How to Approach Indirect Sourcing in the Retail Industry: Part I

In Greek mythology, Cerberus is the three-headed dog guarding the gates of Hades. For many of today’s retailers, approaching the topic of indirect or non-merchandise spend is like fighting a three-headed dog. It stumps many retailers because purchases of indirect goods and services are usually not controlled by a center-led procurement organization. Even though indirect goods and services are part of division or store budgets, many retailers have little or no visibility across buying organizations and into spending habits.  Retailers often do not know who they buy from, what they buy, or how much is purchased across the organization. Not only are these goods and services often not subject to the rigorous discipline to which merchandise categories are subject, but there are oftentimes no competitive bids, service level agreements, or even, in some cases, valid contracts. Still worse, non-merchandise suppliers are not subject to risk evaluations or supply chain disruption reviews.

Indirect categories commonly consist of both of goods and services. Indirect goods can include store supplies, circulars and promotional materials, fixtures, and MRO (maintenance, repair, and operations). Indirect can also includes such services as security, janitorial services, and waste pickup.

Why has indirect spend on these goods and services been historically overlooked? The answer is not hard to see. The power of the budget resides in functions like store operations, supply chain, or IT – and these organizations have been reluctant to give up control of these dollars. To corporate, indirect has traditionally been seen as nothing more than a nuisance; after all, it doesn’t drive day-to-day business, like merchandise purchasing does and the dollars are a small percentage of general and administrative costs. However, in these days of mandatory cost reductions, leading retailers are looking into indirect spend as never before by reviewing options for indirect purchasing with a single goal in mind – to save money. 

Saving money by lowering the costs of indirect can take shape for three primary reasons:
• It can help retailers gain competitive advantage. By lowering costs of indirect, retailers become empowered to increase operating margin on a 1:1 ratio as they build a foundation to lower prices of merchandise goods.  In comparison, most savings with merchandise categories are significantly diluted before they hit the bottom line.
• It can increase your efficiency. By reducing the sourcing and managing process on operating organizations, you can increase the productivity of your existing resources. If your divisions are no longer sourcing or administering MRO or managing contracts or compliance, they can focus on the tactical buying and running operations. They can do more with less.
• It can reduce your supplier risk. By proactively managing cost, such as print and janitorial chemicals, you can avoid and prevent supplier issues; but furthermore, you can institute a “three deep” plan for goods and services, including prequalified suppliers that can be used interchangeably during critical times.

In the next 3 Parts, we will explore each of the three ways to approach this problem.  Here are some questions to think about:

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