Best Buy Purchasing and Supply Management

Purchasing and Supply Management at Best Buy Today
Headquartered in Richfield, Minnesota and founded in 1966, Best Buy Co., Inc. (hereinafter alternatively “the company” or “Best Buy”) is a leading retailer in electronics and other consumer products that competes throughout North America and Mexico today. As of early 2019, Best Buy operated nearly 1,200 large format as well as 51 small-format retail stores (Company profile, 2019). Despite its success in growing its market share in its existing market, the company is faced with the same existential threats as other major retailers, including most especially e-commerce operators such as Amazon (Wack, 2017). The purpose of this paper is to provide a review of the relevant literature to develop an informed and timely discussion and explanation concerning Best Buy’s new competitive environment and an analysis concerning how Best Buy's purchasing and supply management strategies contribute to their competitive advantage. In addition, an examination and some salient examples concerning Best Buy's impact of building relationships with their suppliers as well as a discussion and examples concerning how Best Buy drives innovation .and how Best Buy improves their quality and reputation to remain competitive are followed by a summary of the research and important findings concerning this major retailer in the conclusion.
Discuss and explain Best Buy's New competitive environment
Best Buy competes as a retailer of technology products and services as well as offering a wide array of other consumer products throughout its North America and Mexican markets in two main business segments: (1) domestic and (2) international (Company profile, 2019). Besides these retail outlets, Best Buy also offers and products through its Web sites using the Best Buy, bestbuy.com, GreatCall, Geek Squad, Best Buy Mobile, Best Buy Direct, Magnolia, Pacific Kitchen and Home, bestbuy.ca, bestbuy.com.mx and the Best Buy Express brand names (Company profile, 2019). In addition, the company also offers range of consumer products and services using mobile apps and a network of call centers (Company profile, 2019).
The company’s top leadership team has been highly successful in keeping track of changes in consumer trends and Best Buy’s combination of a big-box store format and specialty retailing has made it one of the top major retailers in the world today. Indeed, Murphy (2009) emphasizes that:
Today, with annual revenue exceeding $25 billion 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. (para. 2)
At present, though, the company also plans on closing all 250 of its smaller retail stores in the United States (Canada will not be affected) that are dedicated to the sales of mobile phones (Ong & Ong, 2018). A growing number of industry analysts caution that these store closures may just be the tip of the store closure iceberg, especially based on the closures of other big-box stores in recent years (Wack, 2017). Moreover, the existing retail market has become increasingly competitive in recent years, due in large part to the proliferation of e-commerce retailers such as Amazon (Chan, 2011). Against this backdrop, it is clear that Best Buy is at a critical juncture in its corporate history going forward and it is equally clear that the company must implement and sustain purchasing and supply management strategies that contribute to its competitive advantage and these issues are discussed further below.
How does Best Buy's purchasing and supply management strategies contribute to their competitive advantage?
On the one hand, Best Buy enjoys a political climate that is conducive to its retail operations. In this regard, Mitchell (2009) emphasizes that, “The playing field has been tilted by government policy, which, for more than two decades, has fostered and underwritten the expansion of big-box retailers while systematically undermining the survival of independent businesses” (p. 35). In fact, nearly half of all of the states in the U.S. have some type of tax relief or loophole provisions on their books that encourage big-bog stores such as Best Buy to locate new retail outlets in their jurisdictions based on the perception that these retailers will create hundreds of new jobs and attract other businesses to the area (Mitchell, 2009). On the other hand, though, these advantages have not prevented the closure of other big-box retailers operating in states with tax loopholes on their books (Chan, 2011), but Best Buy has managed to avoid this eventuality except for the aforementioned closure of its mobile phone stores in the United States to date.
It is reasonable to suggest, though, that this undesirable outcome looms large in the minds of decision-makers at Best Buy, making the need for other purchasing and supply chain management strategies all the more important. To this end, the company has also been taking advantage of its purchasing clout and economies of scale to force its supply chain partners to provide it with substantial discounts in order to undermine its main competitors and smaller retailer enterprises (Mitchell, 2009). For instance, Mitchell (2009) reports that companies such as Best Buy “They win not by being better competitors, but by using their size and power to gain an unfair advantage. They pressure suppliers to give them special deals that are not available to independents” (p. 36).
In addition, the company uses a purchasing and supply management strategy in which its mega-stores are stocked to excess, in other words, purchasing levels that are far beyond the ability of local economies to sustain them, all in an effort to eliminate local independent retailers that may represent even a modest threat to their market share (Mitchell, 2009). For instance, Mitchell (2009) adds that, “They do this because they know that by flooding a market with excess retail capacity, it is a lot easier to capsize independent retailers [because] no matter how well-run or popular, independents often lack the deep financial resources to withstand a sustained attack by a global corporation” (p. 36).
While this strategy has been the focus of a growing amount of scholarship concerning the adverse effects of the introduction of big-box stores on local economies, the company’s success to date in establishing and growing new businesses in different regions of the country and abroad make it clear that Best Buy recognizes what consumers want and has positioned itself to deliver these goods. For instance, according to Chan (2011), “While any new retailer needs time to bed in, this highly competitive sector is a particularly unforgiving environment. On the flip-side, Best Buy is hardly new to this game - it has a 22% market share” (p. 29). Besides its savvy marketing team, Best Buy also has a world-class supply chain management team in place that has directly contributed to its impressive success over the years as discussed further below.
Best Buy's impact of building relationships with their suppliers. Provide two examples.
Being a supply chain partner of Best Buy is a dual-edged sword. While the company has been highly effective at marketing its broad range of consumer products and services in recent years and vendors recognize the enormous economic value of a long-term contract with Best Buy, the company also builds long-term relationships by requiring all of its supply chain partners, including manufacturers for its private-label brands) to conform to specific human rights and labor standards (Best Buy supply chain, 2019). While these conditions may not appear particularly meaningful in the company’s North American markets where strict labor laws already exist, the company’s supply chain is global in nature and the employment practices that are used in developing nations might violate these conditions unless Best Buy made them a specific condition for establishing and continuing contractual relationships.
While this strategy is pragmatic and intended to protect Best Buy from claims that it supports child labor or other onerous labor practices, it is clear that companies that succeed in securing a contract with Best Buy recognize that it is in their best long-term interests to comply with these contractual requirements, even if it places them at a competitive disadvantage in their domestic markets. As a result, this increasing reliance on long-term contracts with the company contributes to building long-term relationships with vendors.
Yet another example of the types of relationship-building strategies that are used by Best Buy with its supply chain partners is the company’s global sourcing strategy. In this regard, Murphy (2009) advises that, The process to get products on Best Buy's shelves is a collaborative effort, which often begins with the global sourcing organization located in Shanghai” (para. 5). The Shanghai-based global source organization used by Best Buy aggregates the feedback that is received from the company’s consumers to provide its vendors with the timely information they need to develop new products and services in response. Just as importantly, the global sourcing organization also provide vendors with the data they need to develop the most efficient product designs for saving transportation costs, including their respective levels of “stackability” (Murphy, 2009). This strategy has been highly beneficial for Best Buy’s supply chain partners that are able to nimbly respond to changes in consumer preferences in a highly cost-effective fashion. This strategy has also contributed to the company’s success by introducing new innovations in transportation technologies that have streamlined its supply chain operations even further as discussed further below.
How does Best Buy drive innovation? Provide two examples.
In many ways, innovation has always been at the core of Best Buy’s success. For example, Best Buy was in the vanguard of retailers that recognized the potential advantages of using radio-frequency identification (RFID) technologies for supply chain management (Wamba & Boeck, 2011). Today, of course, these advantages are well documented and the use of RFID technologies for streamlining supply chain management is widespread, but Best Buy was among the first movers more than a decade ago (Wamba & Boeck, 2011).
Since its introduction, Best Buy has leveraged RFID and other state-of-the-art technologies in a number of innovative ways to enhance its supply chain operations. For example, the company uses sophisticated robots at its fulfillment center near New York City. In this regard, Thomas (2019) reports that, “Best Buy is using dozens of robots to sort through boxes of iPads, HP laptops, Beats by Dre headphones, DVDs, video games and more to ship to shoppers’ homes” (para. 2). These robots have replaced human warehouse workers who routinely logged more than 7 miles each day in order to locate and ship products from this fulfillment center, and the process was inherently inefficient and physically demanding for its warehouse workers (Thomas, 2019).
Although the company’s supply chain operations had already been streamlined and optimized over the years through the introduction of RFID technologies, the elimination of manual labor and the addition of robotics to its supply chain operations have made the company more efficient than ever in reducing the amount of time that is required to actually place products in the hands of consumers (Thomas, 2019). Based on the success of its robotics initiative in its New York fulfillment center, Best Buy has since added these technologies to its fulfillment centers in Chicago, Los Angeles and Piscataway, New Jersey (Thomas, 2019).
Besides implementing robotic solutions in these four fulfillment centers, the company has also driven innovation through diligent research in order to identify other opportunities and strategies that could further streamline its supply chain management. For example, Best Buy enlisted the assistance of a consulting firm to evaluate its core supply chain systems and processes in order to remain responsive to its aggressive plans for future growth. Based on the consulting firm’s recommendations, the company’s top leadership team determined that the best course of action was to replace a number of existing supply chain systems and processes, but it approached this ambitious initiative thoughtfully and only after performing the due diligence that was needed to avoid disruptions to its supply chain. According to a Best Buy supply chain executive:
We needed to do some curb jumping. 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. (as cited in Murphy, 2009, para. 5)
A number of action team were created and tasked with evaluating specified existing supply chain processes and systems, with an emphasis on retail transactions, transportation and inventory management, in order to develop a set of recommendations for their replacement. Based on the recommendations that emerged from these evaluations, Best Buy selected internationally recognized vendors to provide innovative solutions to these three primary supply chain processes (Murphy, 2009).
While the company has realized significant across the board cost savings and improved its supply chain management processes, the lion’s share of the monetary benefits have been achieved in its inbound transportation strategies. This initiative was deemed among the most important at the time because the company’s outbound transportation was serviced by dedicated fleets, but its inbound transportation network was “managed with Access databases, Excel spreadsheets, white boards and the system knowledge carried by a team of about 50 people” (Murphy, 2009, para. 6). This mish-mash of outdated systems and reliance of tacit knowledge was clearly inefficient, but Best Buy succeeded where many of its competitors have failed by seizing the opportunity for improvement.
Drawing on the consulting firm’s recommendations, the company’s supply chain management team brought the same level of expertise to its inbound transportation network as it had to its highly efficient outbound fleets. For instance, the company’s supply chain executive explained that, “I think on balance we can do a better job than our vendors of managing transportation costs and bringing exceptional value to the organization” (as cited in Murphy, 2009, para. 6). The success of the initiatives that followed has been proof positive that the company possessed in in-house expertise to take advantage of third-party recommendations to add value to its supply chain operations.
One innovative approach that was adopted company-wide by Best Buy that achieved significant cost savings and efficiency was the transition from pre-paid to collect terms for inbound shipments. In addition, Best Buy also achieved impressive cost savings by improving the company’s computer-based transportation suite’s ability to coordinate, schedule and monitor its loading and consolidation capabilities. This innovation not only generated cost savings through improved inbound transportation operations, it also succeeded in eliminating the need for the antiquated tools that its supply chain team had relied upon in the past for these activities (Murphy, 2009). These innovations have helped the company remain competitive during an especially perilous period in history for traditional retailers, but Best Buy has not rested on these corporate laurels alone as discussed further below.
How does Best Buy improve their quality and reputation to remain competitive?
As noted above, the company has a proven track record of performing aggressive market research to monitor trends in consumer preferences and using outside resources when it believes it is in their best interests, but Best Buy has also has a formal commitment to its corporate social responsibilities as well. In this regard, the company’s statement on corporate responsibility and sustainability emphasizes that: “At Best Buy, we aim to positively impact the world, enrich people’s lives through technology and contribute to the common good. We are an organization with a heart and soul that is built upon purposeful, values-driven leadership” (2019, para. 2). In support of this statement, the company has established ambitious goals for greener operations over the next several decades as follows: (1) reduce carbon emissions in its operations by 75% (over 2009 baseline); carbon neutral by 2050; and (2) reduce carbon emissions by 20% (over 2017 baseline); saving $5 billion in energy costs by 2030 (Corporate responsibility and sustainability, 2019).
Conclusion
Today, Best Buy Co., Inc. is a leading retailer competing in North America and Mexico, with more than 750 retail stores. The company’s wide array of value-priced products and services, combined with its world-class leadership team, have help fuel the company’s growth to date and have enabled the company to survive and even thrive in a competitive environment that has driven many of its top competitors out of business in recent years. Complementing its stellar marketing efforts has been the company’s focus on developing a streamlined supply chain network and forging long-term relationships with its supply chain partners, and the research was consistent in showing that these efforts have been responsible for helping Best Buy achieve and sustain a competitive advantage.
References
Chan, R. (2011, June 29). Best Buy. Marketing, 20.
Corporate responsibility and sustainability. (2019). Best Buy Co., Inc. Retrieved from https://corporate.bestbuy.com/sustainability/.
Best Buy supply chain. (2019). Best Buy Co., Inc. Retrieved from https://www.bestbuy. com/site/help-topics/ca-transparency-act/pcmcat263000050003.c?id=pcmcat 263000050003.
Company profile. (2019). Yahoo! Finance. Retrieved from https://finance.yahoo.com/quote/ BBY/profile?p=BBY.
Mitchell, S. (2009, September-October). The big box swindle: The true cost of the mega-retailers. Multinational Monitor, 27(5), 34-39.
Ong, T. (2018, May 1). Best Buy is closing all 250 of its mobile stores in the U.S. The Verge. Retrieved from https://www.theverge.com/2018/3/1/17066232/best-buy-close-all-mobile-stores-may-us.
Thomas, L. (2019, August 28). Best Buy revs up supply chain ahead of the holiday season. CNBC. Retrieved from https://www.cnbc.com/2019/08/28/best-buy-revs-up-supply-chain-ahead-of-the-holiday-season.html.
Wack, K. (2017, June 29). Credit card issuers face peril from rise in store closures: American Banker, 182(124), 37-39.
Wamba, S. F. & Boeck, H. (2011, April). Enhancing information flow in a retail supply chain using RFID and the EPC network: A proof-of-concept approach. Journal of Theoretical and Applied Electronic Commerce Research, 3(1), 92-95.