Arming Retailers with Proactive Product Sourcing Strategies to Contend with Ever–Changing Market Dynamics

Smart retailers use sophisticated IT capabilities to balance selling–season length, fashion orientation, manufacturing flexibility, and onshore/offshore tradeoffs in choosing sourcing techniques.

It's a reality in retail that, regardless of how much planning a merchant does, there will always be a substantial amount of scrambling during the selling season to convert opportunity into revenue. A great merchant possesses both proactive and reactive skills and understands when and how to apply each. Smart retailers leverage the accelerating global supply chain to establish a position that optimizes flexibility and profitability. They do this by creating an IT infrastructure that supports best sourcing practices and processes that unleash competitive advantage in their key demographics.

The Recommended Techniques

Retailers can deploy one or more of the following three techniques to position themselves to be nimble and respond quickly to their situational assessment. The choice of which technique a retailer should follow depends on its ability to manage fast turnarounds and decision–making. The techniques are listed in order of increasing sophistication.

• Trial: This technique involves identifying products believed to have strong potential, sourcing a small quantity of the product, determining a trial market and testing product sales. This simple technique hinges on the selection of an accurate trial market(s) that enables the retailer to properly extrapolate sales and conduct a proper analysis. Because small quantities of product are being purchased, the retailer places less emphasis on cost negotiations during the trial. Results are analyzed, and only then does the retailer make product commitments, adjusting product design, specifications, order quantities, distribution, etc., as appropriate.
  The primary advantages of this technique are the limited capital needed to implement the pilot and the ability to change any aspect of the product based on the results of the trial. The biggest disadvantage of the trial technique is the time delay between the trial test and ultimate roll–out, due to the fact that no commitments to materials or factory time have been made in advance.
• Pilot: In this technique, retailers ship in early a small quantity of a product to which they have already committed mass quantities to gain intelligence for use during the primary selling season. The pilot enables retailers to optimize gross margins and flow–through by pinpointing those markets and customers that will support the most sales and, importantly, to validate pricing decisions.
  The primary advantage of the pilot is the immediacy with which its results can be applied in–market to the greater distribution. The disadvantage of this technique is that there are limited changes that can be made to the product–pricing and distribution.
• Domestic/Import Variable Sourcing: In recent years, retailers have applied “smart sourcing” parameters, where a product can be sourced in more than one import country to handle localized issues, such as increases in the cost of raw materials and labor wages, political instabilities and weather or other “acts of God.” The problem is, this smart sourcing was generally not dynamic enough to handle changes or improved knowledge within the season.
  A unique fixture in the U.S. manufacturing landscape is emerging: the import manufacturer. With its shorter lead times, domestic sourcing has a place in today's retail environment, particularly when it comes to mid–season replenishment. The scenarios typically work as follows: pre–season or early–season shipments are sourced from offshore to maximize profit, and mid– and late–season shipments are sourced domestically to shorten lead times to stores. Domestic/import variable sourcing requires a more sophisticated IT approach than traditional sourcing.

Making the Sourcing Decision

The factors that need to be considered when it comes to the domestic/import variable sourcing technique include the length of the selling season, the extent to which the product is fashion–oriented, the flexibility of manufacturing capabilities and the financial tradeoffs between onshore and offshore production.

All these factors, taken together, create a framework (see Figure 1, where “short” selling season = one to three months; “long” = four to six months) for determining how a combination of offshore and onshore/nearshore can be effective for a retailer, looking at product–level situations.

Figure 1

Trade–off Model

A retailer must also consider its specific financials and adjust the “variable sourcing decision matrix” accordingly. Figure 2 illustrates how the sales line item is related to the sales forecast accuracy and why a greater historical strength of sales forecast accuracy can provide better support for offshore–only sourcing.

Figure 2

Case Studies

The case studies shown in Figure 3 highlight how the “domestic/import variable sourcing” technique helped major apparel retailers position themselves to react quickly to the most current marketplace data. The first example is from a North American apparel client; the second includes insights gleaned from a major European retailer. In both cases, the retailers utilize a combination of methods to react to marketplace conditions. In particular, they use a combination of domestic and import sourcing to react to insufficient inventory in their pipelines.

Figure 3

Taking advantage of a globalized supply chain can create opportunities for forward–thinking retailers. They should start with the trial method to gain information prior to making commitments, move to pilots to both collect data and react quickly, and employ a domestic/import variable sourcing model to optimize both profit and in–stock.

Read the full white paper, Arming Retailers with Proactive Product Sourcing Strategies to Contend with Ever–Changing Market Dynamics (PDF) or learn more about Cognizant's retail practice