Retailers must adopt holistic sourcing strategy to cut costs, says study

Butler: holistic approach to sourcing required

Butler: holistic approach to sourcing required

Retailers need to adopt a holistic sourcing strategy to stabilise gross margins and reduce overall sourcing costs in the current economic climate, according to a new study from global management consultancy Kurt Salmon.

Kurt Salmon’s latest edition of its Global Sourcing Reference reveals the cost of doing business in 45 countries.

“Price and cost increases are too big to be compensated by focusing on the individual ‘links’ of the supply chain in isolation,” said Sue Butler, Kurt Salmon UK.

“However, if sourcing is managed as an integral part of the whole process it can deliver a 4-5% improvement. In addition, alongside the cost pressure, the demand for more flexibility within the supply chain and innovation has intensified as companies wrestle with changing consumer demand and competitor activity. By implementing cross-functional planning and managing a holistic ‘go-to-market’ calendar, lead times can be reduced by up to 25-40%.”

These are key findings from a survey of 100 European sourcing decision-makers conducted by Kurt Salmon for the 10th edition of its Global Sourcing Reference.

In addition to identifying the current and long-term sourcing trends and developments along the complete supply chain, the guide contains production and logistics costs of the 45 most important sourcing countries for the EU market, so companies can benchmark the competitiveness of their own sourcing, said Kurt Salmon.

Sourcing regions appropriate for the US market have also been included for the first time.

Not unexpectedly, the figures for China show a steady increase in production costs over the past five years and are 50% higher than in 2009 (when the previous guide was published) – by far the largest percentage increase of those regions working with European customers.

Only Turkey has become relatively cheaper. For other countries, such as Vietnam and Pakistan, the change has been less acute, or as with Turkey and Indonesia, characterised by heftier influences such as currency, cost productivity and capacity fluctuations.

Given its size and capabilities, China will continue to be the major supply region for the foreseeable future, said researchers.

However, its competitors are getting closer. Vietnam, which has profited from the shift of Chinese suppliers and a stronger domestic demand, as well as Turkey, which faces considerably less capacity constraints, are looking to catch up, Kurt Salmon said.

Bangladesh, despite the fact that it could not maintain its growth rate during the economic downturn in 2009, still remains an important sourcing market as wages are the lowest. The losers are once again the Eastern Europe countries, which continue to face shrinking market share.

This is mainly due to poor productivity and a lack of vertical integration in the industry. As opposed to Turkey, Eastern Europe also does not have the capacity needed to fill the gap in supply from China, said reseachers.

Looking at other sourcing trends, Kurt Salmon has identified switching activities such as technical product specifications and quality control into sourcing countries results in a better and faster local co-ordination of development and sourcing decisions. Forty per cent of the 100 plus sourcing managers surveyed said they found it easier to shift these activities into their own buying offices, rather than working with external agents (30%).

As far as corporate social responsibility is concerned, this is becoming more of an issue for retailers and brands working with not just for tier one but also tier two suppliers, particularly relating to the payment of a fair wage. Despite the fact buyers are not looking to increase costs, from a long term perspective, the trend towards CSR will continue, said Kurt Salmon

From a consumer perspective, however, ecologically or socially responsibly manufactured products are not considered as differentiators: 40% of interviewees only saw such potential for 5% of their assortment.