April 28, 2006, 12:00 AM

Sourcing Sense

For Gap, the web brings more science into the art 
of sourcing operational supplies.

There has been a lot of buzz in the retail industry in recent years about web-based collaborative supply chain technology and processes that help retailers get the right merchandise into the right stores at the right time. But running a successful retail operation means more than just perfecting merchandise fashions and market timing. It also means keeping the lights and air-conditioning on and having on hand enough of those fashionable shopping bags that customers carry home as moving advertisements of their favored stores.

As much as retailers try to compete with the best merchandise, the breadth of competition online as well as offline among a constantly growing array of retailers in nearly every product category is making it difficult to stand out on merchandise alone. At the same time, merchants can’t rely on that merchandise alone to squeeze out enough profits to satisfy senior executives and investors. So retailers are reaching beyond merchandise into the mundane world of sourcing and procuring non-merchandise operating goods to make customers feel special and investors feel rewarded.

Leveraging technology

Retailers like Gap Inc. are using web-based sourcing and procurement systems to put more science and organization into the often inefficient art of buying operational goods ranging from shopping bags to heating and ventilation systems to IT services-improving the impact of procurement on the way a merchant serves customers and maintains its overall image as a place where consumers want to shop.

Though well-known for its distinct line of casual apparel, Gap is adopting web-based sourcing and procurement technology to better manage the way it chooses non-merchandise suppliers, improving the overall operation of its retail channels, says Eric Germa, senior director of strategic sourcing. “We’re leveraging technology to become world-class and have a competitive advantage through our sourcing and procurement practices,” he says. “In my department, our job is to value-engineer our specifications and come up with options for sourcing products. E-sourcing enables us to bring more science to the way we rate buying opportunities and suppliers.”

With its web-based sourcing strategy, Gap has cut the cost of sourcing non-merchandise operational products and services by 10-20% while shortening the time to prepare sourcing projects-increasing the productivity of sourcing and procurement practices while cutting overall procurement costs, Germa says. “E-sourcing reduces project lead times 20% to 50%,” he says.

The paper chase

Industrywide figures for indirect costs as a proportion of revenue are hard to come by, but some analysts place the figure around 5%, depending on what gets counted as indirect and how many stores are involved. For a retailer with $500 million a year in sales, that would amount to $25 million. By those estimates, retailers in the Gap range-$20 billion or so-would spend $1 billion a year on indirect purchases. Trimming 10-20% of those costs would result in savings of a hefty $100 million to $200 million a year.

In the past, Gap worked with paper documents and spreadsheets and multiple forms of communications between its buyers and its suppliers, making it difficult to maintain consistent procurement practices across more than 3,000 stores as well as its online operations. “It was difficult to do requests-for-proposals while going back and forth with different suppliers, and it was a challenge to have consistent procurement across all of our teams,” Germa says. “We used to have to get suppliers to e-mail us information and also hard copies of materials, and it would be hard to make changes like adding tariffs, because then they’d have to send us more materials.”

Now with its web-enabled sourcing-based on in-house and outside technology, including Ariba Inc.’s Ariba Sourcing-Enterprise and Ariba Category Management applications-Gap gathers initial information from suppliers through online requests for proposals, analyzes how well each supplier’s offerings meet Gap’s needs, then uses the centrally located information to design contracts by factoring in the best available terms from suppliers.

While making it possible to better gather and analyze information from multiple suppliers, the web-based system’s universal accessibility also makes it possible for people throughout Gap’s global operations with sourcing duties to contribute and view sourcing information, providing for increased speed and consistency in planning spending projects, Germa says.

Ensuring compliance

Once it finalizes contracts with suppliers, Gap incorporates the approved spending arrangement into its separate web-enabled procurement application, where store managers and others with procurement responsibilities can purchase items through the approved contacts. “The system helps us improve compliance with corporate procurement policies,” Germa says.

The system also lets retailers spend less time in meetings with suppliers and reviewing what can be multiple versions of documents. “Retailers want to get away from face-to-face negotiations whenever they can and get into an online format,” says Latane Conant, a former sourcing manager for Walgreen Co. who is now a retail industry engagement manager for Ariba.

The online method is designed to help overcome a major problem retailers have traditionally faced in maintaining accurate spending records, she adds. “Retailers often have no idea how much they’re spending with vendors on the indirect products side,” she says. “Sometimes they have to call their suppliers to ask how much they’ve spent with them.”

One step at a time

It can take about two days of formal training for employees to learn an e-sourcing system, though most users continue to build up their expertise over a year or so, Conant says. Most retailers start out using e-sourcing for finding suppliers of non-merchandise goods before moving on to the sourcing of merchandise, she adds.

Gap is using e-sourcing for complex non-merchandise projects rather than for the most basic supplies, but it’s careful to apply it in cases where it believes e-sourcing can bring the biggest return, Germa says. “We’ve gone after the projects where we can create the most value, and we’ve shied away from using it for quick wins, auctions and commodities.”

Two areas where Gap has significantly increased the value of its sourcing and procurement are in global sourcing of items like shopping bags-a task that can be far more complicated than might appear, Germa says-and in the provision of heating, ventilation and air-conditioning systems and related maintenance services for its stores.

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