Goods and services not for resale (GNFR) represent a largely untapped opportunity for retailers to drive revenue and savings, however compared to other sectors where indirect spend is successfully optimised, only a small number of retailers have a holistic GNFR operating system generating substantial and sustainable savings. According to the McKinsey Global Procurement Excellence survey across more than 800 global companies, the retail industry lags behind consumer peers and cross-industry average, despite the exceptional opportunity GNFR has to offer. This is something that we are seeing regularly across our Retail clients.
The struggle to control indirect spend runs across all sectors as the responsibility for it is often widely distributed across the business. Some functions might resist collaborating when it comes to indirect sourcing as they believe others don’t have the required expertise to meet their specific needs. Functions responsible for indirect spend categories also often solely focus on procuring the right services or products within their budget, so it can be a common issue that they simply choose the lowest price from the few quotes available, without fully understanding how much these should really cost. In addition, the ‘use it or lose it” budget management mentality can result in inefficient sourcing. This can be compounded by the fact that GNFR spend is controlled by budget holders who are usually incentivised on performance and risk, with cost control being a distant third on their priority list, so where is the incentive?
Whilst focus is often exclusively on price reduction levers, over half of the potential value comes from different levers – demand and specification management. For retailers these challenges are amplified as indirect spend is highly fragmented and almost half of it is typically managed at store level, with key categories like rent or media considered ‘nonaddressable”. The function also lacks resources, as retailers have around one-eight the number of people devoted to indirect sourcing compared to the cross-industry average.
Taking the indirect route
To maximise the potential of indirect sourcing, retailers need to move away from traditional procurement approach and evolve the role of GNFR sourcing. As so many indirect purchasing activities take place across retail businesses, simply gaining visibility into what is being bought and from whom can reveal significant savings opportunities and help simplify the retailer’s supply base. This process can be cumbersome and time-consuming as it typically involves not only collecting, but also cleaning of the data available, following the matching of the data with other factors such as customer demand or specification. We recently did this for a major UK Hardware retailer which was enlightening for them once we showed what their real spend was, rather than what they thought they were controlling.
One of the most effective ways for retailers to get the best value from their indirect procurement activities is better demand and specifications management, which can deliver double the savings compared to those achieved by price negotiations. Indirect sourcing teams can deliver even more value when being involved upfront in shaping commercial strategies, evaluating suppliers and finding ways for partners to work more effectively or deliver additional services. Research into purchasing practices suggests that purchasing staff’s capabilities correlate with higher average sourcing savings and to sustain performance businesses need to build capabilities systematically, establish stretch targets and robust plans. Any perceived failings in this approach are not caused by an wanton disregard for cost, but usually a lack of capacity and a process that allows, and often encourages, short cuts in approach resulting in supplier led, technical, specifications, rather than buyer led functional specifications, significantly reducing competitive tension. An example just this week for a Retail client resulted in an 8% reduction, with the incumbent supplier, just by taking back control of the specification and increasing the threat of competition. This was on a like for like output specification.
A common belief is that GNFR consists of only simple products or services, however this is far from the truth. Retailer’s cost management capabilities tend to be at different levels of maturity and the various aspects of GNFR need to be managed differently. Whilst consumables are characterised by low unit prices, high purchasing volumes and fragmented supplier base, equipment require a comprehensive and complex cost of ownership view including installation, spare parts, energy consumption and maintenance. On the other hand, services such as cleaning or temporary labour require complex standardisation. This is a real reason why Retail GNFR teams need to co-source with the business and show how they add value through process and market knowledge, yet the requirements need to be led by the end user to achieve the optimal balanced output, and not reduce cost to the detriment of increased risk. 4C’s retail team has board-level experience and extensive knowledge of the latest innovations in retail process and technology that will help your organisation maximise its short and long-term commercial performance.
To find out more, please contact Jeremy.smith@4cassociates.com.
