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The Retail Brand Management Sourcing Benchmark Study

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29 pages
AberdeenGroupThe Retail Brand ManagementSourcing Benchmark StudyThe Next Generation of Strategic SourcingJune 2004Sponsored byThe Retail Brand Management Sourcing Benchmark Report Executive Summary ore than 70% of retailers are also brand managers; that is, they design and source product for resale under proprietary in-house labels. Adding this pri-M vate-label product to the retailer’s merchandise mix is intended to improve overall gross margins and enhance retail brand awareness. Aberdeen Group recently sur-veyed more than 100 retail companies to determine best, worst, and most common prac-tices in private-label brand management. This report reviews the results of that survey while highlighting the challenges that brand managers face in implementing strategic, rather than purely tactical, sourcing practices. Key Business Value Findings Retailers remain mired in organizational structures that are ill suited to 21st century com-petitive challenges and opportunities. Although they are aware that immediate business benefits are attainable through a more holistic examination of strategic sourcing opportu-nities, they are mostly unable to implement these strategies within their organizations. Spreadsheets, faxes, and e-mail remain the most commonly used sourcing technologies even though more comprehensive Web-based technologies are available and affordable. Implications and Analysis Retailers’ inability to examine and implement better sourcing ...
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AberdeenGroup
The Retail Brand Management Sourcing Benchmark Study
The Next Generation of Strategic Sourcing
June 2004
Sponsored by
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All print and electronic rights are the property of Aberdeen Group © 2004. AberdeenGroup i 
Executive Summary
 Mo re sou vat overall gross margins and enhance retail brand awareness. Aberdeen Group recently sur-veyed more than 100 retail companies to determine best, worst, and most common prac-tices in private-label brand management. This report reviews the results of that survey while highlighting the challenges that brand managers face in implementing strategic, rather than purely tactical, sourcing practices. Key Business Value Findings Retailers remain mired in organizational structures that are ill suited to 21st century com-petitive challenges and opportunities. Although they are aware that immediate business benefits are attainable through a more holistic examination of strategic sourcing opportu-nities, they are mostly unable to implement these strategies within their organizations. Spreadsheets, faxes, and e-mail remain the most commonly used sourcing technologies even though more comprehensive Web-based technologies are available and affordable. Implications and Analysis Retailers inability to examine and implement better sourcing strategies has cost them dearly. Gross margin dollars are left on the table, and the supplier-brand manager rela-tionship remains adversarial and essentially noncommunicative. Market leaders validated Aberdeens hypothesis that a sound sourcing strategy can provide more value than just squeezing another penny out of suppliers.Retailers that do go forward with both organ-izational changes and supporting technologies achieve gross margin and turn improve-ments without sacrificing customer service levels. Aberdeen created Sourcing for Innova-tion, a new sourcing framework based on survey results that encourages and rewards a holistic view of the relationships between product development, sourcing, demand fore-casting, logistics modeling, and actual demand. Recommendations for Action Aberdeen offers the following recommendations to retailers:  Evaluate how you are doing compared with your peers. Take small steps toward im-proving sourcing processes, generating return on investment (ROI) all along the way. Incrementally adopt a Sourcing for Innovation strategy.   and compensation to team, not just individual performance.Align incentives   Look beyond your current supplier base to possible new sources of finished goods. Consider sourcing short life-cycle product geographically closer to the point of de-mand.
 
The Retail Brand Management Sourcing Benchmark Report
 
 
 
 
The Retail Brand Management Sourcing Benchmark Report
Table of Contents Executive Summary .............................................................................................. i Key Business Value Findings.......................................................................... i Implications and Analysis................................................................................ i Recommendations for Action.......................................................................... i Chapter One: 1Issues at Hand............................................................................... Chapter Two:Key Business Value Findings ......................................................... 3 Differentiation Is Key to Surviving in a Hypercompetitive Marketplace .......... 3 PACE: Strategic Sourcing in Retail and Brand Management .................. 4 Supply Chain Visibility Is Critical for Rapid Reaction ..................................... 5 Most Know Collaboration Is Necessary; Few Can Get It Done...................... 7 Chapter Three: Implications and Analysis ........................................................... 9 Rapid ROI Is Attainable by Companies of Any Size....................................... 9 Introducing Sourcing for Innovation ............................................................. 10 Sourcing for Innovation Explained......................................................... 11 Cross-Divisional Opportunities Exist for Further Cost Improvements .......... 12 Chapter Four 13: Recommendations for Action ...................................................... Evaluate How You Are Doing Compared with Your Peers............................ 13 Incrementally Adopt a Sourcing for Innovation Strategy .............................. 15 Align Incentives and Compensation to Team Performance.......................... 15 Look Beyond Your Current Base of Suppliers.............................................. 16 Featured Sponsors............................................................................................. 17 Sponsor Directory .............................................................................................. 18 Author Profile ..................................................................................................... 19 About AberdeenGroup...................................................................................... 20 Appendix A: 21Research Methodology .................................................................. Appendix B:Related Aberdeen Research and Tools.......................................... 23 
All print and electronic rights are the property of Aberdeen Group © 2004. AberdeenGroup 
 
The Retail Brand Management Sourcing Benchmark Report
 
 
 
Figures Figure 1: Relative Importance of External Pressures ........................................... 3 Figure 2: Relative Importance of Key Strategic Actions........................................ 4 Figure 3: Most Frequently Added Capabilities for Sourcing Activities................... 6 Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives ..... 6 Figure 5: Visibility into Inbound Orders................................................................. 7 Figure 6: Concerns and Challenges Blocking Adoption of Strategic Sourcing...... 8 Figure 7: Systems and Solutions Employed as Part of Sourcing Initiatives.......... 8 Figure 8: When Does Strategic Sourcing Make Sense? .................................... 10 Figure 9: Sourcing for Innovation ....................................................................... 11 Figure 10: Sourcing Organizational Structures................................................... 12 Figure 11: Strategies Used to Overcome Barriers to Sourcing Adoption ............ 16 
Tables Table 1: Prioritized PACE for Strategic Sourcing in Retail and Brand Management....................................................................................... 5 Table 2: Competitive Framework for Strategic Sourcing..................................... 14 
 All print and electronic rights are the property of Aberdeen Group © 2004. AberdeenGroup 
 
The Retail Brand Management Sourcing Benchmark Report
Chapter One: Issues at Hand
 A strong sourcing strategy is critical to surviving todays hyper-competitive retail world.  Or anizations must evolve to take advanta e of cost reductions and o ortunities for innovation.  Rapid ROI is still available; years of effort are not required to gain benefit .  Th has changed dramatically over the past decade. Driven by chan-e world of retail nel masters like Wal-Mart and Target, retailer survival now depends on differen-tiation, and on catering to the empowered consumers ever changing demands. New strategies are required across the board to maintain gross margin and minimize markdowns.  Ratcheting up inventory turns alone does notA stron urcing strategy can miti-ensure survival in this post-Wal-Mart world.g so Often, increased inventory turn results ingate merchandising mistakes with empty shelves and decreased service levels.minimized markdowns while turning Depending on the hot hand of a chief mer-potential design winners into customer chant to generate full-price revenue is also aservice and profit home runs. risky proposition. Just as in baseball, no mer-chant can bat 1,000, and sourcing product in far-flung locations often requires the merchant to do just that: building large purchase orders with long lead times. The bigger the retailer is, the larger the potential impact of merchandising miscues will be. A strong sourcing strategy can mitigate merchandising mistakes with minimized markdowns while turning potential design winners into cus-tomer service and profit grand slams. The retail organization of the 21st century, with its prebuilt functional barriers, is incapa-ble of taking advantage of these opportunities. Classically, new product introduction has been accomplished by throwing a set of specifications over an organizational transom. Some leading retailers lack of communication between merchants and product develop-ers results in a staggering 90%+ of product designs never seeing the light of day; they never arrive on the retailers shelves. There are several reasons for this essentially wasted effort. Each revolves around the lack of communication and coordination between assortment planners and product developers. The first reason is physical: stores have size constraints and cannot physically fit the number of products that are developed. The second is more strategic in nature: lack of communication on the overall feel that an assortment planner wants to convey in the store. Designs that match the look and feel of the planned collection are more likely to survive than designs created in a vacuum.
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The Retail Brand Management Sourcing Benchmark Report
Once a product is ready for sourcing, it is tossed over another organizational transom, with a specification package faxed or e-mailed to a select group of prequalified factories. Statistics show that simply holding an online bidding event can reduce product costs by 10% to 15%, yet Aberdeen Groups study revealed that less than half of the respondents take advantage of this relatively simple and mature technology. In short, the next generation of retail strategic sourcing is a windfall waiting to drop into the hands of responsive retailers. Aberdeen calls the organization, technologies, and strategies of this next generation, Sourcing for Innovation and believes it is a key linch-pin to success in the post-Wal-Mart world.
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The Retail Brand Management Sourcing Benchmark Report
Chapter Two: Key Business Value Findings
 Product differentiation is key to surviving in a hypercompetitive marketplace.  Supply chain visibility is critical for rapid reaction.  Most know collaboration is necessary; few can get it done.
 Differentiation Is Key to Surviving in a Hypercompetitive Marketplace Discussion of the hypercompetitive retail marketplace is so prevalent that it verges on cliché, yet it remains the No. 1 priority facing retailers and brand managers today (Figure 1). These same retailers believe that product differentiation is their key to survival; 85% cite it as an important business strategy (Figure 2). The second most critical business strategy strikes to the heart of the current endless cycle of markdowns  moving their business model closer to make to order (in the latest trend of mass customization) or make to demand rather than make to stock. Figure 1: Relative Importance of External Pressures 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Eroding gross Hypercompetitive Eroded brand Increased Import quotas margins (%) environment loyalty opportunity cost of caused by out-of-stocks markdowns  Aberdeen Group, June 2004
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The Retail Brand Management Sourcing Benchmark Report
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Differentiating Decreasing time to Buying raw Aggregating Decreasing time to through product volume  make to materials on behalf sourcing of raw volume leadership order rather than of suppliers materials across make to stock divisions  Aberdeen Group, June 2004 PACE: Strategic Sourcing in Retail and Brand Management Respondents to the Aberdeen survey detailed multiple pressures, actions, capabilities, and supporting technologies (enablers) that their companies are using  or plan to use  to address sourcing process improvements. Aberdeen examined sourcing trends, chal-lenges, and practices in retail and brand management using the following framework methodology:  Pressures  external forces that impact an organizations market position, competitiveness, or business operations (e.g., economic, political and regula-tory, technology, changing customer preferences, competitive)  Actions the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage in-dustry opportunities, such as product/service strategy, target markets, finan-cial strategy, go-to-market, and sales strategy)  Capabilities the business process competencies required to execute corpo-rate strategy (e.g., skilled people, brand, market positioning, viable prod-ucts/services, ecosystem partners, financing)  Enablers the key functionality of technology solutions required to support the organizations enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, part-ner interfaces, data cleansing, and management) 
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The Retail Brand Management Sourcing Benchmark Report
Table 1: Prioritized PACE for Strategic Sourcing in Retail and Brand Management Prioritized Prioritized Prioritized Prioritized Priorities Pressures Actions Capabilities Enablers 1 Hypercompetitive Differentiating Extended sup- Supply chain visibility appli-environment through product ply chain visi- cations leadershi bilit 2 Eroding gross Make to order Spend analy- Collaborative product devel-margins caused rather than sis opment management sys-b markdowns make to stock tems 3 Increased oppor- Decreasing Component- Strategic sourcing and RFQ tunity costs of out overall time to based product applications of stocks volume develo ment 4 Eroded brand Aggregating Bill of materi- Near real-time demand fore-loyalty sourcing re- als-based casting and planning quirements sourcing across divisions 5 Import quotas Buying raw Tailored logis- Lead time optimization materials on tics modeling behalf of sup-pliers Source: Aberdeen Group, June 2004 By a wide margin, surveyed companies singled out the hypercompetitive environment as the key external pressure; 87% of respondents rated it as important, very important, or extremely important. Supply Chain Visibility Is Critical for Rapid Reaction Taking a typically pragmatic approach to problem solving, retailers place the highest pri-ority on improving visibility of inbound orders (Figures 3 and 4). One would assume that they would extend visibility back into the supply chain, to the status of raw materials. Yet when asked to describe the extent of their capabilities, 46% of respondents reported that they had visibility into orders only after they were en route from factories to distribu-tion centers or stores, and another 36% had no visibility until the supplier called to re-quest an appointment (Figure 5).
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The Retail Brand Management Sourcing Benchmark Report
Figure 3: Most Frequently Added Capabilities for Sourcing Activities
Tailored logistics modeling
35.8%
50.0%
62.3%
Spend analysis Extended supply chain visibility Bill of materials-based40.6% sourcing Component-based47.2% product development 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%  Aberdeen Group, June 2004  Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives
Lead time optimization
Strategic sourcing and RFQ applications Supply chain visibility applications Collaborative product development management systems Near real-time demand forecasting/planning
38%
46%
55%
46% 42% 0% 10% 20% 30% 40% 50% 60%  Aberdeen Group, June 2004
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Figure 5: Visibility into Inbound Orders
The Retail Brand Management Sourcing Benchmark Report
Visibility into raw materials prior to16% arrival at factory
Visibility into orders once they have left the factory
No visibility until supplier calls for delivery appointment
49%
36% 0% 10% 20% 30% 40% 50% 60%  Aberdeen Group, June 2004 This level of visibility does provide a tactical benefit: distribution center and transporta-tion personnel can use the data to expedite shipments of hot products or redirect specific shipments to stores that need them the most, but retailers with this level of visibility into their supply chains also miss a boatload of opportunity. However, halting or postponing production of items that are not selling is far less expensive than holding finished goods in the distribution center, or worse, shipping them to store locations and marking them down. Visibility into the status of raw materials gives brand managers the opportunity to divert, adjust, or convert losing styles into winners. It also provides an early warning sys-tem about potential product delays and allows them to make contingency plans like re-moving a planned promotional item from the Sunday newspaper circular or finding a new supplier for the raw material that will be delayed. Bill of material-based sourcing im-proves retailers ability to substitute components and clearly understand the cost impact associated with that substitution. Most Know Collaboration Is Necessary; Few Can Get It Done Not surprisingly, brand managers know that the most effective sourcing strategies can be put in place only when they collaborate with their suppliers. The ideal scenario occurs when brand managers and their product suppliers collaborate on product design, ensuring that a product maintains the look and feel that extends the retailers brand, but relies on components and construction that make it easy to build. Forty-six percent of survey re-spondents have implemented technologies geared to collaborative product development (refer back to Figure 4). Yet 41% reported that their own internal organizational struc-tures loom as their biggest challenge to implementing strategic sourcing policies and pro-cedures (Figure 6). However, as will be discussed later in the report, more than half of the respondents be-lieve that collaborating with their suppliers will somehow solve these internal organiza-tional deficiencies. Clearly, these retailers must get their own houses in order before they can effectively collaborate with the outside world. Although brand managers report con-cerns over having the right technology in place to support a strategic sourcing strategy, Aberdeen Group does not believe that they have fully exploited the technologies that they already have in place. Fax and e-mail remain the predominant technologies used for sourcing, and forecasting through spreadsheets is a close second.
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