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Best Buy’s Best-Cost, Customer-Centric Supply Chain

Few retailers have been as successful as Best Buy in delivering a localized customer experience on a global scale. With more than 1,086 stores in the United States, Canada and China, the Minneapolis-based retailer has seen sales increase steadily, growing from $5 billion in 1995 to nearly $36 billion last year and projected to hit $40 billion in its current fiscal year.

In the presentation he gave to Supply Chain Summit attendees, Dan Currie, Best Buy’s senior VP of global supply chain, talked about his company’s customer-centric supply chain transformation—a transition that continues to contribute to the retailer’s global expansion, which will include stores in Puerto Rico, Mexico and Turkey within the next 12 months.

“Quality, speed and cost are the three key attributes of the supply chain,” Currie stated. “At Best Buy, we can’t focus on just one attribute because it changes across the life cycle of a SKU. We have to know when to shift our focus from one attribute to another.”

Cost control, or “lean provisioning” as Currie calls it, is a factor in every retail supply chain. However, at Best Buy the objective is not always to choose the lowest cost, but to identify the best-cost scenario that will enable the retailer to deliver the optimum customer experience. For instance, the cost of processing returns through the back side of the supply chain can destroy any front-end profits. Last year the retailer received more than $1 billion in returned products.

Additionally, maintaining inventory balances are a challenge for every retailer, but Best Buy’s sales model is closer to a 90/10 split rather than the typical 80/20 rule (meaning 90% of its sales are generated from 10% of its products.) Multichannel shifts are also creating supply chain challenges, particularly given the diversification of the retail market and the fact that consumers can buy popular electronics virtually anywhere.

“We have to be responsive to our customers and this adds pressures to the supply chain,” noted Currie. What Best Buy has determined is that “customers want a voice in what a product is and does,” a phenomenon Currie defined as “co-creation.” This is in perfect accord with the Best Buy customer-centric philosophy that dictates the product life cycle must start and end with the customer.

“From development to the end of life, we need to own the pipe [supply chain], from the consumer’s home, back to the supplier’s raw materials. We may not own the work, but at least [we own] the processes,” continued Currie. “Another strategic objective of the customer-centric supply chain is to move work and cost out of our stores and up the supply chain so that products arrive floor-ready and store associates are available to be more focused on our customers.”

Customer-centric goals also call for the retailer to adhere to a “one-version-of-the-truth” forecast that will enable migration away from a push model to a pull model. Additionally, speed and flexibility must be built into the supply chain to support customer expectations for “freshness and fashion.”

One technology that is bringing Best Buy closer to realizing its customer-centric goals is RFID. “We began with a pilot of RFID tagging on cases and pallets that runs in parallel with our current processes for shipping, routing, receiving, packaging, labeling and invoicing,” explained Currie. “However, we believe the biggest benefits of RFID are at the point of contact with the customer.”

Suppliers participating in the case- and pallet-tagging pilot represent 80% of Best Buy’s total shipment volume and span all of the retailer’s major product categories. Best Buy’s suppliers are responsible for tagging the pallets or cases and transmitting the electronic product code (EPC) information to the retailer through advanced shipping notices (ASNs).

On the receiving end, RFID-enabled dock doors at Best Buy’s DCs capture the EPC data, and subsequent reporting compares this actual EPC information to the ASN and purchase order. Although Currie said the pilot has worked quite well, RFID technology needs to progress from the invention stage to true innovation. For Best Buy, that means turning the focus from the back end of the supply chain to the customer in the store.

Showtime for RFID: Earlier this year, Best Buy began testing item-level RFID on movies. The goals of the test were to gauge the readiness of RFID technology as well as to glean visibility into RFID’s operational benefits. Results confirmed the viability of RFID as a solution for enhancing sales and the shopping experience. There was an 18.7% revenue lift in tested products as well as a 14.1% increase in the number of units sold. Best Buy concluded that item-level RFID tagging improved retail processes, but the technology needs to become more flexible, easier to maintain and less expensive.

Looking ahead, Currie said Best Buy will expand the pilot to more categories. “True supply chain transformation will only happen through collaboration and partnerships from one end to the other; it has to be a holistic approach,” he said. His parting advice: “Focus on the customer, who keeps changing all the time, and remember that innovation is important, but integration and collaboration are essential.”

© 2014