The retail industry has undergone tremendous change over the last decade. Large brick-and-mortar stores no longer hold the key to sales. Rather, online retailers such as Amazon are taking up a big chunk of business. According to Statista, the value of e-commerce in the US currently stands at $433 billion. It’s expected to grow by more than 10% year on year to $560 billion in 2025. Traditional stores are facing great pressure from these online retailers in terms of prices and innovation.
In response, there is a great deal of research going into improving retail procurement processes to make savings and improve offerings to customers. For instance, brands with physical stores are increasing the volume of private brands in their stores. More grocery stores are stocking fast-moving consumer goods with their own labels. They are seeking contract manufacturing partnerships with producers. Those who can are attempting vertical acquisitions to get a bigger portion of margins in the supply chains. These moves further complicate procurement in the retail sector.
The Impact of Private Labels on Procurement
The procurement process was once seen as simply the negotiation of a good price with suppliers of reputable brands. However, the move towards private brands has changed the procurement landscape a great deal. Private brands’ in-house brands will eventually surpass the 50% mark of all goods sold in brick-and-mortar stores. What does this mean?
Retailers today are dealing with more variables than before. Initially, they would simply pass on products to customers with a simple margin. Now, they must monitor production facilities, transportation logistics, and determine where to position their products in terms of pricing. Their products are competing with brands that have been in existence in the market for a long. They have to forecast demand accurately as this will advise capacity utilization in their production facilities.
However, there is evidence to suggest their efforts are not all in vain. Initially, private label brands were limited to a few simplistic or entry-level categories with little complexity. However, private labels in niche categories such as personal care and baby food are a sign that retailers are managing to successfully appeal to certain consumer groups. In fact, some private label products have assumed leadership positions in their categories.
More Complicated Relationships with Manufacturers
Negotiations with suppliers of retail stores have changed. In the past, retailers were the gatekeepers to what consumers thought about brands. Manufacturers would rely on data from retailers to gauge product performance. However, manufacturers today have ways to directly engage with customers to create their own knowledge on consumer preferences. Now retailers have to improve their game during engagement with suppliers because manufacturers are now more informed about their products.
Instead of hiring people to simply negotiate with manufacturers, retailers need cross-functional procurement teams. The team should have people that understand disciplines such as data analytics and machine learning. Product management experts must also be included. Cross-functional teams will be better placed to engage with suppliers to find ways to create value for both entities. Collaboration agreements are quite common between retailers and suppliers.
Tools Needed for Different Functions
As the procurement process landscape for retailers continues to become more complex, a wide range of tools have emerged to help manage the process.
Certain tools ought to be common for all retail procurement departments. For instance, all retailers need a tool for spending analysis and price variance analysis. These tools help compare supplier prices and trends over time. A supplier matrix tool is also important for determining what to outsource or do in-house.
Retailers today also need tools to help manage requests for quotations. Owing to the big number of potential suppliers and files expected, such a module is necessary for receiving bids during the RFQ process. The tool helps to quickly draft requests for templates and filter the suppliers to invite to make a bid. Changes can be made and sent over to those potential suppliers automatically.
Supplier Performance Monitoring
Retail companies also need sophisticated ways to monitor supplier performance. It’s important to measure key performance indicators such as supplier defects, the accuracy of invoices, vendor availability, supplier lead time, and more. Small changes in these KPIs could translate to significant savings or losses for retailers. The margin for errors is so small that nothing that is measurable ought to be left to chance.
Design to Value
Another recent trend in procurement lately is the use of Design-to-Value as a cost management tool. Design-to-value is driven by the need for companies to maintain margins in an increasingly competitive environment and rising material costs.
Design-to-Value happens through continuous research into what informs purchase decisions of customers and making trade-offs in the design process. It stems from the realization that there are certain features in products that cost a lot to design and make and yet customers do not necessarily pay for them. This includes expensive packaging too.
Since 80% of a product’s costs are determined in the design stage, companies must make the right choices between value and cost. If customers are willing to pay for certain features, then more effort goes to improve those features. It’s sometimes referred to as value engineering. It calls for collaboration between sales, marketing, operations, and research and development teams to produce the final product. The impact will be significant cost savings on unnecessary complex features and added margins by working on features that customers care about in products.
Retail Procurement Is Not What It Was
The emergence of online retailers, availability of consumer preference data, and complex analytical tools have changed the retail procurement landscape. Procurement is no longer simply negotiating for favorable prices and credit terms for retailers. It now involves monitoring supplier performance, doing spend analysis, global sourcing, building resilience, and contract management. Procurement teams now need to have multiple skill sets and retail companies need multiple tools to manage their procurement processes.
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