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09/28/2017

Outlook Hazy: “What If” Costing for Retailers

We all attempt to predict the future. Unfortunately, retailers can’t gaze into a crystal ball and predict the factors that might affect their margins.

In a volatile market, retailers must be prepared for almost anything. The unpredictability of the retail industry paired with the uncertainty of the current U.S. administration and continued rhetoric around raising tariffs has many retailers struggling to keep up. It’s been difficult to plan for the possibilities of the future. The retail industry has become more vocal in political conversations, whether around border-adjusted taxes or NAFTA, because so much of the industry relies on stable international relationships. In the face of change, not every company can or wants to vacate the U.S., but those wishing to stay need to be prepared for any eventuality that could impact costs.

Retailers need to reshuffle their tarot cards and reframe their sourcing philosophy to answer any big “what if” questions that may arise. Currently, retailers have limited visibility into full landed costs until after a deal is done, which poses a problem if the anticipated sourcing costs don’t match the actual landed costs. These landed costs can be influenced by a variety of factors, including (but not limited to):

  • Tariff variability

  • Transportation factors

  • Licensing

  • Third-party fees

  • Product destination

  • Material cost and demand

Reading the trade tea leaves

Any potential tariffs or change in material costs could impact retailers’ relationships with the international community, including suppliers, manufacturers and end consumers. Instead of trying to divine meaning from tea leaves, retailers that employ “what if” costing practices — and solutions — see an accurate snapshot of how their demand is distributed across the world. With technology that provides full visibility into all the possible variables, retailers can account for trends around commodity pricing, currency fluctuation and spread of volume across suppliers, ultimately allowing them to make fully informed and more accurate business decisions.

Even the unpredictability of natural disasters can be accounted for using a “what if” costing approach. Maybe abnormally high seasonal rainfall in an area makes one of your garment factories susceptible to potentially devastating mudslides. Predictive costing tools can calculate the impact of those worst-case scenarios and provide guidance on how retailers should respond, giving them the ability to quickly and confidently make decisions when the time comes.  

Without advanced technology, retailers are using outdated manual methods such as Excel to manage their costs — and often, they skip the predictive “what if” costing process all together. Instead, retailers that invest in technology that provides them a crystal-clear view into all possible scenarios remain fully informed and better equipped to make accurate decisions. Retailers require technology that allows them to see all the information from different suppliers on a single screen before even thinking about costing, making it easier to assess the “what if” scenarios for each option before making a decision. With this information, retailers can simplify the complexity that goes into global trade and purchasing, saving time and effort by providing all the information they need in one place.

Retailers that can gaze into the future and apply a “what if” costing approach to engage suppliers will find it improves their margins, reduces administrative costs and mitigates risks that come with fluctuating currencies, geographic or political issues, and labor hazards.

 

Ann Diamante has directed retail merchandising, private label development and operations for some of the largest U.S. retailers, and currently serves as chief product officer at Bamboo Rose.