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Optimization of indirect spending can transform retail business

Comfortable shopping drives to increase the popularity of E-commerce, which reduces indirect cost. By utilizing this opportunity, retailers can boost return on sales by as much as two percent.

Imranul Imran

Retail business in the world is facing challenges due to E-commerce emerging as a competitive sector with retailer business within shortest possible time. In this modern era, people are concerned about their shopping time and due to the boundless working hour, E-commerce is becoming a big economic catalyst in business and affects the contemporary retail business world.

Comfortable shopping drives to increase the popularity E commerce which reduces indirect cost
Figure 1: Comfortable shopping drives to increase the popularity of E-commerce, which reduces indirect cost.

The Wall Street Journal recently reported that retail margins decreased from 10.5% in 2012 to 9% in 2016, as online revenues increased from 10.5% to 15.5% of total sales during the same period. Credit Suisse has estimated, there will be 8,600 store closings this year in the US alone, which is more than the total number of closings during the 2008 recession.

To mitigate the scenario, retailers must rethink indirect spending as a potential opportunity for business growth rather than just burdening in business. Indirect spending means the goods and services that retailers purchase but do not resell—are equivalent to 10 to 15 percent of sales on average, and most retailers know that their indirect spending is far from optimized.

Moreover, retailers should be more concerned about sale procurement rather than just procurement staff in order to sustain their business and their continued growth of revenue.

Figure 2: Typical breakdown of indirect costing in a retailer.
Figure 2: Typical breakdown of indirect costing in a retailer.

To consider this data about the retail business, Mckinsey & Company shared their views as an expert to boost up retail business as well as possible transformation to keep pace with contemporary market arena. These considerations, as well as new techniques for the optimization of indirect spending, are given below:

Cross-functional team

The Cross-functional team acts more proactive rather than just procurement staff. The Team should not do for less pricing negotiation with suppliers that actually diminish their business in various cases. This team should find the potentiality where a company should invest and how the company gets the return on investment. Think about longtime marketing strategy rather than quick response and logistics issues that will transform the retail business in the new way and optimization of indirect costing.

Spend Visibility

Application of digital technologies supported by Artificial intelligence and digital procurement solutions can be able to decentralize the costing from root level stage that will ensure optimization of costing in business and monitor the total task spontaneously to take better future decisions for further investment.

Consumer Insight

The Customer is the key driver of business. In the age of the fourth industrial revolution, using cyber-physical systems as well as regular survey and strong research to know about consumer perceptions in retail service such as cleaning and better ambient environment for customer shopping. For growth improvement and accelerate the retail business, Authority must do product design and sourcing according to consumer perception.

Design to value

By taking consideration on product dimensions, and data from cashier surveys, as well as using digital analysis, which is derived from cashiers, baggers, and vendors, the retailer determined the ideal dimensions of a shopping bag based on the distribution of physical volume and weight of products. Statistics show that the retailer reduced the cost of its paper shopping bags by 25 percent by redesigning them.

Clean sheeting

Digital clean-sheeting tools can reduce indirect costs by as much as 40 percent in a category. Such tools typically feature algorithms for determining costs in various NFR areas, dynamic databases of input costs (such as raw-material index prices), and a sophisticated calculation engine.

Speed control

Digital procure to pay tools to give retailers better spend control by enforcing more discipline in how suppliers are set up and approved, and by supporting a more rigorous PO-approval process.

Zero-based budgeting

Using digital tools (and enabled by increased spend visibility), retailers can easily build detailed bottom-up budgets, detect the exact drivers of variances, and take swift action to close gaps named ZBB that was first gained traction in consumer-goods companies, can be powerful for retailers, especially in store-related NFR categories.

Closer collaboration with supplier

The retailer must give policy support towards supplier and to be a counterpart in their innovation that is actually a win-win approach where both parties are benefited to boost up their respective business. Closer collaboration with the supplier, the retailer can easily decrease the number of suppliers that will pave the way to enhance supplier performance and credibility and reduce cost drastically in most cases such as warehousing.

In doing so, retailers are saving as much as 10 to 15 percent off their annual indirect spend, capturing impact worth 1 to 2 percent in return on sales, and seeing a more than the fifteen-fold return on the cost of their NFR sourcing team.

Business transformation

By adaption these techniques, the retailer can transform their business but the challenge is to sustain these changes to keep with maintaining the business growth and returns on investment. Experts suggest retailers to use Influence model to sustain their business and handling behavioral changes in new transformation.

Fostering understanding and conviction

Leading retailers lay out a clear case for change and help each stakeholder connect to it on a personal level. An important aspect of the changing story is communicating why savings are needed and what they will be used for. Allowing business units or functions to reinvest part of the savings can increase motivation. (One initiative leader at a retailer put it this way: “Half goes to the CFO, but the other half we get to keep.”) The head office should, of course, have enough visibility into the reinvestments to ensure they align with corporate priorities and generate strong returns.

Business transformation
Figure 3: Influence Model.

Intelligent target setting also helps foster understanding across the organization. Targets should be based on detailed diagnostics, including benchmarking against a relevant peer set. Otherwise, stakeholders will reject the targets as arbitrary; there is also a risk of damaging the business by pushing it into “slash and burn” cost-cutting.

The diagnostics should yield not just a single target—say, $100 million in cost savings—but also a set of quantified initiatives. Targets should include cost ratios (for example, logistics spending as a percent of sales) rather than just absolute numbers, to ensure that cost efficiency genuinely improves even when the category experiences tailwinds. (For example, a decline in logistics costs due to a decline in sales is not really an improvement.)

Reinforcing with formal mechanisms

Any kind of change in any organization depends on how stakeholders react to this environment and changed behavior. Ensuring dedicated ownership and taking company target as personal employee target as well proper coordination within officials can change the total procurement procedure and better optimization of indirect spending in the field of NFR (Not for sale) procurement and management services.


Most of the retailers have significant opportunities to reduce indirect costs. The first step is to acknowledge that the potential exists, and then conduct a thorough investigation to quantify it. Though challenging, a transformation in indirect spending can yield greater profitability, funding for growth, and competitive advantage.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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