By Paul Noël
Retailers have one job: get consumers what they need, when they need it. Sounds simple, right?
In reality, retailers have to satisfy consumer demands while simultaneously keeping costs down and growing profits. Fulfilling these goals depends on having the right suppliers. Brands are only as strong as the weakest link in their supply chain. A missing clause in one supplier contract can make or break your efficiency and results.
Here’s an in-depth look at some of the most costly supplier sourcing mistakes retailers commit and how to prevent them:
1. Not including risk management into contracts. Contracts are a valuable risk prevention tool, as long as they’re thoroughly drafted and reviewed to address certain standards. However, many companies fail to include clauses that would otherwise protect them in the event of a natural disaster or production glitch.
As retailers increasingly source goods and services from a broader base of global suppliers, they must proceed with extreme caution before signing purchase agreements. Especially during peak holiday seasons or new product launches, brands need a safety net. Factors such as defective products or services, intellectual property loss and product availability are all critical terms to weave into contracts when engaging with new suppliers, or renewing the services of a current one.
2. Relying heavily on one supplier. Putting all (or most of) your eggs in one basket is a precarious move for retailers. While centralizing production can cut superfluous waste out of a supply chain and simplify certain procurement processes, it also exposes retailers to extreme risk, turning small hiccups into crippling downtime.
Apple is just one major name that’s grappled with single-supplier dependency issues. The company is no stranger to supply shortages, but its latest iPhone 6 and 6 Plus release has suffered significant delays. By contracting with one manufacturer to produce the bulk of both models, Apple has a major output imbalance on its hands. Building a diverse base of trusted suppliers mitigates these vulnerabilities, ensuring companies have a back-up plan when they need it most.
3. Getting careless with seasonal supplier sourcing. It’s not uncommon for retailers to bolster operations with seasonal supplier contracts leading up to back-to-school time or the holidays. But crafting a long-term strategy around these seasonal relationships escalates supply chain volatility. Retailers may be locked into paying premiums with companies that work exclusively in short-term arrangements.
Shopping around for the best price—and fulfillment track record—before locking in with one seasonal supplier is a crucial step to take. Likewise, retailers should have a stockpile of trusted standby suppliers they can tap to avoid eleventh hour meltdowns.
4. Skipping subcontractor due diligence. When sourcing finished goods, suppliers usually rely on their own network of subcontractors for parts or production. Retailers should mind this extra supply chain layer closely. Despite the degree of separation, brands often suffer the consequences of subcontractors’ noncompliance, from labor violations to intellectual property theft.
In 2013, after widely publicized issues in unauthorized subcontractor facilities, Walmart announced it would instantly drop suppliers that subcontracted to factories the retailer hadn’t approved. Retailers should require similar subcontractor clauses before signing with a supplier, and continuously review suppliers to ensure partnerships stay above board.
5. Failing to honestly evaluate long-term suppliers. Supply chain management, like many aspects of running a business, is about relationships. Forming long-term partnerships with key suppliers who understand your process and customers is a procurement officer’s dream. At the same time, it’s easy to let relationships negatively bias supply chain decisions.
All suppliers, new or existing, should be regularly assessed across different metrics, including price, delivery performance, quality, subcontractors, disaster recovery plans and credit standing. This habit not only reinforces risk management, but also helps retailers identify areas for cost savings and growth.
Eradicating any or all of these common sourcing mistakes doesn’t have to mean added paperwork for sourcing and procurement officers. With the right technology and techniques, retailers can use information they already have at their disposal to reduce risky behavior and supplement their bottom line.