The ground on which retail and consumer goods sourcing organizations have long been based has shifted in recent years, the result of competitive and regulatory changes, rising costs, and the Internet, which brings issues of quality and working conditions to the attention of end users around the world in near real time.
It is a landscape rich with opportunity. Sourcing organizations that develop the key capabilities needed to leverage such opportunity will position themselves and their companies for success well into the future.
A Shifting Landscape
There have been a number of changes that, taken together, have fundamentally altered the sourcing organization landscape. Among them are:
Shift from deflation to inflation. For much of the aughts, the levels of personal consumption and cost were headed in opposite directions, with the first moving higher, while the second fell or stayed flat. Then in 2011, costs started to spike, but expenditures remained relatively unchanged. Now that the days of deflation are over, suppliers, producers and retailers need to adjust to the “new normal.”
Proliferation of sourcing location options. There is no one country poised to become the “next China.” As such, picking an effective sourcing base now requires advanced macroeconomic forecasting that takes into account everything from political turmoil to currency changes to infrastructure development.
Vendor base consolidation. After the global credit crunch forced the shuttering of many factories, leading consumer products companies began establishing long-term relationships with vertically integrated manufacturers that provide production capabilities and a full range of services across multiple countries.
Increase in regulations. Product-related regulations have become more complex and stringent in recent years and are increasingly particular not just to countries, but also to cities and states. Consider California’s Proposition 65, which requires companies to notify the public about potentially harmful chemicals in the products they purchase.
Near-real-time consumer awareness of quality issues and working conditions. The Internet, which has further sped up the 24-hour news cycle and added to the mix social media and online reviews, has made it virtually impossible to contain issues of poor quality or subpar working conditions, as a leading retailer’s recall of its yoga pants and the devastating factory fires in Bangladesh made clear.
The New Sourcing Organization
In light of the 21st-century challenges facing sourcing organizations, we have identified nine capabilities necessary for success, and arranged them by category: strategy, supply base and speed.
The first and most critical step is for organizations to accurately assess how closely their sourcing and overall business strategies align with one another. In the process, they need to identify those areas in which they can independently excel and those in which they need to seek the help of partners.
1. Sourcing location: An effective sourcing location strategy should take into account the following factors:
Macroeconomic: Labor climate, political stability, currency movements, energy rates, raw material availability, duties, regulations and country competencies
Consumer: Costing or pricing strategy, order quantities, product classifications, merchandising strategy, quality requirements, lead times, and calendars
Market: Retail sales, future-season orders, unemployment rates and trade regulations
Vendor skills: Financial stability, factory locations, production capabilities, capacities, raw material supply base and product lead times
Internal: Capabilities and needs, financial investments in overseas offices
Cost: Not just the buying price, but the total cost, which often includes hidden expenditures before, during and after sourcing
Service level: How fast the sourcing organization can get products from the sourcing base to a brand’s DC
Speed: How quickly the products can reach consumers and how agile the sourcing organization is in responding to changes in demand
Special mention needs to be made of near-shoring, or bringing manufacturing closer to home. The reduction in cycle times and money saved on transportation and labor costs have prompted retailers from Target to The Children’s Place to Zara to near-shore a portion of their manufacturing, while most brands continue to task Asia-based suppliers with handling full orders should the initial sample sell well.
Consumer products manufacturers are near-shoring as well. For example, GE, by near-shoring its GeoSpring water heater, has been able to drop the price from $1,599 to $1,299 on lower material and shipping costs and fewer labor hours. Meanwhile, it’s been able to increase the GeoSpring’s quality and energy efficiency and to slash the time needed to incorporate design updates from five weeks to mere minutes.
2. Operating model/organizational structure. When deciding what should be insourced and what should be contracted to outside vendors, the leading practice is to invest in improving capabilities that are necessary for supporting the core business strategy and outsource those that are more transactional in nature or for which the company has limited competence.
The operating model should also take into account what should be handled centrally and what should be decentralized. For example, in addition to merchandising and sourcing, Dick’s Sporting Goods uses its overseas sourcing team to contract out support services that include compliance and quality testing. PVH uses its overseas offices for fit and color approval, fabric management, quality, and production management, all of which contribute to shorter cycle times, while Carter’s has handed over supplier evaluation and verification to its local sourcing offices, believing that it’s the people on the ground who are most familiar with local vendors’ capabilities.
3. Innovation. The ability to identify and commercialize new ideas—whether in the form of materials, construction, production or product use—is crucial for success in the 21st century. Doing so requires that the sourcing organization be structured and measured to support innovation, with the ability to both identify and enable the development of new concepts.
To be sure, few organizations can turn truly cutting-edge ideas into market-ready solutions using just internal resources; forging strong relationships with external partners, including vendors that have demonstrated a commitment to innovation as well as academic institutions, is often necessary.
With that in mind, Hanesbrands in 2009 signeda joint development agreement with Naturally Advanced Technologies to commercialize a cost-effective and environmentally sensitive alternative to cotton, a proprietary flax-based fiber created using NAT’s CRAiLAR® technology. In 2011, the two inked a 10-year supply deal for the fiber.
Sourcing organizations must actively work to establish and maintain partner relationships and be vigilant about ensuring their partners’ reliability and effectiveness.
4. Supplier relationship management (SRM). Companies with a strong SRM program in place can yield substantially greater cost savings than companies with lackluster SRM programs or none at all: one to two basis points per year, on average. Within three to five years, such savings create a significant gap between top and bottom performers.
When building SRM programs, there are four key areas of focus:
Stratification: Tiering the supplier base to prioritize and manage supplier relationships according to strategic importance
Collaboration: Creating continuous improvement programs to strengthen supplier capabilities and performance of joint activities
Evaluation: Defining metrics to evaluate supplier performance
Governance: Developing clearly defined roles and responsibilities, both internally and externally, and defining cadence to prioritize and track progress
Companies serious about enhancing their SRM efforts develop Lean manufacturing models, diversify production locations, strengthen just-in-time replenishment and implement defined initiatives to lower cost, boost productivity and improve responsiveness across the nodes that make up the end-to-end value chain.
5. Supplier compliance. The increasing number and complexity of regulatory requirements—coupled with heightened consumer awareness of any missteps—mean it’s more important than ever to have good visibility into supplier compliance. However, it goes both ways: Branded wholesalers need to make sure their retail partners are the right ones too.
Such deep understanding and mutual trust can be established by way of transparent data sharing, facilitated by a team of key players that represent distribution, merchandising, inventory control and auditing and who are tasked with reviewing all aspects of compliance policies and procedures, including making recommendations and implementing improvements.
The benefit of vendor compliance is twofold: It not only helps to reduce the amount of time spent handling supplier glitches and improving overall product quality, but it also lessens the chance of negative press, which these days can be virtually impossible to contain.
6. Supplier risk. The scope of potential supplier risk is vast: It can include everything from a supplier’s financial health to its ability to respond to service requirements in a timely and effective manner to potential work stoppages—even natural disasters. To minimize risk, sourcing organizations need to first identify it, then proactively address it.
The best way to identify risk is to use a scorecard or something equivalent on which suppliers’ performance across risk categories is assessed and then assigned a rating. Doing so will yield a comparative snapshot of supplier risk in one central location and, in the process, bring to light the areas where risk mitigation strategies need to be put into place.
Neither a good strategy nor a properly managed supply base will be effective without the ability to get product to market quickly and effectively.
7. Local sourcing and vertical integration. When it comes to speed, perhaps the best example is Zara and its dual supply chain, which sees its most trend-dependent items produced locally to reduce lead times, while basics are produced more cheaply in Asia. Elsewhere, Carter’s has cut its lead times to 105 days (versus an industry average of 144) by making sure all negotiations are concluded before purchase orders are issued.
In grocery, Whole Foods has developed strong networks of local farmers to cut lead times for perishable products, an approach that also helps reduce the chance of product shortfalls.
8. Multi-echelon inventory. Another way to improve speed and boost sales is to manage inventory at multiple locations in the supply chain. Such an effort requires close collaboration between the retailer and manufacturer across the supply chain, and upstream, between the manufacturer and its suppliers.
Gap, for example, purchased several years’ worth of the unique denim used in Old Navy’s Rockstar jeans line in an effort to reduce costs. Through close collaboration with the mill, it was able to provide daily updates on color, quantity and size, filling out the pipeline more accurately and boosting average unit retail.
9. Sustainability and product compliance. Adhering to product safety and labor regulations and developing products with the environment in mind not only engenders goodwill with customers and reduces costs, it also decreases risk and, as a result, helps organizations get their products to more markets without delay. VF’s restricted substance list, for example, lets it make products that can be sold in any country around the globe.
H&M takes it a step further: It’s the world’s largest buyer of certified organic cotton and features a Conscious Collection made of sustainable materials and an in-store clothing recycling center. Its secret is working with highly rated suppliers (53% of production is carried out by first- or second-tier suppliers) that are more attuned than most to environmental and labor performance.
And Green Mountain Coffee Roasters (GMCR) invests heavily in the farm communities from which it sources coffee beans; it funded more than 75 supply chain projects in 14 countries in 2012 alone.
The number of changes that sourcing organizations have had to contend with in recent years is unprecedented, and there are undoubtedly more on the way. But sourcing organizations that are armed with the capabilities that support their strategy, effectively leverage their supply base and ensure that speed is at the core of all their operations will not just survive in such a dynamic environment, they will thrive.
24 September 2013