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Smart sourcing in retail market
Smart sourcing in retail marketing
Retail marketing executives often look at their peers in consumer goods with great envy: “Why is it that manufacturers of beverages, snacks, or household products pay only a single-digit commission on activation to their creative agencies, while the same agencies charge us 10 percent or more and keep asking for extra compensation as soon as we request a single change to a TV commercial or print ad?” Surely, advertising volume cannot be the only reason for this difference? It is not. Of course, consumer goods companies’ huge global accounts make it easier for agencies and other service providers to offer them favorable conditions. But, to a large extent, marketing efficiency is a function of smart sourcing management. While most consumer goods giants have already implemented compre-hensive marketing procurement programs, many retailers are still in the early stages of efficiency optimization.
Scope of marketing efficiency efforts
The positions covered by marketing efficiency programs are sometimes referred to as non-working spend or indirect cost, defined as investments that are necessary enablers of marketing effectiveness but which do not actually reach end consumers. But both terms are misleading, since media buying is often one of the biggest line items in the mar-keting budget and should, therefore, be part of any holistic marketing efficiency effort. Media buying includes all expenses incurred to secure customer contacts, e.g. TV airtime or print advertising space purchased through media agencies or directly from media owners such as TV networks and publishing houses. Comprehensive marketing efficiency efforts should, in fact, include all external marketing cost positions.
Efficiency levers include rigorous supplier management, streamlined demand management, and procurement process optimization
Marketing efficiency can be improved by pulling three types of levers: sup-ply levers, demand levers, and process levers. While most traditional cost reduction efforts cover only supplier management, our experience shows that the improvement potential is just as substantial, or even larger, in the areas of demand management and purchasing process optimization. For example, a global retail company found that 60 percent of its marketing efficiency improvement impact came from demand and process levers.
Supplier management is about paying less for what you buy, i.e. improving sourcing conditions without changing the character or quality of products purchased and services rendered.
• Bundling volume: Buying from fewer suppliers or service providers enables retailers to capture volume discounts. Relevant cost positions include creative agency services, production services, media agency services, and media buying. Volumes can be bundled across legal enti-ties, business units, departments, brands, regions, and countries.
• Switching to cheaper providers: While switching creative agencies may be too sensitive from a strategic perspective, less critical items, such as POS materials, can often be purchased more cheaply from providers in low-cost countries (so-called LCC sourcing). A point to note is that it is important to have a physical presence in the low-cost provider’s home country in order to be able to monitor quality.
• Negotiating rigorously: With thorough preparation and full data transpar-ency, retailers frequently succeed in reducing commission percentages, establishing performance-based fees, or extending payment terms in their negotiations with suppliers.
Demand management is about defining what you really need and getting rid of the waste. It comprises all activities that cut the volume or reduce the complexity of products and services purchased.
• Standardizing/harmonizing: By reducing the number of specifications of certain media products (e.g. formats of a catalog, variants of POS displays), you can increase demand volume and decrease complexity. This usually results in lower design and production costs.
• De-specifying/”design-to-value”: By reducing product or service specifications to what is really needed and valued by consumers, you can reduce costs significantly. For example, an addressed direct mailing in black and white may be just as effective as a full color version at a much higher price.
• Configuring materials just-in-time: For example, preproducing a standard media product (e.g. a TV commercial for all European markets) and then tailoring it to specific needs late in the value creation process (e.g. by adding a voiceover in the local language) is much less costly than individual local versions, and might be just as effective.
Process optimization is about increasing the internal transparency and discipline around the sourcing of materials and services from external providers.
• Introduce advanced procurement processes. To capture the benefits of smart sourcing sustainably, standardized, streamlined, and automated procurement processes are crucial. This includes applying advanced sourcing techniques across the company, such as IT-enabled auctions or sophisticated online catalogs.
• Improve inventory and logistics management. In the case of physical marketing materials, inventory and logistics are major drivers of cost and working capital for many retailers. For example, by optimizing your network of print shops, you can often capture major transportation cost savings.
• Optimize demand planning, approval processes, and order management.
1. Increasing marketing efficiency might be hard work, but it is well worth it: smart sourcing yields sizeable savings without compro-mising quality.
2. Efficiency levers include rigorous supplier management, stream-lined demand management, and procurement process optimization.
3. Efficiency optimization is a five-step process: gather facts, create a long list of improvement ideas, select ideas for execution, negotiate, and implement.
4. Follow best practice in preparation, negotiation, and implementa-tion to capture the full value of smart sourcing efforts.
5. Optimizing commercial print sourcing, an important cost positions in retail marketing, can yield savings of 10–30 percent.