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Head, Heart, and Hands: Best Buy’s Approach to Distribution Center Loss Prevention

Best Buy’s executive management realized some years ago that the challenges and approaches to loss prevention at our fast-growing chain of retail stores—there are currently more than 870 stores throughout the United States and Canada—were distinct from what is required to maintain security and prevent losses at the company’s eight distribution centers.

With about 3,400 employees, Best Buy’s distributions centers (DCs) are the hubs through which billions of dollars worth of merchandise flow every year. Virtually around-the-clock, shipments arrive from our vendors, are processed, and then shipped out to the stores. When it comes to super-promotional campaigns and any hot, new merchandise—particularly the latest video games and pop music CDs—additional rush shipments from the DCs often are required.

So there’s a constant, rapid movement of valuable goods within our distribution pipeline; tens of millions of individual units ranging from high-end refrigerators and ranges to personal computers, DVDs, and batteries.

- Digital Partner -

Best Buy’s DC loss prevention is focused on one critical mission—keeping Best Buy financially safe. Lost merchandise compromises retail operations, weakens the company’s financial operations, and, ultimately, our bottom line. This driving mission unites each distribution center team that consists of a LP  manager, LP auditors, and a staff of LP officers.

I would characterize Best Buy’s DC loss prevention operation as being shaped and driven by culture and controls. It is no coincidence that many retail industry experts believe Best Buy’s success is due to management’s constant focus on  culture and controls throughout every aspect of our company. We believe the two go hand-in-hand

Building the Best Buy Distribution Center Culture

Culture is our first and best weapon in controlling shrink. It is our most powerful tool, because our organization’s culture is based solely on our people. Each person, regardless of title or position, is equally important in impacting the culture of a facility. In order to grow a desirable culture, everyone must be involved in the learning process, which means that everyone has equal buy-in and support of what you are trying to accomplish.

At Best Buy, we use the “Head, Heart, and Hands” theory. This refers to

  • Head—our belief that people have a clear and concise understanding of what needs to happen,
  • Heart—then they need to understand why it is important and what is in it for them, and
  • Hands—you have to teach them how to do it.

The Head, Heart, and Hands approach is established at our centers with a disciplined process. The follow-up phase is the final step to ensure the change has been implemented successfully. Communicating these three principles is particularly important in growing a successful shrink culture, because getting strong team buy-in is essential.

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We continually drive to make our shrink culture a part of the fabric of each facility, or, in other words, to make it second nature to the work life of each facility. We work to ensure that employees know what shrink is, where it comes from, and what they can do about it. We will win or lose the battle against shrink as a team.

The Principle of Strong LeadershipHead, Heart, and Hands

Leadership is crucial to the creation of a strong shrink culture within the facility. The DC leadership team must have full and complete buy-in to the cultural piece for that team to be successful. We rely on our DC leadership team to teach, influence, and listen to the people; they are responsible in growing and maintaining the shrink culture. Best Buy learned long ago that our people are our greatest asset. It is in our leadership’s best interest to listen to their people. Our employee teams are a wealth of knowledge that we as leaders need to continuously tap into. By harnessing and utilizing this knowledge, there really is nothing that we can not accomplish. True leaders see the power of the people, and they will ensure that that power is unleashed.

Without the proper people in DC management positions, all aspects of these critical operations can be negatively impacted. We have learned that a weak leadership team has a negative effect on employee morale. Employee morale is directly connected to the overall performance of a facility, whether it isshrink performance, process execution, or productivity.

Leadership is the all-important “cog” in this operations “engine” that drives the end result. If a DC has a negative shrink result, the first place we look is the leadership team. Do we have the right people on that team? Have we enabled them to be successful? What can be done  to help them improve?

- Digital Partner -

The Company Shrink Plan

We have a plan here at Best Buy. It is the same plan for both retail and logistics. It is called simply the Company Shrink Plan. The beauty of this plan is its simplicity. The shrink plan is made up of four components. If the leadership is working on all four components on a daily basis, it cannot lose.

1. Talk about shrink every day. First and foremost, you have to keep shrink in the forefront everyday. The risk of loss is always there and never goes away. The minute you take your eye off the ball, you have already lost the game. We incorporate shrink topics into our daily meetings and talk about it with our employees. We maintain an interactive dialogue around the causes of shrink in our processes and what each person can do to prevent such occurrences.

2. Measure shrink every day. At Best Buy, we call this “managing our barometers.” We count and track variances, both positive and negative, each day. Each variance will tell you a story about what happened. When you count and track on a daily basis, trends  reveal themselves, whether they are theft or process driven. The bottom line is if you count it, track it, and post it, you don’t lose sight of it; and everyone is made aware of the trend.

The barometer process identifies breakdowns and is a theft deterrent in itself. I can’t tell you how many times I have conducted employee theft interviews and had the employee perpetrator tell me, “If I had known you were counting this stuff every week, I never would have taken it.”

3. Hire good people. Consistently using proper hiring techniques provides the opportunity to build a talented team; but more importantly, to place people in areas where they can excel. With the right people on the team, and those people in the right positions, you have the recipe for success.

4. Correct problems when they appear. Finally, if something does go wrong and a facility ends up with higher-than-anticipated shrink, an “overbudget meeting” is scheduled. This is a meeting of the facility leadership team and district and regional LP managers. The meeting is an opportunity for the leadership team to discuss three things—what happened, why it happened, and what actions are being taken to ensure it will not happen again.

Even though these meetings are something that every leader in Best Buy wants to avoid, we have found they are not always a bad thing. It is a tremendous learning experience for the leadership teams that go through them. It can and has brought teams closer together and made the individuals better leaders. Most importantly, the plan that is developed by  he leadership team creates the buy-in necessary for success. We all leave the meeting with a plan for success that we hold each other accountable to.

Inevitably, we end up back at the Company Shrink Plan. A renewed commitment to this simple plan almost always works. This is the basis for our internal mantra: “Work the plan, because the plan works.”

Empowering Employees to Take Action

Head, Heart, and HandsIn order to enable all Best Buy employees throughout the company to report issues and concerns that may include theft, we have an “Open and Honest” program in place. Employeescan call a number and report issues and concerns to our corporate offices for follow up. We communicate the idea that any employee who steals from the company will just as easily steal from a fellow employee.

Best Buy also has a generous employee reward plan for positive shrink results. The employees are paid back for their efforts leading to a successful inventory result in the form of a shrink bonus. This empowers our employees to make an impact every day on their facilities’ shrink performance. It is a clear message of “what’s in it for them.”

If You Don’t Count It, You Can’t Manage It

At the same time that our DC leadership works on a daily basis to make our people our strongest weapon against shrink, we also recognize strict and effective controls are required in our fast-paced environment. As a logistics organization, we have disciplined programs and systems in place that help keep Best Buy’s inventory accurate.

Each DC has an internal inventory control department that is responsible for conducting process audits. These processes track the inventory from the time it is put away in location until the time it is picked, sorted, and loaded in trucks for shipment to the stores. They provide the reporting and analysis of the data generated by the audit processes. The inventory control department’s sole purpose and focus is inventory integrity. This is all they do. We have found this intense focus helps drive inventory accuracy.

Best Buy DCs also have a structured cycle count process in place. It consists of full-count rotations within each DC. The results of these counts trigger count corrections or inventory adjustments, which are systematic adjustments that either increase or decrease inventory. These are financial transactions, which we use as a barometer to measure  nventory integrity. As I described, we manage these barometers looking for trends and researching the results. The results are a road map to identify issues that need to be addressed over the course of the year.

In addition to cycle counts, we also conduct annual physical inventories. As  an inventory period comes to an end, we draw a line in the sand and book the shrink. In the DCs,  hese inventories consist of a final cycle blitz where every location is located, counted, and adjusted during the final thirty days of the fiscal year. The final results show the difference between the book and the perpetual.

It’s All about the People

Ultimately, our people are the key to successful shrink performance. Great leadership, employee buy-in, and culture are the ingredients you need to be successful. No one person is the reason that Best Buy logistics posts world-class shrink results each year. Rather, it is because of the efforts and dedication of our talented employee teams that make it happen. They will continue to make it happen because our leadership has empowered them to make an impact on shrink each and every day. The tools we have given them—the Company Shrink Plan and the “Head, Heart, and Hands” philosophy—would be useless without them driving it every day.

It is all about people, empowerment, and process. Simplicity at its best.

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How Consistency and Discipline Drive Best Buy

The logic in Best Buy’s approach to distribution loss prevention sounds simple, almost simplistic. Yet, the approach—and the results—are just a tip-off to what appears to be a well-considered and precisely executed strategy for managing inventory losses to a minimum in Best Buy’s mammoth supply chain. Very little is left to chance and the company seems to be willing to make investments in systems, staff, and processes to ensure its distribution operations are as consistent and disciplined as possible.

Consistency and discipline are important at Best Buy. In fact, consistency and discipline seem to be the key characteristics of the management’s approach to business, and key to  the company’s remarkable success.

About ten years ago, Best Buy introduced the Standard Operating Platform (SOP). As it was rapidly building new stores and gobbling up other retail chains, Best Buy developed SOP as a way to achieve consistency of operations as well as consistency of customer experience. SOP includes everything from all aspects of store operations—from the yellow-shirted product security controller at the front door who greets and says goodbye to customers (and checks their receipts) to employee product training, merchandising, stocking, and in-store loss prevention; from the financial management systems and controls (financial transaction systems, internal audit, and inventory controls) to supplier and distribution logistics and distribution center security and loss prevention.

A Most Efficient EnterpriseHead, Heart, and Hands

In 2004, STORES magazine billed Best Buy as North America’s number-one specialty retailer of consumer electronics, personal computers, entertainment software, and appliances. The company today is based in Richfield, Minnesota, a ten-minute drive from downtown Minneapolis. It was initially called Sound of Music. The first store was built in St. Paul, MN, by Richard Schulze back in 1966. Schulze today remains Chairman of the Board. Sound of Music was one of the first specialized retail stores selling discounted records, tapes, and consumer electronics.

Getting off on a fast-growth path as the music and consumer electronics industries boomed, the company rapidly expanded its product lines to include everything from TVs to refrigerators and stoves, and, of course, personal computers. It  constantly advertised extremely competitive prices and quality service—SOP at work. In 1983, the name changed to Best Buy and the company launched a successful IPO in 1985, raising millions for even more dramatic expansion.

Today, Best Buy (NYSE: BBY) is a Fortune 100 company with a market cap of $16.5 billion and fiscal 2005 revenue of $27.4 billion. With more than 105,000 employees, Best Buy operates more than 870 stores across the United States and Canada. In addition to the flagship Best Buy chain, its other store brands include Future Shop (in Canada), Magnolia Audio Video, and Geek Squad. It has recently announced plans to accelerate the building of several hundred more super-Best Buy stores in North America.

In an age of rapid technology advances and even more rapid commoditization of sophisticated electronic devices and software, Best Buy continually hits hard on core values, all of which are related to consistency, discipline, and the customer. The company talks a lot about maintaining an “efficient enterprise,” which relates to the SOP—increase speed to market, reduce administrative expenses, make better capital allocations, re-engineer the supply chain, and source globally.

The company’s other strategies—“Customer centricity,” “Win the home with service,” and “Win entertainment”—refer both to quality of customer experience and helping customers really want to buy more products and services from Best Buy.

In a ferociously competitive industry and despite some setbacks over the years, Best Buy’s business model and management approach has worked. Its accolades are expansive. In 2000, Fortune named it one of the ten top-performing stocks since 1990; and in 2003 listed it fourth on its list of “Most Admired US Companies.” Forbes named it “Best-Managed Company” in 2003 and “Company of the Year” in 2004; and STORES Magazine called Best Buy number one out of the “Top 100 Specialty Retailers” in the United States

Distribution Center Loss Prevention at Best Buy

With a strong culture of control and consistency, and obvious successful results, it is not so surprising that Best Buy’s distribution center LP is convinced it plays a direct and important role in the company’s financial performance.

Understandably, distribution logistics at Best Buy is a very big operation. There are currently eight distribution centers in California, Ohio, New York, Indiana, Virginia, Georgia, Oklahoma, and Minnesota totaling almost six million square feet. Best Buy purchases products globally from several thousand manufacturers. The company also recently established a global sourcing office in Shanghai, China, in order to maintain direct communication lines with Asian suppliers.

LP’s constant emphasis on culture and controls reflects Best Buy’s corporate priorities and business methodologies. Arguably more so than some other retail chains, Best Buy stores are known for their brightness, orderliness, knowledgeable and enthusiastic sales staff, and for their ability to deliver solid customer experience time after time. There has always been a high energy level and esprit de corps among Best Buy employees.

Best Buy’s reputation for tight controls covers all the bases, from the dress code and store merchandising tactics to back room financial management systems, and is inseparable from its culture. This is certainly reflected in how distribution center LP integrates culture and controls.

Aligning LP with the Enterprise

Not all LP programs look alike or are equally as successful. It’s possibly worth some research down the road to determine just how closely LP programs tend to be shaped by andtherefore mirror their companies’ business models, management philosophies, culture, and success.

Even with distinct operational differences and environments between its more than 870 retail stores and eight distribution centers, it is clear that Best Buy’s distribution logistics LP program places a lot of emphasis on consistency and discipline. It achieves those virtues by vigorously using internal controls and building a culture in which loss prevention is a daily fact of working life. This seems to mirror what Best Buy has been all about over the past forty years.



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