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Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
Faculty Introductions
Name
Home Office
Years with Accenture?
Experience in Retail Buying?
Current Role & Client Engagement
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
PROCUREMENT
COST
Buying
55%
of cost
55%
of cost
Transportation
Cost
17%
of cost
72%
of cost
Inventory
Cost
15%
of cost
87%
of cost
Facility
Cost
8%
of cost
95%
of cost
Selling
Cost
5%
of cost
100%
of cost
Buying Strategy
A retailers buying strategy provides the framework for identifying
suppliers and drafting supplier agreements and supplier evaluations.
Cost Leadership Strategy
Buy from multiple vendors through the reverse auction process/bidding process
Have alternate sources developed based on the lowest cost structure
Purchase maximum quantity from lower cost vendor and minimum quantity from
expensive vendor
Global Purchase policy to identify lowest cost supplier
Technology Leadership Strategy
Have very few vendors as business partners
Encourage vendors to suggest product upgrades and share the benefits
Vendors to establish company specific units with huge investments
Responsive Supply Chain Strategy
Minimum supplier parts combinations
Single supplier would be able to supply multiple products to multiple locations
Vendors to manage complete delivery operations or either outsourced to third party
logistics providers
Cost Leadership
For cost leadership, the retailer buys from multiple vendors through the
reverse auction and bidding process.
Retail companies, Wal-Mart and Argos, procure
procure products to sell from multiple sources,
provided that they are cheaper
They develop alternate sources to keep existing
supplier in check and derive maximum mileage
out of competing vendors
Delta Airlines used reverse auctions to select its
vendors for food as well as liquor items
Technology Leadership
For technology leadership, the retailer establishes a dedicated network of
vendors.
Companies like Dell and Cisco have a very dedicated network of vendors
supplying exclusive critical parts
The volume and purchasing price are maintained to benefit vendors in the long
term
Many automobile companies develop a
dedicated vendor base for critical
parts such as transmissions and
engines
Collaboration Benefits
Design collaboration ensures easy-to-manufacture, easy-to-use products, thereby
reducing the cost of manufacturing
Risk Sharing
Appropriate supplier contracts can allow for the sharing of risk, which results in high
profits for both the supplier and vendor
Class Discussion
1. Supplier Scoring
and Assessment
2. Supplier Selection
and Negotiations
3. Procurement
4. Sourcing
and Planning
Supplier Scoring
and Assessment
Supplier Selection
& Negotiations
Procurement
Sourcing
and Planning
Importance
Evaluation Brand A
of Issues (I)
(Pa)
(1)
(2)
Vendor reputation
9
Service
8
Meets delivery dates
6
Merchandise quality
5
Markup opportunity
5
Country of origin
6
Product fashion ability 7
Selling history
3
Promotional assistance 4
Overall evaluation =
(3)
5
6
5
5
5
5
6
5
5
290
Brand B
Brand C
(Pb) (Pc) (Pd)
Brand D
(4)
9
6
7
4
4
3
6
5
3
298
(6)
8
6
4
5
5
8
8
5
7
341
(5)
4
4
4
6
4
3
3
5
4
212
Innovations
Suppliers suggest innovations in the product design to make it more sellable
Many companies pass benefits to supplier, if supplier suggested innovations save the cost
Many innovative products like Apple iPOD, Dell computers are developed through innovative
support of supplier network
Supplier A
Supplier B
Reliability
Price
Quality
Order Lead Time
Exclusivity Rights
Functions to be Managed
Credit / Payment Terms
Long Term Relationship
Replenishment
Mark Ups / Pricing
Innovativeness
Local Promotions
Risk of Business
Procurement
Sourcing
and Planning
Single Product
Single Product
Multiple Products
Multiple Products
Single Supplier
Multi Suppliers
Single Supplier
Multiple Suppliers
Reverse Auctions
Direct
Negotiations
Case 2
In both the cases, the retailer decides on the quantity to purchase based on the
ability to sell, the profit margin and the cost of overstocking. This will reduce
product availability and thus limit the profitability of deal.
The manufacturer makes a product at $1 and sells to the retailer at $5 and the
customer gets it for $10. The retailer has a profit margin of $5 against the
potential loss of $5. So the retailer aims at a minimum 0.5 service level.
Now the supply chain (buyer+manufacture) can make a $9 profit against a loss
of $1. Combined, they can aim at 0.9 Service level.
When stores act individually, they carry less items and this reduces supply chain
profits
The Buyer pays a minimal amount to purchase the merchandise and shares the revenue
Reduces retailer acquisition costs and increased availability. There are no product returns.
Examples: Blockbuster video rentals
Drawbacks: Reduced retailer effort and huge information management cost
Class Discussion
Procurement
The procurement process should be product specific and based on product
requirements and categorization.
Supplier Scoring
The procurement process should ensure information is
assimilated across the supply chain (demand and inventory at
the retailer, and inventory and capacity at the supplier)
E-Hub at Cisco
Designed with the goal of providing
synchronized planning and end-to-end
supply chain visibility
Cisco aims to add more than 2000 of its
suppliers, distributors and manufacturers
in its specific trading network
Cisco holds periodic reverse auctions
where suppliers bid.
A private trading network provides CISCO
huge savings.
and Assessment
Supplier Selection
& Negotiations
Procurement
Sourcing
and Planning
Daimler Chrysler
Johnson Controls integrates components
from its 35 suppliers and deliver assembled
components to DC Jeep shop
When DC makes a demand, Johnson has
204 minutes to deliver a module
This is done 900 times in a day for different
color and interior combinations
The focus of procurement is to synchronize
production at DC and at Johnsons
Significant reduction in inventory and better
matching of supply with demand
Procurement Types
Buyers generally use any of the following five procurement types, or policies.
1. Consignment
Supplier places inventory at retailers location and retains ownership of the inventory
Payment is not made until the item is actually sold
4. Replenishment
Supplier supplies inventory on recurring basis for staple items
5. Direct Store
Supplier routes inventory directly to individual stores
Aggregate
Analysis
Determine EOQ
Volume discounts, quantity
discounts
Supplier deletion
Supplier
Performance
Supplier ratings
Decision of deletion or adding
of supplier
Additional product assignment
The sourcing and planning process helps retailers to determine what suppliers they would
use and to allocate demand to the selected suppliers.
The portfolio takes into account short term as well as long term requirements.
Generally, companies use the following combination:
In case of demand is consistent, retailers use a low cost supplier with bulk purchasing
quantities and longer lead times
To meet sudden spurts in demand, retailers use more expensive suppliers with small
quantities
and2009
smaller
lead times. All Rights Reserved.
Copyright
Accenture
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
When to buy
Consumer Demand
Seasonal Factors
Inventory Levels
From whom to buy
Manufacturers &Primary
producers
Wholesalers
Importers
Agents
Delivery Cycle
Direct to Store
Direct Supply to Line
Vendor Managed Inventory
Consignment
How to buy
Purchase Order
Process
Examples
Functionality
Manufacturer
Finished products
Manufacturers such as J&J,
Godrej, Unilevers
Full service
wholesaler
General merchandise
Special Merchandise
Rack Jobber
(Typical Demand and supply
aggregator)
Limited service
merchant
wholesaler
Drop Shipper
Mail Order
Cash and Carry
Agents and
brokers
Buyer
Manufacturing
Manufacturing
Carry Inventory
Provides credit
Huge availability
Manufacturing
Manufacturing
Country A
Products A, B
Products C, D
Products A, B
Products C, D
Provide clearance
service, carries
inventory for fees
Manufacturing
Country B
Buyer
Bulk Buying
Open-to-Buy
Procure to
Sell
Rule-based process
that requires the
involvement of
suppliers.
Identifying a supplier
with the least lead
time is the key of
success
Procure to
Stock
Initiated to take
advantage of low
cost buying during
off seasons
Buying decisions are
based on
transaction and
inventory costs
It is a PUSH
Scenario
Forward Buying
Replenishment Overview
Replenishment is the act of acquiring a product on a recurring basis to
support anticipated need and maintain desired levels of inventory (safety
stock).
Replenishment
Procure to
Replenishment
Replenishment Techniques
Quick Response Inventory Planning (QR)
Just in Time Inventory (JIT)
Vendor managed inventory (VMI)
Collaborative planning forecasting and replenishment (CPFR)
Traditional Replenishment
In traditional replenishment, buyers utilize independent systems and
processes to create Purchase Orders (POs).
POs are submitted via EDI, Internet or fax
In build-to-stock environments, the supplier fills out the order and delivers the order
through the established transportation method
Execution
Manage supply from supplier to retailer through
consistent and reliable information sharing
Analysis
Monitor performance on a regular basis
9 Steps to CPFR*
Capabilities
Links the supply and demand processes
Completes collaboration and continuous exchange of information between
trading partners
Includes merchandising process, item/category selection, and seasonal and
promotional planning
Combined with real-time updates based on hourly activity, trading partners are
able to engage in total supply chain visibility and forecasting
Consumer-driven supply chain
Benefits
Increases sale by having the right stock
Reduces administrative costs
Reduces obsolete inventory
Simplifies entire procurement process
Procure to Sell
Initiated when there is confirmed demand
Identifying the supplier with the least lead
time is a key to success
Applicable in the made-to-order business
scenario
Procure to
Stock
Procure to Stock
Initiated to take advantage of low
cost buying during off seasons
Buying decisions are based on
transaction and inventory costs
It is a PUSH Scenario
It is a PULL Scenario
Historical Information
Sales and Inventory levels
Markdown amounts &
percentages
Receiving amounts
Forecasted Information
Sales and Inventory levels
Markdown amounts &
percentages
OTB Planning
Process
OTB Formula
OTB calculations are based on (1) existing inventory and sales details (2)
projected sales and planned inventory, and (3) the impact of pricing on
sales.
Open-To-Buy = Planned Sales
+
Planned Reductions
+
Planned End of Month Inventory
Benefits of OTB
OTB ensures that an adequate amount of inventory is on hand to support
the level of planned sales.
Has the ability to estimate in advance, the amount of
cash that will be required for inventory from month to
month for the coming season
Places restraints on merchandise commitments, so
stores do not receive too much or too little new
merchandise, or too early in the season
Keeps a fresh flow of new merchandise coming into
the store throughout the season. This creates return
customers, keeps the sales staff excited and increases
cash flow.
Establishes clear goals so that actual performance can
be compared to the plan, thereby identifying areas
where corrective action needs to be taken
Forward Buying
Cost
Benefits
Class Discussion
Can you identify the appropriate buying strategy for each scenario?
Product
Scenario
Oil
Demand will be severely impacted because of the violence in the Middle East
Sugar
Brazil and Argentina are planning to bring more fertile land under cultivation to
produce Ethanol
FMCG Items
Rice
Procter &Gamble is facing production issues in one of its plants in the United States
The economy of Thailand, Japan and South Korea are in a shambles with the value
of their respective currencies likely to fall
Delivery Methods
A retailers delivery options are determined by what products are being
procured, which suppliers are being leveraged and how products are
being bought.
Traditional Delivery Method
When a distributor needs a product, an order is placed with a manufacturer
A representative of the manufacturer visits the distributor a few times a month to
restock supplies to an agreed-upon level
The distributor is in total control of the timing and size of the order being placed
The distributor maintains the inventory plan
Key Points
The vendor is responsible for inventory management, makes delivery-related
decisions and schedules delivery
Lower inventory aggregation results in a correlation between demand and
supply
There is increased inventory carrying costs because inventory is accumulated at
the selling location
The Retailer (Buyer) owns the inventory once it is delivered to its stores.
Therefore, if, a product is not selling well, it will lead to lost opportunities
(because it occupies space that could have been used for other more popular
products)
Copyright 2009 Accenture All Rights Reserved.
Retailers calculate sale and inventory details on a daily basis for each item
along with promotions data, and send out that information to the manufacturer
using Electronic Data Interchange (EDI)
Manufacturers system creates corresponding purchase orders and sends the
back to the retailer
Electronic data exchange enables the entire process to move faster and creates
significant cost savings for both partners
Dell does not buy required components for its computers and electronics
until it is ready to build these products. Also, it doesn't build any product
until it receives orders.
Vendor
Inventory
Management
Process
Inventory
Purchase
Notification
Shipment
PO
Inventory
Notification
Receiving
Reports
Account
Payables
PO
GL Inventory
Update
General
Ledger
Process
Purchasing
Process
Payable
Notification
PO
Notification
Stock
Notification
Purchase
requisition
Warehouse
Various
departments
Requisition
generation
process
Once the requisition is approved, the system creates a standard purchase order
describing supply conditions and delivery options.
Requisition
generation
process
PO Generation
Requisition
generation
process
PO Generation
Requisition
generation
process
PO Generation
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
Profitability Analysis
A buy deal is effective only if it meets the retailers profit targets.
The buying process impacts the retailer either through inventory build up, sales
profitability or vendor performance
Sell through analysis
Inventory
ABC analysis
Sell-Through Analysis
A sell-through analysis compares actual and planned sales to determine
whether more merchandise is needed to satisfy demand or whether a price
reduction is required.
ABC Analysis
An ABC analysis identifies the performance of individual SKUs in the
assortment plan.
ABC Analysis orders merchandise according to specific performance measures
that determine which items
should never be out of stock
should be allowed to be out of stock occasionally, and
should be deleted from the stock selection
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Multi-Attribute Method
This method is used to gauge vendor performance. In this instance,
multiple attributes are used to analyze the performance of each product.
Performance Evaluation of Individual Brands Across Issues
Issues
(1)
Vendor reputation
Service
Meets delivery dates
Merchandise quality
Markup opportunity
Country of origin
Product fashion ability
Selling history
Promotional assistance
Overall evaluation =
Importance
Evaluation Brand A
of Issues (I) (Pa)
(2)
9
8
6
5
5
6
7
3
4
(3)
5
6
5
5
5
5
6
5
5
290
Brand B
(Pb)
Brand C
(Pc)
Brand D
(Pd)
(4)
9
6
7
4
4
3
6
5
3
298
(5)
4
4
4
6
4
3
3
5
4
212
(6)
8
6
4
5
5
8
8
5
7
341
Multiple factors such as the vendors ability to meet delivery dates, deliver quality
merchandise, etc., are used to determine vendor performance
Vendor performance is ultimately evaluated on the basis of the vendors ability to meet
the parameters set for each brand
Business
Planning
Data
captured into
Sales Management
Inventory Management
Financials
Data
captured into
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
Marks & Spencer decide not to raise the price since it is already part of their catalog
Instead they help the vendor reengineer the product at a lower cost
Marks & Spencer take a hit on profit by supporting the reengineering process
They use sophisticated EDI systems coupled with CPFR that enable P&G to work with
Wal-Mart to establish sales forecasts and replenishment goals for products such as
Crest
P&G receive continuous data sales, inventory and prices for its products at each WalMart store. This information is used to help the company to anticipate demand and
ship orders automatically.
Who benefits?
Wal-Mart customers pay lower prices for products that are always readily available
P&G reduce their order processing cost and lead times
Wal-Mart has less inventory, no stock outs and higher sales
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
Useful Reading:
Sunil Chopra & Peter Meindl. Supply Chain Management, 2008
Michael Levy & Barton Weitz. Retail Management, 2006
Key Contacts:
Retail CoE: Retail.coe.mailbox@accenture.com
Kevin Bartlett: kevin.p.bartlett@accenture.com