EXECUTIVE WHITEPAPER. The 5 Stages of Global Sourcing: From Revolution to Evolution

Transcription

1 EXECUTIVE WHITEPAPER The 5 Stages of Global Sourcing: From Revolution to Evolution

2 Page 1 TABLE OF CONTENTS Executive Summary The First Stage: The Domestic Buy The Second Stage: Opportunistic Buys The Third Stage: Achieving a Sourcing Split The Fourth Stage: Establishing a Private Label The Fifth Stage: Creating a Brand The Financial Impact of Global Sourcing Strategies 9

3 Page 2 Executive Summary The mandate comes down from the boardroom: We need to increase our international sourcing efforts by another 25% in order to remain competitive. While the task might seem daunting and overwhelming at first, developing a core competency in global sourcing is one of the critical business initiatives for retailers and channel masters. By understanding exactly how global sourcing strategies impact margins, retailers can develop creative product categories that not only compete in the marketplace on trend, but also push margins and profit higher. The rewards are impressive for those who lay the groundwork and build one success on top of another. According to the World Trade Organization, global sourcing has changed the dynamics of raw materials acquisition and finished goods manufacturing. Today, 55% of all raw materials for American manufacturing are sourced outside the U.S. And for those corporations in apparel and footwear, consumer packaged goods, and high tech electronics, the numbers are even higher. What does it take to master global sourcing techniques? What types of technology are available for worldwide buying organizations? How should your organization incorporate global sourcing into creative product development, margin enhancement, private label development, and even branding? This paper addresses the natural migration of buying organizations through the five stages of global sourcing: from evolution to revolution; and provides examples of organizations who are progressing towards their corporate goals. But where are you in this process? Where is your organization along this continuum?

4 Page 3 The First Stage: The Domestic Buy The first stage of global sourcing is the domestic buy: honing the buying process, developing supply base selection criteria, and establishing supply chains for routing products from the raw material stage, to the warehouse, to storefronts. Executives today have developed this purchasing procedure to fit the way they do business, making 45% margins acceptable across the board. Establishing the right speed relative to what is needed can even include adjusting product design and delivery to a slower speed for more basic goods, allowing smaller shipments of basics in the right sizes and colors. And slower speeds for basics can position a retailer to take advantage of factory down time and price concessions that longer lead times allow. One women s fashion house revealed their own internal audit of redundant data systems: Over $800,000 is spent annually between the Merchant and Sourcing Groups to update thirteen spreadsheets, sort through correspondence with suppliers and factories, and research information. Taking time out to re-key information into redundant systems was costing the organization $250,000 annually. The cost of fixing documentation and international compliance expenses were adding $300 - $500 to the cost of each international shipment. It s easy to see how organizations can remain stuck in the first stage of global sourcing. There is no way to imagine how the current operating system can accommodate the complexities of this process, and the thought of bringing in more technology freezes people in their tracks. However, they are also extremely frustrated by the limitations of the current system, the constant updating and data entry, and the inability to capture a true and accurate snapshot of their business.

5 Page 4 The Second Stage: Opportunistic Buys Oftentimes, there are two systems in place for sourcing: the reliable workflow for domestic direct buys, and the cumbersome, clunky, complex system for international buys. By giving merchants one way to buy in an easy-to-use, logical workflow, you remove the bias of selecting the incumbent vendor, and prompt the buyer to view the supplier selection process for the good of the particular product line. Oftentimes, these Stage Two Imports can round out a product portfolio with a low-risk item: for example, printed t-shirts for a season, linens for a housewares collections, or simple accessories for a consumer electronics items. Imported items are often half the cost of their domestic counterparts, but have additional costs such as agent fees, duties, freight and brokerage fees. Overall, though, the margin on these items jumps from 45% to 58%...a significant increase that whets the appetite for more savings in other product categories. By increasing the comfort level of dealing with new suppliers on these low-risk items, buyers and merchants gain more confidence to move onto more complex buys requiring extensive collaboration. One such organization making the migration from Stage 1 to Stage 2 is a $50-million trading company which offers a wide array of promotional items to large organizations. These promotional items include everything from calculators to squeeze balls to pens the type of tchotchkes one would find at any grand opening, tradeshow, or corporate get-together. This 15-person organization develops or buys domestically the base, blank items on a landed basis, before the goods are customized with logo marks and taglines. The company is just starting to import items from overseas and wants a technology infrastructure to support the new operations without adding to staff.

6 Page 5 The Second Stage: Opportunistic Buys cont. It is critical for organizations of all sizes to use a step-based, or guided wizard approach to help them build comprehensive RFQs and orders. Understanding that buyers and vendors around the world won t have time for training or learning a new system, the wizard can guide each party through all the necessary steps without missing a beat. The workflows should be tailored to the way the buyer likes to work, so there s no resistance to the system. And the application should make the origin of goods transparent for costing and planning purposes. With a unified buying process in place, the buyers and merchants can compare estimated landed costs and lead times from suppliers across the world and across the street, and select the best supplier to meet the margin goals for the product at hand. Organizations can also look across product portfolios and target a particular percentage of items to source internationally to meet corporate goals. The Third Stage: Achieving a Sourcing Split At this point, we can say that the organization has migrated to Stage Three: Sourcing. By selecting the appropriate product mix to be sourced domestically and internationally based on the margin mix, lead times, and sell channels, the organization can increase their margins to 65% - an enviable position among their peers. One example of an organization becoming a leader in sourcing strategies is a $400-million retailer who specializes in close-outs, excess inventory opportunities, and consumer packaged goods knock-offs. At first, this organization imported only 5-6% of their total purchases and focused on bulk hardline items such as patio furniture purchased through agents. After being introduced to a new sourcing and order management solution that encourages collaboration with suppliers, this organization s buyers send requests for quote to suppliers it has done business with before, as well as new vendors it is just identifying. Suppliers respond with quotes, which the new system organizes and presents to the buyers in a dashboard. Buyers can see summary quotes and drill down on those that seem the most promising. At that point, a buyer can accept a bid, ask a bidder for clarification or negotiate further with a bidder. The offer is then turned into a purchase order and passed into the merchandising system.

7 Page 6 The Third Stage: Achieving a Sourcing Split cont. The process streamlines the existing workflow, which used to include a redundant mix of faxing, ing and re-keying information. With the new system in place, this organization has doubled the number of imports and is now dealing directly with factories and even expanding its product portfolio to include apparel items. Having established their sourcing expertise and achieved a comfort level with their collaboration capabilities, the team is confident about accurately costing items and rapidly turning around orders. Now knockoff items are an essential part of the product offering and a unique draw for customers. And the goal for the organization is to double the amount of imports yet again. The Fourth Stage: Establishing a Private Label With supplier collaboration tools in place to manage the work in progress, the quality testing milestones, containerization and shipment options, organizations can move quickly towards Stage Four: Establishing a Private Label. In a Gartner research report Private-Label Apparel Sourcing: Achieving Demand-Driven Speed for Retail, the analyst states, Private-label apparel sourcing is a complex process with numerous steps that must be executed flawlessly for today s retail merchandise assortments, which include the hundreds of thousands of SKUs required to offer the multitude of styles, colors, and sizes today s consumers demand. Legacy systems and manual processes can slow lead times by up to 18 months. But any retailer can create a truly demand-driven fashion supply chain by adopting advanced private-label sourcing processes that make use of the latest PLM and sourcing visibility applications. Moving ahead with PLM-extended global sourcing as a key component of the unified buying process allows organizations to grow private label collections quickly. And the rewards here are just as stunning: a jump in margin to 72%.

8 Page 7 The Fourth Stage: Establishing a Private Label cont. Innovations in technology are also bringing the product development process online and accelerating the discovery and exchange of ideas across all players. New marketplaces such as Bamboo Rose, offer retailers and trusted designers and suppliers the ability to be immersed in the shopping experience before transitioning into the buying process in a frictionless, social way. As a result, retailers can gain significant time savings and bring products from inspiration to in-store shelves 45 days sooner. With the intelligence gained from the new solutions in place, the buying organization understands how disparate supplier lead times and seasonal sales patterns impact the balance sheet. They streamline the buying processes with supplier collaboration features and eliminate redundant data entry. Now the organization can clearly see which items are candidates for private labeling and buyers can better monitor factories and production results. The Fifth Stage: Creating a Brand With increased foot traffic and a loyal customer base accustomed to a high quality label, the final stage of sourcing evolution is Establishing a Brand. Being able to extend the brand loyalty of a product category outside the originating storefront is a bold move only a few retailers and channel masters can execute successfully. But with a global sourcing core competency already in place, with buyers and merchants who can collaborate both artistically and business-wise with suppliers around the world, the supply chain is in prime condition to support a new market venture. Stage 5 offers a product margin of 76% and the opportunity to attract even more loyal customers.

9 Page 8 The Fifth Stage: Creating a Brand cont. For example, several multi-billion dollar department stores offer their own private brand to unrelated retailers as well as in-house. As an illustration, one department store offers a mix of: 56% non-food and drugstore goods 44% textiles Six private label brands Approximately 50,000 separate items on a seasonal basis These retailers have internal goals to move the targeted private brand into 25% of the store s total purchases. These organizations deploy a unified buying process to develop product, assess costs, track WIP and factory production capability, as well as to create line lists and range plans to offer to multiple channels among owned and non-owned retailers. The solution handles their customers demands for multiple pre-packs and unique packaging, color offerings, pricing in multiple currencies, labeling to meet language and government regulations, as well as billing and document requirements. This transparency also facilitates improved product planning during promotions, special seasons, and trends. The continual snapshot of plan vs. execution gives buyers and suppliers a financial view of budget and onorder status that aids in more efficient planning, and a quicker turnaround. New marketplaces such as Bamboo Rose are focusing on faster design cycles that can cut as many as 40 days out of the supply chain length. This is a huge advantage in retail where speeding items to market keeps consumers returning to stores for more purchases. This depth and breadth of solution functionality supports the development and delivery of their brand on a worldwide basis. Retail strives to match the creativity and personality of a brand to its customers and build supply chains to support that brand vision as well as deliver profits. Successfully navigating through the Five Stages of Global Sourcing can increase a departmental IMU from an average initial mark-up of 45% to 63%.

10 Page 9 The Financial Impact of Global Sourcing Strategies Let's examine the example margins referenced in this piece by looking at a typical women's sweater which retails for $60 US: Obviously, there are a whole host of additional charges associated with international sourcing which may be new to your buying team. However, there are very sophisticated costing engines that work behind the scenes to provide an Estimated Landed Cost based on country of origin, country of manufacture, and product/commodity category. And with interactive wizards guiding the buyer through the RFQ and Order process, the workflows are straightforward and efficient. As you can see from the chart above, the same sweater carries widely disparate margins as organizations migrate through the various sourcing stages. This prompts the question: where are you in the five stages of global sourcing...and where are your competitors? Developing this core competency in global sourcing represents dollars at each cash register transaction. Are you leaving money on the table by remaining in your comfort zone?

11 Page 10 The Financial Impact of Global Sourcing Strategies cont. Extending this example out to your product portfolio for any given season, we see: As global sourcing is increased throughout the Five Stages, and private label and private brand elements are introduced, the initial mark-up at the department level starts to soar from 45% to almost 63%. These margin levels are the key to competitiveness both on Main Street and on Wall Street. Understanding how global sourcing strategies can impact your product and department margins is an important first step. Where does your organization fall within these Five Stages? Are you ready to make a move? Deploying a unified buying process is the key to ensuing your organization is on target for success through the Five Stages of Global Sourcing.

12 Page 11 TradeStone Software TradeStone Software helps retailers, brand manufacturers and suppliers increase market share and improve margins through the use of Merchandise Lifecycle Management solutions that unify the design, sourcing, ordering and delivery of their private label and branded goods. Organizations including American Eagle Outfitters, Belk, Boots, Family Dollar, Guitar Center, Kohl's, Le Chateau, Macy's, NBrown Catalog Company, Pacific Sunwear, Shoprite and Urban Outfitters use TradeStone s solutions to help them bring innovative and highly profitable products to market at record speeds. The company is headquartered in Gloucester, Mass., with offices in Atlanta, Boston, Bangalore, Hong Kong and London. For more information visit Bamboo Rose Bamboo Rose is the first online marketplace where savvy retailers wish, share and shop across vetted designers and suppliers. An invitation-only site, Bamboo Rose drastically changes retail buyers shopping and buying trip experiences, turning product inspirations into designs and wishes into great products resulting in significant time savings and bringing products from inspiration to in-store 45 days sooner. Through Bamboo Rose, buyers, designers and suppliers can be immersed in the shopping experience and then transition to the buying process supported by in a frictionless, social way using TradeStone Software. Bamboo Rose is headquartered in Boston, Massachusetts. More information about the company can be found on the Web at: