The mandate comes down from the boardroom: We need to increase our international sourcing efforts by another 25% in order to remain competitive.

While the task might seem daunting and overwhelming at first, developing a core competency in global sourcing is one of the critical business initiatives for retailers and channel masters. By understanding exactly how global sourcing strategies impact margins, retailers can develop creative product categories that not only compete in the marketplace on trend, but also push margins and profit higher.

According to the World Trade Organization, global sourcing has changed the dynamics of raw materials acquisition and finished goods manufacturing. Today, 55% of all raw materials for American manufacturing are sourced outside the U.S. And for those corporations in apparel and footwear, consumer packaged goods, and high tech electronics, the numbers are even higher.

What does it take to master global sourcing techniques? What types of technology are available for world-wide buying organizations? How should your organization incorporate global sourcing into creative product development, margin enhancement, private label development, and even branding?

What follows is a schema that breaks down what might at first seem a daunting challenge into five discrete process stages:

Stage One: The Domestic Buy

The first stage of global sourcing is the domestic buy: honing the buying process, developing supply base selection criteria, and establishing supply chains for routing products from the raw material stage to your warehouse to your storefronts. Everyone in business today has developed this purchasing procedure to fit the way they do business. And the 45% margins are acceptable across the board.

In these business environments, there might be fifteen to twenty spreadsheets to organize and update the order information.

In addition, there are usually six to eight enterprise software applications into which buyers and merchants type in data from the spreadsheets: everything from ERP to APS and every acronym in between. It’s no wonder that buyers and merchants are leery of technology that impedes the way they work and actually hinders their success.

One women’s fashion house revealed their own internal audit of redundant data systems: Over $800,000 is spent annually between the Merchant and Sourcing Groups to update thirteen spreadsheets, sort through email correspondence with suppliers and factories, and research information. Taking time out to re-key information into redundant systems was costing the organization $250,000 annually. The cost of fixing documentation and international compliance expenses were adding $300-$500 to the cost of each international shipment.

It’s easy to see how organizations can remain stuck in the first stage of global sourcing. There is no way to imagine how the current operating system can accommodate the complexities of global sourcing, and the thought of bringing in more technology freezes people in their tracks.

However, they are also extremely frustrated by the limitations of the current system, the constant updating and data entry, and the inability to capture a true and accurate snapshot of their business.  

Stage Two: ‘Low Risk’ Imports

Oftentimes, there are two systems in place for sourcing: the reliable workflow for domestic direct buys, and the cumbersome, clunky, complex system for international buys.

Imports can round out a product portfolio with a low-risk item: for example, printed t-shirts for a season, linens for a housewares collections, or simple accessories for a consumer electronics items. Imported items are often half the cost of their domestic counterparts (but have additional costs such as agent fees, duties, freight and brokerage fees).

Overall, though, the margin on these items jumps from 45% to 58%...a significant increase that whets the appetite for more savings in other product categories. By increasing the comfort level of dealing with new suppliers on these low-risk items, buyers and merchants gain more confidence to move onto more complex buys requiring extensive collaboration.

One such organization making the migration from Stage 1 to Stage2 is a $50-million trading company, which offers a wide array of promotional items to large organizations. These promotional items include everything from calculators to squeeze balls to pens—the type of tchotchkes one would find at any grand opening, tradeshow, or corporate get-together.

This 15-person organization currently develops or buys domestically the base, blank items on a landed basis, before the goods are customized with logo marks and taglines. The company is just starting to import items from overseas and wants a technology infrastructure to support the new operations without adding to staff.  

Stage Three: Global Sourcing

With a unified buying process in place, the buyers and merchants can compare estimated landed costs and lead times from suppliers across the world and across the street, and select the best supplier to meet the margin goals for the product at hand. Organizations can also look across product portfolios and target a particular percentage of items to source internationally to meet corporate goals.

At this point, we can say that the organization has migrated to Stage Three.

By selecting the appropriate product mix to be sourced domestically and internationally based on the margin mix, lead times, and sell channels, the organization can increase their margins to 65%--an enviable position among their peers.

One example of an organization becoming a leader in sourcing strategies is a $400-million retailer who specializes in close-outs, excess inventory opportunities, and consumer packaged goods knock-offs. At first, this organization imported only 5%-6% of their total purchases and focused on bulk hardline items such as patio furniture purchased through agents.

After being introduced to a new sourcing and order management solution that encourages collaboration with suppliers, this organization’s buyers send requests for quote to suppliers it has done business with before, as well as new vendors it is just identifying.

Suppliers respond with quotes, which the new system organizes and presents to the buyers in a dashboard. Buyers can see summary quotes and drill down on those that seem the most promising. At that point, a buyer can accept a bid, ask a bidder for clarification or negotiate further with a bidder. The offer is then turned into a purchase order and passed into the merchandising system.

The process streamlines the existing workflow, which used to include a redundant mix of faxing, emailing and re-keying information. With the new system in place, this organization has doubled the number of imports and is now dealing directly with factories…and even expanding its product portfolio to include apparel items.

Having established their sourcing expertise and achieved a comfort level with their collaboration capabilities, the team is confident about accurately costing items and rapidly turning around orders. Now knock-off items are an essential part of the product offering and a unique draw for customers. And the goal for the organization is to double the amount of imports yet again.

Stage Four: Establishing a Private Label

With supplier collaboration tools in place to manage the work in progress, the quality testing milestones, containerization and shipment options, organizations can move quickly towards Stage Four: Establishing a Private Label.

In a recent AMR Research paper entitled, “Private-Label Apparel Sourcing: Achieving Demand-Driven Speed for Retail,” the analyst states, “Private-label apparel sourcing is a complex process with numerous steps that must be executed flawlessly for today’s retail merchandise assortments, which include the hundreds of thousands of SKUs required to offer the multitude of styles, colors, and sizes today’s consumers demand. Legacy systems and manual processes can slow lead times by up to 18 months. But any retailer can create a truly demand-driven fashion supply chain by adopting advanced private-label sourcing processes that make use of the latest Product Lifestyle Management (PLM) and sourcing visibility applications.”

Moving ahead with PLM-extended global sourcing as a key component of the unified buying process allows organizations to grow private label collections quickly. And the rewards here are just as stunning: a jump in margin to 72%.

One such company making the leap to establishing its own private label is a specialty electronics retailer with over 160 stores nationwide. This organization has determined that any item in the product portfolio must deliver at least 30 additional margin points to be considered for private labeling.

However, several factors complicate the supply chain for premium merchandise such as specialty electronics. Big ticket items, along with high SKU counts of low cost accessories sourced directly from Asia, require an integrated approach to supply chain management and accurate visibility. Collaboration between suppliers, logistics providers, buyers and product managers is critical throughout the product lifecycle.

With the intelligence gained from the new solution in place, the buying organization understands how disparate supplier lead times and seasonal sales patterns impact the balance sheet. They streamline the buying processes with supplier collaboration features and eliminate redundant data entry. Now the organization can clearly see which items are candidates for private labeling and buyers can better monitor factories and production results.  

Stage Five: Establishing a Brand

With increased foot traffic and a loyal customer base accustomed to a high quality label, the final stage of sourcing evolution is Establishing a Brand. Being able to extend the brand loyalty of a product category outside the originating storefront is a bold move only a few retailers and channel masters can execute successfully. But with a global sourcing core competency already in place, with buyers and merchants who can collaborate both artistically and business-wise with suppliers around the world, the supply chain is in prime condition to support a new market venture. Stage 5 offers a product margin of 76%and the opportunity to attract even more loyal customers.

For example, several multi-billion dollar department stores offer their own private brand to unrelated retailers as well as in-house. As an illustration, one department store offers a mix of: 56% non-food and drugstore goods, 44% textiles, six private label brands, and approximately 50,000 separate items on a seasonal basis.

These retailers have internal goals to move the targeted private brand into 25% of the store’s total purchases.

These organizations deploy a unified buying process to develop product, assess costs, track WIP and factory production capability, as well as to create line lists and range plans to offer to multiple channels among owned and non-owned retailers. The solution handles their customers’ demands for multiple prepacks and unique packaging, color offerings, pricing in multiple currencies, labeling to meet language and government regulations, as well as billing and document requirements. This transparency also facilitates improved product planning during promotions, special seasons, and trends.

The continual snapshot of plan vs. execution gives buyers and suppliers a financial view of budget and on-order status that aids in more efficient planning, and a faster turn-around. Faster design cycles can cut as many as 40 days out of the supply chain length. This is a huge advantage in retail where speeding items to market keeps consumers returning to stores for more purchases. This depth and breadth of solution functionality supports the development and delivery of their brand on a worldwide basis.

Obviously, there are a whole host of additional charges associated with international sourcing which may be new to your buying team. However, there are very sophisticated costing engines that work behind the scenes to provide an Estimated Landed Cost based on country of origin, country of manufacture, and product/commodity category. And with interactive wizards guiding the buyer through the RFQ and Order process, the workflows are straightforward and efficient.

As global sourcing is increased throughout the Five Stages, and private label and private brand elements are introduced, the initial mark-up at the department level starts to soar from 45% to almost 63%. These margin levels are the key to competitiveness both on Main Street and on Wall Street. Understanding how global sourcing strategies can impact your product and department margins is an important first step. Where does your organization fall within these Five Stages? Are you ready to make a move? Deploying a unified buying process is the key to your organization’s success through the Five Stages of Global Sourcing.

This article is excerpted from “The Five Stages of Global Sourcing,”  an Executive Whitepaper published by TradeStone Software, Inc.(www.tradestonesoftware.com)