Understanding an Earnings Success Story — RadioShack and Total Cost

Earlier today, RadioShack announced that it had yet again beaten its earnings estimate. Reuter's coverage notes that the company "reported a higher-than-expected quarterly profit on lower costs and improved sales of netbooks, prepaid wireless handsets and digital televisions … In the latest second quarter, the company managed to reduce selling, general and administrative expenses about 11 percent by spending less on advertising and keeping a lid on costs in other areas." While the 11% SG&A cost reduction sounds good on the surface, dig below the headlines and a fascinating Spend Management story begins to emerge, something that companies across industries can learn from. Indeed, RadioShack's earning success is due in large part to a holistic sourcing and supply chain management strategy that dates back to a transformational process started over five years ago.

Back in 2005, I had the chance to listen and speak to Dr. Michael Kowal at an Economist event in Chicago about his company's cost reduction strategy. Kowal, who had served as both CIO and Chief Supply Chain Officer at RadioShack, discussed his experience during the early stages of their supply chain transformation. I noted in an article that I wrote for another publication at the time that in contrast to the other presenters at the event, "His talk focused less on sourcing and purchasing, and more on supply chain and trade. Kowal believes 'reverse auctions useful' but he suggested 'the next generation [of savings] will come from a focus on total cost.'" Kowal's focus on total cost in 2005 was way ahead of its time. But it was not surprising giving the competitive dynamics of the industry that his company was competing in.

Looked at in today's context, this total cost focus is critical to understand RadioShack's recent earnings surprise. As I wrote back in 2005, "for a company which can lose as much as 10% ($500 million) of potential revenue to mark-downs in a single year, balancing such areas as unit cost, inventory, and lead times become critical. Discussing the importance of mastering total cost in a global world, Kowal mentioned how a shirt bound for sale at the Gap might go to as many as six countries before reaching a consumer (to minimize tariff and duties)." The situation was (and is) no different at RadioShack today.

So what is RadioShack's secret savings sauce? It's a rather complex recipe that focuses first on the end customer and trying to adapt to demand patterns and sell as many price-blind items as possible (where margins can be disgustingly high on certain SKUs -- don’t ask, don’t tell, I say). Strategic sourcing and reverse auctions are an essential part of the mix as well (for both direct and indirect spend categories). But the most important ingredient of all in this savings mix is supply chain flexibility and responsiveness that places an emphasis on reading demand drivers versus simply reacting to the market. In other words, we can credit RadioShack's success to a perfect cocktail comprising equal parts sourcing- and cost-reduction driven Spend Management programs and demand-driven supply chain forecasting, planning, execution and overall flexibility.

Jason Busch

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