Sourcing overseas can help retailers innovate, but there are risks involved, says Mark Faithfull

The dramatic events in the worldwide economy of the past two years have put an even sharper focus on price optimisation and product innovation in the retail sector. Global sourcing has thrown up huge cost and product enhancement opportunities but at the same time it has meant retailers have had to remodel procurement strategies and step into the unknown regarding risk management.

In a fast-changing world, opportunities and challenges are emerging in equal measure. Some retailers are exploiting these shifts to make bold operational moves that fundamentally restructure the industries in which they compete, according to management consultant PRTM.

Its research cites consumer products giant Proctor & Gamble as a good example of a business that has taken a new approach, redefining its R&D around a global approach that has dramatically increased its R&D output while reducing spend.

But it is not just the FMCG retailers that are innovating to capture consumer imagination. Retailers are also working with their global suppliers to provide the better value for money items they believe consumers expect.

Lloyds Development Capital-backed Ultimate Products has invested heavily in the past 12 months; its recent acquisition of the luggage and small leather goods divisions of Japinda Group is the third such purchase it has made within a year. Manchester-based Japinda manufactures luggage and travel goods under the Constellation Luggage brand and supplies Argos, Dunnes, Sainsbury’s and TJ Hughes, among others.

Ultimate Products brand director Bernadette Spofforth points to the rapid growth in own-label products in supermarkets and says increasing sophistication in both sourcing and presentation has helped make huge strides against established, legacy brands.

“The trends indicate clearly that shoppers want value for money, but not cheapness,” she says, citing a 60% sales lift for one grocer when the company helped it with an underperforming category, which was rebranded and promoted in-store. “You might only be able to afford a £5 pair of jeans but you don’t want to feel that way. It’s about creating a John Lewis experience at Asda prices and that is why the supermarkets have garnered great traction in categories such as clothing.”

Supermarkets are not the only ones to have upped their game. Last year value fashion chain Primark joined forces with Swallowfield, a global provider of beauty and personal care solutions, to develop a new value-oriented make-up range. Beautiful Colour Cosmetics went on sale in May 2009, with prices starting at £2 for mascara and £2.50 for a lip gloss, and has become a strong seller for the retail chain in what Primark describes as “econo-chic”.

Swallowfield chief executive Ian Mackinnon adds: “The formulations, packaging and brands have been developed to create excitement and engage the consumer.”

Similarly, Liverpool-based discount department store chain TJ Hughes worked with consultant ADR International to streamline procurement of indirect goods and services for its 52 stores nationwide. ADR launched a strategic sourcing exercise, including opportunity analysis and wave planning, through to tendering of specific categories. The company then worked with key TJ Hughes staff to put recommendations into action, delivering annual savings of more than £500,000 in the first phase alone.

Suri Zafari, internal audit and procurement manager at TJ Hughes, says: “We were able to work together to deliver the service and the savings we were looking for.”

Spofforth believes that retailers will increasingly look to strengthen their own brand positions and that in many cases it will be at the expense of the legacy brands, which she feels have been too slow to respond to the changing dynamics of sourcing. She points to the retail acquisitions and rights held by Argos for Alba and Bush products and by DSGi for the Grundig mark as indicators of further such developments in the future, as retailers take over brands.

Own-brand advantages

“Strong own brands give retailers very strong advantages,” she stresses. “They give them more control of how they balance their product offering, how and when they promote it and pricing strategies. But, equally, retailers have to remember that, as they become more sophisticated at these techniques, so will their rivals.”

But PRTM warns that the cost benefits of increased globalisation are not without risk. In particular, product safety and quality can be issues. More than a fifth of respondents to a PRTM’s Global Supply Chain Trends 2008-2010 survey said such issues were frequent and serious. In some cases, decisions to manufacture products offshore have been reversed because quality problems could not be resolved and lately there have been two cautionary tales for any global sourcing operation - Toyota’s huge global product recall and the sofa chemical burns case, which involved Argos and Homebase, among others, in a £20m settlement.

Bill Michels, chief executive of the North American arm of sourcing specialist ADR, points out that when a design goes wrong it is extremely difficult to isolate the cause; and, further, that lean manufacturing increases certain risks, which must be anticipated and mitigated. “One approach to managing risk would be to add fail-safe features,” he says.

ADR Sourcing director Simon Aldred says there are some best practice tests that help to decide whether a country will be successful as a low-cost source of goods and services. These include analysing the profile of the items being purchased and asking which regions are already geared up to produce them.

He says: “A good supply market analysis will involve assessing the supplier country’s infrastructure. This should include robust road, rail and port links, stable telecommunications and a reliable energy network.”

The incidence of product safety and quality problems varies by industry, according to PRTM, which some reassuring words for retailers. “Automotive and industrial equipment companies are the most likely to experience major issues, and electronics and consumer goods companies are the least likely.”

There are strategies that can be put in place to minimise potential problems. Increasing the frequency of on-site audits is the most commonly cited, followed by physical deployment of company resources within the supplier’s location, increasing inspection and increasing supplier training.

Other approaches to minimising risk include adopting consistent dual sourcing strategies, early integration of product development and supply chain management and customisation of products in home market facilities.

Spofforth believes one of the most important solutions is even simpler. “Retailers should stick with what they know and bring in specialist expertise where they need it,” she says. “There are experienced sourcing houses and using those helps to mitigate problems with suppliers in emerging markets.”

Product innovation is crucial to keep up with consumer demand but, wherever your suppliers are based in the world, value must not come at the expense of product safety.

Innovation During a Downturn

  • Severe trading conditions naturally call for refocusing and innovation on the part of retailers, and re-engineering of products is one way in which retailers can optimise their supply chain and reinvigorate their merchandise ranges, according to Rob Shelton, a partner at consultant PRTM’s product and service innovation practice. He recommends:
  • Clear the pipeline Get rid of the projects in the research and development pipeline that are not essential. Under current conditions, you cannot afford to waste resources on good, but not great, projects.
  • Reduce complexity Dump those products and broad portfolios that are weighing you down and do not provide value.
  • Move faster Drive a few critical projects faster and reap the benefits sooner. Allocate additional resources to selected, high-priority, innovative projects that can deliver quick benefits.
  • Find new sources Take advantage of R&D talent in low-cost countries such as China, India, Vietnam and Eastern Europe. Properly executed, sourcing not only lowers costs but also improves innovation.
  • Identify constraints Find out where you have constrained resources and make sure you do not make matters worse by cutting those.
  • Optimise what you have Don’t get stuck in a rut and use your innovation resources solely to create new products.
  • Innovate on cost reductions for existing products Re-evaluate the projects that you may have shelved before the global economic storm that provide cost reductions to processing or manufacturing, assembly, and the supply chain.
  • Leverage customer loyalty Identify major gaps in the customer experience and focus innovation resources on creating improved experiences.