March 31st, 2008 | by Jens-Peter Labus
Best Buy of Richfield, Minnesota, USA, is the North American market leader in the consumer electronics retailing industry. Founded in 1966 in St. Paul it has achieved tremendous growth over the last decades, reaching a compounded annual growth rate (CAGR) of 13% over the last 3 years (Best Buy Annual Report 2008, subsequently abbreviated BBYAR08 p.5). At the end of fiscal year 2008Best Buy operated 923 of its classic blue boxes with the distinct yellow tag in the US. The whole operation consisted of 1,314 retail units in 3 countries (US, Canada, China). Revenues soared to $40,023m, while the net earnings reached $1,407m or 5.4% of the revenue.
The field of logistics has evolved since in 1962 management guru Peter Drucker called it ‘the last great unexplored continent of business’ In the 1980’s the term was widened to Supply Chain Management (Fernie & Sparks 2004).
The Supply Chain: noteworthy was the work of management consulting firm Kurt Salmon Associates for the American apparel industry, which led to the development of the Quick Response (QR) concept to further optimize the supply chain. Parallel work was done in the grocery industry under the umbrella of Efficient Consumer Response (ECR) leading to the next step of Collaborative Planning, Forecasting and Replenishment (CPFR) (Fernie & Sparks 2004).
Managing the Logistics Mix
Logistics consists of five interwoven strands (Sparks, L 2008a):
Inventory: this denotes a physical product which has to be transported from the place of manufacturing to the Store - until eventually bought by consumers. Out of the business logic of retailers there are many different forms inventory like cycle, safety, seasonal, promotional or in transit inventory (Sparks L 2008c). Financing all this inventory is of great concern to any retailer. Thus the way to handle stock more quickly and efficiently throughout the pipeline is paramount to the success and survival of any retail business.
Warehouses: facilities are needed to accept and forward goods throughout the supply chain. Those facilities have to be designed to store, stock and distribute the physical product in flow according to the specific needs and limitations of the product (for instance cooling, stackability). Some facilities do not store product (e.g. cross-docking) while others cater only to certain aspects of the supported retail business (e.g. defective product return warehouse and repair center).
Communication: parallel to the flow of physical product throughout the supply chain there is parallel flow of information: were, when, how much, which price and/or additional conditions the product flow is located and/or affected. The catch-up of information related to the process and entering those into the Enterprise Resources Systems (ERP) would fall into this category, too.
Transport: the physical transport of goods from point A to point B by a variety of means: road, rail, sea, air. Trade-off decisions of time vs. cost have to made and reviewed constantly.
Materials handling: this aspects describes the proper material handling of the goods “en-route” in the supply chain, which might be quite different considering variations in weight, volume, value, bulk, speed and seasonality to name a few.
Compare theory and practice: Best Buy
This chapter looks at the logistic functions supporting the core business of Best Buy – the operations of superstores for Consumer Electronics (CE) retailing in the US (compare Chandra, C 2000). Other aspects of the business, like operating stores in Canada et al. (e.g. Future Shop) and / or business activities like delivering services (e.g. Geek Squad) are not considered or mentioned briefly only. The chapter follows the key issues of logistics and supply chain management as laid out above and gives an overview of the current situation and changes made recently which led to the current state.
Before 2000, Best Buy had many independently managed functions across its logistics network. Those siloed operations worked independently and had little integration of systems and functions (Murphy, J 2005). Around that time Best Buy began to critically assess and reconstruct its supply chain. (compare Chandra, C 2000).
The Logistics Mix at Best Buy
Inventory: According to the annual report of fiscal year 2008 Best Buy recorded revenues of $40,023m, while the merchandise inventories were reported to be at $4,708m. Best Buy reported a gross profit rate of 23.9%, slightly falling in the third consecutive year (BBYAR08, p.27). Put into equation these three figures would state an inventory turn of 6.45 per year.
In a rough calculation those figures would mean a ‘stock reach forward’ (SRF) of seasonally unadjusted 58 calendar days. From these figures it can be argued that Best Buy was able to time-compress the length of its supply chain and accelerate the inventory velocity (compare Forza, C 2000) thus achieving a competitive advantage.
Note: in the arguably quite different industry of grocery retailing, Tesco’s (UK) SRF stood at 45 days at the end of the 1970’s. After embarking to a longterm supply chain optimization Tesco had been able to reduce this figure to 11 days by the end of the 1990s (Fernie & Sparks 2004). It can be argued that Best Buy was able to translate the streamlined supply chain performance into sound financial rewards by accelerating the velocity of its inventory. The resource time acts as a strategic competitive weapon. (Sparks, L 2008c).
Warehouses: From the perspective of a US store the supply chain today looks like this:
In the US Best Buy has consolidated the secondary distribution to its 931 US stores to 9 Distribution Centers (DC) which are dispersed geographically (BBYAR08 p.19) across the continent. The stores are dependent to the DCs, while in some cases (time-critical) product is shipped directly to the stores. These 9 DCs cover 6,331,000 square feet or 6,800 sqft per store.
In the US there are an additional 13 satellite warehouses for the storage of large appliances close to big metropolitan markets. Those warehouses are also the hub for home deliveries of large items like TV sets (Murphy, J 2005).
Primary continental distribution
Further upstream Best Buy has consolidated the inbound goods which are imported from Asia to one of the two West Coast consolidation centers located in Seattle, WA and Long Beach, CA. (Murphy, J 2005). From there the goods are forwarded to one of the 9 DCs serving the stores.
Primary distribution overseas
In Shanghai, China, Best Buy has leased office space to support its global sourcing initiative (BBYAR08 p.20). In its South China warehouse it collects shipments from local supplies and consolidates them into shipments to the US.
Transport: Best Buy has an annual transportation budget of $400m. When considering the optimization potential the initial projections came to savings of roughly $5m per year. After implementing the solutions of i2 (see IT) those projections were exceeded by far. Total saving were in excess of $20m per year (Murphy, J 2005).
Materials Handling: Clearly defined types of warehouse operations dispersed over the supply chain allow Best Buy to handle every aspect of inventory handling efficiently and effectively.
Communication / Information Technology: beginning in the 1980s the data captured from the supply chain was communicated by modern underlying information technologies through the company for a more effective management of inventory in the supply chain. Efficient Consumer Response (ECR) strategies were developed in the grocery industry. (Katzab, H 1999).
Best Buy: Reconstructing the Supply Chain
Strategic Shift to Customer Centricity
In 2003 the management of Best Buy realized it was up against three challenges.
· It lost market share to the aggressive competitors Wal-Mart and Target.
· Due to demographic shifts the consumer base was getting more and more heterogeneous.
· Consumer research revealed that a growing number of consumers left the stores empty-handed.
Best Buy came to the conclusion that the one size fits all approach of its business model had to be transformed into a customer centric model. It did so by shifting basic retailer’s decision such as assortment and placement of product to the stores. This has had deep ramifications for the supply chain as this had to be transformed from the push mode (central buying pushing product down the supply chain) to the pull mode (demand generates orders which have to be met with fulfillment coming down the supply chain) (Cotrill, K 2006). Thus, Best Buy needed an agile supply chain (Christopher, M 2000) able to react on changing demand on short notice.
Supply Chain Transformation
Best Buy management saw its approach to supply chain management as an integral part to its customer centricity strategy.
Best Buy decided to remove non-sales activities from the sales floor. The supply chain was reconfigured in such a way that deliveries matched perfectly the physical set up of aisles in the store. As under the new strategy sales associates were allowed to alter the store configurations delivery methods further up the supply chain had to altered in a dynamic way.
Best Buy decided to share information about inventory levels and the whereabouts of inventory in the supply chain widely. This helped providing reliable information for sales associates, headquarters (compare Fisher, M et.al. 2000) and prospective consumers as well as giving suppliers deep insights about real time demand patterns in order to alter actual product deliveries travelling down the supply chain to the very last minute (Cotrill, K 2006). The latter is also known as the physical de-coupling point downwards in the supply chain, while the efforts of CPFR are directed at moving the de-coupling point for the information about real time demand patters as much ‘up’ as possible within the supply chain. Behind that point the materials handling process inside of the suppliers manufacturing network terminates. Most often those latter processes are organized in a ‘lean’ way, as opposed to the neccessity of an ‘agile’ process on the retailer’s side (Sparks, L 2008b)
Communication and the use of Information Technology
To execute the customer centricity strategy both in the business and in the supply chain, a major overhaul of the IT systems had to done. After considerations of alternatives, Best Buy began to implement the IT systems in March 2000.
Current structure of IT systems (Murphy, J 2005)
Retail Transaction Systems
subsidiary of Oracle, Redwood City, Calif
Demand and replenishment planning, supply chain management, transportation management
i2 Technologies, Dallas, TX
Oracle, Redwood City, Calif
The implementation was handled by two different teams: IBM Global Services for demand planning and Cap Gemini Ernst & Young for transportation. The whole project was completed in a record time of just seven months, as Best Buy wanted to reap the benefits of the reconstruction of the supply chain in the seasons’ business of the year 2000.
Today, Accenture, a global management consulting company (BBYAR08, p.16) is running the information technology division of Best Buy (alongside human resources operations and certain procurement activities).
Best Buy decided to leverage its abilities to capture and deliver discrete information from the supply chain for further improvement by collaborating with select suppliers. It joined the Voluntary InterIndustry Commerce Standards Association (VICS) and forged initially four collaborative contracts with key suppliers, namely Panasonic, Sony, Hewlett-Packard and Tompson, along the CPFR scheme of activities. Sharing accurate information along the supply chain helped the partners to improve forecast accuracy and adjust product lead times favorably for Best Buy (Murphy, 2005).
Utilising Power Relations
In the fiscal year 2008, Best Buy achieved a market share of 21% in the US and 35% in Canada. The 20 largest suppliers of Best Buy accounted for over 60% of total revenues (BBYAR08, p.15). Connecting these two figures suggests clear evidence that Best Buy would be able to wield its retail power in a unique way to achieve better results (compare Sparks, 2008b). It appears it has chosen to overcome the formerly confrontational style and replace it with a collaborative approach (compare Ogbanna, 1996). By 2006, Best Buy had contracted 17 or more of its suppliers into a collaborative scheme for planning, forecasting and replenishment (CPFR) (SCD EdStaff, 2006).
In academia the term ‘reverse logistics’ (Fernie & Sparks, 2004) is often used for the emerging field that looks at the better utilization of resources, especially packaging resources, throughout the supply chain. In the standard framework, reduction of resources is the top most priority, followed by reuse and recycling, followed by the least wanted alternatives of disposal with energy recovery, followed by disposal in landfill sites (Carter, 1998).
No such scheme concerning the forward supply chain is currently running at Best Buy. The Annual Report of fiscal year 2008 states merely that “no material capital expenditures … are anticipated in the foreseeable future” (BBYAR08, p.13).
A slightly different picture appears when looking at the reverse supply chain from a consumer perspective: today it is estimated that more than 80% of all outdated consumer electronic equipment in the US is sent to landfill sites or exported. Due to shareholder proposals, Best Buy has agreed to run a pilot with nonprofit organization As You Sow, in which consumers can return CE free of charge to one of 117 participating stores (GreenBiz EdStaff, 2008).
After benchmarking its in-house processes in the field of defective products returned by consumers, Best Buy decided to integrate a centralized return management process provided by logistics partner Genco Distribution Systems. Defective units are consolidated in stores and handled by Genco in one of the aforementioned satellite warehouses. As a result, Best Buy’s in-house processing costs have gone down by about 50% (Blanchard, 2005).
New Business Models
New Business Models appear in the modern management of the supply chain as both knowledge of the supply chain and complexities within grow and provide new challenges and solutions (Sparks, 2008d). A few of them are mentioned hereunder.
To facilitate growth in its CPFR strategy, in 2005 Best Buy started together with i2 (see section on Communication/IT) to develop CPFR modules and, after running and testing them internally, deployed them to the industry standard internet retail exchange WorldWide Retail Exchange (WWRE), thus allowing other suppliers to share in Best Buy’s supply chain (Murphy, 2005).
Best Buy’s online distribution channel, BestBuy.com, contributes to the overall revenue performance and marketing positioning of Best Buy. Although the company does not reveal figures it states that online revenue increased by 25% in the fiscal year 2008, contributing significantly to comparable store sales gains (BBYAR08, p.33). As those were a mere 2.9% in the fiscal year 2008, only guesses can be made of the real like-for-like figures of the stores (compare Fernie & Sparks, 2004).
Specialized Distribution Centers
For deliveries of Best Buy’s etailing arm, BestBuy.com, a specialized distribution center in Harrisburg, PA has been established. The fulfillment agreement was made with IM-Logistics, who run this specialized site and cover nearly all of BestBuy.com’s products, except for special products like appliances or other large volume items which are shipped from one of the satellite RDCs.
Due to external circumstances the logistic capacities of IM-Logistics in Harrisburg, PA had to be brought in at short notice in February 2001. Connectivity and integration to Best Buys’ core ERP systems were brought up in 30 days, which is pretty quick from an IT perspective (Cruz, 2001).
In a further step to enhance its online business model Best Buy decided to acquire online music provider Napster for $121m (Hickey, 2008). With this step Best Buy wanted to strategically achieve two correlated stages in supply chain management. Firstly, it would add the world of delivery of non-physical assets to its supply chain universe, and secondly it wanted to deliver its services to the burgeoning world of wireless mobile devices as interfaces to current and future consumers’ demands and values.
Extension of Supply Chain: Open API
In yet another move to extend the physical supply chain to digital realms, Best Buy has announced the project ‘Remix’, which consists of an IT-function known as ‘open Application Program Interface’ (open API). This will enable software developers external to the company to set up their own idea of how to run an online business and connect it via the open API to the core process of Best Buy in a transactional sense. It will allow third parties to access Best Buy catalogues and products, and provide physical distribution for products ordered, thus actually deriving an additional value out of the existing supply chain itself (Ross, 2008). Similar programs at amazon.com have attracted hundreds of thousands of third party digital entrepreneurs globally.
After participating in a consortium led by Accenture to explore and discover cases for the deployment of RFID (Radio Frequency Identification) technology (Wilding, 2004) (Fernie & Sparks, 2004), Best Buy intended to tag all pallets and product cases with RFID tags throughout its supply chain, starting from January 2006. Their initial plan called for full implementation by May 2007 (CRMBuyer, 2004). It has not been documented whether Best Buy was able to reach these target dates. Doing so would have furnished them with additional efficiencies in the supply chain.
Task: Then, consider how they are likely to have to adapt their practices and approach in light of developments and cost in packaging and reverse logistics.
In 2008, Best Buy unveiled its plan to acquire 50% of UK retail specialist chain Carphone Warehouse for £1.1bn. This bridgehead in Europe is geared to open the first Best Buy boxes in the summer of 2009. In the long term the yields are set at 200 stores (Potter, 2008). Opening a second flank in Europe, Best Buy announced it would open stores in Turkey (TurkishDailyNews, 2008).
These new strategic goals will provide some serious ramifications for Best Buy’s supply chain (compare Camuffo et al., 2000). In a series of steps Best Buy will have to adapt to the enormously diverse business environment in Europe (e.g. developed vs. Less Developed Countries (LDC)) and enhance its current, somewhat singular, China-US supply chain so that it becomes a truly global supply chain spanning continents.
A challenge can be seen in the risk of management distraction stemming from the high complexity of the tasks ahead. To retail professionals it is a well-known fact that there is no single example of a major US retailer enjoying long-term growth and business success in Europe, while there are quite a few examples of successful European retailers expanding in the USA.
In a possibly vicious combination, the steady and unprecedented rise of energy costs and raw materials, high inflation pressure caused by a burgeoning economy in mainland China, possible devaluations of the US Dollar due to the aftermath of the financial crisis, and negatively affected consumer spending on the domestic market due to turmoil on the financial markets might have severe consequences for the marketing positioning of Best Buy and consequently its profitability. It is seen as a fact that US consumers will have to repay towering debts in the coming years, eating away disposable income, especially for high ticket items such as CE. A serious decline in available free cash flow might hamper Best Buy’s ability to expand internationally and might refocus management attention to more premiere tasks.
Finally, based on the issues raised by this paper it can be said that the Best Buy supply chain strategy does not offer a holistic approach to waste and energy reduction in its supply chain. There is a good chance that the pressing issue of sustainability and global warming will find its way back to global headlines once the financial crisis loosens its grip on the media. Thus, Best Buy will need to work on these issues.
In terms of retail business, Best Buy has adopted an aggressive and bold expansion strategy, propelling it to a rank of 28 in Deloitte’s 2006 list of ‘Global Powers of Retailing’. The list shows a 5 year CAGR of 17%.
In terms of supply chain management, Best Buy is ranked number 14 on the ‘Supply Chain Top 25 List’ by AMR research (AMR, 2008), placing it between The Coca-Cola Company (ranked 13) and Nike (ranked 15). Only two retailers are further up the list. Interestingly, one is from the UK (Tesco ranked 12) while the other is from the US (Wal-Mart ranked 6).
It can be argued that Best Buy has a highly competitive business model that is supported by an effective supply chain, both ready for international deployment. New challenges and new risks will derive from this very strategy, set against the backdrop of its domestic market in which it will have to ride out a storm.
Glossary of abbreviations and terms:
CAGR - compounded annual growth rate
CPFR – Collaborative Planning Forecasting and Replenishment
DC – Distribution Center
ERP - enterprise resources systems
LDC - Less Developed Country
Open API - open Application Program Interface
SRF – stock reach forward
VICS - Voluntary InterIndustry Commerce Standards Association
eob – end of body text
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