Retail Level 1 - 03 Retail Buy

Retail Level 1 for the Solutions Workforce
Module 3: Retail Buying
Copyright 2009 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
Module Agenda
Module Introduction
Buying Process
Buying Decision
Buying Effectiveness
Strategic Relationship
Module Summary
Copyright 2009 Accenture All Rights Reserved.
Faculty and Participant Introductions

Welcome! Please Introduce Yourself!
Name
Home Office
Current Role / Client Engagement
Any Experience with the Retail Buying Process?
Faculty Introductions
Name
Home Office
Years with Accenture?
Experience in Retail Buying?
Current Role & Client Engagement
Module Goals: Lets Begin with the End in Mind

This module will enable you to:
Explain the importance of the buying process in retail
Describe different buying strategies and policies
Identify different types of buying organizations
List the components of the buying cycle
Explain how to assess the effectiveness of
a buying deal between the retailer and
supplier
Explain the importance of developing a
strategic relationship between the retailer
and supplier
Responsibilities and Expectations

What can you expect from faculty?
Expert-led instruction
Deep knowledge of the retailing industry
Several years of retail experience
Commitment to Your Success in the classroom and on the job!
What is expected of you?

Attention and courtesy during class
Turn off mobile devices
No email, web-surfing or instant messaging
Your best effort on course activities

and exercises
Curiosity ask questions and offer feedback!
Q&A
Do you have any questions?
Module Agenda
Module Introduction
Buying Process
Buying Decision
Module Summary
What is the Buying Process in Retail?

Buying is the process by which companies acquire products to sell to
their target markets.
During the buying process, the retailer
identifies the right suppliers who will supply the merchandise in the required quantity and
at right price in order to keep total procurement costs low
ensures that there is a continuous supply of merchandise, and
establishes beneficial long term relationships with business partners as well as
customers
Why is the Buying Process Important?

When we buy a product from a retailer, 55% the products total cost is
equal to its actual selling price.
By optimizing the buying process, the retailer provides maximum cost savings to
the customer while increasing its profit margins
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
Responsive Supply Chain

For responsive supply chain, a single supplier supplies multiple products
to multiple locations.
Pioneered by automobile companies and computer
manufacturers
Toyota has car assembly plants across multiple
countries, and each plant is capable of producing
cars for different countries
Very few suppliers are capable of supplying vast
range of items to provide companies with a lower
cost of supplier management and for higher
supplier economies of scale
Benefits of Coordinated Buying Strategies

The benefits of coordinated buying strategies include:
Economies of Scale
Orders for single vendors are aggregated to achieve better economies of scale
Low Cost Transactions

Efficient procurement transactions reduce the cost of transactions by eliminating low
value transactions
Collaboration Benefits
Design collaboration ensures easy-to-manufacture, easy-to-use products, thereby
reducing the cost of manufacturing
Forecasting and Planning

Efficient processes ensure coordination with suppliers and improved forecasting and
planning, thereby reducing inventory levels
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
What buying strategies should the following organizations employ to achieve

competitive advantage, and why?
A low cost retailer
A high-end technology equipment provider (e.g., telephone network components
manufacturer)
A maintenance equipment or service provider
Developing a Buying Strategy

Retailers go through a four-step process when developing a buying strategy.
1. Supplier Scoring
and Assessment
Supplier rating based on business factors

Pricing, lead time, quality, quantity and assurance, supplier
flexibility, coordination capabilities and its impact on total cost
2. Supplier Selection
and Negotiations
Supplier selection based on product importance

Single supplier-single product, multiple Supplier-single
product, investment capability
3. Procurement
The procurement process should be inline with product

characteristics (direct and indirect)
Supplier should have visibility to demand side, so as to
plan production and online delivery
4. Sourcing
and Planning
Procurement spending and supplier performance need to

be monitored on a regular basis
Aggregation of spending across and within categories and
suppliers, analysis can be used to determine EOQ, volume
discounts and achieve higher economies of scale
Supplier Scoring and Assessment

The quoted price should not be the focus of the supplier scoring exercise;
companies need to understand other areas that impact total cost.
Factors include lead time, compliance to schedule, supplier flexibility to
change, quality plays important role in the supplier assessment, etc.
Supplier Scoring
and Assessment
Supplier Selection
& Negotiations
Procurement
Sourcing
and Planning
Performance Evaluation of Individual Brands Across Issues

Issues
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
Supplier Scoring and Assessment (cont.)

Supplier selection impacts a retailers performance in a variety of ways.
Reduce cost of doing business
Lowered Inventory aggregation, hence lowered carrying cost

Compliance to delivery schedule and low lead time will enhance demand filling, reducing loss sale
Quality Supply ensures no rejection or returns, reducing cost of rejects
Various inbound techniques like VMI, Consignment, JIT to reduce inbound transportation cost
Favorable payments terms to enhance liquidity
Responsive Supply chain

Information coordination to enable retailer to match demand with supply
Design collaboration to enable retailers sell more market oriented products, designed to suit
customer requirement
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
The Supplier Score Card

Retailers use a Supplier Score Card to compare and grade potential
suppliers.
Example of a Supplier Scorecard
Parameters
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
Developing Buying Strategy Supplier Selection and

Negotiations
The supplier scoring exercise should provide a list of promising vendors.
Supplier Scoring
and Assessment
Supplier Selection
& Negotiations
How many suppliers we need
Procurement
Sourcing
and Planning
Single Product
Single Product
Multiple Products
Multiple Products
Single Supplier
Multi Suppliers
Single Supplier
Multiple Suppliers
How to select them

Offline Competitive
Bidding
Reverse Auctions
Direct
Negotiations
Supplier Selection and Negotiations: Supplier Contracts

Supplier contracts impact overall profitability of supply chain, so they
should be drawn up with care to ensure that all supply chain partners
benefit.
An ideal contract has the following
characteristics:
The overall supply chain benefits
There are no incentives for
information distortion
It ensures long term performance
Supplier Selection and Negotiations: Examples

Final product pricing is based on multiple value contributions made at
different phases of the product conversion.
Case 1
Case 2
Manufacturer/Supplier fixes the

selling price based on profit margin
Buyer makes buying decision based

on profitability, not on demand
Manufacturer wants retailer to carry

large inventory to meet any surge in
demand
Buyer prefers to carry lower inventory

in order to avoid losses due to unsold
merchandise
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
Supplier Selection and Negotiations: Buying Contracts

Buying contracts define the structured way to manage information as well
as the material flow between supplier and buyers.
Buyback or Returns Contract
Allows the retailer to return unsold inventory up to a specified amount at an agreed price
Encourages the retailer to procure more, resulting in higher product availability and therefore
more sales
Examples: Music, software, books, magazines, etc.
Drawbacks: Additional returns cost, inventory salvage cost
Revenue Sharing Contracts
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
Quantity Flexibility Contracts

Allows the buyer to reduce the quantity of products to order as demand visibility increases
Increases the profitability of the supply chain
Class Discussion
Sony is about to introduce a new product in the market

This product is not an innovation; it is a completely new product idea and there is
no previous history of a similar product being introduced to the marketplace
Therefore, it is difficult for Sony to project the expected consumer demand
What Buying Strategy should Sony adopt, and why?
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
2. Vendor Managed Inventory

Supplier manages inventory based on expected demand and on previously agreed
minimum and maximum inventory levels
3. Direct Supply to Line

Supplier routes inventory to warehouse or point of consumption
4. Replenishment
Supplier supplies inventory on recurring basis for staple items
5. Direct Store
Supplier routes inventory directly to individual stores
Sourcing and Planning

Sourcing and Planning is the process of analyzing procurement spending
Supplier Scoring
and supplier performance.
and Assessment
Supplier Selection
& Negotiations
Procurement
Sourcing
and Planning
Aggregate
Analysis
Aggregation of spending across and

within categories and suppliers
Analysis of what company is
purchasing, from whom and volumes
Determine EOQ
Volume discounts, quantity
discounts
Supplier deletion
Supplier
Performance
Supplier performance to be measured

against plan on all dimensions, lead
times, responsiveness, quality etc.
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
Module Summary
What is a Buying Decision?

A buying decision is a procurement activity that a retailer carries out at
regular intervals.
When making buying decisions, the retailer asks the following questions:
Who buys
What and when to buy
How to buy
How much to buy
Types of Buying Decisions

There are six types of buying decisions:
What to buy
Current market
trends
External Sources
Sales History
Who will buy?
Individual
Cross Functional
Team
How much to buy

Open To Buy approach
Bulk buying
Replenishment
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
From Whom to Buy (Supplier Classification)

Supplier classification is a very important link in the buying process.
Suppliers are classified according to their business characteristics.
Type
Examples
Functionality
Manufacturer
Finished products
Manufacturers such as J&J,
Godrej, Unilevers
Physical producer of goods, might provide

credit and delivery
Full service
wholesaler
General merchandise
Special Merchandise
Rack Jobber
(Typical Demand and supply
aggregator)
Provides a huge assortment of

merchandise from various manufacturers
Extends variety of retailing services,
credit, storing and shipping
Connects the buyer and seller
Limited service
merchant
wholesaler
Drop Shipper
Mail Order
Cash and Carry
Same as above, but limited retailing

services are provided
Agents and
brokers
Purchasing agents or demand

and supply aggregators
They dont take ownership of goods and

provide variety of services for a fee
From Whom to Buy (Supplier Classification)

Each supplier type has an impact on a retailers total cost of doing
business.
Strategic relationship, higher economies of scale, direct mapping of supply to demand
Justifiable in case of higher volumes, higher inventory aggregation, higher cost of obsolescence
Buyer
Manufacturing
Manufacturing
Carry Inventory
Provides credit
Huge availability
Manufacturing
Manufacturing
Country A
Quicker delivery, inventory carried by wholesaler, low lead time
Products A, B
Products C, D
Expensive in case of huge volumes

Buyer
Effective in case of imports, multi-country purchases
Products A, B
Products C, D
Provide clearance
service, carries
inventory for fees
Expensive route of purchasing, inventory aggregation
Manufacturing
Country B
Buyer
How Much to Buy

Retailers use three different methods to determine the quantity of
merchandise to purchase.
Replenishment
Procure to
Replenishment
Bulk Buying
Open-to-Buy
Procure to
Sell
Initiated as and when

inventory falls below
certain levels
Initiated when there

is confirmed
demand
Rule-based process
that requires the
involvement of
suppliers.
Identifying a supplier
with the least lead
time is the key of
success
It enables the retailer to

meet demands in a
pre-planned way
without accumulating
inventory
Applicable in Madeto-Order scenarios

It is a PULL
Scenario
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
This is the Procure to

Stock process
The buyer decides to
purchase more than
his current
requirement, provided
there is a huge price
advantage
The forward buying
quantity is determined
on the basis of price
advantage vs.
inventory carrying cost
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 is initiated as and when inventory falls

below certain levels
A rule-based process that requires the collaboration
of suppliers
Enables companies to meet demands in a preplanned way without any inventory accumulation
Replenishment Trigger Points and Techniques

During replenishment the retailer plans for inventory in the stores and at
all points of the supply chain.
Replenishment is carried out for items with regular, predictable demand patterns
It requires the participation of all the players involved in the supply chain
Trigger Points
Economic order quantity
Minimum stock
Reorder point
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
Limitations of Traditional Replenishment

The supplier has a limited view of future demand requirements
The buyer may lack category/market insight required to make better forecasts and orders
Both trading partners forecast their needs independently
Past supply chain outages drive both suppliers and buyers to establish a buffer stock to
accommodate surprises. In addition, many systems automatically build additional safety.
When demand and supply outages occur relationships become adversarial
Many companies are working towards implementing Collaborative

Planning Forecasting and Replenishment to eliminate limitations of the
traditional replenishment process.
Overview of Collaborative Planning, Forecasting and

Replenishment (CPFR)
CPFR is a collaborative supplier management framework used by retailers
and suppliers to share information.
CPFR provides a framework for evaluating the supplier management process
and establishing a collaborative approach for sharing the information about
Planning (what the retailer is planning to sell)
Forecasting (What the market is interested in, and in what quantity)
This information helps suppliers to integrate their production planning with

retailers, thereby ensuring that the right product is available to the customer at
the right time and at the lowest possible cost
CPFR Strategic Areas

CPFR has four strategic areas:
Demand and Supply Management
Develop an integrated system to trigger supply
execution based on anticipated or realized
demand
Execution
Manage supply from supplier to retailer through
consistent and reliable information sharing
Strategy and Planning

Develop a strategic relationship with vendors and
develop joint buying strategies and contracts to
promote mutual interests
Analysis
Monitor performance on a regular basis
Nine Steps of CPFR

When implementing CPFR, retailers and supplies go through a nine-step
process.
Step 1: Front-End Arrangement
Agree to confidentiality and dispute resolution
Develop scorecard to track supply chain metrics
Establish incentives
Step 2: Joint Business Plan
Partners develop plans for promotions,
inventory policy changes, new product
introductions, store openings and closings
9 Steps to CPFR*
Steps 3 to 5: Sales Forecast Collaboration

Trading partners share demand forecasts and
identify exceptions. Collaboration on causal
factors to reach consensus on a single forecast
number.
Steps 6 to 8: Order Forecast Collaboration
Trading partners share replenishment plans
and identify and resolve exceptions
*Voluntary Inter industry Commerce Standards (VICS) Association
Step 9: Order Generation/Delivery Execution

Execution results data are shared and forecast
accuracy problems are reviewed. Performance
metrics are reported and communicated
Capabilities and Benefits of CPFR

CPFR saves time and money by reducing expensive last minute re-orders
and lost sales opportunities due to unavailable merchandise.
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
How Much to Buy

Procure to Sell and Procure to Stock are the two options in the opento-buy process.
Open-to-Buy
Procure to
Sell
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
Open-To-Buy (OTB) Process

In OTB, the budget determines the quantity to buy and the frequency.
The budget represents the amount available for buying in a given period
It is prepared for almost any timeframe week, month, season or year
depending on the retail framework
It must be related to the forecasted sales for the period in question
Determines how much has been spent and how much is left to spend
Logical Merchandise Hierarchy
Department
Class
Subclass
Historical Information
Sales and Inventory levels
Markdown amounts &
percentages
Receiving amounts
Forecasted Information
Sales and Inventory levels
Markdown amounts &
percentages
OTB Planning
Process
Key Performance Indicators

Markdown %
Sell Through %
Turnover
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
Planned Beginning of Month Inventory
On Order to be Received in this Period

Where Reductions = Markdowns + Employee Discounts +
Customer Discounts + Stock Shortages
* OTB is calculated in units or dollar value
* Dollar value could be on the basis of cost or retail price
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 Bulk Buying

When forward buying, the buyer procures more than is currently required
to meet future demands when purchasing cost is low.
Bulk Buying
Forward Buying
Cost
Benefits
Inventory carrying cost

Discounts on Purchase
Transportation cost
Forward buying is generally used for bulk purchases of commodities such as

food grains, oil, etc., depending on the current price and the anticipated
future price
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
Vendor-managed Delivery Method

In this case, the vendor is responsible for developing an inventory plan in coordination
with sales plan
Different types of vendor managed delivery:
Direct Supply to Stores and Lines
Vendor Managed Inventory
Consignment
Vendor-managed Delivery: The Direct Supply to Store /

Lines Option
For this vendor-managed delivery option, the vendor maintains the inventory.
The vendor receives the sales plan and prepares a manufacturing and inventory
plan.
The vendor directly provides supplies to stores, avoiding delivery to distribution
centers
This reduces inventory aggregation and multiple handling of goods
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)
Vendor-managed Delivery: The Vendor-managed

Inventory Option
Vendor-managed Inventory (VMI) is a proven system for improving the
efficiency of supply chain operations.
VMI is made possible through the electronic exchange of inventory information
between buyers and sellers
Electronic links eliminate many of the built-in delays associated with traditional
ordering systems, and enable the establishment of collaborative inventory
management systems
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
Vendor-managed Delivery: The Consignment Option

Consignment is scan-based trading. This is where the inventory is
owned by the manufacturer until it is sold to end-user.
Consignment is highly popular with huge retailers who are willing to push their
inventory back to their suppliers. In the case of Wal-Mart, it is a question of 50
billion USD of inventory.
The success of the consignment process depends largely on the technology
backbone that supports the integration of the VMI network with POS
RFID (Radio Frequency Identifier) plays a very important role in consignment
implementation, as it accurately updates critical inventory information
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.
The Ordering Process: What is a Purchase Order?

A Purchase Order (PO) is a legally binding document between the supplier
and the retailer.
Purchase orders specify:
The merchandise to be supplied
The payment and commercial terms
The delivery dates
The location details for delivery
POs are used as a reference document to validate all

contractual obligations between the supplier and
purchaser regarding the approval, tracking and
processing of purchased items
Types of Purchase Orders

Here are seven types of commonly used purchase orders:
1. Advance: A regular order placed for future (not speedy) delivery
2. Back Order: An order to be filled out as soon as the merchandise becomes
available
3. Blanket Order: An overall order to cover all or part of a season
4. Open Order: A buying office order on behalf of a retailer
5. Regular or Stock Order: A normal order that includes full specifications, amounts,
time of shipment, etc.
6. Reorder Order: Used for additional quantities of goods
7. Special Order: Placed at store level for an individual customer
The Purchase Order System Flow

Purchasing is a highly integrated process connected to multiple inventory
management, vendor, financial and warehouse management systems.
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
Purchase Order Process Flow Generating a Requisition

Generating a requisition is the first step on the Purchase Order process.
Requisition
generation
process
Purchase Order Process Flow Creating a Purchase

Order
Once the requisition is approved, the system creates a standard purchase order
describing supply conditions and delivery options.
Requisition
generation
process
PO Generation
Purchase Order Process Flow Vendor System

Integration
In the third phase of the process flow, the purchase order is integrated into
the vendors system.
Requisition
generation
process
Integration with Vendor system
PO Generation
Purchase Order Process Flow Receipt and Payment

Finally, the retailer initiates the payment process upon receipt of the
product.
Requisition
generation
process
Integration with Vendor system
PO Generation
Receipt and Payment
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Module Summary
Buying Effectiveness Overview

Buying effectiveness is the process of determining the profitability of
business with suppliers.
When retailers sell to customers, they use a number of strategies to remain
competitive (e.g., everyday low pricing or deep discounts)
Buying effectiveness is determined by the
following factors:
Whether the objectives of the business
(profitability and volume) are met
Whether vendors can meet their delivery schedules
and keep up with demand
Whether the most profitable vendors have
been selected
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
Multi-attribute analysis of vendors

Inventory
Two season vendor 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.
The effectiveness of a deal is determined by the sales pattern of products. A

deal is considered a success when actuals are as close as possible to plan.
If the sales pattern is close to planned sale, this means that the forecasting was
effective
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
The Performance Measures are:
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
More than one criteria may be used
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
Two-Seasons Vendor Profitability Analysis

This analysis compares multiple suppliers for single products.
Buying effectiveness Analysis A Case Study from Retail

Inventory
Forecasting
Business
Planning
Data
captured into
Receipt Management System

Purchase Order System
Receivables Systems
Scan Down Systems
Etc
Sales Management
Inventory Management
Financials
Business Process Pain Points
Deal Size in Quantity

and Value Registered
into Deals System
1. Disparate systems and scattered data

2. Deals data and sales data captured across
multiple systems built on multiple platforms
3. No system support available for determining
returns on the Deals, manual process
4. Determining actual sales figure and comparing
with deals was a cumbersome time consuming
exercise
Data
captured into
Sale happens through

Sales Channels
Buying effectiveness Analysis A Case Study from

Retail: The Accenture Solution
Accenture proposed an online reporting tool which integrates with 16
different systems and prepares reports that help the user to view, track
and compare deals performance.
ETL tool extracts data from 16
different source systems
Ab Initio integrates with diverse
geographically distributed source
systems
Extracts Desired Deals Information,
from Deal System, items, Lost or
Return items Systems, etc.
Transform it after applying
business rules
Load into Staging areas
Buying effectiveness Analysis A Case Study from Retail:

The Accenture Solution (cont.)
The data in the staging area is checked for inconsistency
The data validated according to a pre-defined business logic
If there is any discrepancy, then the source system owners are notified
Once the data in the staging area is cleansed and validated, it is aggregated at
different levels and loaded into a Deal Metrics Tables, which is an Oracle Database
Buying effectiveness Analysis A Case Study from Retail:

Benefits of the Accenture Solution to the Client
The Accenture solution gives the client the ability to search deals based on
pre-defined user-defined parameters that result in improved deals
management.
The solution provides:
A single view of deal details and
corresponding sales figures
Periodic monitoring of the performance of
deals to identify Overspent and Underspent,
and take corrective measures
Periodic updates on the profitability of deals
and inputs for the decision-making process
An enabler to manage and track the
performance of deals that are derived from
master deals
A single view of actual earnings and total
estimated earnings, inputs for future planning
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Module Summary
Defining a Strategic Relationship

A strategic relationship is when the retailer and supplier are committed to
maintaining a long-term relationship to invest in mutually beneficial
opportunities.
Example of Marks and Spencer
Marks & Spencer have jointly developed a kitchen product with their vendor
Four months later, the vendor finds out that it incorrectly calculated the price of the
product, grossly under pricing it,. As a result, it is losing money on the deal.
The product, however, is a hit for Marks & Spencer because it was under-priced
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
Strategic Relationship Example Wal-Mart and Procter &

Gamble
Wal-Mart is demanding lower
prices and best service from
its vendors
Procter & Gamble is

demanding a price advantage
from its buyers
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
Foundations of a Successful Strategic Relationship

Any successful strategic relationship is based on mutual trust, open
communications, common goals and credible commitments.
1. Mutual Trust: When both the parties trust each other, information becomes
more comprehensive, accurate and timely
2. Open Communication: This helps both parties to develop sales forecast and
inventory plans together, and to coordinate deliveries. It also helps both parties
to understand what really drives each others business.
3. Common Goals: Shared goals give both members the incentive to pool their
strengths and abilities to exploit potential opportunities
4. Credible Commitments: These are tangible commitments in the relationship.
They involve investing in each others strengths to improve service to customers
Q&A
Module Agenda
Module Introduction
Buying Process
Buying Decision
Module Summary
Knowledge Checkpoint: Some Key Terms

What role does the buying process play in the retail industry?
What are the four key steps for developing a buying strategy?
How are centralized buying organizations different from decentralized buying
organizations?
What are the different phases of the buying cycle?
What are some of the different types of analyses that a retailer may use to
gauge the effectiveness of a buying deal?
Why is it critical for a retailer to develop a strategic relationship with a supplier?
Useful Resources & Key Contacts

Useful Links:
Retail Homepage on the KX: https://kx.accenture.com/Industries/Pages/Retail.aspx
RIPM on the KX:
https://kx.accenture.com/Industries/Pages/Retail-HPPE.aspx?PageView=Shared
Accenture Business Process Repository: https://businessprocess.accenture.com
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
Thanks for Making this Session a Great Success!

Thank you for participating!
Do you have any final questions?
Appendix A: Intellectual Property and Sources

Trademark Use
This Instructor-Led training course makes reference to trademarks that may be
owned by others. The use of such trademarks herein is not an assertion of
ownership of such trademarks by Accenture and is not intended to represent or
imply the existence of an association between Accenture and the lawful owners
of such trademarks. No sponsorship, endorsement, or approval of this site or its
contents by the owners of such trademarks is intended, expressed, or implied by
the references to such trademarks.

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Retail Level 1 for the Solutions Workforce

Module 3: Retail Buying

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Faculty and Participant Introductions

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Module Goals: Lets Begin with the End in Mind

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Responsibilities and Expectations

What is expected of you?

Your best effort on course activities

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Do you have any questions?

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What is the Buying Process in Retail?

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Why is the Buying Process Important?

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Copyright 2009 Accenture All Rights Reserved.

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Responsive Supply Chain

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Benefits of Coordinated Buying Strategies

Low Cost Transactions

Forecasting and Planning

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What buying strategies should the following organizations employ to achieve

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Developing a Buying Strategy

Supplier rating based on business factors

Supplier selection based on product importance

The procurement process should be inline with product

Procurement spending and supplier performance need to

Copyright 2009 Accenture All Rights Reserved.

Supplier Scoring and Assessment

Performance Evaluation of Individual Brands Across Issues

Copyright 2009 Accenture All Rights Reserved.

Supplier Scoring and Assessment (cont.)

Lowered Inventory aggregation, hence lowered carrying cost

Responsive Supply chain

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The Supplier Score Card

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Developing Buying Strategy Supplier Selection and

How many suppliers we need

How to select them

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Supplier Selection and Negotiations: Supplier Contracts

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Supplier Selection and Negotiations: Examples

Manufacturer/Supplier fixes the

Buyer makes buying decision based

Manufacturer wants retailer to carry

Buyer prefers to carry lower inventory

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Supplier Selection and Negotiations: Buying Contracts

Revenue Sharing Contracts

Quantity Flexibility Contracts

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Sony is about to introduce a new product in the market

What Buying Strategy should Sony adopt, and why?

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