Strat Sourcing Report

AberdeenGroup
The Retail Brand Management

Sourcing Benchmark Study
The Next Generation of Strategic Sourcing
June 2004
Sponsored by
The Retail Brand Management Sourcing Benchmark Report
Executive Summary
M ore than 70% of retailers are also brand managers; that is, they design and
source product for resale under proprietary in-house labels. Adding this pri-
vate-label product to the retailer’s merchandise mix is intended to improve
overall gross margins and enhance retail brand awareness. Aberdeen Group recently sur-
veyed more than 100 retail companies to determine best, worst, and most common prac-
tices in private-label brand management. This report reviews the results of that survey
while highlighting the challenges that brand managers face in implementing strategic,
rather than purely tactical, sourcing practices.
Key Business Value Findings

Retailers remain mired in organizational structures that are ill suited to 21st century com-
petitive challenges and opportunities. Although they are aware that immediate business
benefits are attainable through a more holistic examination of strategic sourcing opportu-
nities, they are mostly unable to implement these strategies within their organizations.
Spreadsheets, faxes, and e-mail remain the most commonly used sourcing technologies
even though more comprehensive Web-based technologies are available and affordable.
Implications and Analysis

Retailers’ inability to examine and implement better sourcing strategies has cost them
dearly. Gross margin dollars are left on the table, and the supplier-brand manager rela-
tionship remains adversarial and essentially noncommunicative. Market leaders validated
Aberdeen’s hypothesis that a sound sourcing strategy can provide more value than just
squeezing another penny out of suppliers. Retailers that do go forward with both organ-
izational changes and supporting technologies achieve gross margin and turn improve-
ments without sacrificing customer service levels. Aberdeen created Sourcing for Innova-
tion, a new sourcing framework based on survey results that encourages and rewards a
holistic view of the relationships between product development, sourcing, demand fore-
casting, logistics modeling, and actual demand.
Recommendations for Action

Aberdeen offers the following recommendations to retailers:
• Evaluate how you are doing compared with your peers. Take small steps toward im-
proving sourcing processes, generating return on investment (ROI) all along the way.
• Incrementally adopt a Sourcing for Innovation strategy.
• Align incentives and compensation to team, not just individual performance.
• Look beyond your current supplier base to possible new sources of finished goods.
Consider sourcing short life-cycle product geographically closer to the point of de-
mand.
All print and electronic rights are the property of Aberdeen Group © 2004.
AberdeenGroup • i
Table of Contents
Executive Summary .............................................................................................. i

Key Business Value Findings.......................................................................... i
Implications and Analysis................................................................................ i
Recommendations for Action.......................................................................... i
Chapter One: Issues at Hand...............................................................................1
Chapter Two: Key Business Value Findings .........................................................3

Differentiation Is Key to Surviving in a Hypercompetitive Marketplace .......... 3
PACE: Strategic Sourcing in Retail and Brand Management .................. 4
Supply Chain Visibility Is Critical for Rapid Reaction ..................................... 5
Most Know Collaboration Is Necessary; Few Can Get It Done...................... 7
Chapter Three: Implications and Analysis ...........................................................9

Rapid ROI Is Attainable by Companies of Any Size....................................... 9
Introducing Sourcing for Innovation ............................................................. 10
Sourcing for Innovation Explained......................................................... 11
Cross-Divisional Opportunities Exist for Further Cost Improvements .......... 12
Chapter Four: Recommendations for Action ...................................................... 13

Evaluate How You Are Doing Compared with Your Peers............................ 13
Incrementally Adopt a Sourcing for Innovation Strategy .............................. 15
Align Incentives and Compensation to Team Performance.......................... 15
Look Beyond Your Current Base of Suppliers.............................................. 16
Featured Sponsors............................................................................................. 17
Sponsor Directory .............................................................................................. 18
Author Profile ..................................................................................................... 19
About AberdeenGroup ...................................................................................... 20
Appendix A: Research Methodology .................................................................. 21
Appendix B: Related Aberdeen Research and Tools.......................................... 23
AberdeenGroup
Figures
Figure 1: Relative Importance of External Pressures ...........................................3
Figure 2: Relative Importance of Key Strategic Actions........................................4
Figure 3: Most Frequently Added Capabilities for Sourcing Activities...................6
Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives .....6
Figure 5: Visibility into Inbound Orders.................................................................7
Figure 6: Concerns and Challenges Blocking Adoption of Strategic Sourcing......8
Figure 7: Systems and Solutions Employed as Part of Sourcing Initiatives..........8
Figure 8: When Does Strategic Sourcing Make Sense? .................................... 10
Figure 9: Sourcing for Innovation ....................................................................... 11
Figure 10: Sourcing Organizational Structures................................................... 12
Figure 11: Strategies Used to Overcome Barriers to Sourcing Adoption ............ 16
Tables
Table 1: Prioritized PACE for Strategic Sourcing in Retail
and Brand Management.......................................................................................5
Table 2: Competitive Framework for Strategic Sourcing..................................... 14
AberdeenGroup
Chapter One:
Issues at Hand
Key Takeaways
• A strong sourcing strategy is critical to surviving today’s hyper-competitive retail world.

• Organizations must evolve to take advantage of cost reductions and opportunities for
innovation.
• Rapid ROI is still available; years of effort are not required to gain benefit .
T he world of retail has changed dramatically over the past decade. Driven by chan-
nel masters like Wal-Mart and Target, retailer survival now depends on differen-
tiation, and on catering to the empowered consumer’s ever changing demands.
New strategies are required across the board to maintain gross margin and minimize
markdowns.
Ratcheting up inventory turns alone does not
ensure survival in this post-Wal-Mart world. A strong sourcing strategy can miti-
Often, increased inventory turn results in gate merchandising mistakes with
empty shelves and decreased service levels. minimized markdowns while turning
Depending on the “hot hand” of a chief mer- potential design winners into customer
chant to generate full-price revenue is also a service and profit home runs.
risky proposition. Just as in baseball, no mer-
chant can bat 1,000, and sourcing product in
far-flung locations often requires the merchant to do just that: building large purchase
orders with long lead times. The bigger the retailer is, the larger the potential impact of
merchandising miscues will be. A strong sourcing strategy can mitigate merchandising
mistakes with minimized markdowns while turning potential design winners into cus-
tomer service and profit grand slams.
The retail organization of the 21st century, with its prebuilt functional barriers, is incapa-
ble of taking advantage of these opportunities. Classically, new product introduction has
been accomplished by throwing a set of specifications over an organizational transom.
Some leading retailers’ lack of communication between merchants and product develop-
ers results in a staggering 90%+ of product designs never seeing the light of day; they
never arrive on the retailer’s shelves.
There are several reasons for this essentially wasted effort. Each revolves around the lack
of communication and coordination between assortment planners and product developers.
The first reason is physical: stores have size constraints and cannot physically fit the
number of products that are developed. The second is more strategic in nature: lack of
communication on the overall feel that an assortment planner wants to convey in the
store. Designs that match the look and feel of the planned collection are more likely to
survive than designs created in a vacuum.
AberdeenGroup • 1
Once a product is ready for sourcing, it is tossed over another organizational transom,
with a specification package faxed or e-mailed to a select group of prequalified factories.
Statistics show that simply holding an online bidding event can reduce product costs by
10% to 15%, yet Aberdeen Group’s study revealed that less than half of the respondents
take advantage of this relatively simple and mature technology.
In short, the next generation of retail strategic sourcing is a windfall waiting to drop into
the hands of responsive retailers. Aberdeen calls the organization, technologies, and
strategies of this next generation, “Sourcing for Innovation” and believes it is a key linch-
pin to success in the post-Wal-Mart world.
2 • AberdeenGroup
Chapter Two:
Key Business Value Findings
Key Takeaways
• Product differentiation is key to surviving in a hypercompetitive marketplace.

• Supply chain visibility is critical for rapid reaction.
• Most know collaboration is necessary; few can get it done.
Differentiation Is Key to Surviving in a Hypercompetitive Marketplace

Discussion of the hypercompetitive retail marketplace is so prevalent that it verges on
cliché, yet it remains the No. 1 priority facing retailers and brand managers today (Figure
1). These same retailers believe that product differentiation is their key to survival; 85%
cite it as an important business strategy (Figure 2). The second most critical business
strategy strikes to the heart of the current endless cycle of markdowns — moving their
business model closer to “make to order” (in the latest trend of mass customization) or
“make to demand” rather than “make to stock.”
Figure 1: Relative Importance of External Pressures

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Eroding gross Hypercompetitive Eroded brand Increased Import quotas
margins (%) environment loyalty opportunity cost of
caused by “out-of-stocks”
markdowns
Aberdeen Group, June 2004
AberdeenGroup • 3
Figure 2: Relative Importance of Key Strategic Actions

90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Differentiating Decreasing time to Buying raw Aggregating Decreasing time to
through product volume – make to materials on behalf sourcing of raw volume
leadership order rather than of suppliers materials across
make to stock divisions
PACE: Strategic Sourcing in Retail and Brand Management

Respondents to the Aberdeen survey detailed multiple pressures, actions, capabilities,
and supporting technologies (enablers) that their companies are using — or plan to use
— to address sourcing process improvements. Aberdeen examined sourcing trends, chal-
lenges, and practices in retail and brand management using the following framework
methodology:
• Pressures — external forces that impact an organization’s market position,
competitiveness, or business operations (e.g., economic, political and regula-
tory, technology, changing customer preferences, competitive)
• Actions — the strategic approaches that an organization takes in response to
industry pressures (e.g., align the corporate business model to leverage in-
dustry opportunities, such as product/service strategy, target markets, finan-
cial strategy, go-to-market, and sales strategy)
• Capabilities — the business process competencies required to execute corpo-
rate strategy (e.g., skilled people, brand, market positioning, viable prod-
ucts/services, ecosystem partners, financing)
• Enablers — the key functionality of technology solutions required to support
the organization’s enabling business practices (e.g., development platform,
applications, network connectivity, user interface, training and support, part-
ner interfaces, data cleansing, and management)
4 • AberdeenGroup
Table 1: Prioritized PACE for Strategic Sourcing in Retail and Brand Management
Prioritized Prioritized Prioritized Prioritized

Priorities Pressures Actions Capabilities Enablers
1 Hypercompetitive Differentiating Extended sup- Supply chain visibility appli-
environment through product ply chain visi- cations
leadership bility
2 Eroding gross Make to order Spend analy- Collaborative product devel-
margins caused rather than sis opment management sys-
by markdowns make to stock tems
3 Increased oppor- Decreasing Component- Strategic sourcing and RFQ
tunity costs of out overall time to based product applications
of stocks volume development
4 Eroded brand Aggregating Bill of materi- Near real-time demand fore-
loyalty sourcing re- als-based casting and planning
quirements sourcing
across divisions
5 Import quotas Buying raw Tailored logis- Lead time optimization
materials on tics modeling
behalf of sup-
pliers
Source: Aberdeen Group, June 2004
By a wide margin, surveyed companies singled out the hypercompetitive environment as

the key external pressure; 87% of respondents rated it as important, very important, or
extremely important.
Supply Chain Visibility Is Critical for Rapid Reaction

Taking a typically pragmatic approach to problem solving, retailers place the highest pri-
ority on improving visibility of inbound orders (Figures 3 and 4). One would assume that
they would extend visibility back into the supply chain, to the status of raw materials.
Yet when asked to describe the extent of their capabilities, 46% of respondents reported
that they had visibility into orders only after they were en route from factories to distribu-
tion centers or stores, and another 36% had no visibility until the supplier called to re-
quest an appointment (Figure 5).
AberdeenGroup • 5
Figure 3: Most Frequently Added Capabilities for Sourcing Activities
Tailored logistics
35.8%
modeling
Spend analysis 50.0%
Extended supply chain

62.3%
visibility
Bill of materials-based
40.6%
sourcing
Component-based
47.2%
product development
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives
Lead time optimization 38%
Strategic sourcing and

46%
RFQ applications
Supply chain visibility

55%
applications
Collaborative product
development 46%
management systems
Near real-time demand

42%
forecasting/planning
0% 10% 20% 30% 40% 50% 60%
6 • AberdeenGroup
Figure 5: Visibility into Inbound Orders
Visibility into raw materials prior to

16%
arrival at factory
Visibility into orders once they have left

49%
the factory
No visibility until supplier calls for

36%
delivery appointment
0% 10% 20% 30% 40% 50% 60%
This level of visibility does provide a tactical benefit: distribution center and transporta-
tion personnel can use the data to expedite shipments of hot products or redirect specific
shipments to stores that need them the most, but retailers with this level of visibility into
their supply chains also miss a boatload of opportunity. However, halting or postponing
production of items that are not selling is far less expensive than holding finished goods
in the distribution center, or worse, shipping them to store locations and marking them
down. Visibility into the status of raw materials gives brand managers the opportunity to
divert, adjust, or convert losing styles into winners. It also provides an early warning sys-
tem about potential product delays and allows them to make contingency plans like re-
moving a planned promotional item from the Sunday newspaper circular or finding a new
supplier for the raw material that will be delayed. Bill of material-based sourcing im-
proves retailers’ ability to substitute components and clearly understand the cost impact
associated with that substitution.
Most Know Collaboration Is Necessary; Few Can Get It Done

Not surprisingly, brand managers know that the most effective sourcing strategies can be
put in place only when they collaborate with their suppliers. The ideal scenario occurs
when brand managers and their product suppliers collaborate on product design, ensuring
that a product maintains the look and feel that extends the retailer’s brand, but relies on
components and construction that make it easy to build. Forty-six percent of survey re-
spondents have implemented technologies geared to collaborative product development
(refer back to Figure 4). Yet 41% reported that their own internal organizational struc-
tures loom as their biggest challenge to implementing strategic sourcing policies and pro-
cedures (Figure 6).
However, as will be discussed later in the report, more than half of the respondents be-
lieve that collaborating with their suppliers will somehow solve these internal organiza-
tional deficiencies. Clearly, these retailers must get their own houses in order before they
can effectively collaborate with the outside world. Although brand managers report con-
cerns over having the right technology in place to support a strategic sourcing strategy,
Aberdeen Group does not believe that they have fully exploited the technologies that
they already have in place. Fax and e-mail remain the predominant technologies used for
sourcing, and forecasting through spreadsheets is a close second.
AberdeenGroup • 7
Figure 6: Concerns and Challenges Blocking Adoption of Strategic Sourcing

What are the top three concerns and challenges blocking adoption
of strategic sourcing in your organization?
Organization does not see the need

Difficulties in scaling pilots
Excessive time to benefit
Inability to culturally absorb process changes required
Lack of technology maturity/functionality
Lack of a compelling business case
Lack of active executive support
Lack of flexibility
Product does not warrant this type of effort
Nonaligned internal organization structure
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Figure 7: Systems and Solutions Employed as Part of Sourcing Initiatives
Aligned demand and supply decision support systems 8%
Basic demand and supply decision support systems 31%
Integrated PDM, sourcing, and visibility 14%

Integrated PDM, sourcing 7%
Stand-alone logistics modeling system 18%
Single forecast feeding all demand systems 12%
Multiple disconnected forecasting systems 23%
Forecasting through spreadsheets 47%
Stand-alone PDM system 9%
Stand-alone sourcing/automated RFQ application 25%
Communication is manual or via fax or e-mail 58%
0% 10% 20% 30% 40% 50% 60% 70%
8 • AberdeenGroup
Chapter Three:
Implications and Analysis
•
Key Takeaways
Rapid ROI is attainable by companies of all sizes.

• Product leadership can be sustained through a multidisciplinary approach — introducing
Sourcing for Innovation.
• Cross-divisional opportunities exist for further cost improvements.
T he Aberdeen survey clearly indicated that

the opportunities associated with moving
to better strategic sourcing practices have
barely been tapped. Small steps can be taken to
The opportunities associated with
moving to a strategic sourcing
framework have barely been
gain cost opportunities, but it is also possible to
take more radical steps to create a holistic view tapped.
of sourcing across the enterprise, which Aber-
deen calls “Sourcing for Innovation.”
Sourcing for Innovation is the convergence of
product development, logistics modeling, traditional best sourcing practices, supply chain
visibility, and advanced forecasting. It is enabled by integrated technologies and driven
by cross-functional organizational teams.
Rapid ROI Is Attainable by Companies of Any Size
Companies believe strongly in the concept of strategic sourcing (Figure 8), yet most have
not taken the necessary actions to gain short- and long-term benefits. :Respondents stated
their views on the following strategic sourcing issues:
1. Unbundling in-bound freight — One piece of low-hanging fruit is clearly found in
the unbundling of inbound freight. Forty-seven percent of survey respondents bun-
dled the cost of in-bound freight into product cost more than 75% of the time. Imme-
diate gross margin improvements can be achieved by separating out this cost and
creating a bidding process with logistics providers.
2. Innovation is attainable — More than 50% of respondents said that they think strate-
gic sourcing initiatives would enhance their ability to innovate. Innovation that ex-
cites consumers and creates a call to action (to buy new and interesting products) is
virtually the only cure for the current markdown-crazed environment.
3. Organizational alignment is key — Nearly 76% of respondents indicated that they
believe that alignment between product development, procurement, and supply chain
logistics is required to achieve sourcing benefits.
4. Creating win-win scenarios is possible — Approximately half the survey respon-
dents believed that strategic sourcing can be a win for both suppliers and brand man-
agers, improving decades of adversarial relationships.
AberdeenGroup • 9
Figure 8: When Does Strategic Sourcing Make Sense?
Next-Generation Strategic Sourcing...
makes economic sense only in enterprises

with more than $1 billion in revenues
requires strong internal alignment among
product development, sourcing, and supply
requires that you work at it for at least three years
- no low-hanging fruit
is a useful approach that enhances our ability Agree
to innovate
Neutral
is a valuable strategy for generating consumer
excitement Disagree
ia a valuable strategy for enhancing customer
retention
creates a clear win-win supplier-brand
manager relationship
has potential to achieve strategic competitive
advantage for your enterprise
0 10 20 30 40 50 60 70 80 90 100
% % % % % % % % % % %
Source: Aberdeen Group, June 2004
Introducing Sourcing for Innovation

This survey and other Aberdeen research clearly demonstrate the need for a new, more
holistic view of sourcing in retail and brand management organizations. Specifically, Ab-
erdeen believes that the next generation of strategic sourcing will combine the disparate
organizations and supporting technologies that govern product development and life-
cycle management, sourcing, supply chain visibility, and logistics planning, all supported
by an advanced forecasting engine. Figure 9 shows Aberdeen’s Sourcing for Innovation
model. Sourcing for innovation cannot be accomplished without cross-functional col-
laboration and cooperation, both within and outside the enterprise. Implementation will
take some time, but incremental adoption will reduce the risk of business disruption
while providing almost instant gratification of ROI all along the way.
10 • AberdeenGroup
Figure 9: Sourcing for Innovation
What is my production
How will I status?
build it? Supply chain visibility
Component -
Component-
based Whom will I buy it from? Where will I buy it? What is
product the
design Component- -
Component Plan/
Select actual
based execute POs
supplier(s
supplier(s)) demand?
sourcing
sales
How will I
ship it?
Logistics Forecasting engine
What do I think demand will be?
modeling
What is my product
concept?
Goals/life
expectancy
Sourcing for Innovation Explained

The Sourcing for Innovation model consists of a series of steps:
1. The first step in Sourcing for Innovation is clearly stating the product concept. This
is the fundamental art form that all subsequent science-based processes will support.
It is, in essence, the art of merchandising. The product designer will be expected to
define his or her goals for the product: long or short life cycle; expected customer
demographics; a generally anticipated sales curve; an appropriate, approximate price;
and promotional plans for the item. This information is fed into a forecast engine,
which will generate approximate sales volumes and become part of the product’s
core characteristics.
2. Next, a product manager decides how the product will be built. In a world of iterative
designs, the ideal scenario is to build from a library of preapproved component parts
whenever possible These components are as applicable to fabrics and trims in apparel
as they are to disk drives and video cards in personal computers or peanut butter and
jars in grocery. The goal is an adaptable product design that is easy to build, adjust,
and replenish.
3. Concurrent to determining how to build the product, a logistics manager will deter-
mine the best possible means of transportation. Product life cycle and expected de-
mand will help in determining whether the item should be shipped directly to the
store, if there are preferred case pack or inner pack quantities, or if it should be
shipped to a distribution center for later allocation.
4. Once shipment and design methods have been determined, an organization can make
traditional sourcing decisions. These decisions include who appropriate suppliers are
and who can make it for the best cost. Once a supplier has been selected, the process
of creating and executing purchase orders and arranging logistics activities can begin.
AberdeenGroup • 11
5. Visibility into purchase order production status begins as soon as a primary supplier
is selected and the purchase order is cut. The status of materials critical to production
must be continually monitored prior to the expected manufacture date to determine if
ship dates are still viable. This step is more important, in some ways, than visibility
into a purchase order after it leaves the factory. Adjustments can still be made into
cut or ship quantities at this time.
6. Once product arrives in the field and is available for sale, actual demand signals are
received. In particular, it has been said that the demand curve for short-life-cycle
product is known to the 90th percentile in the first 11 days of sales. Actual demand
or sales information is then fed back into the forecasting engine.
At this point, the whole process begins again, as expected product goals are adjusted to
reflect reality, and the rest of the sourcing life cycle moves to accommodate these new
expectations.
Interestingly enough, once an enterprise accomplishes the full life cycle of Sourcing for
Innovation, further rewards are still achievable.
Cross-Divisional Opportunities Exist for Further Cost Improvements

Sourcing for Innovation provides enterprises with a new model for efficient and cost-
effective product introduction. The organizational alignment achieved from adopting the
new model can be extended to other areas as well. Less than 40% of Aberdeen’s survey
respondents reported that sourcing is a corporatewide shared resource, whereas more than
50% allowed sourcing decisions to be made at the individual buyer/product manager
level (Figure 10). Opportunities to exert an enterprise’s mass are clearly being missed by
not aggregating raw materials requirements, with expected additional savings of 10% to
15%.
Figure 10: Sourcing Organizational Structures

Which of the
following sourcing organizational structures is employed at your firm?
Fully integrated supply/demand organizations 11%
Partially integrated supply/demand organizations 20%
Normally aligned supply/demand organizations 9%
Partially aligned supply/demand organizations 26%
Unaligned supply/demand organizations 12%
Internal integration of demand/supply 36%
Sourcing is a corporatewide shared service 38%
Divisionally based sourcing decisions 28%
Individual buyer/product manager sourcing decisions 52%
0% 10% 20% 30% 40% 50% 60%
Chapter Four:
Recommendations for Action
Key Takeaways
• Evaluate how you are doing compared with your peers.

• Incrementally adopt a Sourcing for Innovation strategy.
• Align incentives and compensation to team performance.
• Look beyond your current base of suppliers.
Evaluate How You Are Doing Compared with Your Peers

In any overheated, hypercompetitive marketplace, one thing is certain: today’s acceptable
business practices will become dated and inadequate tomorrow. So it is with sourcing
practices for goods for resale. The landscape is littered with companies that were unable
to adjust to the emergence of retail giants. Regional mass merchants — with a few nota-
ble exceptions — are virtually extinct, the world of department stores has been consoli-
dated into a few mammoth brands, and supermarket industry giants feel the hot breath of
Wal-Mart breathing down their necks. Consumers are impatient with the lack of fashion
freshness, but they have proven willing to pay a premium price for interesting products
like the iPod mini mpg player. In the world of retail, hit products are most frequently cre-
ated through an iterative design process, with many near misses before the final home
run. Sourcing practices must be able to accommodate these rapid design shifts. In other
words, product design and sourcing are inextricably linked.
Aberdeen Group has developed a competitive framework to help retailers and brand
managers determine how their sourcing practices match up with others in their industry.
The framework covers processes, organization, knowledge, technology, and performance
metrics. To determine where your company is today, find the box that best describes your
sourcing practices.
If your company is already lagging, you can be sure that upcoming events — whether
they are changes in customer tastes, supply chain shocks, the end of import quotas, the
emergence of a new up-start player in your target market, or some yet undefined business
challenge — will drive you into a battle for survival. You are likely in one of two situa-
tions: (1) you are a small to midsize company with a hot product that customers are will-
ing to pay a premium for today or (2) you are a larger company with ever-declining bot-
tom-line results. In either case, the time for action is now. You can be sure that hot prod-
ucts will not stay hot forever, and ever-declining bottom-line results will ultimately prove
a disaster to your enterprise.
A best practice is typically not the most common practice. If you find yourself as part of
the industry average, it is likely that your sourcing practices are adequate today, but you
are still vulnerable. Either you are in a subsegment not yet targeted by a channel master
like Wal-Mart, Target, or Home Depot, or private-label product is not yet a critical part
of your merchandising mix. In either case, sooner or later your investors will push you
for greater bottom-line growth. Most companies have found that private-label sourcing is
the fastest way to improve gross margins, but real growth in both earnings per share and
market share can best be sustained by tight management and control of the sourcing
process.
If you are in the best-in-class category, you are enjoying the bottom-line benefits of an
effective sourcing strategy. Although sourcing practices in themselves cannot ensure a
successful enterprise, coupling the disciplines of strategic sourcing with the art of mer-
chandising and product design is a prescription for retail and brand management success.
Aberdeen’s benchmark study showed that leaders achieved increases in gross margin re-
turn on inventory investment (GMROI), improvements in service levels, and improve-
ments in the number of perfect orders.
Table 2: Competitive Framework for Strategic Sourcing

Laggards Industry Average Best in Class
Process All supplier relation- Standard RFQ proc- Collaboration with sup-
ships preestablished. esses in place. Suppli- pliers on least cost
No competitive bidding. ers evaluated annually sourcing opportunities.
Company is unable to on on-time and quality Internal collaboration
absorb process of delivered orders. on best development,
changes required to sourcing and logistics
source from alternative plan for each product.
suppliers.
Organization Sourcing decisions Sourcing decisions Sourcing is a shared
made by individual buy- made divisionwide. service across all divi-
ers/product managers. Some attempt to ag- sions. Aggregated re-
gregate needs across quirements for raw ma-
divisions. terials used to drive
costs down.
Knowledge Little visibility into Visibility into order Visibility into status of
status of inbound or- status while in the fac- raw materials. Aware-
ders until they leave tory. Quality checks ness of qualified sup-
the factory or until an during production. pliers across multiple
appointment is made Strong knowledge of regions. Demand sig-
for delivery. alternative regional nals delivered in near
suppliers. real-time so that orders
can be adjusted ac-
cordingly.
Technology Limited automation and Disjointed technologies Web-based enterprise-
supplier coordination. in place for product de- focused automation.
When collaboration is velopment, purchase Complete sourcing life-
done, it is phone or fax- order management, fi- cycle integration that
based. nancial supply chain, facilitates collaboration
logistics modeling, and inside and outside the
sales forecasting. enterprise.
Laggards Industry Average Best in Class

Performance No interrelationship be- Freight unbundled from Optimal service levels
Metrics tween performance cri- product cost at least determined and meas-
teria of functional ar- 50% of the time. ured along with GMROI
eas. Turn and gross GMROI used to evalu- to evaluate both inven-
margin are primary ate inventory effective- tory effectiveness and
metrics. ness. opportunity costs.
Incrementally Adopt a Sourcing for Innovation Strategy

Incremental adoption of a Sourcing for Innovation strategy will help move enterprises up
to the industry norm and ultimately help them leapfrog the competition to best of class.
Aberdeen Group recommends that each company start at the beginning — in having
clearly articulated goals for each product built for the merchandise assortment. Measure
actual performance against these preestablished goals to help refine future product con-
cepts. Assemble a cross-functional team to establish and agree on those product goals.
These actions will help drive the adoption of subsequent steps of Sourcing for Innova-
tion.
Align Incentives and Compensation to Team Performance

One of the greatest challenges facing enterprises today is effective individual and corpo-
rate performance management. Retail is no exception. Although leading companies en-
sure that corporate objectives, individual goals, and information technology initiatives
are all aligned, it is far more typical for individual goals to reflect departmental, rather
than corporate, objectives. The drive for rapid individual project ROI has become a
shackle around the neck of IT departments. Classic merchant and product manager incen-
tives are top-line sales, turn, and gross margin for their specific products, whereas logis-
tics managers are incented to keep transportation and labor costs to an aggregate mini-
mum percentage of sales.
As mentioned earlier, the largest blockage to adoption of strategic sourcing was identi-
fied as a nonaligned internal organizational structure with a lack of technology function-
ality and maturity cited as the second biggest challenge. Oddly enough, these same com-
panies felt the best way to overcome these concerns and challenges was by collaborating
with suppliers (Figure 11). In fact, departmental loyalties often lie more with their trusted
external suppliers than with their internal suppliers. It is far more typical for merchants to
defend the practices of their supplier communities than it is to defend the practices of
their own corporate logistics departments. Most of the time, neither of those departments
will come to the defense of their internal IT staff.
Figure 11: Strategies Used to Overcome Barriers to Sourcing Adoption
What are the top three strategies your company has used or will
use to overcome these barriers?
Positive customer feedback 24%
Ability to rapidly create iterative designs 20%

Quantifiable compression of time to volume
for new product introduction 34%
Collaboration with suppliers 56%
Collaboration with customers 46%
Interdisciplinary implementation team 35%
Interdisciplinary team prior to decision 19%
ROI-based case for action 44%
0% 10% 20% 30% 40% 50% 60%

Aberdeen believes that companies would be better served to look within and aim for in-
ternal collaboration as a prerequisite to collaborating with suppliers. Consider joint re-
wards for achieving ROI goals as a primary means of drawing together a diverse group of
internal constituencies.
Look Beyond Your Current Base of Suppliers

China has emerged as the supplier of choice for much of the retail industry. It has been
estimated that sales to Wal-Mart represent 1% of China’s gross domestic product, and the
end of apparel quotas in 2005 promise to add even more volume to China’s already stag-
gering rate of export to U.S. brand managers. For long life-cycle product, an all-China-
all-the-time policy may in fact be the safest and least expensive route to sourcing success.
But shorter life-cycle product may be better sourced closer to the point of demand.
Leading companies create their initial orders from the Far East, but reserve factory time
closer to the point of demand for replenishment orders. This strategy provides them with
the fastest reaction time possible, but also presents challenges of insuring consistent qual-
ity between initial and reordered product.
Technology is a powerful enabler for this type of sourcing strategy. A detailed specifica-
tion package is the best tool to ensure consistency in design and execution. Clear quality
assurance checkpoints are also necessary, especially in the early stages of the sup-
plier/brand manager relationship to ensure that standards are met.
No matter how advanced one’s sourcing strategy, at the end of the day, product freshness
and innovation create product leadership in the marketplace. However, the next genera-
tion of strategic sourcing can provide a springboard for that leadership, rather than a
roadblock stifling the creativity of effective product managers.
Featured Sponsors
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Sponsor Directory
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807 11th Avenue
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610-661-1601
www.sap.com
Author Profile
Paula Rosenblum,
Director of Retail Research
Aberdeen Group, Inc.
As director of Aberdeen Group's Retail Research practice, Paula Rosenblum focuses on
the critical issues facing today's retail executives. Her research demonstrates how retail-
ers can satisfy their shareholders by promising sustainable growth; delight consumers by
providing product selection, convenience, and reasonable pricing; and motivate employ-
ers by setting clear expectations and defining manageable tasks. Rosenblum's research
gives retailers the strategies to optimize their enterprises, empowering the customer
through the art of merchandise selection and marrying world-class technology with logis-
tics management.
Over the next 12 months Rosenblum will release four studies that address the specific
issues facing retailers in today's market. These studies can be characterized by one over-
arching theme: Next-Generation Retail — The Post-Wal-Mart World.
The four topics Rosenblum will examine are (1) The Proactive Merchant, in which re-
tailers use science to supplement intuitive processes, taking the grunt-work out of run-
ning the enterprise; (2) Practical Collaboration, which spotlights the need for improved
synchronization and collaboration between supplier and retailer; (3) Next-Generation
Strategic Sourcing, which stresses the need for retailers to develop sourcing processes
that focus on improving time-to-market while keeping the flexibility to shift with rapidly
changing consumer demand; and (4) The Empowered Store, a concept that can realign
retail to meet consumer needs and dramatically change the fundamental criteria for sus-
tainable competitive advantage and business success.
Prior to joining Aberdeen, Rosenblum was a retail research director for AMR Research,
where she was a trusted advisor to Fortune 500 clients on the development of their busi-
ness strategies. Her research ranged from the challenges of long-range strategic planning
to short-term tactical execution. Previous to that position, Rosenblum was a retail tech-
nology executive. She was chief information officer at iParty and Domain Home Fash-
ions and was director of retail systems at Morse Shoe Inc., and Hit or Miss.
Rosenblum holds an M.B.A. in Management of High Technology from Northeastern
University and was nominated for the Beta Gamma Sigma Honor Society. She also holds
a Bachelor of Arts from the State University of New York.
About
AberdeenGroup
Our Mission
To be the trusted advisor and business value research destination of choice for the Global
Business Executive.
Our Approach
Aberdeen delivers unbiased, primary research that helps enterprises derive tangible busi-
ness value from technology-enabled solutions. Through continuous benchmarking and
analysis of value chain practices, Aberdeen offers a unique mix of research, tools, and
services to help Global Business Executives accomplish the following:
• IMPROVE the financial and competitive position of their business now
• PRIORITIZE operational improvement areas to drive immediate, tangible value
to their business
• LEVERAGE information technology for tangible business value.
Aberdeen also offers selected solution providers fact-based tools and services to em-
power and equip them to accomplish the following:
• CREATE DEMAND, by reaching the right level of executives in companies
where their solutions can deliver differentiated results
• ACCELERATE SALES, by accessing executive decision-makers who need a so-
lution and arming the sales team with fact-based differentiation around business
impact
• EXPAND CUSTOMERS, by fortifying their value proposition with independent
fact-based research and demonstrating installed base proof points
Our History of Integrity

Aberdeen was founded in 1988 to conduct fact-based, unbiased research that delivers
tangible value to executives trying to advance their businesses with technology-enabled
solutions.
Aberdeen's integrity has always been and always will be beyond reproach. We provide
independent research and analysis of the dynamics underlying specific technology-
enabled business strategies, market trends, and technology solutions. While some reports
or portions of reports may be underwritten by corporate sponsors, Aberdeen's research
findings are never influenced by any of these sponsors.
Appendix A:
Research Methodology
B etween May and June 2004, Aberdeen Group in partnership with RIS News and
Consumer Goods Technology examined the procedures, experiences, and inten-
tions of more than 115 retail and consumer product enterprises in the area of
sourcing of goods for resale.
Responding product management, supply chain, logistics, and operations executives
completed an online survey that included questions designed to determine the following:
• The degree to which sourcing of private label product impacts corporate strate-
gies, operations, and financial results
• The structure and effectiveness of existing sourcing procedures
• Current and planned use of automation to aid these activities
• The benefits, if any, that have been derived from strategic sourcing initiatives
Aberdeen supplemented this online survey effort with telephone interviews with select
survey respondents, gathering additional information on service parts management
strategies, experiences, and results.
The study aimed to identify emerging best practices for service parts management and
provide a framework by which readers could assess their own sourcing capabilities. In
addition, we provided a framework for a next generation of strategic sourcing practices,
which combines the disciplines of product development, logistics, sourcing, and sales
forecasting into a comprehensive structure designed for innovation and responsiveness to
consumer demand.
Responding enterprises included the following:
• Job title/function — The research sample included respondents with the following
job titles: CFO or other C-level officer (vice president and above) (52%) procure-
ment, supply chain, logistics executive or manager (15%); IT manager (10%); and
administrators (3%).
• Industry — The research sample included respondents predominantly from retail and
consumer products industries. Sellers of high technology and software products rep-
resented 24% of the respondent base, followed by consumer packaged goods (14%).
Apparel brand managers represented 10% of the respondents. Other sectors respond-
ing included hard goods, consumer electronics, and automotive parts retailers.
• Geography — Nearly all study respondents were from North America. Other re-
spondents were from the United Kingdom and the Asia-Pacific region.
• Company size — About 17% of respondents were from large enterprises (annual
revenues above US$1 billion); 35% were from midsize enterprises (annual revenues
between $50 million and $1 billion); and 48% of respondents were from small busi-
nesses (annual revenues of $50 million or less).
Solution providers recognized as sponsors of this report were solicited after the fact and
had no substantive influence on the direction of the Retail Brand Management Sourcing
Benchmark Report. Their sponsorship has made it possible for Aberdeen Group, RIS
News and Consumer Goods Technology to make these findings available to readers at no
charge.
Appendix B:
Related Aberdeen Research and Tools
Related Aberdeen research that forms a companion or reference to this report includes:
• Product Development in Consumer Industries Benchmark (June 2004)
• The Quiet Revolution in Supplier Management. How Companies are Communicating
with and Monitoring their Suppliers (June 2004)
• Trade Promotions: Pouring Water into a Leaky Bucket (March 2004)
Information on these and any other Aberdeen publications can be found at
www.aberdeen.com or by e-mail at inquiry@aberdeen.com.
AberdeenGroup, Inc. Founded in 1988, AberdeenGroup is the technology-
260 Franklin Street, Suite 1700 driven research destination of choice for the global
Boston, Massachusetts business executive. AberdeenGroup has over 100,000
02110-3112 research members in over 36 countries around the world
that both participate in and direct the most comprehen-
USA
sive technology-driven value chain research in the
Telephone: 617 723 7890 market. Through its continued fact-based research,
Fax: 617 723 7897 benchmarking, and actionable analysis, AberdeenGroup
www.aberdeen.com offers global business and technology executives a
unique mix of actionable research, KPIs, tools,
© 2004 AberdeenGroup, Inc. and services.
All rights reserved
June 2004
The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but is not
guaranteed by Aberdeen. Aberdeen publications reflect the analyst’s judgment at the time and are subject to change
without notice.
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AberdeenGroup

The Retail Brand Management

Key Business Value Findings

Implications and Analysis

Recommendations for Action

Executive Summary .............................................................................................. i

Chapter One: Issues at Hand...............................................................................1

Chapter Two: Key Business Value Findings .........................................................3

Chapter Three: Implications and Analysis ...........................................................9

Chapter Four: Recommendations for Action ...................................................... 13

Sponsor Directory .............................................................................................. 18

Author Profile ..................................................................................................... 19

About AberdeenGroup ...................................................................................... 20

Appendix A: Research Methodology .................................................................. 21

Appendix B: Related Aberdeen Research and Tools.......................................... 23

Figure 1: Relative Importance of External Pressures ...........................................3

Figure 2: Relative Importance of Key Strategic Actions........................................4

Figure 3: Most Frequently Added Capabilities for Sourcing Activities...................6

Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives .....6

Figure 5: Visibility into Inbound Orders.................................................................7

Figure 6: Concerns and Challenges Blocking Adoption of Strategic Sourcing......8

Figure 7: Systems and Solutions Employed as Part of Sourcing Initiatives..........8

Figure 8: When Does Strategic Sourcing Make Sense? .................................... 10

Figure 9: Sourcing for Innovation ....................................................................... 11

Figure 10: Sourcing Organizational Structures................................................... 12

Figure 11: Strategies Used to Overcome Barriers to Sourcing Adoption ............ 16

Table 2: Competitive Framework for Strategic Sourcing..................................... 14

• A strong sourcing strategy is critical to surviving today’s hyper-competitive retail world.

• Product differentiation is key to surviving in a hypercompetitive marketplace.

Differentiation Is Key to Surviving in a Hypercompetitive Marketplace

Figure 1: Relative Importance of External Pressures

Aberdeen Group, June 2004

Figure 2: Relative Importance of Key Strategic Actions

Aberdeen Group, June 2004

PACE: Strategic Sourcing in Retail and Brand Management

Prioritized Prioritized Prioritized Prioritized

By a wide margin, surveyed companies singled out the hypercompetitive environment as

Supply Chain Visibility Is Critical for Rapid Reaction

Figure 3: Most Frequently Added Capabilities for Sourcing Activities

Spend analysis 50.0%

Extended supply chain

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Aberdeen Group, June 2004

Figure 4: Top Technology Solutions Employed As Part of Sourcing Initiatives

Lead time optimization 38%

Strategic sourcing and

Supply chain visibility

Near real-time demand

0% 10% 20% 30% 40% 50% 60%

Aberdeen Group, June 2004

Figure 5: Visibility into Inbound Orders

Visibility into raw materials prior to

Visibility into orders once they have left

No visibility until supplier calls for

0% 10% 20% 30% 40% 50% 60%

Aberdeen Group, June 2004

Most Know Collaboration Is Necessary; Few Can Get It Done

Figure 6: Concerns and Challenges Blocking Adoption of Strategic Sourcing

Organization does not see the need

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Aberdeen Group, June 2004

Figure 7: Systems and Solutions Employed as Part of Sourcing Initiatives