Strategic Sourcing 101
The 9 Key Capabilities 21st-Century Sourcing Organizations Need
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.” (See Exhibit 1.)
EXHIBIT 1
310
132
130
126
250
124
122
230
120
210
118
190
116
114
112
110
Jan 2013
Jul 2012
Jan 2012
Jul 2011
Jan 2011
Jul 2010
Jan 2010
Jul 2009
Jan 2009
Jul 2008
Jul 2007
Jan 2007
Jul 2006
Jan 2006
Jul 2005
Jan 2005
Jul 2004
Jan 2004
Jul 2003
Jan 2003
Jul 2002
Jan 2002
Jul 2001
150
Jan 2008
Personal Consumption Expenditures, Apparel
Consumer Price Index, Apparel
170
Amount Spent per Consumer
128
270
Jan 2001
Amount Spent ($ thousands)
290
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The first and most critical step is for organizations to accurately assess how
closely their sourcing and overall business strategies align with one another.
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.
Strategy
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
»C
onsumer: Costing or pricing strategy, order
quantities, product classifications, merchandising
strategy, quality requirements, lead times, and
calendars
»M
arket: Retail sales, future-season orders,
unemployment rates and trade regulations
»V
endor skills: Financial stability, factory locations,
Near-real-time consumer awareness of
production
capabilities, capacities, raw material
quality issues and working conditions.
supply base and product lead times
The Internet, which has further sped up the 24-hour
news cycle and added to the mix social media and
» Internal: Capabilities and needs, financial investments in overseas offices
online reviews, has made it virtually impossible to
contain issues of poor quality or subpar working
» Cost: Not just the buying price, but the total cost,
conditions, as a leading retailer’s recall of its yoga
which often includes hidden expenditures before,
pants and the devastating factory fires in Bangladesh
during and after sourcing
made clear.
THE NEW SOURCING ORGANIZATION
»S
ervice level: How fast the sourcing organization
can get products from the sourcing base to a
brand’s DC
In light of the 21st-century challenges facing sourcing
organizations, we have identified nine capabilities
» Speed: How quickly the products can reach connecessary for success, and arranged them by category:
sumers and how agile the sourcing organization
strategy, supply base and speed.
is in responding to changes in demand
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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.
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.
3. Innovation. The ability to identify and commer-
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.
To be sure, few organizations can turn truly cuttingedge 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.
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.
cialize 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.
With that in mind, Hanesbrands in 2009 signed
a joint development agreement with Naturally
Advanced Technologies to commercialize a costeffective 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.
Supply Base
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 priori-
tize and manage supplier relationships according
to strategic importance
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Neither a good strategy nor a properly managed supply base will be effective
without the ability to get product to market quickly and effectively.
»C
ollaboration: 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-intime 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.
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STRATEGIC SOURCING 101
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.
Speed
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 trenddependent 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.
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.
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.
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.
8. Multi-echelon inventory. Another way to
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.v
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.
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AUTHORS
Together, Cort Jacoby, Adi Zukerman and Courtnay
Thomas have more than 50 years of experience advising
the world’s leading retailers and consumer products
companies on their product development and sourcing
strategies. They can be reached at cort.jacoby@
kurtsalmon.com, adi.zukerman@kurtsalmon.com and
courtnay.thomas@kurtsalmon.com.
Kurt Salmon is the leading global management consulting
firm specializing in the retail and consumer products
industry. We leverage our unparalleled industry expertise
to help business leaders make strategic, operational and
technology decisions that achieve tangible and meaningful
results. For more information, go to www.kurtsalmon.com.
© 2013