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Recent Trends in Retail Outsourcing

If you look at a continuum of retailers’ business objectives, at the far left is intense cost-cutting and cost control; at the right edge is top-line growth. Although some retailers have focused somewhere in the middle of the continuum, the majority up though 2004 were in the cost-cutting mode. In the last two quarters of 2005, however, there was a noticeable migration of retailers moving from the middle toward the right.

Achieving top-line growth is not just a matter of differentiating products in a crowded market. As most retailers are finding out, it requires business transformation, impacting the entire enterprise. Achieving help in transformation is now a significant driver for many outsourcing agreements in the retail arena.

According to Richard Marino, Vice President of Retail Practice at Capgemini, there are two approaches to transformation. Both are viable; the choice depends on the retailer’s objectives. A process redesign approach usually yields the biggest gains from a cost perspective. The other approach uses technology as the enabler for top-line growth as well as reductions in inventory and markdowns.

Retail enterprises with a vision of dramatic growth in their business in the next two-to-five years are investing a lot of capital in all facets of transformation. Most had put off their technology investments because of the softness in the business over the last three-to-four years.

Trend #1: Reducing operational costs is a good strategy for finding capital to fund new systems, so more retailers are now looking at outsourcing their cost centers such as IT or accounting.

Limited Brands is a good example of this strategy. The retailer entered into a relationship with Capgemini in September 2005 for a multi-year retail transformation of its 3,800 stores, involving an overhaul of the company’s information systems and multiple operating processes (finance, business intelligence, supply chain, merchandise planning and allocation, demand chain, and customer marketing).

Creating a shared services center for all the Limited’s brands stores will achieve the stores’ objective of standardizing transactions at the enterprise level and creating efficiencies. This strategy should also improve demand planning and execution systems that drive the business and provide all the brands with the necessary information, processes, and support for future growth. They will also allow the company to focus on better serving its customers’ needs and expectations.

Trend #2: Retailers are turning to outsourcing service providers for assistance with merchandising processes.

Retailers are now focusing on getting as specific as possible in meeting the demands of their customers–which are very different from one location to another, whether at a store or online. Key to achieving this objective, Marino says, is investing in more technology. “Retailers need information systems and supply chains that enable them to replenish stock at specific locations faster, while maintaining lower inventory.”

With better technology, a company can understand very specific needs at the store level. Without the technology enablers, the company cannot quickly replenish what sells and risks either being out of stock on the items that fly off the shelves in a particular location, or being overstocked on those that don’t sell well. Technology enables retailers to become smarter at forecasting demand, replenishing products closer to when the need is, and shortening the overall cycle from the buy to the distribution point.

Canadian Tire Corporation (CTR), with 440 retail stores across Canada, turned to outsourcing for assistance in electronic retailing. The outsourcing provider integrated a number of technologies to provide seamless, end-to-end capabilities for CTR Online, including content management; an e-merchandising functionality; payment and fulfillment functions; replenishment; and customer service. Two months after launching the site, it was one of the top sites in Canada, and the Retail Council of Canada selected Canadian Tire as the winner in the online retailing category for 2001 at the Retail Council of Canada Excellence in Retailing Awards.

Trend #3: Retailers want collaborative supply chain management.

Capgemini’s 2005 “10th Annual Third-Party Logistics Study,” conducted jointly with the Georgia Institute of Technology, DHL, and SAP, tracked trends and customer perspectives regarding outsourced logistics. The study reveals that improved supply chain management is the second most important factor (behind cost pressures) affecting North American and Western European businesses. Implementation of new information technologies ranked third.

The study further reveals that enterprises view a collaborative partnership approach with their third-party logistics (3PL) providers as key to improving company performance and critical to achieving better replenishment in retail establishments. Seventy percent of respondents report they have a collaborative relationship with their 3PL providers and that there are continued pressures on maintaining ongoing collaborative relationships.

Despite overall satisfaction with their 3PL providers (88 percent rated their relationships as successful), respondents in the study cited a significant new expectation of their providers going forward: “service offering aligned with customer strategy and deep industry knowledge.”

Discount Auto Parts, an auto parts and accessories retailer in the Southeastern region of the United States, outsourced its supply chain transformation to enable its corporate growth plans. The outsourcing arrangement included implementing systems and processes that resulted in a more collaborative supply chain, allowing the retailer to achieve a more competitive position across key industry operating benchmarks. Outsourcing also helped the retailer achieve:

  • $56.5 million in freed-up working capital
  • $106 million in cost reductions over four years
  • 25 percent inventory reduction
  • 3 percent COGS (Cost of Goods Sold) reduction
  • Improved inventory accuracy

Trend #4: Total Transformation

Meijer, Inc., a large retailer based in Grand Rapids, Michigan, operating more than 160 supercenters across the Midwestern region of the United States, took the transformation approach of using technology as the enabler for top-line growth. The company’s outsourcing strategy also centered on taking costs out in order to enable future growth.

According to Jim Postma, Senior Vice President of Meijer, the retailer and its outsourcing provider, Capgemini, implemented a wide-ranging retail transformation program organized around four areas: store operations, merchandising, supply chain, and finance/administration.

Within 18 months, Meijer was approaching its goal of sustained cost reduction and had also achieved significant value in cost avoidance. Postma says, “The transformation created a ‘culture of thrift,’ which affects day-to-day decision-making and prioritization around spending.” That’s certainly one of the crucial steps to becoming a world-class retailer.

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