Where should Retailers hunt to find incremental value from their Supplier relationships?
5th February 2020
We, at 4C, are lucky that our individual and corporate experiences are not restricted to just Retail. We learn how different industries drive value from their respective business models. This got us thinking…what can we apply from other sectors to help Retail drive incremental value for their customers and stakeholders?
‘…around $90 to $95 billion in merchandise will be heading back to stores…a total of $400B in merchandise will be returned to retailers’
source – Forbes, The Retail Industry Has A Problem With Returns: ReturnRunners Wants To Be The Solution
Retail is going through some fundamental changes. Risk is being redistributed – no longer do retailers take the risk on forecasting and sale & return is becoming more common. This means that in current commercial constructs Consumer Goods companies are either pricing in the risk of poor sales or relying on better sales forecasts. The problem we see, mainly in GM and Fashion, compared to other sectors, such as Construction or Automotive, is the relationships are still mostly short in duration and arm’s length in approach.
‘The good news is that innovation is radically changing retail. The bad news is that innovation is radically changing retail.’
What this drives is little justification for either party to invest in the relationship and look to solve the bigger problems. When you operate off purchase orders, or not even that, and the buy is range by range or annual at best, you don’t have that incentive to invest in problem solving or risk mitigation. Other sectors, even when they have the issues around forecasting customer requirements so far in advance, do make longer commitments. Construction makes long term commitments and flexes resources around base levels. Automotive makes long term commitments around manufacturing processes, which contain performance requirements and flexibility linked to that performance, as well as making mutual investments in the relationship to stretch that performance to their mutual commercial benefit. Retail does not seem comfortable doing that but we’re starting to see change.
‘Supplier relationship management (SRM) is undergoing a major transition. Gone are the days where simply managing spend and finding the best deal possible within your supply base is enough – or easy…’
We are now working with clients who are willing to make multi-year, flexible commitments to suppliers. These allow the specific specifications to flex, within boundaries of supplier technical capability and volumes, but set at a historic minimum base level of volume with shared best estimate forecasts so that capacity can be budgeted for in manufacturing. This gives the suppliers certainty, and buyers secured capacity while retaining flexibility for both as things change. The multi-year relationships then allow mutual investments in optimising product innovation (NPD, increased sustainability, design to cost), process efficiencies (MoQs, shelf ready packaging) and general relationship improvements. This is where significant COGS improvements are released and innovation stimulated.
‘At a time of challenge for the UK retail market, an efficient supply chain would provide a much welcomed boost.’
source – Look to the future
We’re not saying this should be done with all suppliers, some you should not collaborate with, but we see many opportunities to explore more collaborative, long terms yet still competitive relationships to balance commerciality, risk and innovation. Knowing where and when to do this is the key to allowing Retail to unlock these benefits but management needs to be aware there is a capability requirement often not seen in the traditional buyer mindset in order to commit to this style of collaborative supplier management whilst retaining the appropriate commercial control. Look at your team and pick those with the right mindset.