Melodies in Marketing

Big box retailers are turning to do-it-yourself sourcing, when they have historically been purchasing primarily through domestic importers who developed and/or procured the merchandise on their behalf.

They began purchasing goods directly from cross-border suppliers and manufacturers, opening sourcing offices in such remote locales as Indonesia and Vietnam, and flying employees with the mission to haggle with local producers, audit quality and labor practices, and figure out how to ship merchandise to their stores.

Many retailers, ranging from Target and Federated Stores to Tesco and Wal-Mart, are looking to buy more without agents. Even companies that have been sourcing direct for years are pushing the direct approach to new levels. Hewlett-Packard, for one, not only purchases computers and monitors directly from its contract manufacturers, but it also sources parts and materials on behalf of those manufacturers.

What started as fledgling purchasing operations mostly handled by others has matured into true sourcing organizations.

Not surprisingly, cost is driving the switch to direct sourcing. This is particularly true in the retail sector, where cutthroat pricing from the competition is forcing rivals to focus on high-margin, private-label goods and wring new savings out of procurement. By sourcing goods directly, they can shave about 10 to 20 percent off the net average cost of their house-brand products.

The benefits of direct sourcing also includes greater control over the production, quality and transportation logistics of merchandise. While some retailers still use consumer packaged goods importers or agents, they now work more closely and consistently with a smaller number of factories, teaching them best practices, and then give them enough volume so they’re captive to them instead of handling work for 30 other importers.

However, the gains from direct sourcing come at a price. A company must develop products, find qualified factories, solicit bids, place orders, inspect the factories, monitor quality, handle logistics, customs, duties and various compliance issues—no small checklist. Determining the true cost of those activities can also prove tricky. While the purchase price of an item may look great, the true cost may be much higher. But the risks and costs increase when you add in factors like inventory management, branding and product innovation. A failure to deal with these dynamics can erode profitability because: Lead times to correct inventory shortages can be longer, Overseas manufacturers traditionally cannot offer innovation, and House brands generally can’t command a premium retail price. This results in the generation of commodity-based products that lack differentiation thus reducing sales and long-term profitability. Many Category Managers (buyers) agree with this line of reasoning; but in the end, their actions are driven by financial pressures.

In order to survive this movement, CPG suppliers/importers MUST focus their proposition on offering unique value to the end consumer so as to differentiate their retail partner; therefore commanding higher margins. They ought to collaborate with their diverse customer base on collecting better data on the value of their brands, how their customers buy from them, and what their strengths and weaknesses are, which in turn will help retailers understand the economic trade-offs. Data coupled with research can help determine where brands and innovation drive profit and where it will not. Additionally, they can implement testing, inventory management strategies and sales programs that will diminish risks and increase profitability - a degree of collaboration that overseas manufacturers will find difficult to duplicate.

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