Retailers Look to Strategic Sourcing for Sustainable Savings

Transcription

1 SOURCING INSIGHTS Retailers Look to Strategic for Sustainable Savings In This Report Even though retailers have been aggressively cutting costs over the past year, most can still do more and do so without diminishing product quality or customer experience. One key area for more savings opportunities is sourcing. To capture sourcing opportunities, retailers are analyzing their entire spend base, from product to non-product costs, identifying where they have the highest-return potential and vigorously renegotiating vendor relationships to the benefit of both. In this article, we discuss how to: > Uncover more savings through strategic sourcing > Develop a roadmap for a strategic sourcing model > Rethink existing processes and vendor relationships > Cut costs on non-product areas > Create a leaner retailing mindset that lasts beyond the recession

2 BY ALAN PINCUS Uncertainty still overshadows the economy s early signs of recovery, and retailers are responding accordingly, slashing costs to meet profitability expectations. The reason is obvious: Total costs can add up to as much as 80% of net sales for some retailers. As such, industry leaders are scrutinizing every dollar spent and looking internally to systematically create a much smaller overall cost structure. Most retailers have significant savings opportunities in trimming product and non-product sourcing spend. While product sourcing costs can be as high as 60% to 70% of sales, non-product sourcing costs (e.g., real estate, fixtures, professional services, marketing and advertising) can be a significant source of savings as well. When it comes to aggressive cost-cutting, follow the lead of Stephen Sadove, chairman and chief executive officer of Saks: From travel to supplies to benefits to marketing to information technology, leave no stone unturned. Kurt Salmon Associates estimates that most retailers can realize between a % and 4% reduction in COGS through an aggressive strategic sourcing program centered on negotiating more favorable agreements and improving collaboration with vendors. Benefits can be higher depending on the retailer s sourcing capabilities and willingness to pursue product- and vendor-related savings. But ultimately, for all retailers, minimizing costs across the entire sourcing spend spectrum requires a broad set of capabilities, flexible processes and renewed negotiations with vendors. Strategic Opportunities The most successful retailers systematically analyze their entire spectrum of spend and then develop a comprehensive strategic sourcing program accordingly. Such a program addresses the cost drivers unique to a particular spend area and also takes into consideration specific market, vendor and product needs so as to not jeopardize product quality or customer experience. (See Exhibit.) For spend areas directly related to final merchandise, savings come largely from optimizing the sourcing operating model. Accordingly, a key decision is how to source each product type, i.e., whether to use internal resources or agents. With this foundation in place, retailers can evaluate product requirements, by category or brand, and unearth savings opportunities across each tier of their vendor base. This may mean reevaluating relationships with each vendor, providing volume commitments to those strategic vendors or aggressively negotiating all financial terms above and beyond product costs. These improvements will result in a more stable business relationship and allow vendors to plan their processes and capacity more effectively, freeing up savings for both retailers and vendors. In non-product spend areas, the focus is twofold. Externally, retailers can aggressively negotiate more favorable terms across companywide spend. Internally, they can reevaluate the selection of the products and product specifications driving overall costs, as well as the selection of vendors meeting those product and service requirements across multiple brands and businesses. Strategic Roadmap A fundamental tool to help retailers realize potential sourcing savings is a detailed roadmap specifying cost-reduction targets and prioritized activities. There are significant savings opportunities for retailers to benefit from as a result of a wellthought-out roadmap combined with effective and efficient execution, says Anthony Romano, executive vice president of Global and Business Transformation at Charming Shoppes Inc. As General George S. Patton Jr. once said, A good solution applied with vigor now is better than a perfect solution applied ten minutes later. The major components of a strategic sourcing roadmap (see Exhibit ) often include: > identifying and prioritizing supply and demand improvement opportunities by area of spend > Operating Model process and organization required to support the overall sourcing strategy, goals and objectives > approach and process required to manage vendors to ensure that product is provided at the right total cost with minimized risk > Cost knowledge of product/service total cost and applying the understanding of cost drivers in vendor negotiations > Technology tools required to enable the sourcing organization to realize cost-savings goals

3 The current economic landscape is forcing retailers to challenge established processes and relationships with current vendors in spend areas directly related to final merchandise. A key component within a sourcing roadmap addressing product-related spend is determining whether to keep sourcing activities in-house or to use sourcing agents. Logically, activities with the largest return on investment are the highest priority. However, sourcing leaders will balance this with activities that also address any critical issues. For example, if a retailer has not attacked non-product spend areas in recent years, efforts might first center on establishing the appropriate sourcing strategy for this key area. More specifically, initial activities might include a spend analysis, Opportunities across the Entire Spend Base Direct/Product Spend Areas Potential Opportunities Model While Building Internal Capabilities Flexibility in Approach to Enhance Collaboration between Retailer and Base buying/selling agents) by organization Key Considerations as well as an evaluation of current contracts and administration requirements. The expectation is that this initial effort will provide a quick understanding of what is being spent, by whom and with which vendors. This focus will also provide opportunities to negotiate more favorable pricing, optimize the vendor base and determine what product specifications can be simplified to reap additional savings. local/current supply base supply base supply base Indirect/Non-Product Spend Areas Potential Opportunities Aggregate Companywide Spend and Consolidate Supply Base Pursue Third-Party Consortium for Subset of Spend Categories Standardize Product/Specification Final Merchandise Spend The current economic landscape is forcing retailers to challenge established processes and relationships with current vendors in spend areas directly related to final merchandise. A key component within a sourcing roadmap addressing product-related spend is determining whether to keep sourcing activities in-house or to use sourcing agents. (See Exhibit.) Determining the appropriate business model strategy aligned with sourcing goals and objectives has significant organization and resource implications: > Resource Requirements domestic and overseas resources needed to manage sourcing activities with vendors or agents to facilitate development and product movement throughout the supply chain > Resource Capabilities appropriate country and vendor knowledge to collaborate effectively with vendors and agents without sacrificing quality and cycle time The Key Components of a Strategic Roadmap Operating Model Cost Technology Stakeholder and Business Model Process Design and Certification Total Cost Modeling Technology Effectiveness Evaluation > Performance metrics that monitor and report vendor and agent performance on delivery, cost, quality, cycle time and collaboration Individual Components of the Roadmap Spend Organization Design and Mitigation Total Cost Negotiations Package Evaluation and Spend Analysis and Diagnostics Internal Performance Enhancement (Supply and Internal) Package Implementation Whatever the operating model, it must improve the way a retailer collaborates with vendors and yield benefits to both organizations. s involved with a retailer s planning and development can better plan for their own materials and production capacity to enhance efficiency. This enables a retailer to make product decisions closer to consumer purchasing decisions, resulting in more-effective product assortments and reduced store inventories. Pressures on revenue and top-line contraction have created an intense focus on managing our costs, says Romano. In order to provide products to our customers that have the quality appropriate for the brand while being rewarded at retail, we must work with our vendors to be as cost competitive as Contracts and Administration Improvement Supply Performance Key Outcomes category strategy and end-user negotiation and management processes products and services and processes

4 With non-product spend contributing as much as 0% to 0% to a retailer s cost base, a well-defined strategic sourcing program to aggressively pursue savings opportunities in this area can net tens of millions of dollars in savings. possible. Collaboration with our vendors is critical to achieving these goals and objectives partnering with them to understand our product requirements, offering alternatives without sacrificing quality or consumer expectations, will go a long way in being cost competitive and maintaining healthy margins. A key part of a successful strategic sourcing program is the identification and management of vendor risk. The recession affected all aspects of the supply chain worldwide with closures of suppliers numbering in the thousands. For example, Panjiva, an Internet-based tracker for shipping data, noted a 7% drop in the number of active apparel suppliers worldwide during a four-month period last year. In turn, risk-wary retailers are proactively identifying vendors whose financial or operational risks could disrupt supply. Doing so requires a formal vendor performance evaluation process using key metrics to monitor both short-term and long-term expectations. Where risks are high or performance fails to meet expectations, retailers can work with vendors to improve performance or start building relationships with alternative sources of supply. Of course, building new vendor relationships takes time, effort and resources, all of which are in short supply for many retailers during lean times. Non-Product Spend With non-product spend contributing as much as 0% to 0% to a retailer s cost base, a well-defined strategic sourcing program to aggressively pursue savings opportunities in this area can net tens of millions of dollars in savings. Case in point: marketing and advertising, which is a large part of non-product spend for most retailers. In identifying opportunities in this area, a key first step is to create a culture of effective collaboration between marketing, the part of the organization that establishes and controls the marketing budget and sourcing. (See Exhibit 4.) Many retailers are unable to fully realize significant savings because of misaligned goals and priorities between the two functions. The most successful sourcing functions focus on working with current vendors to expand the return on investment for marketing spend, as opposed to a myopic focus on slashing budgets, which provides only a temporary fix at best. By comparison, the former approach strengthens relationships both internally and externally while simultaneously increasing value. Similar to other non-product spend areas, marketing costs tend to be fragmented across different brands; therefore, it is critical to document and analyze companywide marketing spend to best understand the current vendor base, detailed costs and the buying behaviors unique to each brand. Cost-Reduction Focus Lean times create leaner competitors. While less disciplined sourcing organizations might tend to return to old habits once sales start to rebound, stronger sourcing groups will continue to drive toward a lower cost structure they can sustain for the long term. Accordingly, industry leaders will continue to invest in strategic sourcing programs that address their entire spend spectrum, redefining vendor relationships and revising internal processes and behaviors to ensure a leaner retailing mindset for years to come. 009 Kurt Salmon Associates The Key Components of Collaboration with Marketing and Advertising Spend Related to Final Merchandise Key Questions for Consideration Non-Product Spend (e.g., Marketing/Advertising) Key Questions for Consideration Stakeholder and Business Model Spend effective and efficient way to source? commitments? Spend Spend Analysis and Diagnostics Operating Model Process Design Organization Design vs. utilizing agents? development)? Classification, and Certification Supply Performance Classification, and Certification Risk and Mitigation Cost Total Cost Modeling Total Cost Negotiations 4 5

5 About the Author Alan Pincus, a senior manager in KSA s New York office, is a sourcing expert and the author of this article. Kristie Tippner, a senior consultant in KSA s New York office, also contributed to this article. For more information, alan.pincus@kurtsalmon.com. Kurt Salmon Associates Kurt Salmon Associates (KSA) is the leading global management consulting firm specializing in the retail and consumer products industries. We leverage our unparalleled industry expertise to help business leaders make strategic, operational and technology decisions that achieve tangible and meaningful results. Contact Kurt Salmon Associates 650 Fifth Avenue New York, New York