Start with the obvious: RadioShack Corp. is no Best Buy or Circuit City. Its business model couldn't be more different from the superstores that dominate consumer electronics retailing today. Where others favor big-box outlets with massive selection, RadioShack dots the landscape with thousands of storefronts, averaging 2,500 square feet each. And that decades-old strategy seems to be working still. Today, Fort Worth, Tex.-based RadioShack is the third-largest electronics retailer in North America. Sales last year topped $4.8bn, up 4.1 percent over the prior year, while net income exceeded $337m, a 13-percent rise.
So what's not to like? It's a question that many at RadioShack were asking three years ago, even as sluggish growth in revenues and earnings per share was giving some executives cause for concern. One might even say that RadioShack was mired in complacency, given its years of success and evident lack of rivals with a similar retailing model.

No one had put the company's supply-chain performance under the microscope. "There was a widespread belief that we were actually world-class," recalls Michael Kowal, senior vice president and chief supply chain officer. "I said, 'Yeah, but it's the Third World.'"

At the time, Kowal was an outsider, employed by Lexington, Mass.-based Celerant Consulting to scrutinize the RadioShack organization. But he had support for his views from a highly placed insider: David Edmondson, then president of RadioShack. (The company recently announced that Edmondson will take on the additional title of chief executive officer.) Edmondson, says Kowal, saw the supply chain as a "Trojan horse"-a way of breaking up old ways of doing things and transforming the entire business.

By any definition, Edmondson was out to stir things up. His goal, says Kowal, was to create "organizational dissatisfaction." It was the first step toward a massive change both in the supply chain and corporate culture.

Edmondson had plenty of facts to back him up. By 2000, says Kowal, financial performance had plateaued. Business processes were parceled out among a series of corporate silos, with managers rarely speaking to one another. Part of the problem was that RadioShack had grown up with a merchant's mentality, with little focus on supply chain realities and virtually no link between sourcing and logistics.

In fact, RadioShack had no supply chain organization as such. The task was spread among four vice president "fiefdoms," says Kowal, "none of which communicated." Key decisions were made on the basis of emotion, not hard numbers, and the company had little visibility into the status of orders and inventory.

Part of the problem lay in RadioShack's heavy dependence on privately labeled merchandise, which accounts for some 60 percent of SKUs. One might think the company would have better information over a supply chain that it directly controls, all the way from manufacturing to store shelves. Indeed, many of the traditional products sold by RadioShack-cables, connectors, cordless phones and the like-move through well-established channels.

But the introduction of new products with private labels is fraught with complications, Kowal says. Vendors have unreasonably long lead times for filling orders, as much as 120 days, versus 30 to 60 days for branded merchandise. RadioShack must build in the time required to get product direct from Asia, since private-label suppliers rarely maintain distribution warehouses in the U.S. Then there's the challenge of overseeing product validation, testing and packaging.

Regardless of where product originated, RadioShack's biggest problem lay in forecasting and inventory management, says Kowal. For example, the retailer couldn't determine how a price change would affect the sale of a given item such as a DVD player. That's a serious deficiency in an organization that has more than 7,000 stores in the U.S. alone, plus hundreds more in Puerto Rico, the Virgin Islands, Mexico and even Egypt. The network also includes eight distribution centers in the U.S., one in Mexico, two factories in Asia, and approximately 18 Asian countries from which RadioShack imports product.

Culture Comes First
From the start, Edmondson decided to tackle the basic corporate culture before overhauling the company's information technology systems. For the first year to 18 months of a five- to six-year "roadmap," he would focus on changes that didn't require large capital expenditures.

That's when Kowal came on board from Celerant. He oversaw creation of a cross-functional team of 70 people divided into seven sub-teams, each headed by a senior-level executive. Job one was to document the company's current supply chain processes, which embraced distribution, inventory management, logistics management, customer support, operational effectiveness and repair services. Each team would then be assigned projects to correct specific deficiencies.

Similar efforts at other companies have been stymied by personnel who fear change and loss of control. Kowal and Edmondson were determined not to see that happen. Team leaders were made accountable for every task within the master project plan, and had to report on their progress at bi-weekly meetings. Each project milestone was monitored through a system of "traffic lights"-green, yellow or red, depending on its status. Says Kowal: "We moved it up to the level of awareness where things get done."

The retailer's goals were ambitious. They included the introduction of processes and systems to support multiple sales channels, reduce inventory and total operational costs, slash order lead time, adjust to last-minute changes in demand, improve store receiving and putaway through an emphasis on "store-ready" merchandise, reduce excess and unsold product, improve on-time delivery, reduce overall transit time, manage repair operations and other aspects of reverse logistics, and support annual sales growth of 5 to 11 percent.

Kowal knew he was saddled with a host of overlapping, redundant and downright ineffective operations. The teams had mapped 115 business processes, including 32 ways of processing a return at a store. The whole thing was laid out on sheets of paper tacked to the walls of a large conference room. Right away participants could spot what didn't make sense.
Identifying the problems was just the first step. The real goal was to set up a system for achieving continuous excellence in the RadioShack supply chain. To that end, the company adopted Celerant's Managed Control and Reporting System, which set operational targets based on key performance indicators.

Reaching a consensus on metrics was essential for a company that had previously lacked a traditionally defined supply chain. "If you don't do that," says Kowal, "you're just setting yourself up for failure."

One old metric was weeks of supply, calculated by dividing current inventory by historical sales. That, says Kowal, "was like driving a car by looking in the rearview mirror. You don't see the brick wall in front of you."

The company would switch to more forward-looking metrics, allowing for better forecasting of SKUs by matching current inventories with order-fulfillment lead times. A report card would assess weeks of supply on hand at the end of each month, and help to close the gap between promotional flyers and what was actually in stores. In addition, better use of demand data would allow RadioShack to calculate replenishment for new products that lacked sales histories.

By insisting on metrics that were "measurable, trackable and realistic," RadioShack would force its planners to justify their conclusions. And where targets were missed, action could be taken immediately.

Within six months, Edmondson was requiring managers to tie their strategies to a balanced scorecard, containing 28 metrics which covered four major elements of the business: financial, customers, processes, and "learning and growing," Kowal says.

The move had the effect of further linking corporate performance to individual activities. For example, the financial side could be measured by increased shareholder value, cash-flow growth, revenues from new products or services, revenues from new customers, and increased sales from boosting the total number of customers. Other factors being tracked included inventory usages, shrink (loss or theft), and reliance on direct versus indirect labor. Responsibility for meeting and maintaining set targets would filter down from senior executives to directors, division managers and department managers, so that all were striving for the same goals. Progress on the metrics would be reviewed at weekly staff meetings, as well as monthly meetings between Kowal and the president and chief executive officer.

No one was expected to be perfect from the start. "It should be a barometer, not a thermometer," says Kowal. "It's just telling you the general trend direction." In fact, as of April, RadioShack was only about three-quarters of the way toward defining and tracking all key metrics, and linking them to functional areas.

RadioShack didn't stop there. In a bid to ensure individual accountability for meeting targets, it linked compensation directly to employee performance. Kowal's bonus in 2004 was calculated this way: 40 percent based on operating income, 20 percent on sales, general and administrative expenses, 20 percent on inventory metrics and 20 percent on stock in store. Others were subject to similar formulas.

The Software Side
Culture change may have been the initial priority, but RadioShack didn't overlook the IT piece of the puzzle. It turned to several software vendors to install new systems that could boost supply-chain efficiency. In early 2001, it implemented a suite of applications from Rockville, Md.-based Manugistics Group Inc. They included the vendor's forecasting, replenishment and transportation tools. By July of this year, the company will be live on a major upgrade of the software, says Lori Mitchell-Keller, senior vice president of global marketing and solution management with Manugistics.

With up to 90 percent of its suppliers located offshore, primarily in Asia, RadioShack faces long waits for the manufacturing and delivery of product. Lead times range between six and nine months, says Mitchell-Keller, although the company has to forecast at least 53 weeks out. As product gets closer to delivery, therefore, it needs a way to alter the routing of shipments to meet changes in consumer demand.

Making things more complex is the unbalanced nature of RadioShack's demand patterns. Roughly 20 percent of its annual revenue is generated in the period between Thanksgiving and Christmas, says Mitchell-Keller. During the Christmas shopping season, the retailer stocks large quantities of product that don't appear in its stores any other time. So it's vital that information systems generate accurate forecasts.

RadioShack plans stocking levels for all of its U.S. stores from the Fort Worth headquarters. Forecasts incorporate point-of-sale data, which is distributed to all distribution centers so that they can determine adequate stocking levels for the entire year. Manugistics' system recommends which purchase orders need to be cut to which suppliers in a given time frame, Mitchell-Keller says. And when a shipment moves, the system can determine the need for changes in its destination.

Manugistics also re-optimizes load planning for shipments moving out of consolidation points operated by major trucking companies. Once goods get to the RadioShack distribution centers, however, the retailer takes over. Kowal says RadioShack maintains control over a portion of its inbound transportation, and is moving more in that direction, as a means of gaining better visibility over shipments bound for the DCs. FedEx and UPS handle the great majority of outbound shipments, which are mostly in the form of small packages to RadioShack's network of small stores.

The unusual nature of RadioShack's supply chain does not allow for much use of third-party logistics providers. Due to the size, number and location of its stores, the retailer ships mostly small packages in limited quantities. "The cost associated with a 3PL doing that is astronomically higher than doing it yourself," says Kowal. Moreover, he says, few 3PLs would be willing to invest in automating a system tailored to a company like RadioShack.

That puts responsibility for transportation squarely in RadioShack's lap. Still, the company managed to cut its annual freight spend by 19 percent after initial implementation of the Manugistics software, Mitchell-Keller says. That goal was achieved despite the complexity of managing a network of small stores, and the need to plan orders at a fine level of detail.

RadioShack has also been using a service of Manugistics called Demand Classification. It generates an algorithm that helps the retailer to distinguish between SKUs that turn over quickly, and those with a more sporadic history. The tool allows RadioShack to forecast more accurately the demand for each SKU, Mitchell-Keller says. Demand Classification is now a product within the latest version of the Manugistics software.

Control of Merchandising
RadioShack has upgraded its software for controlling a variety of merchandising activities. Retek, the Minneapolis, Minn.-based vendor that was recently acquired by Oracle Corp., provides the Retek Merchandising System (RMS). Modules deployed by RadioShack relate to foundation data, stock ledger, price execution, purchase-order management and inventory management.

The basic data module supplies information on items, locations and vendors for the management of multiple merchandising tasks, says Scott Groven, client executive with Retek. Stock Ledger maintains a record of all transactions across the business, and furnishes the data to the company's financial systems. Price Execution allows for variable pricing based on a store's location, demographics and cost to serve. Such information is then sent to the purchase-order system, which cuts P.O.s to vendors when required. Inventory Management keeps tabs on product in stores, DCs and in transit. It, too, is tied to the P.O. system, which automatically subtracts product from the inventory database at the appropriate time.

The system lets RadioShack keep a full list of vendors, including multiple suppliers of the same items, along with prices for regular sale, promotions and clearance. It can therefore manage items all the way to the store level, Groven says, with thousands of possible combinations based on chosen supplier or price.

RadioShack recently threw its IT vendors a new challenge, in the form of a program that varies the assortment of product in individual stores. For many years, every store got essentially the same stock. The strategy has since been altered to allow for the buying patterns of each locality. That means no more emergency weather radios taking up space on shelves in Scottsdale, Ariz., Kowal says.

Additional complications will arise as RadioShack expands its reliance on multiple sales channels. Last year, it took over operation of wireless kiosks at 550 Sam's Clubs stores. It also plans to open 500 kiosks in shopping malls on behalf of Sprint. And it's determined to boost the volume of consumer sales over the internet. All will be treated the same from a supply chain standpoint, sharing warehouses and transportation vendors with traditional store-bound merchandise, Kowal says.

Still, information systems must be tailored to manage all channels. "What we find most valuable to our clients is the ability to understand how to combine demand [for multiple channels], and lower safety stocks and inventory," says Mitchell-Keller.

RadioShack's long wish list of goals is far from accomplished. Recently it reported a 1-percent decline in comparable store sales for the first quarter of 2005, and missed profit targets for the period. Slow sales in the retailer's wireless business were blamed.

Nevertheless, RadioShack has made significant progress in a short time. In the first 18 months of the supply-chain transformation, it slashed annual operating costs by $48m. Savings came in such areas as reduced cost of goods, improved vendor terms, and better logistics practices. Inventory levels were reduced by $200m, freeing up cash for other purposes. According to Celerant, RadioShack's inventory weeks of supply went from 24 to 18.1. Inventory turns rose to 2.6 from 2.4. And average cycle time for new-product development declined from nine months to seven.

Along the way, says Kowal, the company has learned some important lessons. Some are common to such efforts, such as the need for active involvement by top-level executives. He also stresses the need for performance metrics about which everyone agrees-a task he calls "very difficult."

Other lessons include the impossibility of divining "one version of the truth," given the many different ways of measuring corporate performance. IT can't respond fast enough to change, Kowal further observes, and "everything takes a lot longer than you imagined."

Most of all, he says, companies seeking to transform their supply chains should strive for the best results they can achieve-and not become frustrated when they fall short. "Seventy percent of perfection is better than 100 percent of nothing," says Kowal, who admits to lowering his own expectations as the realities of the task became clear.

"It's a journey," says Kowal. "It's going to take you years to get there."