Indirect Procurement: Fueling Innovation in Retail’s New Reality
These days it takes about everything businesses have just to get goods on shelves. Product inventories have fallen to historic lows. Goods are held up by shipping container shortages, congested ports and a long-simmering lack of truck drivers that’s worsened with unprecedented resignation and retirement rates.
These and other breakdowns along the complex global supply chain have caused shipping costs to soar and other expenses like warehousing, marketing and packaging to skyrocket as well. In response to these pressures, retailers must secure product availability while balancing how much of these rising costs they can pass along at the register and how much they need to absorb to retain price-conscious consumers.
The key to addressing the retail sector’s supply chain nightmare could lie in a sometimes-overlooked area: indirect, or not-for-resale, expenditures.
Recognizing the Value of Indirect Procurement
Many business leaders assume indirect spending only encompasses non-strategic “back-office” spend. But here’s the reality: indirect procurement includes critical, high-value categories like marketing, packaging, corporate services, IT and more, and typically equates to 20% of a business’s total revenue. Seems like a good place to start if leaders want to drive savings to the bottom line without having to boost sales in lean times.
While savings are a key outcome, true procurement difference-makers move beyond the basic practices of negotiating prices and bidding on contracts. Experienced teams add value by optimizing processes and accelerating innovation. For example, by leveraging tactics like dual- and multi-source awards (contracts that tap more than one supplier to deliver a similar item), leaders can do a better job of ensuring product availability and reducing risk.
Importantly, procurement teams operating at this level can tailor a retailer’s capacity through demand management strategies, rethink entrenched business processes to find efficiencies and value-engineer expenditures to generate positive results at the lowest possible cost.
An empowered and proactive procurement team can keep the doors open even when market winds are doing their best to blow them closed. LogicSource’s recent experience with a long-time retail client is an impressive case study for the power of procurement as a strategic partner.
When COVID-19 hit we worked to keep the retailer’s employees and shoppers safe by sourcing scarce PPE-related goods like masks, hand sanitizers and plastic register shields. What’s more, our impact wasn’t limited to COVID-related supplies. When the pandemic started, few could have guessed shopping cart supply would become a pain point for a national retailer. But when holiday season rolled around, a large order of shopping carts was stuck at an offshore manufacturer. LogicSource sprang into action, identifying refurbished domestic carts and buying them to greatly improve delivery schedules, and at a reduced cost.
Most recently, our team has focused on keeping distribution centers running in the face of the new COVID variants by finding self-administered tests that comply with the company’s regular testing protocols. All of this was made possible by the retailer recognizing and acting on the value of indirect procurement years ago.
Unleash the Power of Indirect Procurement to Optimize Value
Indirect procurement teams can be proactive drivers of profit improvements and business innovation. With the right tools, expertise and focus, your team can optimize value for every business unit in your company. It all starts with data. Procurement teams must have effective technology to capture real-time organizational spend data that is clean, accurate and actionable. This data provides a foundation for meaningful dialogues with the executives needed to motivate change and drive organizational buy-in for modern indirect procurement policies and processes.
Armed with data insights, procurement teams can start approaching business stakeholders to understand each function’s priorities and challenges. Given the wide reach of an optimized procurement function, leaders should equip their team with experts in each category. These experts can provide a strategic, function-specific roadmap for success based on each function’s data, culture and approach to value.
Enable Agility in an Uncertain Market
Long-time procurement professionals likely remember when the department was once considered little more than “business supporters.” It’s an attitude that can still be pervasive if your organization hasn’t transitioned its thinking. Some of that onus is on leaders to play catch-up when it comes to optimizing their business. But much of the responsibility lies with procurement to differentiate itself, articulate its updated value proposition and elevate the procurement brand from order-takers to innovators and revenue generators.
Let’s revisit LogicSource’s experience with their retail client as an example of this maturity journey. The retailer was once heavily reliant on store foot traffic, but its ecommerce business has increased dramatically over the past two years as a result of shifting consumer habits. As the company’s procurement operators, we have invested resources to understand the solutions required to drive a successful ecommerce business, tapping into the ideas and best practices of clients with mature ecommerce solutions. Those on-the-ground experiences have guided a successful “buy online, pick up in-store” (BOPIS) service and helped scale the capacity for stores to launch a “ship from store” (SFS) model.
While the pandemic was ultimately the catalyst for this transition, the retailer was prepared for the change long before it became urgently needed. In a partnership spanning nearly a decade, our team has freed up more than $100 million in indirect procurement savings, and that savings is now funding the retailer’s strategic reinvestment in its ecommerce business. When we talk about Procurement driving business innovation, this is exactly what it means.
As retailers continue adapting to unexpected challenges, they should look to procurement to find efficiencies and unlock long-term profitability. That should be the baseline expectation of any procurement function, but leaders shouldn’t settle for status quo, especially now. Make data a priority. Win hearts and minds. With data visibility and executive buy-in, business leaders can also rely on their procurement operators to transcend bottom-line savings by increasing agility, streamlining processes and becoming true business innovators. In a volatile era of supply chain disruptions and a perilously shifty retail environment, better buying practices could mean the difference between being around for the next boom or shuttering your doors for good.
Mike Crawford is Managing Partner of Client Services and Center of Excellence at LogicSource. He brings 20+ years of strategic sourcing, procurement and supply chain experience in both indirect and direct spend categories. Crawford is skilled and experienced in establishing procurement maturity roadmaps and operationalizing and executing the plan to ensure measurable advancement in the procurement function is realized. He is accomplished in building sourcing organizations, developing sourcing talent, setting category strategies, negotiating complex contracts/agreements, employing stakeholder engagement, leveraging supplier performance management, conducting value engineering and process optimization and redesign and advancing procurement teams to become differentiators for their respective businesses.