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Sourcing to save:
Dennis Silva gets results at Best Buy Canada
Lisa Wichmann
In 1992, Dennis Silva was just out of university, and like most new graduates, he had a vision to change the world. Fourteen years later, he hasn't exactly accomplished that mission, but he’s certainly made an impact in the world of purchasing.
With an ebullient, tenacious approach, Silva and his small purchasing team at Burnaby, BC-based electronics retailer Best Buy Canada Ltd. have taken control of vendor management, brought more formality to procurement, and saved chunks of money in various segments of the business, such as travel, tech equipment and supplies.
Much of its success revolves around a decision by Best Buy over a year ago to centralize procurement, recalls Silva, senior manager of central purchasing. The move enabled more control and aggregation of spending, the application of best practices, and uniform supplier metrics.
"I don't think we're 100 per cent there yet, but when you look at all the teams that have been amalgamated, it's much more consistent," Silva reflects. "And it’s funny, because I run around from meeting to meeting and I don't know what I’m going into," he jokes. "But in those meetings, it's all structured and communicated the same in terms of the spirit of saving and customer service."
The "before" situation wasn’t quite as heartening. Disparate teams throughout the company handled buying of the various commodities and services. For instance, the tech buying team was embedded in the IT department.
"The IT purchasing team was tactical, so [they] would just be pushing down all this work. Our buying people weren't buying. They were just cutting purchase order numbers and kicking them out, relying on the receiver to take care of the reconciling and the billing."
Once the tech team and other buying arms were folded into central purchasing, all the processes were reviewed and a few key best practices were implemented.
From handshakes to RFPs
Best Buy, which is headquartered in Minneapolis, bought Canadian electronics retailer Future Shop in 2001. The two companies cover much of the market in computers, home electronics, cameras and camcorders, and music, software and games.
Future Shop—which still operates as a separate, wholly-owned subsidiary—first opened as a one-store operation in Vancouver 20 years ago. Through its growth, the company has maintained some of its small-company culture, which might explain some of the informal purchasing practices that used to be in place before central purchasing took over.
"It was very handshake driven," Silva recalls, who worked for several years in a Future Shop store before embarking on a career in supply chain management with the company, that eventually led to his current role in Best Buy’s central purchasing department.
"Some of our groups did not pre-qualify vendors, and some of our vendors did not think from a contractual point of view. A lot of it was emotionally driven...Like 'this person has done a great job for us over the years. I'll continue doing business'. But we did not take an objective approach. So what we were finding was through these emotional or handshake deals, we ended up making things way more complex than we had to."
For example, every week, the stores send out promotional in-store packages. The job of getting them printed is high-volume but low-dollar, and over the years, additional deals had caused the printing to become too complicated and costly.
"We had eight vendors across Canada creating their part of the merchandise kit, and sending it to Vancouver," he says. For instance, a supplier in Montreal would send the items to Vancouver, where they would be repacked at a printer who didn't necessarily have the logistics capability, and sending it all the way back across Canada.
After taking a month to review the project, and issuing a request for proposals—something the company rarely did before centralizing this area of spend—the team decided to consolidate the business with two companies in Vancouver; a printer and a logistics firm. It also got rid of the next-day air shipping used in the old system. "So we shaved about 25 per cent off the program," Silva explains.
The logistics company in Vancouver also provides tracking visibility, so Best Buy can view which files have been sent, and the progress of the kit as it’s built. "So it becomes much more methodical, rather than reactive...And that was a huge win," he says. "Our two vendors are contractually obligated to their costs. They will be scorecarded because it's a material business and it's quite a bit of product that they’re doing."
Silva also uncovered substantial savings in procurement of plastic bags used at all the shops. Up to about a year ago, the company was getting its bags supplied by a third-party distributor. The problem was the distributor was sub-contracting to another firm, incurring an extra layer of cost.
"Well, I'm looking at the cost and I'm thinking, bags can't be that much. So the first thing we did was looked at the global opportunity. We can get low cost from China. Can we get this in the US and other areas?"
As the Canadian dollar strengthened, Silva made sure he included the US when sourcing products and services. A few years ago, the low dollar made US sourcing prohibitive, but lately, buying from the US has become more palatable. Aside from supplier discovery, the purchasing team did its homework on commodity research.
"We actually pulled out three years of data on resin costs, he says. "We discovered that for the last three years...resin prices would decrease up to July, and then spike up through the US Thanksgiving and Christmas because of demand. So our strategy was to lock in a vendor that would give us the lowest price and then put a formula in place so if there are [resin] increases...we don't get the full increase."
Despite the temptation to source in China, the strike at the Port of Vancouver last year put a damper on that idea. Silva and his colleagues decided to focus on North America, to ensure reliable delivery. "We created an RFP and we looked at this formula to make sure we would get the best price, irrespective of resin costs. We ended up going directly to a Canadian manufacturer."
The end result was a better quality of bag, and a 20 per cent reduction on bag spending.
Online travel procurement
When Silva began to lead the central purchasing group a couple of years ago, he found certain aspects of Best Buy’s travel procurement somewhat perplexing. The company was working with a third party travel agent to book flights, hotels and other arrangements.
"I was asking the administrator of the time, 'why, in this day and age are we e-mailing an agent somewhere in Canada to book our flights?' The response I got back was 'well, there's no appetite to have online reservation systems. Nobody wants it here in the office'," Silva says.
"What I found out was we were paying [the agent] a fee to manually find some flights for us and book our travel, and then we as individuals would go online to price match to see if we could get a better price. Then we would go back to the [agent] and say 'please book this flight.'"
To Silva, it seemed a waste of money to pay the agent by transaction, only to have employees hop on the Internet to find the best deal. In November of last year, the purchasing team partnered with colleagues in the Minneapolis head office to launch an Internet-based program.
"We're using an online tool to book the majority of our flights," he explains. "The tool has been customized with our travel policies, such as hotel limits. Our car rental agreement is on there, and all our hotel rates will be loaded onto the system as well. The transaction fee, compared to the agency fee we were paying, is substantially less."
The tool is also quite easy to use. Employees simply select their destination and the program checks all the available carriers, plus sites such as Travelocity and Expedia, to find the best deal. It also ensures employees stick to pre-arranged contracts.
The examples of savings continue. Consider toner cartridges, a supply category many purchasers struggle with. Best Buy tackled toner challenges by renewing its sourcing efforts.
"We used to do a remanufactured program, but we would never get the yields. We really didn't get the bang for our buck," he explains. "When we worked with our current vendor and reviewed our long-term strategy, we came up with a refurbished program, that provided us with [better quality] remanufactured toners at a lower cost. The vendor guarantees the toners, and they're ISO 9000 certified," he explains. "And it gives us an environmental opportunity as we can take these toners out of the landfill."
With that program under control, Best Buy is contemplating online auctions as one of its next frontiers. The US parent company in Minneapolis is much further ahead in that area, and managed to save millions of dollars on an auction for blank CDs. At press time, the Canadian team was targeting a couple of auctions for packaging material and print jobs.
Measuring supplier performance
Of course, any seasoned purchaser knows getting the best price is only half the battle. From that point on, vendor management kicks in, and requires constant attention to ensure quality and service remain high. Best Buy seems to excel in this area as well, with established metrics and regular review meetings with key suppliers.
"We do have a scorecard program, because as with all purchasers, it's difficult to separate the objective from the subjective. So we measure time, quality and cost," Silva says. "We're not highly scientific here because we don't have the resources to measure each and every thing."
The team measures ontime delivery for its logistics partner, with an expectation of 100 per cent. If they miss a shipment, they must log why, in terms of weather delays, customs issues, etc. Other vendors are measured by quality and the number of product defects, usually in terms of dollar values.
"We review our scorecards through a quarterly business review process, for all of our high-spend vendors. We meet either here or at their location or a neutral site and over the course of the meeting we discuss scorecard...So out of that review we come up with three goals and then we target those three goals for next quarter’s achievement."
These quarterly business reviews (QBRs), allow the team to rationalize supplier relationships. "We have objective goals that we shoot for and everyone's on the same page until the next QBR."
High velocity vendors are also required to attend tracker meetings, often on a weekly or bi-weekly basis. Usually, Best Buy uses the tracker meetings as an opportunity to get a performance report from the vendor, and to explore cost saving and customer service ideas. These meetings are more frequent and tactical, compared to the QBRs, which are more strategic.
Not only does it foster good communication with vendors, and a sense of obligation on the supplier’s part to be ready with fresh ideas, it also simplifies communication, Silva explains. That can be a big time saver and stress reducer. He recalls the situation a few years ago when communication with certain vendors was getting out of hand.
"There was actually more noise around the relationship with non-business issues than there were things that needed focusing on," he says. In one case, there were about 20 reps calling him from one vendor, because of the complex nature of the business.
The tracker meetings turned out to be beneficial for both Best Buy and the vendor, because they got rid of a lot of uncertainty around future orders and projects. Payment timelines to certain vendors also improved, from over 90 days down to 47, because of the enhanced communication.
Lean team
The achievements of Best Buy's purchasing department are impressive on their own, and even more noteworthy when you consider the team is comprised of just 12 people, overseeing a substantial budget.
Moving to a centralized purchasing model allowed the company to streamline the department to make it less populated and more lean. The use of purchasing cards helps relieve the transactional workload, allowing staff to focus on RFPs and ongoing innovation.
Out of the 12 purchasing staff, two are members of the Purchasing Management Association of Canada (PMAC), and Silva attends PMAC events as a non-member. When things settle down at work, he’ll make the time to pursue professional certification himself. As things stand now, he has a degree with a major in urban economics, and four years of retail experience in a Future Shop store enriching his supply chain management career.
But those aren't the only assets. Silva refers to Best Buy's culture of empowerment as a key element of its purchasing wins. He reports to a senior vice-president, who likes to keep connected, but otherwise gives Silva the space and backing to pursue new ideas. "We're making things happen and trying and experimenting. Sometimes, things don't go the way we planned, and the company doesn't mind because it’s all part of our challenge and change philosophy," he says.
He's also fortunate that his purchasing team gels. All its members are enthusiastic and friendly, and they treat vendors with respect. "I think purchasing is all about relationships and how you communicate and interface with the customer," he remarks. The company holds a regular vendor thank-you event and award presentation, along with a charity golf tournament.
Asked about future plans, Silva says he'd like to continue benchmarking with outside organizations. Last year, after reading an article on Montreal-based Air Transat's strategic sourcing program, he paid a visit to the purchasing team there. Strategies were shared and Silva came back with several practical ideas.
The company also networks with external organizations, to share best practices and ideas. It's something Silva would like to continue doing, perhaps even on an expanded level in the years ahead.
He's making a point to celebrate the purchasing team's achievements within the company. In many companies, purchasing is still viewed as a cost centre, so it’s vital that supply chain managers draw attention to their team’s achievements, Silva reflects. Those efforts will eventually drive home the message that purchasing can enhance the profitability and growth of an organization.
With a string of successes already under his belt, and the bulk of his career still ahead of him, that goal won’t be long in coming.
Contact the editor, Lisa Wichmann, at lisa.wichmann@pb2b.rogers.com
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