Rethinking Commodity Sourcing Strategies—The Lifeblood of Retailers and BrandsJanuary 8, 2018
Is “commodity” a dirty word in retail? If you’ve read the Market Watch and Consumer Experience Marketing columns in this month’s issue, you might be left with that impression. But as you’ve probably found before, the same word can have multiple meanings and connotations depending on their context. That comes into clear focus when we discuss commodities.
When referring to finished goods, as those previous articles do, the definition takes on a more negative tone, along the lines of “a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors other than price.” That’s not a good thing for retailers and brands looking to differentiate. But as we learned during a recent interview with Pedro Carmo, Director of Global Sourcing for Daymon, the term has a very different meaning and connotation in the context of sourcing.
According to The Economist, “commodities are vital components of commerce that are standardized and hence easy to exchange for goods of the same type, have a fairly uniform price around the world (excluding transport costs and taxes) and help make other products.” Put more simply, they are the critical building blocks of all other products—think corn, wheat, soy and rice, which are made into a million other items.
So when it comes to sourcing, commodities are the lifeblood of retailers and brands. But for years, many have neglected to take a strategic approach to value generation when negotiating for them, says Carmo. “Their approach has often been more tactical due to a variety of factors, including a lack of deep commodities knowledge by category managers, their frequent rotation between categories, business pressures and price instability. All of these lead to a survival-mode mindset, which does not promote efficiency and value generation,” he explains.
Daymon’s sourcing team is working to help its retailer partners rethink their strategies in order to move to the type of smart sourcing that’s becoming a critical component of retail competitiveness. Carmo points to a recent example where a retailer partner asked the Daymon sourcing team to launch a tender for tomato sauce because they wanted to get better prices. The request was received in January so that the tender could be done in February, as the retailer had always done. But instead of simply following the retailer partner’s historical timeline, the Daymon team went back to basics—analyzing everything tomato, including news, crop outlook, harvest seasons and price evolution.
“Our initial impacting conclusion was that this tender negotiation was being performed in a period that was not the most suitable one for tomato sauce. By looking at the harvesting season and combining that analysis with tomato price evolution over the last five years, we reached the conclusion that one of the first things our client had to do in order to get better conditions was to change the tender date from February to July, as this was the month with lower tomato prices over the last five years,” explains Carmo.
The recommendation was accepted by the retailer, and future tenders started to be done in this month, allowing the retailer’s buyers to negotiate the best possible prices. “This demonstrates the importance of strong commodities knowledge in negotiating with suppliers and reaching defined category goals,” says Carmo. “Knowledge is power, and knowledge allows us to make the best strategic decisions, and well as to best implement tactical measures that help generate more value. At Daymon, sourcing is foreseen as a strategic tool and building and sharing knowledge around sourcing activities is paramount for retailer to generate as much value as possible.”
To learn more about Daymon’s global sourcing and supply chain services, contact Vipon Kumar, Chief Sourcing Officer, at email@example.com.