Retailers face yet another tough year after the annus horribilis of 2011.
Retailers face yet another tough year after the annus horribilis of 2011. The traditional seasonal discounts started in early December, well ahead of normal, as retailers chased sales and competed against low-cost online competition.
The result has been often sluggish sales, and margins and profits have been eroded. What can be done in 2012 to maintain competitiveness and protect margins? Historically, the first response is to squeeze suppliers to buy products at a cheaper price, effectively passing on the pain. However, this isn’t a sustainable option. The supply chain, like any chain, is as strong as the weakest link.
OK, I hear you shout; when a supplier fails we have fall-back suppliers that can take up the slack. Maybe so, but these fall-back suppliers still need to make a turn and they too are under inflationary pressures. Retailers have increasingly tried to protect product margins by slapping on onerous ‘fines’ for small deviations from the order terms, but suppliers are getting wise to that game.
So, what’s the answer? It is to drive down costs further to improve competitiveness and protect profits. In most retailers, there is 15% to 20% of the cost base that is less closely looked at – the unsexy ‘indirect’ or ‘not for resale’ cost base.
Furthermore, the end-to-end procurement process tends to carry with it high levels of transaction costs – independent research suggests that this could be higher than £100 per transaction. I believe this is where retailers should concentrate their efforts. In most instances, there is the opportunity to add 1.5% to 2% of sales onto the bottom line profit margin by applying an effective programme of ‘control, enhance and optimise’.
This three-stage process provides for immediate process efficiency savings and delivers up to 30-day cash flow benefits.
The process provides control by aligning the procurement policy to a set of clearly defined procedures. It delivers controls providing structure across the spend process, allowing for approval of all expenditure in line with agreed delegation.
Initial benefits can be further extended through better leverage of spend and supplier contracts nationally. It also helps to simplify the entire ordering process.
So within a relatively short period, retailers can have a fully operational solution delivering significant process efficiency savings, improved effectiveness of the back office and invoice/payment processes, improved governance and a process to enable the ongoing rationalisation of suppliers through integrating national contracts.
Additional benefits include improved cash flow and improved time to receive goods and less time needed to run procurement.
The process efficiency benefits can flow across their ‘goods for resale’ expenditure.
In conclusion, 2012 is unlikely to see retailers rescued by strong sales growth, but there is much that can be done to reduce the costs of procurement and that will allow high street players to live to fight another day.
- Tony Lockwood, chief executive, Xynergie