the government could learn a great deal from the private sector about how to prepare for and respond to a natural disaster. But the private sector may have something to learn from the government, too.