Where is the value in better management of GNFR for retailers?
Jun 1, 2011 6:19:00 PM
Following on from my first post in the UK Retail Series (in which I asked how can UK retailers look to safe guard themselves over the coming 2 years?), I would now like to look a bit closer at the importance of the supply chain.
Many retailers have spent decades engineering their primary (direct) supply chain - ensuring:
The Goods for Resale (GFR) margin is at or above industry standard
Risk is kept to a minimum
Long term supply has been assured with preferred suppliers
Relationships have been built and developed over time
Processes have been engrained into the core business
Senior executives and Board members acknowledge the value of the supply chain in light of business objectives.
With the increasing focus on driving more margin, a major opportunity (which whether by lack of knowledge/expertise, investment, internal capability or understanding of importance, is staring many retailers in the face) remains underutilised across the industry - driving efficiencies out of Goods not for Resale (GNFR) or indirect expenditure.
When embarking on this journey, many tried to simply overlay the rules, processes and methodologies of GFR which led to the failure in achieving the same efficiencies and ROI from GNFR as such, over the past decade GNFR has continually slipped down the list of business leaders priorities.
We recently ran a study with 120 CFOs/CPOs from Europe and North America to uncover how procurement is viewed by the wider business, including senior executives and board members. We identified that indirect procurement is valued relatively highly by business operating units and functions, implying a mandate at the business operating unit level to take on the role of strategic business partner, but this value is less recognised at board level and by the CFO.
As such, where GNFR sits on the Board and CFOs agenda means that little attention has been placed on developing and driving maximum efficiencies out of this element of business expenditure.
The study found that the primary reasons for the low or moderate contribution from the indirect procurement function further up the hierarchy include:
- A lack of visibility of the indirect procurement function
- The relatively low status of indirect procurement
- A lack of awareness of its contribution to driving business performance
- The indirect procurement function typically covers routinely purchased items, but usually lacks the capacity or the resources to provide full sourcing support for non-routine items
Basically, the typical Board Member within the retail environment may not understand the importance of (or true value that can be delivered by) investing more resources (human and cash) into GNFR nor care to when looking at a long list of priorities. However, if you told them that through better management of GNFR, hard savings to the tune of 10% to 15%, could be added directly to the bottom line, I think we would be reading a very different story.
So why aren't GNFR improvement initiatives on every retail Board members agenda?