Arming Retailers with Proactive Product Sourcing Strategies

• Cognizant 20-20 InsightsArming Retailers with Proactive ProductSourcing Strategies to Contend withEver-Changing Market Dynamics Executive Summary Using these techniques can help retailers serve their customers while managing their inventory Should a merchant be a strategic planner or a investment. This white paper details each of these quick reactor? The glib answer is, yes. It’s a reality techniques and presents case studies — both real in retail that, regardless of how much planning a and hypothetical — to help envision their applica- merchant does, there will always be a substantial tion. amount of scrambling during the selling season to convert opportunity into revenue. A great The Recommended Techniques merchant possesses both proactive and reactive skills and understands when and how to apply Which technique should a retailer follow? That each. Smart retailers leverage the accelerating depends on its ability to manage fast turn- global supply chain to establish a position that arounds and decision-making. The recommended optimizes flexibility and profitability. They do this techniques below are listed in order of increasing by creating an IT infrastructure that supports best sophistication. sourcing practices and processes that unleash competitive advantage in the key demographics • Trial: This technique involves identifying products believed to have strong potential, in which they aspire to dominate. sourcing a small quantity of the product, deter- Given that in-season adjustments are a fact of mining a trial market and testing product sales. life, there are at least three techniques for which This simple technique hinges on the selection retailers can position themselves to be nimble and of an accurate trial market(s) that enables the respond quickly to their situational assessment: retailer to properly extrapolate sales to the overall market and conduct a proper analysis • A trial technique, which enables retailers to of results. Because small quantities of product capture in-market performance data prior to are being purchased, the retailer places less committing to product orders. emphasis on cost negotiations during the trial; • A pilot technique, which brings product into however, consumer pricing must be consistent the market very early in the selling season and with expectations of the overall market in order allows the retailer to measure sales and adjust to get an accurate test. Results are analyzed, distribution for the rest of the season. and only then does the retailer make product • A domestic/import variable sourcing tech- commitments, adjusting product design, speci- nique, which combines sourcing options to fications, order quantities, distribution, etc., balance in-stock and margin. as appropriate. This technique is easy for any cognizant 20-20 insights | june 2011

retailer to pursue, but it requires the longest the trial, this technique involves making an turnaround time of the three techniques rec- inventory commitment prior to conducting the ommended in this paper, since no commitment test and analyzing the results. has been made to product prior to trial. The primary advantage of the pilot is the Therefore, the trial is usually conducted in one immediacy with which its results can be applied season, and the product is ordered for a future in-market to the greater distribution. The season. best way to maximize the program’s efficacy The primary advantages of this technique are is through POS allocation (or store-level dis- the limited capital needed to implement the tribution at the distribution center) so that pilot and the ability to change any aspect of unallocated product can ship from offshore the product based on the results of the trial. simultaneously with the pilot. Since the pilot For example, although trial pricing should be and the rollout typically occur during the same set at the expected market level, the retailer season, the pilot period is brief and requires can adjust pricing or conduct pricing tests to a fast turnaround to leverage analytics for identify the sweet spot at which they can drive decision-making. Pilots are particularly useful volume. Once potential volume is determined, for leveraging current market information to they can focus on cost negotiations in order optimize existing buying decisions. to meet financial goals The disadvantage of this technique is that The primary and inventory management there are limited changes that can be made toadvantage of the pilot through order flow and distribution. The trial’s capital the product-pricing and distribution. If product attributes themselves don’t resonate well in is the immediacy investment requirements the pilot, they cannot be altered unless special with which its results depend on the speed with arrangements are made to rework product can be applied in- which the trialexample,to be conducted. For needs with that has been manufactured.market to the greater the most fashion-oriented • Domestic/Import Variable Sourcing: His- distribution. products, time is of the torically, retailers have defined their sourcing essence, and retailers should technique at a category level based upon expect to ship product by air. From an IT per- brand positioning, pricing/gross margin targets spective, the key investment is in analytics and and other key performance metrics. In recent tools to select appropriate trial markets and years, we have seen retailers apply “smart to measure the success of the trial. Retailers sourcing” parameters, where a product can should also aim to build a repository of test be sourced in more than one import country results to create increasingly pointed trials. to handle localized issues, such as increases in the cost of raw materials and labor wages, The biggest disadvantage of the trial technique political instabilities and weather or other is the time delay between the trial test and “acts of God.” The problem is, this smart ultimate roll-out, due to the fact that no com- sourcing was generally not dynamic enough to mitments to materials or factory time have handle changes or improved knowledge within been made in advance. It is possible to combine the season. the significant flexibility of trials with speed by expediting shipments once a commitment is We have started to see a unique fixture in the made, but this option may be expensive due to U.S. manufacturing landscape: the import man- air freight costs. ufacturer. All parties are starting to recognize that domestic sourcing does have a place • Pilot: In this technique, retailers ship in early a in today’s retail environment, since shorter small quantity of a product to which they have lead times can be exploited for mid-season already committed mass quantities to gain replenishment. The scenarios typically work as intelligence for use during the primary selling follows: pre-season or early-season shipments season. The pilot enables these retailers to are sourced from offshore to maximize profit, optimize gross margins and flow-through by and mid- and late-season shipments are pinpointing those markets and customers that sourced domestically to shorten lead times to will support the most sales and, importantly, stores. This more sophisticated approach looks to validate pricing decisions. Like the trial, this at the entire season and factors in opportuni- technique depends on accurate pilot market ty costs, such as out-of-stocks and inventory selection for the test to be meaningful. Unlike carrying costs. cognizant 20-20 insights 2

Making the Sourcing Decision tend to have less volatility in sales compared with high-fashion items.The factors that need to be considered when itcomes to the domestic/import variable sourcing • Flexibility: This relates to the ability to accesstechnique include the length of the selling season, manufacturing capacity and move productionthe extent to which the product is fashion-orient- from one location to another. Low flexibil-ed, the flexibility of manufacturing capabilities ity might apply to products with valuable rawand the financial tradeoffs between onshore and materials that may be hard to hold in multipleoffshore production. locations or heavy materials that would be difficult to move. It would also include• Length of selling season: At first glance, situations where initiating a run of product in this factor is self-explanatory and refers to a new facility would be difficult due to start-up the number of weeks or months during which costs and processes. High flexibility would product will sell. We break products into two include easy access to required raw materials groups: short (one- to three- month selling and relatively low costs for starting up new seasons) and long (four- to six- month selling production vs. continuing to produce in the seasons), since one might argue that items same location. that sell for more than six months are not, in fact, seasonal. • Tradeoffs: This factor refers to quantitative measures of financial line item impacts. One• Level of fashion: This refers to how trend- point to consider is sales forecast accuracy, driven an item is. A low-fashion item might since more predictable demand enables be a basic product with an element of sea- planning further out in time, which is key for sonality, such as T-shirts that change color offshore production. Also, differences in the palettes from season to season, pants, shorts, cost of goods and shipping between onshore sleepwear, etc. Please note that bagged and offshore will make one option more underwear and similar year-round goods do attractive than the other. not fall into this definition of low fashion. High fashion refers to trend-driven items that are All these factors, taken together, create a not likely to continue from one season to the framework (see Figure 1) for determining how a next. Ponchos, which experienced a revival in combination of offshore and onshore/nearshore the mid-2000s, are such an example. Level of can be effective for a retailer, looking at product- fashion can also be related to demand predict- level situations. ability from year to year. Low-fashion itemsSourcing Framework FLEXIBILITY STRONG WEAK Low Fashion Low Fashion Source from offshore in pre-season Source from offshore in pre-season, early and early season, procure from near- season, mid-season and late season. shore/onshore in mid- and late season. LONG High Fashion High Fashion Source from offshore in pre-season, Source from offshore in procure from near-shore/onshore pre- season, early season SEASON LENGTH in early, mid- and late season. Variable and mid- season. Sourcing Decision Low Fashion Matrix Low Fashion Source from offshore in Source from offshore in pre-season, procure from near-shore/ pre-season and early season. SHORT onshore in early and mid-season. High Fashion High Fashion Source from offshore in pre-season, procure Procure from near-shore/onshore in from near-shore/onshore in early season. pre-season and early season.Figure 1 cognizant 20-20 insights 3

Strong Flexibility and Long Season Length merchants source products from offshore in pre-season to fulfill the early season demand.• For low-fashion products with strong flex- In the case of low fashion, they source the ibility in a long season, merchants can source product from offshore in the pre-season to set products from offshore during the early, stores and fulfill early season demand. They mid and late season. For high-fashion items, place their orders four to six months before the because predictability of demand is less sure, start of the season to offshore vendors and plan they source from offshore in the early and the season inventory according to projected mid-season, and product is allowed to sell down in-season demand. During the early season, for the remainder of the season. they continuously monitor sales data with the Weak Flexibility and Short Season Length help of real-time POS information. If product sales figures are encouraging, they procure • For both low-fashion and high-fashion from offshore vendors to fulfill mid-season products with weak flexibility in a short demand; otherwise, they cancel their orders. season, merchants source products in the During the mid-and late-season, after looking pre-season and the early season. For low-fash- at sales and inventory, they procure from the ion products, products can be sourced from near-shore/onshore vendors for the rest of offshore due to more predictable demand, the season. If they appear to have adequate and for high-fashion products, the shorter or excessive inventory, they can cancel future lead time of near-shore/onshore can provide orders and not switch to onshore/nearshore necessary reaction to sales. ordering. This technique enables the retailer Trade-off Model to keep product in stock for the entire season, with a relatively low inventory risk. • The decision matrix described above is an industry framework for understanding• For high-fashion product with strong flex- options. However, a retailer must also consider ibility in a long season, merchants can source its specific financials and adjust the “variable products from offshore in pre-season and fulfill sourcing decision matrix” accordingly. Figure early season demand. High-fashion merchan- 2 (next page), for example, illustrates how the dise items typically sell quickly and are then sales line item is related to the sales forecast replaced with the next great styles; as such, accuracy and why a greater historical strength the response time is short for these products. of sales forecast accuracy can provide Therefore, merchants need suppliers with better support for an offshore-only sourcing strong, flexible near-shore/onshore production technique. capabilities for the rest of the season. The domestic/import variable sourcing techniqueStrong Flexibility and Short Season Length requires a more sophisticated IT approach than traditional sourcing. For example, sourcing a• For low-fashion products with strong flex- single item from multiple suppliers in multiple ibility in a short season, merchants source products from offshore in the pre-season countries requires a coordinated item file that to fulfill early season demand. During the enables tracking separate inventories, while early season, if sales figures are promising monitoring sales jointly. Retailers must capture and manufacturing capacity is flexible, then information at a very granular level, using variable merchants prefer to procure low-fashion items lead times, points of origin, costs, etc., married from nearshore/onshore to fulfill early and with forecast accuracy and cost/volume historical mid-season demand. data to drive decision-making. Creating the tools to support this analysis requires IT to understand• For high-fashion products with strong Flex- the nuances of the globalized supply chain. ibility in a short season, merchants source products from offshore in pre-season and then Real-World Examples procure products from near-shore/onshore in Case Study 1: Test, Quick Test and Early Read the early season. This inventory is then allowed to sell down for the rest of the season. A major North American soft-line retailer uses three methods to improve the success of its newWeak Flexibility and Long Season Length item launches: Tests, quick test and early read. The latter two methods are equivalent to our trial• For both low-fashion and high-fashion prod- and pilot techniques. Although all types of tests ucts with weak flexibility in a long season, cognizant 20-20 insights 4

Product Sourcing Management: By the Numbers Financial Value of Factors Sourcing Technique Line Item Factor • The historical strength of forecastThe better a retailerthe potential accuracy impacts + Offshore only need for in-season adjustments. can predict Sales sales levels and patterns, the more it can rely on offshore _ Decision based on the “variable production. sourcing decision matrix.” • The difference in product cost between offshore and + Offshore only onshore/near-shore. • The value of bulk This depends on the total volume aproduction buys from one factory vs. splitting Decision based on the “variable sourcing decision matrix.” COGS among facilities. retailer will purchase, negotiating strengths, economies of scale, etc. _ • Absence or low level of tariffs and duties associated with imports from the producing country. • The cost of shipping product from offshore. + Decision based on the “variable Shipping • The risk of shipping from offshore, including labor activity, sourcing decision matrix. shipping route safety, etc. _ • The lead time for shipping the products from offshore. Offshore onlyFigure 2enable the retailer to improve the success of their changing retail environment, speed can make allmass market launches, quick test (trial) and early the difference. The approach they choose variesread (pilot) are specifically used to accelerate based on the item and impacts the logistics of thedecision making. All three test methods help the item introduction.retailer gain market intelligence, but in an ever-Three Ways to Succeed with New Product Launches Early Read Test Quick Test (Trial Technique) (Pilot Technique) Item Type • Lower fashion element • Strong fashion element • Lower fashion element. • Medium to long lifecycle items. Timing • Test market in Season 1. • Test and mass market in the same season or in • Test and mass market in the • Mass market in Season 2 subsequent seasons. same season. Item • Trend identified in Europe. • Trend identified in Europe. • Trend identified in Europe. Design • Product designed • Trend examples hand-carried to China immediately. • Product designed in the U.S. in the U.S. • Product designed in China. Production • Standard product process. • Targeted factories that can expedite production. • Standard production process. Shipping • regular shipping through • centers and thenvia air freight to distribution Product shipped Product shipped • Productshipping through of shipped process through regular channels. regular process of sea freight. sea freight. Test Store • A group of stores volume,representativeisof the that is • Stores are randomly selected Selection _ chain in terms of climate, etc. identified and updated seasonally. This same group is used for each test. • Group represents XXX% of for all quick tests. chain. • Group represents XXX% of chain. Lead time • stores within ninetest Product reaches • identification. stores within two months of trend • Product reaches testof trend Product reaches stores months within seven months of trend identification. identification. Merchandising • assortment without special • special marketing. basic assortment without Product worked into basic Product worked into • Product worked intospecial basic assortment without marketing. marketing. Strategy • Impacts product selection, • Impacts product selection, quantity, distribution. • Impactsup reorder of product. product distribution, Result quantity, distribution. speedsFigure 3 cognizant 20-20 insights 5

Case Study 2: Domestic/Import a North American apparel client; the secondVariable Sourcing includes insights gleaned from a major EuropeanThe case studies below (see Figure 4) highlight retailer. In both cases, the retailers utilize a com-how the “domestic/import variable sourcing” bination of methods to react to marketplacetechnique helped major apparel retailers position conditions. In particular, they use a combinationthemselves to react quickly to the most current of domestic and import sourcing to react to insuf-marketplace data. The first example is from ficient inventory in their pipelines.A Hybrid Approach to Product Sourcing Business North American Retail Client European Retail Client Challenges Forecast 1. Merchants track planned and actual sales and either 1. Merchants track planned and actual sales and either Inaccuracy buy more products from existing vendors/find more buy more products from existing vendors/find more vendors or slow down/shut down orders. vendors or slow down/shut down orders. 2. If the sale of a particular brand is not performing in season, the retailer adjusts its brand fee. Excessive 1. Retailer updates the forecast and stops future orders. 1. Retailer updates the forecast and stops future orders. Inventory 2. If it is early/mid-season, then retailer negotiates with 2. If it is early/mid-season, retailer negotiates with in Chain vendor to return the product. vendor to return product. 3. If it is late season, then retailer runs heavy 3. If it is late season, then the retailer transfers markdowns to move the inventory. inventory to stores where product sales are encour- 4. Retailer runs national promotion for the product and aging. creates promotional displays. 4. Retailer runs national promotions for the product and creates proper promotional displays. Insufficient 1. Retailer updates the forecast and orders more 1. Retailer updates the forecast and orders more Inventory product. In the early season, retailer orders from product. In early season, the retailer orders from in Chain offshore (Asia Pacific), and in mid-season, retailer offshore (Asia-Pacific). In mid- season, the retailer orders from near-shore (Mexico) and local vendors orders from nearshore (Eastern Europe) and local (U.S.). vendors (England). Specific Brand Underperforming 1. If during the season a particular brand is not performing well, then the retailer finds an alternative _ brand from a nearshore/local vendor and replaces the non-performing brand. Inventory 1. Retailer updates the forecast at item/store level. 1. Retailer updates the forecast at item/store level. Misallocated 2. Retailer runs market-level promotions on the Retailer mobilizes the inventory from one store to Across Stores products and creates promotional displays. another, as distance between two stores is small. 3. If the item is not performing, then retailer negotiates markdowns with suppliers.Figure 4Product Sourcing to Build should consider the trial method to gain infor-Stronger Business mation prior to making commitments, pilots to both collect data and react quickly, and employAlthough adapting to sales patterns in-season is a domestic/import variable sourcing model toa fact of life for retailers, there are ways in which optimize both profit and in-stock. Model choicethey can position themselves to gain the data should be based on relative needs to acceleratenecessary to react and reduce the time between decision making, improve business agility anddecision-making and impact. Taking advantage increase management focus on optimizing theof a globalized supply chain can create oppor- product sourcing process.tunities for forward-thinking retailers. They cognizant 20-20 insights 6

About the AuthorsColleen Coleman is AVP of Merchandising within Cognizant Business Consulting’s Retail Practice. Shehas 24 years of experience in retail information technology and a B.S. in Industrial Engineering fromIowa State University. Colleen can be reached at Colleen.Coleman@cognizant.com.Nirupama Raghavan is a Consulting Manager within Cognizant Business Consulting’s Retail Practice. Shehas 12 years of experience in the retail industry and consulting. Nirupama has an MBA from the DardenSchool of Business at the University of Virginia and can be reached at Nirupama.Raghavan@cognizant.com.Amit Kumar is an Associate Consultant within the Cognizant Business Consulting Retail Practice and haseight years of experience in retail information technology and supply chain. He has an MBA from S.P.Jain Institute of Management & Research, Mumbai, India, and B.Tech from IIT Roorkee, India. Amit canbe reached at Amit.Kumar@cognizant.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 111,000 employees as of March 31, 2011, Cognizant is a member of theNASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 1000 and is ranked among the top performingand fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

Arming Retailers with Proactive Product Sourcing Strategies

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Arming Retailers with Proactive Product Sourcing Strategies Document Transcript