For Retailers, It’s Back To The Future

Sudy Bharadwaj

The proliferation of private label, white label, and store brands has caused a fundamental shift in how retailers think and operate from a supply management perspective. Retailers that are focused on private label are able to realize higher margins from this segment of their business, but they need to think and act like a manufacturer of consumer goods, food and beverage, high tech, pharmaceuticals, or whichever industrial segment the retailer participates in. Therefore, retailers need to go back to what works in different industry segments, working with contract manufacturers and other outsourced elements of their supply chain, but look to the future for advanced capabilities.

Back to what works

In a variety of industries, outsourcing manufacturing is a viable option – it works. However, a key challenge is loss of control of materials as they progress through the outsourced supply chain on the journey to the retailer’s shelf.  Without advanced capabilities such as multi-tier visibility, forecast sharing, and collaboration, financial metrics such as cost of goods sold (COGS) and working capital (influenced by inventory such as raw material, work-in-process or finished-goods) will not be where they need to be, resulting in a drain on profitability and customer service.

The future: What are other advanced capabilities private label businesses may leverage to thrive?

With new, diverse, and geographically dispersed suppliers, the discovery and selection of suppliers (strategic sourcing) has taken on new levels of importance. For example, private label and fresh produce can be obtained from different suppliers, and therefore a competition between them is possible. The competition may be on factors such as price, quality, assurance of supply, total cost (including transportation), and other factors that contribute to the success of the business.

From strategic sourcing, we can move to the operational phase of the supply chain, where sharing forecasts with suppliers and contract manufacturers provides visibility of demand and supply across this extended ecosystem. The future capability is more than basic sharing of purchase orders. To drive out unnecessary costs and improve margins, collaborating on capacities with contract manufacturers, collaborating on product requirements, alternates, etc. with suppliers contributes to the profitability equation.

Leveraging digital twins

Current methods of improving supply chain and supply strategies, such as the ubiquitous spreadsheet, are not robust and scalable enough to perform the advanced capabilities required to squeeze out waste and profitability and improve margins and service levels.

A specific capability in strategic sourcing is including a collection of product-specific attributes – a sourcing model, or digital twin, of the process, which suppliers can respond to during a bidding process. With this capability, the category manager can efficiently perform trade-offs or what-if scenarios during the analysis process. This digital twin enables sourcing professionals to focus their efforts on making the optimal sourcing decision. Machine-learning systems can assess what attributes have worked well in achieving the sourcing objectives and suggest new suppliers or methods to source other items. Optimization capabilities can enable scenario-based analysis for optimal supply allocation.

Are these capabilities possible within a conventional spreadsheet? Possibly, but can those best practices, strategies, what-if scenarios, and optimization be scaled to the rest of the organization? With some retailers predicting that 25% of their business will be private label, successful best practices need to be propagated to more than a select few – advanced sourcing techniques need to be used by all sourcing professionals. This is where digital twin and capabilities discussed are valuable.

Suggestions

Retailers can look back and learn from the success of other industries when striving for supply chain excellence in a private label segment of their businesses. However, the business opportunity and resulting value proposition is so large that it is important to look to the future for newer and advanced capabilities to seize those opportunities.

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Sudy Bharadwaj

About Sudy Bharadwaj

Sudy Bharadwaj has over 25 years experience in helping businesses transform operations in a variety of areas and industries. Sudy's current focus for SAP is helping organizations transform direct spend leveraging supply chain and sourcing competencies.