In just over two decades, Best Buy Co. has become one of North America's best known retail brands. Originally a chain of music stores, Best Buy adopted its current name and opened its first superstore in 1983 and soon after introduced its familiar yellow-tag logo. Marrying the concepts of big-box and specialty retailing, Best Buy has adroitly capitalized on America's passion for home entertainment and gadgetry, achieving meteoric growth. Today, with annual revenue exceeding $25bn and more than 780 stores in the U.S. and Canada, Best Buy is North America's number one retailer of consumer electronics, personal computers, entertainment software and appliances. It was named Forbes's 2004 Company of the Year and has been cited by AMR Research as having one of the nation's best-run supply chains.
That was not always the case, says Chuck Dow, director of logistics. Until about three years ago, Best Buy, like many companies, had little integration of systems and functions. "We had a siloed operation with all our teams working pretty much independently," says Dow.
After a rigorous, consultant-assisted review, the company concluded that it needed to replace a number of core systems and processes in order to support its growth and future vision. "We needed to do some curb jumping," says Dow. "We had a lot of systems that had been built in-house that could not help us achieve the integrated demand-and-supply or glass-pipeline capability that we wanted. To make more effective use of our business model, remain profitable and take the next steps forward as an organization, we had to do things differently."
Several teams were formed to conduct evaluations of specific areas and make systems recommendations. Dow served on teams that looked at systems for inventory management, retail transactions and transportation. In the end, the company selected Retek, Minneapolis, to provide the retail transaction system and i2 Technologies, Dallas, for demand and replenishment planning, supply chain management and transportation management. Oracle, Redwood City, Calif., was the choice to manage the financial piece of the business.
One of the key criteria for all systems was that the architecture be as open as possible because all systems would need to work together. "All of the participants were mandated to try to bring to the table an open architecture so that we would have integration capabilities bar none," says Dow.
Implementation began in March 2000. Dow led two separate implementation teams-one for i2's Demand Planning and Replenishment and another for the transportation suite. Both teams consisted of Best Buy and software vendor employees as well as an integration partner-IBM Global Services for demand planning and Cap Gemini Ernst and Young for transportation.
The transportation team had the greatest time pressure because the company wanted to reap the anticipated benefits of that system during its upcoming busy season, which begins each year around September. "We had five to seven months to get the system received, implemented, tested, developed, and successfully turned on so that we could achieve the benefits we were planning for," says Dow.
Omer Bakkalbasi, director of i2's transportation and distribution product line, acknowledges that this schedule presented challenges, "but we were able to work through them," he says. "Later on, our challenge was to essentially match their speed of business," Bakkalbasi adds. "Best Buy operates in an environment where things move very fast and change very fast as well."
Returns from the transportation suite have exceeded expectations. During the evaluation process, the team projected that the company would get an annual benefit of $4m to $5m per year on its annual transportation budget of more than $400m, says Dow. In fact, the company exceeded that projection in the first year and has continued to surpass it every year since. Total savings now are in excess of $20m.
Much of the anticipated and actual benefits have come from savings on inbound transportation, which was the first target. Outbound transportation from Best Buy's distribution centers to the stores is handled by dedicated fleets, Dow says, but the inbound environment was managed with "Access databases, Excel spreadsheets, white boards and the system knowledge carried by a team of about 50 people." Dow knew that automating and optimizing this area, and converting more inbound freight to Best Buy's control, had the potential to save the company substantial dollars. "I think on balance we can do a better job than our vendors of managing transportation costs and bringing exceptional value to the organization," says Dow.
Best Buy has a dedicated team to help convert inbound freight from pre-paid to collect terms. So far, about 40 percent has been converted and the process is ongoing. Other savings come from the transportation suite's optimized loading and consolidation capabilities and more accurate ratings. "We put all of our carrier rates and lane assignments in the TMS so that when we actually do the scheduling and rating it gives us incredible optimization and benefits," says Dow. "We also were able to replace all the manual activity and the spread sheets that some of our people previously used to do their jobs."
Best Buy has a complex transportation network. Most of its products are imported from Asia to one of two West Coast consolidation centers located in Seattle and Long Beach. From there, "brown goods," which include 27-inch televisions and anything smaller, go to seven distribution centers around the country. Three of these serve the online store as well as the brick and mortar stores.
Large-screen televisions and appliances go to 14 home delivery centers. A specialty DC in Franklin, Ind., handles all music and movie distribution for the stores as well as online orders and returns of these products. Other product returns go to three return centers that are operated by third-party specialist Genco, Pittsburgh.
Best Buy used the Supply Chain Strategist tool from i2 to model its network and evaluate the appropriate number and location of delivery and distribution centers. Today, it is using this tool to model a new networking strategy that the company wants to roll out for fiscal year 2006.
"We are looking at possibly realigning the kinds of products that are stored in each of our facilities," says Dow. The new strategy would move some of the products now stored at the seven DCs to the 14 home-delivery distribution centers. "There are twice as many of these facilities," notes Dow, "and if we can get some of our product out closer to the stores we can increase delivery frequency." Most of the stores currently get two deliveries per week, he says, with some getting one or three deliveries, depending on size. "We can do a more effective job for the stores if we can do more frequent deliveries during the week," he says.
Best Buy manages all transportation centrally, from offices at its headquarters in Richfield, Minn. "We work very closely with all of the regional transportation mangers at the distribution centers," says Dow. "We send them information on scheduling and coordinate with them daily on issues like expedited freight." The company works with about 75 to 80 core carriers for inbound freight under contracts that are bid out annually. Outbound uses regional dedicated fleets. "We operate these fleets as though they were our own assets," says Dow, "but actually we work on a cost-plus basis with several different providers." The transportation group also employs home delivery carriers, a courier service that helps with special programs at some of the stores for same-day or next-day delivery, and it manages a fleet of more than 800 vehicles used by the Geek Squad, Best Buy's popular computer maintenance service. For imported freight, an international operations team headed up by Belinda Bathie is responsible for port selection and contract negotiations with freight forwarders and ocean carriers. A carrier relations group managed by Eric Morley oversees all contract terms and conditions. All report to Wayne Bourne, vice president, logistics and transportation. "We all work as a kind of combined team," says Dow.
The process to get products on Best Buy's shelves also is a collaborative effort, which often begins with the global sourcing organization located in Shanghai. This group uses feedback from Best Buy's customers to help vendors develop product features and enhancements that meet specific consumer desires and demographics. Once a product is introduced, it is cataloged in the Retek system as part of a centralized item master. "At that point, we have all of the attributes of that product, such as dimensions, weight and whether or not these products are stackable and how high they can be stacked," says Dow. "That helps us build the appropriate capability for cube utilization and to plan how to pack the containers and truck trailers in the most efficient and store-friendly way. The idea is to limit the time and labor it takes to get the product from the dock door to the store floor."
Once a release strategy for a product is in place, the inventory team uses i2's forecasting and replenishment tools to synchronize product demand with the advertising calendar and seasonal fluctuations. Markdown Optimization from i2, which was developed in conjunction with Best Buy, is used to plan for a product's end of life.
The transportation teams work very closely with retail and inventory teams to monitor freight until it is delivered to the store. "These teams are in constant contact to manage scheduling and other requirements that happen on a day-to-day basis," says Dow.
To further empower these efforts, the company recently added supply-chain event management from i2. "This visibility solution enables all stakeholders to take a look at shipments, orders and inventory positions," says Dow. "They know, for example, when things are five days out from the port. So if Long Beach is backed up and we have SKUs coming across from Asia that we need for a specific advertisement, we may decide to divert that freight to Seattle. We have to be flexible and this new event-management capability gives inventory, logistics and even the retail stores the ability to see where product is in the pipeline, not just how many of an item are in the distribution center."
In addition, he says, every alert and monitoring event is captured and put in a database so it can be used in predictive modeling scenarios. "If you have a situation that has happened before, the system will tell you how it was previously resolved. It will give you scenarios that show you what can be done to mitigate particular circumstances," he says. The event manager also automatically escalates certain alerts to ensure that events are handled effectively, says Dow.
Best Buy helped i2 develop specific workflows for this solution, including those that track products all the way from purchase order to receipt at the DC, says Bakkalbasi. "We currently are expanding these work flows for international orders and multimodal transportation so we also can provide full tracking of these shipments, including interior pickups at ports and modal changes along the way," he says.
This end-to-end visibility is key to making sure customers find the products they want when they shop at Best Buy. "We don't want to leave anything on the dock, particularly during our busy season," says Dow. "And with all the retailers out there going through the same busy season and going after the same carrier base, it is important for us to know where our product is." This capability currently is being expanded to store employees. "We want the associate down at the store to be able to actually see the product's inventory position-where it is, how many of each are going to be delivered and when," says Dow. "They will have that capability very shortly."
This will help with a new approach that Best Buy is taking to store assortments. "In the past, our stores generally took a cookie-cutter approach," says Dow. "All of our circulars were the same throughout the country and each store would get basically the same assortment. Over the past six months we have been moving toward a more tailored approach, where we send different assortments based on geographic and demographic factors and customer profiles."
To help its vendors better understand upcoming demand, Best Buy also is moving toward greater use of the collaborative forecasting and replenishment process (CPFR) developed by the Voluntary Interindustry Commerce Standards Association. "We have eight or nine people on the VICS committee because we think CPFR is very important," says Dow. At the same time that Best Buy was working with i2 to develop the Markdown Optimization solution, the two partners also jointly developed a CPFR module that now is being used by the Worldwide Retail Exchange (WWRE). "We ran this module internally for a couple of years with some of our major vendors to prove it out and it has been very, very successful," says Dow. "We can't possibly run it internally for all of our vendors, so we will be doing that through WWRE." The four vendors with which Best Buy ran its pilot were Panasonic, Sony, Hewlett-Packard and Tompson. "We all know that success at this game is very dependent on the accuracy of your forecast," says Dow. "The old school way was to figure out your accuracy percentage-40 percent or 60 percent-and adjust your processes and lead times accordingly to make sure you got the product. But sharing information with these vendors has just been extremely helpful. A lot of companies think it is all about the deal these days, but we really believe in building relationships with our vendors. We think that is a smarter way to do business."
Its vendors apparently agree. Dow serves on i2's Solutions Advisory Board and on a special interest group that helps develop solutions. "One of the things that clearly separates Best Buy as a company is that its people are open to innovation," says Bakkalbasi. "They don't decide there is one way to do things and then close the door.
"In my opinion," he adds, "that is why Best Buy was able to realize even more savings with the TMS and visibility solutions than they had anticipated. And, of course, we are very happy about that."
|Best Buy Gets the Picture With Help from Ensenda|
|Best Buy makes innovative use of dedicated fleets to solve specific transportation challenges. One example is its partnership with Ensenda, a last-mile logistics company based in San Francisco that combines the services of numerous local delivery carriers to form a network serving markets throughout the U.S. and Canada. |
Best Buy turned to Ensenda to help it expand Imagelab, a digital imaging service. Imagelab allows users to upload, print, store and share photos online, to order and pick up prints at any U.S. Best Buy location or to have prints mailed to their homes.
For this service, Best Buy leverages state-of-the-art Kodak image processing technology. However, the high cost of the equipment makes in infeasible to have an Imagelab in every store. Instead, Best Buy uses a hub-and-spoke model. Prints are processed at hub locations and delivered the next day to "spoke" stores within an established radius for customer pickup.
Ensenda manages the store-to-store deliveries. Customers e-mail their digital photos to Imagelab, which routes them to the nearest processing center for printing that same day. Each night, Ensenda local carriers receive orders through the Ensenda system. The next business day, they pick up the processed photos at an Imagelab hub and deliver them to the stores on their route, which is optimized for efficiency. The result is a hassle-free, automatic daily process that requires no intervention by Best Buy.
Ensenda also provides same day delivery of major consumer electronics for a number of Best Buy stores in Canada.
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