63% of UK Finance Directors see indirect spend categories as offering good savings potential – American Express CFO research
In recent years indirect spend has become a key target for many procurement teams looking to address their spend. In this blog we will be taking a quick look at why the retail sector may be one step ahead of other vertical markets.
The UK retail market
The last few years have been tough for the UK retail market, with consumer spending crippled by inflation and reduced expendable income. The market has now started to turn a corner with retail sales up 0.2% on the month and 2.2% on the year (source: National Office of Statistics).
During this period of turmoil, many retailers have learnt valuable lessons which have helped them survive and are now benefiting them greatly in the improving market. The principal lesson it is how to make the most from their procurement and supply chain, working with the premise that “If you look after the pennies, the pounds will look after themselves.”
Why is managing indirect spend vital for retailers?
Retailers occupy top spot in the supply chain which stretches from raw materials, to manufacturing to logistics. Retailers provide a huge range of products and services to end consumers to cover an extensive range of needs and in a highly competitive market, where price and/or price differentiation is often a key factor in the consumer decision making process.
Due to this, profit margins in the retail sector are typically very low in comparison to other vertical markets. Typical net margins in retail are:
- 4.30% Retail – Hardlines (retailers selling “hard goods”—such as home furnishings, electronics, jewelry, and sports equipment)
- 6.24% Retail – Softlines (retailers that sell apparel, accessories, and footwear—“soft goods”)
- 4.24% Retail – Automotive
- 5.50% Retail – Building supply
- 3.33% Retail – Store
- 1.81% Retail – Food / Supermarket
This averages out at 4.23% which can be compared to a general net margin across all other vertical markets of 7.84% (margin figures source: http://pages.stern.nyu.edu)
Low margins mean that retail procurement is based around negotiating to survive and keeping costs down to make a profit.
Retailers spend an average of 21% of revenue on indirect goods and services. With this in mind, effective indirect/GNFR (Goods Not For Resale – i.e. those used in the process of operating the business) procurement and supply chain optimisation , particularly with a regard to pricing, has been a major focus.
Many retailers in the UK have been quick to adapt to the challenges of indirect spend, seizing the opportunity to use sourcing strategically as a means to achieving their key business objectives and improving their bottom line.
So what lessons can be learned from these successful retailers?
Centralise your spend
Centralisation of procurement spend allows individual stores (or sites) to benefit from maximization of supplier negotiation leverage, cost reductions and improved supplier performance across multiple products and services. Centralisation also results in improved control and visibility of expenditure.
Make the most of highly competitive supplier markets
The GNFR market is competitive and has undergone significant change with many specialists expanding resulting in less fragmented market. This has provided more opportunity for retailers to consolidate expenditure with lower numbers of suppliers, in order to further leverage economies of scale. This is particularly evident in the GNFR / Indirect product categories, where sectors as varied as office supplies and shop fittings can be purchased from a single reliable source and at reduced risk. Look for opportunities for consolidation across products and services and areas where you can leverage spend and benefit from economies of scale in your supply chain.
Benefit from economies of scale
Retailers buy in bulk. In both GFR and GNFR categories retailers appreciate that cost is directly related to units purchased and associated contract lengths. This has enabled them to work with suppliers to negotiate the terms that suit their business needs. Work with suppliers that to consolidate a range of products and services to achieve economies of scale and leverage your spend.
Find out more
If you are interested in finding out more about the optimisation of indirect procurement and supply chain management then take a look at our Tail Management solution.