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The Anatomy of Retail Sourcing Processes

Written By: Predrag Jakovljevic
Published On: August 15 2007

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The potential benefits of global sourcing and supplier management that have been discussed for retailers in this series so far are not that easily achieved across the board. To recap, these benefits can be seen both at the top line and at the bottom line. At the top line, benefits include growth of private label business, faster time-to-market, better product availability and fewer stockouts, more competitive offerings and improved customer value, and broader access to global sources and growth of direct imports. At the bottom line, decreased costs of goods sold (COGS) and improved margins, improved efficiencies and reduced operating costs, reduced inventory and tied-up cash, better regulatory compliance, and better ability to manage risks can all be seen.

To learn more, please see The Blessing and Curse of Global Sourcing and Supplier Management, Distinctions and Benefits of Strategic Sourcing, and The Promise (and Complexities) of Private Labels.

As noted at the end of The Promise (and Complexities) of Private Labels, the “inconvenient truth” of retailers' reality is that there is still a bevy of diverse (yet highly interdependent) tasks that require spreadsheets or other rudimentary personal computer (PC)-based tools, if not still needing to be performed manually. These tasks include product specification, design briefs, product quote sheets, product range plans, new product concepts, trends and ideas, requests for quote (RFQs) and bid management, response management (both to and from a supplier), new vendor forms, new line forms, supplier setup, supplier audits, pack copy, product setup, buying briefs, product tests—and the list goes on.

To illustrate a typical modus operandi (MO), during the design brief process, the retailer's designer or buyer performs a variety of tasks. These tasks include creating an initial design brief, which might entail selecting the item type, and then entering shipment dates, volume estimates, and target prices in a certain currency, while also selecting style, color, etc. Following this, the quality manager completes a technical review that may consist of entering testing requirements, specifying packaging requirements, and adding or reviewing various style and quality data, such as for grading, size, curve, etc.

At the end of the day, the buyer signs off the design brief and notifies the remote sourcing office, which then initiates the sourcing brief process. Accordingly, the merchandiser or agent reviews the sourcing brief and selects suitable suppliers to provide quotes. If necessary, he or she may add further comments or requirements. Once this process is complete, the merchandiser or agent accepts one particular sourcing brief and notifies the “lucky” supplier that an order is likely to be placed with it. However, a rapid on-boarding of selected new suppliers requires that retailers have transparency into the suppliers' factory operations so they can minimize the risks associated with product safety, regulatory compliance, and potential late deliveries. Retailers also remain responsible for maintaining audits and ensuring that ad hoc testing is performed throughout the product life cycle.

This then starts the supplier brief process phase, where the supplier reviews the supply brief and, if necessary, adds comments, inquiries, or requirements. After some back-and-forth, the supplier will eventually accept the supplier brief, which then initiates the quoting process phase.

The quoting process phase begins with the supplier creating a preliminary quote with a starting price (most likely based on its internal costs) and submitting it to the sourcing office. The merchandiser then reviews the quote and either approves it, returns it with modifications, or rejects it. Once an agreement is reached between the merchandiser and the supplier, the supplier then submits a much more detailed quote with complete technical details (specifications), ordering information and instructions, and dimensions, as well as complete pricing information. The merchandiser again reviews the quote, and if acceptable without further negotiation or modifications, sends it to the buying office. Once the buyer completes a comparison of the quotes and approves one, the ordering process phase begins.

During the ordering process phase, the buyer confirms the preliminary order, sometimes updating certain information (such as style, size, and color buying allotments and channels), and then signs off the order and creates stock-keeping unit (SKU) numbers. The planner must then update quantities and delivery destinations by creating purchase order (PO) lines, while the quality manager reviews and signs off the required technical details.

Once the purchase orders are placed, buying departments need to maintain control over any purchase order revisions made—regardless of whether chosen suppliers are large or small, or whether they are information technology (IT) savvy or have minimal access to technology. The buying departments also need assurances that the correct information is transmitted throughout the company and its trading partners, and that advanced shipping notices (ASNs) trigger the relevant sequence of events.

When the supplier confirms and signs off (commits to) the order details, the order delivery process commences. The quality assurance department tracks and updates testing and sampling requirements (that is, it manages the sampling process and updates testing completion status). The supplier then begins actual production once it receives permission.

After this, the supplier will select the freight forwarder and the destination distribution center (DC) once it receives permission to ship from the retailer. Finally, the (hopefully correct) order will arrive at the DC at the expected time. Successful retailers have been those that continually focus on driving the very best performance from each supplier, and that work collaboratively to improve performance in areas such as on-time delivery, product quality, and regulatory compliance.

How These Realities Affect Retailers

To see how these realities affect retailers, consider a hypothetical garment retailer that has outlets in major cities across several continents—one that targets young shoppers by offering a full line of moderately priced clothing and accessories. Its stores are thus designed to reflect the tastes and “culture” of these young shoppers, and the retailer's buyers order products at quarterly shows from a variety of vendors. The problem here is that the retailer is always chasing changing fashion trends. The retailer's stock must reflect the very latest fashions, since its target market is likely to be aware of and seek out these fashion trends. For example, if the shopper sees a particular T-shirt in a new music video spot, he or she will want to buy that T-shirt right away, not next season.

Another complication is the unpredictability of local markets, since what might be "hot" or “cool” in one area may not sell at all in another market. If the retail outlet guesses wrongly on a fashion piece, or if it takes too long to get items into the stores (resulting in the merchandise being considered passé by the consumer), the stock must be moved to the deeply discounted (marked down) sales racks. At best, the retail chain is wasting expensive floor space on items with little or no profit margin; at worst, the items will have to be discarded or transported to other resellers. Profit margins are tight on some lines, since price points (the price at which the young shopper with limited finances shrugs and goes somewhere cheaper to shop) dictate aggressive pricing. In spite of these challenges, competition is growing for this customer segment, and it is becoming more difficult to distinguish the value that the retailer is delivering and to remain profitable.

As depicted in the typical sequence of processes listed above, retail personnel spend up to 80 percent of their time on administrative tasks rather than on their primary job. One could only imagine the mayhem that would result should there be virtually no integration among the above processes and its participants, or even between their core business systems, given that each task has its own Microsoft Excel, Microsoft Word, or e-mail trail, with data in isolated and disparate systems. If the above processes are still heavily segregated, with no visibility and very little control, the overall process becomes painfully slow and inaccurate, with extended processing times as a result.

Eqos cites that one major retailer calculated that it took 48,000 spreadsheets to launch just one new product line, which means lots of dreaded manual processing, re-keying, data conflicts, extended processing times, and so on. Further, nowadays, a vast majority of retailers manage inbound logistics processes across a variety of in-house enterprise resource planning (ERP) and supply chain management (SCM) systems, supplier data bases, and outsourced logistics providers' systems. They do this in an environment where it is difficult, if not impossible, to have a single view (version of the truth) of the entire sourcing and delivery process from a single vantage point.

In a more sophisticated scenario, though, all the members of the supply chain communicate through a coherent Web-based system. This means that when, for example, a vendor makes a change in the status of a product, everyone in the supply chain instantly sees the change. The key in global sourcing today is to minimize the overall cycle as well as disruptions, and the most effective way to do this is to have live, accurate, and immediate information available to all parties of the supply chain. New Internet-native sourcing software applications give users visibility of current product or order status at any point in time, anywhere in the world. These applications eliminate almost all duplication of information, thereby allowing all trading parties to collaborate on more rewarding issues rather than having to constantly put out fires.

Prior to implementing a contemporary Web-based automated solution, contacting multiple vendors at once for pricing was a tedious manual process for the sourcing group. In contrast, by using a Web-enabled infrastructure, user enterprises should be able to better integrate globally with their supply bases and broaden the scope of vendors they can locate.

Lately, such technology has streamlined many retail firms' ability to obtain estimated pricing from several vendors simultaneously. Also, when the design team comes up with a new fashion concept and wants a sample of that concept, such a system allows information on the design to flow into the sourcing organization. This allows the sourcing team to acquire estimated costs as well as time-and-action (that is, normalized or synchronized calendars within the entire production cycle) information. The sourcing team can then better determine where it may want to place the production, depending on volume, possibly integrating with the merchant organization to give it a feel for how much product the firm will be sourcing of a given style so that it can review capacity constraints.

The next step is to use the software tools to break style data down by more variables in preparation for placing the purchase or production order. For instance, the software could provide suppliers with answers to questions such as the following: How much does the retailer want to order by color and by size? What is the final pricing? What is the final time-and-action calendar?

More and more, the standard order confirmation and customary ASN procurement practices cannot provide enough of a guarantee that everything is going smoothly with any order placed. This is particularly true of the internationally sourced, custom-made purchases that are common in the consumer goods manufacturing and distribution industries. Here, the difficulties of communicating across time zones as well as long lead times make for lengthy recuperation periods (if recuperation is even possible) when problems occur. That is why buyers benefit from visibility and supply chain event management (SCEM) systems that inform and alert them to the following production scenarios: orders were (not) started on time; orders were (not) placed on the boat on schedule; the design team has changed (yet again) specs on the color or fabric for a particular planned merchandise; and the order was (not) properly documented to clear customs without a glitch.

Landed Cost Calculations Add Fuel to the Fire

While many companies have either made (or are in the process of making) the transition from regional, build-and-sell business models to a global sell-anywhere, build-anywhere, and buy-anywhere model, the current, mainly manual systems still typically require information to flow via spreadsheets, phones, faxes, snail mail, and e-mails within the retailer's different groups. When it is time to place an order, the data is usually no longer current and accurate. The information then has to be revised during the ordering phase, where the vendor might respond with actions based on incorrect assumptions, and one has to go through the vicious cycle again.

Determining the true costs of these activities can also become more complex since, in addition to a nominal purchase price, one has to add freight, taxes, duties, intermediaries' fees, cost of inventory, cost of quality issues (if any), and buyers' time. Landed costs also vary tremendously depending on how the merchandise is shipped, since many supply chains today originate in countries that can provide low-cost manufacturing capabilities, often thousands of miles away from the end market.

In a regional model, companies make parts-sourcing decisions based primarily on per-piece cost and traditional supplier scorecards. In a global model, though, with lengthening supply chains and increasing risk, companies must choose suppliers based on additional factors, such as inbound lead times and associated variability, protection of supply, logistics costs and risk, and inventory expense. Only a thorough analysis of potential scenarios reveals the total landed cost, and poor sourcing decisions could turn out to be counterproductive and may result in increased costs, decreased supply chain flexibility, and customer dissatisfaction.

In other words, an apparent bargain price on paper may not be quite as attractive in reality, since there may be hidden costs to consider in addition to the purchase price of components or per-hour wage rates. Landed cost refers to the total price that the importing company has paid for a resource once it "lands" at its appointed location, such as the incoming dock at the production facility. Imagine the possible, startling differences that might be brought to light with a thorough comparison of the prices of raw materials available in several regional markets around the world.

Again, while the landed cost of domestic items includes the component price plus domestic freight, the landed cost of the same or similar components in a foreign market may include all of the following: purchase price; import duty; international freight; special packaging, travel, and other communications costs involved in acquiring the component; fees and commissions for intermediaries (typically not necessary in domestic purchases); currency exchange and interest costs; costs of hiring or training personnel to deal with export-import complexities, and so on.

Further, determining the relative costs of manufacture and assembly in different markets can be as complex as comparing landed costs for goods. To that end, some vendors provide tools to help companies uncover the true costs of global sourcing to better manage this new business environment. The most recently unveiled i2 Total Landed Cost Sourcing software tool by i2 Technologies is designed to help companies analyze and determine sources of supply for parts, components, and finished products based on all conceivable factors that might contribute to cost and risk. Leveraging this solution with the closed-loop capability to capture all relevant cost elements, represent them in a model, compute and analyze multiple what-if scenarios, and make the best decision, businesses can drive the process with a complete picture of the factors impacting the total cost of a product. Total Landed Cost Sourcing delivers the following capabilities:

  • analysis and decision making;
  • definitions of cost targets and sourcing constraints;
  • automated data management and cleansing of cost, transportation, lead time, inventory, service variability, and network data;
  • the ability to make informed sourcing decisions based on supply chain modeling and corporate objectives;
  • solid reporting and analytics capabilities for continuous learning and ongoing compliance management;
  • supply chain network optimization to calculate variable supply chain costs through strategic network design and inventory optimization;
  • the ability to issue RFQs and collect supplier-quoted costs; and
  • estimation of total landed costs for all sourcing scenarios while considering optimal transportation routes.

Like its i2 CTO counterpart mentioned previously in The Promise (and Complexities) of Private Labels, i2 Total Landed Cost Sourcing will be available in the i2 Business Content Library, a repository of process and technology solutions based on i2's extensive supply chain domain expertise. The idea here is for organizations to use these solutions without modification and to help accelerate the customization and deployment of composite solutions when necessary.

This is part four of the series The Blessing and Curse of Global Sourcing and Supplier Management. Part five's discussion will focus on the fact that very few IT systems are available on the market today to fully support the complexities and requirements of global trade.

For more information and to start your own custom solution comparison, please visit

TEC's Supply Chain Management Evaluation Center

 
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