Best Buy's Supply Chain Transformation

by Ken Cotrill

Rarely has a major shift in a company's strategy relied so heavily on the supply chain. Best Buy is reimagining its big-box retail concept to focus intensively on customer needs, and the company's supply chain is an integral part of the new vision. No longer will the supply chain simply push high volumes of product out of the factories and into the stores—a task at which it excels, by the way. Now it will emphasize agility, responsiveness, and accuracy, pinpointing smaller, sales floor-ready deliveries to meet the changing desires of specific customer segments. In effect, the supply chain is becoming a customer-facing unit.

Best Buy's move is a measure of just how far the supply chain has evolved in its relationship to corporate strategy. But this story offers lessons that go beyond how supply chains can drive vast shifts in strategy. The Best Buy transformation shows how supply chain executives from a range of industries can look beyond cost savings to make sure they're not missing opportunities to satisfy customers, can structure the supply chain to allow customer-facing units to "pull" product from consolidation centers, can help to relieve frontline workers of responsibilities that aren't essential to sales, and can make sure that supply chain decisions are fact driven—that they're based on evidence gleaned from customer experiences.

So how did Best Buy go about this transformation? And how did the company decide it needed to overhaul its supply chain in the first place? It all comes down to competition, demographics, and customer satisfaction.

Getting inside customers' heads
The Richfield, Minnesota-based retailer, a $27 billion market leader in consumer electronics with more than 700 stores in 49 states, faced several related challenges in 2003. For one thing, Wal-Mart and Target were chipping away at its core businesses—consumer electronics, home office equipment, entertainment software, and appliances. For another, as the population ages, consumers are putting more emphasis on service and support and less on the gee-whiz technical aspects of products. Third, the company found that 33 percent of the people visiting its stores were leaving dissatisfied. The stores' broad focus just wasn't meeting their needs.

Best Buy executives realized they needed to reposition the company for future growth. The one-size-fits-all approach clearly was not the answer. So Best Buy developed a strategy that focused on satisfying the needs of eight distinct demographic segments and the desires of customers in those segments. That meant giving up the idea that Best Buy stores had to have similar product mixes and layouts; instead, each store would carry products for all the segments but focus on one or two of the groups. It also meant taking a greater role in helping consumers understand and make choices about the increasingly numerous and complicated products that are constantly being rushed to market nowadays.

"Product solutions are evolving faster, which makes it tougher for the consumer," says Bob Willett, Best Buy's chief information officer and executive vice president of operations. "We want to act as the consumer's ambassador, the equivalent of the modern-day butler." In some stores, personal shopping assistants are available to accompany suburban moms and make the shopping experience easier and more fun.

The strategy, dubbed "customer-centricity," entails seeing the customer experience from the consumer's perspective and investing in new store formats that are tailored to the buying intentions of the demographic segments—affluent professionals, active younger males, family men, and busy suburban moms, to name a few. Store format is no trivial matter. Even the details can have a big impact on sales. Small appliances that appeal to suburban moms, for instance, began selling much better at a California store after they were moved from high shelves, where they were among major appliances, to a low rack in a prominent location.

The decisions that are at the heart of customer-centricity, such as where to place products and displays, are increasingly being made by Best Buy's frontline employees. The company's strategy calls for empowering sales associates to make judgments about the merchandising of products, the product mix, and inventory levels to meet the needs of consumers.

While only about one-quarter of the stores were operating under the new model in the fall of 2005, the strategy already appears to be paying dividends. The company reports that second-quarter 2005 sales gains at its new-model stores were double those of its other stores.

The supply chain comes through
Best Buy's supply chain is an inseparable part of the new strategy. To support the company's transformation, the supply chain is changing in several important ways:

• Nonsales activities are moving higher up the supply chain. In an effort to maximize salespeople's time with customers, the company is moving certain nonsales activities out of the stores—and up the supply chain. For example, shipments are being configured to individual stores' floor plans so that store employees don't have to spend as much time moving products (and their related displays) into the proper places.
• Employees have more autonomy to serve local-market needs. Best Buy is also giving store employees greater flexibility in responding to demand. That might mean, for instance, changing the floor layout or overriding an inventory-management plan so that a store can stock more of certain items to meet local spikes in demand. The supply chain must react quickly to these signals from the stores, reconfiguring shipments to accommodate a new floor plan or altering deliveries. Software is being developed to allow dispatchers to change delivery schedules even when loads are in transit.
• Better information flow. The supply chain is being relied upon to improve the flow of information. Sales associates will have access to detailed data on product flows from the time an item is manufactured to its arrival at a store and will thus be able to provide consumers with more reliable information on when items will be available. And stores will be able to communicate changes in floor plans to distribution centers where loads are built and dispatched. Best Buy is developing this communication capability as part of a three-year project to revamp its IT systems, Willett says.

At the same time, the company is making the supply chain more efficient so that there is less waste and greater accuracy in shipments and, thus, a reduced need for markdowns. That means:

• Higher delivery frequency and smaller shipments. The nimbler network now being piloted will put more emphasis on distribution centers located closer to retail outlets. At present, imports from Asia—where most products are sourced—are consolidated in two large centers in Seattle and Long Beach, California. These facilities feed seven large distribution centers and fourteen smaller home-delivery centers. The streamlined network will channel more loads to the smaller facilities. "We need a high-velocity distribution system, so that we are sending product to where it is needed, as opposed to just sending it," Willett says. And the loads will be ready for the sales floor.
• Greater access to information. Dispatchers and store associates will have better information on the status of loads. For instance, there will be automatic alerts about incidents such as delays in port. A new technology for predictive modeling saves information on past problems; when similar situations occur, it recalls the solutions. Managers can use this information to help them execute corrective actions. In addition, some seventeen Best Buy suppliers are using a process known as collaborative planning, forecasting, and replenishment (CPFR) that automates replenishment by linking suppliers and buyers electronically.
• Better forecasts. "We used to have multiple forecasts," Willett says, from internal departments and from outside parties such as suppliers. The retailer is now moving toward "one source of truth," to use Willett's phrase. That is, Best Buy is combining data from departments and partners into a single consolidated product forecast.

Will Best Buy's strategic turn undermine the economies of scale that are at the heart of the big-box retailing formula? Willett sees the change as sharpening the big-box model rather than blunting it. At the back end, where product is sourced, transported, stored, and delivered, Best Buy will still apply the economies that come with being a large, national retailer. At the front end, the infrastructure is more finely focused. "By understanding the customer's propensity to spend at a local level and being a more accurate retailer, we can cut down on handling costs," he says.

Reprinted with permission from "Best Buy's Customer-Facing Supply Chain," Supply Chain Strategy, Vol. 2, No. 1, December-January 2005.

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Ken Cottrill is editor of Supply Chain Strategy. He can be reached at SupplyChain@hbsp.harvard.edu.