RadioShack's Supply Chain Tune-up
Thanks to a strong foundation created after a three-year, company-wide supply chain project, RadioShack has a new direction, new goals, and new customer markets.
RadioShack is embarking on a three-year strategic plan that will improve revenues, customer service, and sales. But the supply chain tale of how the consumer electronics provider—ranked third in the United States—got to where it is today begins much earlier.
A key turning point in the company's history was July 1993, when Leonard H. Roberts, former chief executive of the Arby's and Shoney's restaurant chains, joined RadioShack as president. Never before had an outsider been appointed to this post.
Roberts brought new business strategies to the company, heading a successful re-imaging campaign during the mid-1990s, driving growth in stores, and increasing overall sales for the company. He also brought a zeal to revamp RadioShack's supply chain. With more than 7,000 outlets nationwide stocking more than 3,000 items, and hundreds more available online and by special order, the potential improvements were vast.
RadioShack stores are now ubiquitous—an estimated 94 percent of Americans live or work within five minutes of a RadioShack store or dealer. While the Fort Worth, Texas-based consumer electronics specialty retailer opened its doors in 1919 as a leather goods dealer, it began selling electronics exclusively in 1975 when it was known as Tandy Corporation.
Today Radio Shack's product mix includes everything from computers to MP3 players to personal digital assistants and wireless phones. In fact, RadioShack sells more wireless phones than any other retailer—approximately one-third of its sales are related to wireless. The company's financial numbers reflect its size: net income for 2003 was $298 million, up from $263 million the previous year. Sales for 2003 were almost $5 billion, up two percent from 2002.
Planning for Change
But in 1999, when Roberts became CEO and chairman of the board, he realized he needed help in updating the company's supply chain strategy. He turned to an outside consulting company to assist with his supply chain project—a project that was about more than just processes. Roberts wanted a cultural mindset change at RadioShack.
The original scope of the project was very broad, encompassing most of the organization, says Mike Kowal, senior vice president and chief supply chain officer for RadioShack. The only departments not involved were legal, public relations, and human resources.
Roberts hired Kowal, at the time vice president of the industrial manufacturing sector at Celerant Consulting, to lead a supply chain project group of 100 full-time equivalent employees and to instill an atmosphere of "organizational dissatisfaction"—constant improvement at the company.
"Five months into consulting for RadioShack I joined the company," says Kowal, who was hired to lead the supply chain team, help speed products to market, and increase inventory turns. Kowal ran the team for the first 15 months of the project, which is still ongoing, albeit at a lower level.
But more changes were in store. Roberts wanted an organization with more visibility into the supply chain and a greater understanding of overall supply chain operations. He created the position of supply chain officer and put Kowal in charge about 18 months ago.
Kowal's position was "part of a broader change in the company," a new way of thinking, he says. "What we are getting to is a truer understanding of the end-to-end cost of fulfillment to the customer."
Distribution and logistics, reverse logistics, repair services, inventory management, and product replenishment now all fall under Kowal's direction. Previously these responsibilities resided in two or three different areas, with a vice president for distribution and logistics, a vice president for reverse logistics and repair services, and a third vice president for merchandising, also responsible for inventory management and product replenishment.
Today, with these vice presidents all reporting to Kowal, information from each of these groups is shared.
Kowal uses the newly created end-to-end information chain to lead process improvements throughout the company, eliminate redundancy, streamline workflow, and improve performance.
"It has impacted a number of different areas," Kowal says. For example, RadioShack used to need seven signatures for every purchase order. By reducing the number of required signatures, the company cut order processing time from 21 days to four.
"We didn't need to spend millions to fix that problem," says Kowal.
More importantly, RadioShack now has visibility in its inbound supply chain, enabling it to address issues such as West Coast port congestion and expediting goods coming in from Asia.
"We've been in China for a long time from a sourcing perspective—probably 20 years," Kowal says. Typically, he explains, companies sourcing from China have shipments coming into the West Coast. Four- to seven-day delays, from the time the ship anchors at Long Beach to the time containers can be offloaded, are common.
"If you don't have the visibility you may not know it's too late until you've missed the ship-to date to the distribution center," says Kowal.
RadioShack can now direct workers at the port to pick up the five most important containers first, which it couldn't do five years ago. The ability to deal with port and rail congestion will become more important as volumes coming in from China increase while the United States' physical transportation infrastructure remains the same, Kowal says.
"Once the congestion reaches a seven-day delay on the West Coast it becomes effective to bring goods into the East Coast," says Kowal, noting this situation is "bizarre, but possible."
We All Have Problems
Deciding whether or not to bring goods into West Coast ports is a problem facing many companies, not just RadioShack. The lion's share of consumer electronics comes into the United States from Asia, with many products manufactured in Japan, Taiwan, and China, says Steve Koenig, senior manager of industry analysis for the Consumer Electronics Association.
In 2002, the United States imported $141 billion worth of electronics from Asia, according to data from the American Electronics Association. Nineteen percent of all goods imported into the United States were high-tech, with nearly two-thirds of these from Asian countries that year, of which China topped the list.
Consumer electronics supply chains are complex because of their geographic length, says Jeff Woods, principal analyst with Gartner Research.
"Everything you can do to speed up and smooth out the supply chain is a huge deal," he explains. "For example, you may have a product that has a six- to nine-month lifecycle. You've got to be able to innovate, design, and communicate that to the manufacturer very quickly.
"Companies need to gain dramatic cash flow from the product in its short lifecycle, "making accurate demand forecasting essential for the industry," Woods says.
"You have to live with and work around this fixed lead time," Woods says. "You can speed up the process but the boats will not go any faster."
To work around these issues, consumer electronics providers are using collaborative design efforts and collaborative sourcing, says Woods. Visibility is also important.
"I often criticize supply chain projects with visibility because of a fuzzy return on investment. But in consumer electronics it can literally cost millions not to have visibility," he says.
The consumer electronics chain is unique in additional ways as well: unlike many other vertical sectors, consumer electronics companies own pieces of the supply chain to have greater control over how quickly products move, says Koenig. Some companies maintain their own facilities at the docks because of the large volumes of product they ship.
"In some cases the manufacturer may own several links in the supply chain—the factory, the dock, the distribution centers—which is somewhat unique to the consumer electronics industry," Koenig says.
And the volume coming into the United States is huge. Last year, slightly more than $100 billion worth of factory-to-dealer consumer electronics were shipped in the United States. That number is expected to grow to $109 billion in 2004 and to $116 billion in 2005, says Koenig.
Keeping Up With Change
The consumer electronics supply chain has changed dramatically in the last five years. Customers have become more demanding, and want to hold less inventory; the Internet has changed the way companies source goods; and more new electronics products are on the market than ever before, explains John Fontanella, an independent supply chain consultant.
These changes may have occurred more dramatically in the consumer electronics supply chain compared to other industries because consumer electronics providers tend to be early adopters of supply chain technology, says Woods.
While companies have been hesitant to invest in technology initiatives over the last few years, that is changing with the upswing in the economy—and more changes will take place in the near future.
Importing consumer demand information into supply chain data is one issue RadioShack, like other consumer electronics companies, has to address.
"One thing that makes RadioShack's supply chain very complex is having to deal with retailers and actual customer demand," says Woods. And consumers are hard to read.
"They won't tell you when they are going shopping," he says, which complicates supply chain management. Finally, all companies "should be thinking about ways to minimize hand-offs when product travels from Asia to its ultimate destination. They should be rethinking their distribution strategy," says Fontanella. "The whole secret is to connect supply with some kind of demand signal. Right now that is a broken process."
While tying consumer demand to supply may never be a perfect process, RadioShack has certainly improved its supply chain responsiveness and is ready to ready to tackle bigger challenges because of its supply chain success. The next three years will be spent executing a long-term strategy for better financials, bigger revenues, and improved customer service.
"Over the past few years, we have focused on the fundamentals of our business by strengthening our supply chain, divesting ourselves of non-core businesses, and becoming a more disciplined organization," says CEO Roberts. "We are now well-positioned to implement a longer-term growth plan that we believe will bring increases to both our top and bottom lines."
In fact, the company already sees growth and success with its new supply chain. Inventory turnover for the full year of 2003 was 2.7 times versus 2.5 times the prior year. Free cash flow was $422 million for the 12 months ended Dec. 31, 2003, compared to $375 million in the prior year. And its earnings-per-share growth of more than 16 percent for the second quarter 2004 caused RadioShack to raise its 2004 EPS guidance.
Those positive numbers continued for the most recently reported quarterly earnings. In late July Radio Shack announced net income of $68 million for the quarter ended June 30, 2004 versus net income of $57 million for the quarter ended June 30, 2003—a growth rate of 19 percent in net income and 24 percent in diluted earnings per share. Sales, however, have been flat during the company's supply chain revamp.
"Improved management of product mix, supply chain initiatives, and markdowns, along with other factors related to gross margin, favorably impacted our quarterly earnings," says Roberts.
A New Growth Strategy
Now, with a strong backbone including better inventory control, faster times to market, and better product assortments, RadioShack starts its new, three-pronged growth strategy, says Charles Hodges, director of media relations for the company.
The first part of the attack: changing the way RadioShack sells in its stores across the country. Today each RadioShack sells essentially the same merchandise.
But that will change in the future under the new strategy, as each store determines its target market and aligns its product to that market—whether the market includes college kids or an aging population. The company is involved in a market optimization project to determine which stores get which products, explains Hodges.
People power comes next. "We are investing a tremendous amount of money in training and hiring, making sure we have the right people in the stores," Hodges says.
RadioShack also is unveiling a new store concept, with different colors, displays, and traffic flows. Test results have been very positive, and the company is accelerating the development of these concept stores across the country.
Finally, RadioShack is expanding geographically in Mexico through a joint venture with Mexico-based retailer Gigante. "We already operate some 80 stores, mostly in Mexico City," says Hodges. Over the next three years the company plans to expand that number to address the needs of the underutilized Mexican market.
The second part of the plan leverages the company's existing infrastructure and operational expertise to create new retail opportunities outside the traditional RadioShack storefront. The company created its new Retail Services division to address this expanded market.
"For years RadioShack has succeeded as an operator of small-box, specialty retail stores. As a result we have developed core competencies and skills in retailing that are attractive to other companies," says Roberts.
The company is already executing on this part of its strategy with two deals involving Sprint and Sam's Club. RadioShack will open 500 Sprint kiosks, branded under the Sprint name, in shopping malls around the country over the next three years. The company plans to open 90 kiosks by spring 2005, staffed by RadioShack employees.
Under a second multi-year agreement RadioShack will provide wireless kiosks inside Sam's Clubs, a division of Wal-Mart Stores. The store-within-a store format will yield RadioShack sales of at least $150 million annually in 2005, a number equal to the total wireless sales revenues for Sam's Club in 2003.
RadioShack will operate these kiosks, branded under the Sam's Club name, in 542 Sam's Club stores nationwide, and has hired 1,900 employees from Arizona-based Wireless Retail, the former kiosk operators, to manage the kiosks.
This store-within-a store concept that RadioShack is using to expand its business is somewhat new for the company, Hodges says. The chance to obtain new customers was a deciding factor in adopting this growth strategy. "The customers using the kiosks to purchase wireless are not the same customers purchasing wireless at RadioShack stores," he notes.
The third portion of RadioShack's strategic plan is retail or original equipment manufacturer opportunities, says Hodges. One example is Arizona-based Mobility Electronics, which makes power supply products for small portable devices, such as laptops and cellular phones.
"We joined forces with Mobility Electronics through a joint venture where we help make product for them for exclusivity and some ownership and residuals. We provide them with a way to distribute their product," says Hodges, noting, "RadioShack is heavily involved in innovative business growth."
The company also opened a wireless repair center in Fort Worth, Texas, to handle testing, refurbishment, and repair of handsets for third parties.
"We have proven that providing third-party repair services is a logical growth channel for us, and we expect to see accretive financial returns this year from this initiative," says Roberts. The company plans to expand its repair facilities in 2005.
"The last few years our sales were flat. We were focused on our supply chain initiative. Now we have shored up and it's time to come out with a growth story," says Hodges. "A lot of opportunities exist to grow our business in ways we've never done before."
The supply chain rubber is meeting the road. "Now we are at the point where we are starting to execute our technology strategy," says Kowal. "In the coming years, we'll focus on leveraging our assets to deliver product to consumers in a multitude of formats. Our supply chain has got to be adaptive."
Says Roberts: "we are bullish about the company's long-term outlook. Our sound operations today, coupled with exciting growth initiatives that are starting to gain traction, make for a very promising future."