Retailers can increase gross profit margins by 20 per cent through better sourcing and product development

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Retailers can increase their gross profit margin by up to 20 per cent through changes in sourcing, product development, and the way they work with suppliers, according to Kurt Salmon Associates (KSA), the management consultancy specialising in retail and consumer goods. Richard Traish, senior partner at KSA, commented: "As total product costs can add up to as much as 80 per cent of net sales, it is not surprising that as part of their margin management activity retailers are looking to find ways to slash costs. A more strategic approach to sourcing, product development and managing suppliers can help improve that all important gross margin."

KSA estimates that most consumer businesses can realise at least a conservative 2 to 4 per cent reduction in cost of goods sold (COGS) through an authoritative strategic sourcing programme centred on negotiating more favourable agreements and improving collaboration with suppliers. "Better integration of customer insights on the one hand and delegation of more added value activity to suppliers on the other is part of the retailers' formula to reduce costs," adds Traish. "Many consumer goods companies could learn a lesson or two from those fashion firms that have built a supply chain that can develop product closer to demand and have upped the stakes in delivering 'newness' because they are benefitting from improved margins."

To check whether they are as efficient as they might be, KSA suggests retailers should challenge themselves on these five questions:

1. Are our planning, product development and sourcing processes organised to deliver maximum responsiveness whilst minimising the cost of building in the flexibility?  

2. Do our processes need to be 'one size fits all' or can we differentiate by product type (standard, infusion, speed)

3. Do we get maximum value from our overseas office and supply base (from seed to shelf), how much more could they deliver for us in terms of product development and cost reduction?

4. Do we have a clear sourcing strategy that is aligned to our business strategy?

5. Does this respond to the constant flux in key sourcing markets and balance the risk of emerging markets?

KSA will have available early next year, the latest findings from its annual global sourcing guide.