Go Direct, Young Man

Despite the headaches, more companies are turning to do-it-yourself sourcing.

Generally speaking, office-supply retailer Staples is not known for selling its own merchandise. Instead, the company has built a nice business selling such well-known brands as 3M, Avery, and Panasonic. So what are managers at the $14.4 billion (in revenues) company doing overseeing a network of far-flung factories that churn out pens, paper, and a host of other products?

Eliminating the middleman, as it happens.

As part of the Framingham, Massachusetts-based company’s strategy of building its own line of products, the retailer is now purchasing goods directly from cross-border suppliers and manufacturers. Toward that, the company has employees flying in to such remote locales as Indonesia and Vietnam. Those workers haggle with local producers, audit quality and labor practices, and figure out how to ship merchandise to the company’s 1,600 stores. Says Paul Gaffney, Staples’s executive vice president of supply chain: “What started as a fledgling purchasing operation mostly handled by others has matured into a true Asian-based sourcing organization.”

Direct sourcing is not new. Multinational giants like Chrysler and Colgate-Palmolive have been doing it for decades. But now the urge to purge go-betweens is catching on with retailers and smaller manufacturers. In the past, such companies relied almost exclusively on agents to procure products.

Indeed, many retailers, ranging from Target to Federated Stores, are looking to buy more without agents. Even companies that have been sourcing direct for years are pushing the direct approach to new levels. Hewlett-Packard, for one, not only purchases computers and monitors directly from its contract manufacturers, but it also sources parts and materials on behalf of those manufacturers.

Big Savings on Moldy Sneakers

Not surprisingly, cost is driving the switch to direct sourcing. This is particularly true in the retail sector, where cutthroat pricing from the competition (aka Wal-Mart) is forcing rivals to focus on high-margin, private-label goods and wring new savings out of procurement. By sourcing goods directly, Gaffney says, Staples is shaving about 10 percent off the net average cost of its house-brand products. “Whenever you can eliminate folks who along the way have to make their own profit,” he says, “you can save money.”

You can also save some aggravation. Shipping goods from China to North America by boat takes three-and-a-half weeks (air cargo is faster, but prohibitively expensive). Hence, there’s no time for corrections if problems with a product aren’t discovered until delivery. Notes Paula Rosenblum, director of retail research with Aberdeen Group: “With direct sourcing, you don’t want to wait for your shipment to get here to discover that the canvas sneakers you ordered are moldy.”

The desire for greater control is behind the sourcing strategy at Pacific Alliance Manufacturing Group, which makes such brands as Nicole Miller and Gloria Vanderbilt Knits. CFO Jake Pleeter says that while the company still uses buying agents, it now works more closely and consistently with a smaller number of factories. “We have worked hard to take factories, teach them best practices, and then give them enough volume so they’re captive to us instead of handling work for 10 other manufacturers.”

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