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McKinsey Outlines Actual Progress in the Digitization of Sourcing

It’s often easier to count the strife sourcing faces than it is to outline the bright spots, and though opportunity appears to be on the horizon, McKinsey and Company says the gap between where the industry is and where it should be, is still quite a wide one.

Starting with what those paying attention have come to know, McKinsey partner Althea Peng said during a panel at Sourcing at Magic Tuesday that the distribution landscape is being disrupted, vertical retail is being disrupted and new business models are emerging and chipping away at the old ways of the world.

“This digital revolution has led to the emergence of a new consumer across demographics and age groups,” Peng said. “And they are more volatile as the next option is just a click away.”

It has also led to the emergence of a bigger gap between retail’s winners and losers.

“The spread of performance between top performers and bottom is really great,” Peng said.

Between 2013 and 2016, she said, sales growth among retail’s top 10 performers was up 13 percent, average sales growth across the industry was right around 6 percent, and the bottom 10 performers in the sector saw sales growth decline 8 percent. When it came to margins over that same period, EBITDA margin for the top 10 performers was up 24 percent, over a 16 percent average and just a 3 percent increase for the lowest 10 performers.

“This difference in sales and profitability growth creates differences in how companies can invest in the future,” Peng said. “The gap between the winners and losers is going to continue to grow.”

One factor that’s going to see that gap widen, is that not enough companies are realizing how real these demands for digital are. Sixty-four percent of companies surveyed for a recently released whitepaper from McKinsey, said they spend less than 1 percent on their digital sourcing.

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While 73 percent believe predictive analytics will have a high impact on demand planning in the next five years, just 17 percent said companies will actually mature in this area in that time. The same went for 3-D design and virtual prototyping, where 56 percent of companies believe it will be important in the next five years, but only 22 percent think the industry will actually deliver on it by then.

Adding his own insight to the conversation, Tory Burch chief supply chain officer Chris Callileri, said while for some, 3-D printing and virtual sampling become the focus when companies start to think about digitizing their operations, it’s more than that.

“The potential is well beyond just the product creation phase,” he said. “It really does extend through the entire supply chain.”

For Tory Burch, it’s been about creating a base of digital assets in virtual form and tapping virtual prototyping to reduce lead times—and costs.

As Peng chimed in, McKinsey, in its research, has seen a 2 percent to 5 percent reduction in FOB just from reducing samples and the transit costs of shipping them back and forth.

But more than cutting costs, Tory Burch has tried to hone in on what ultimately benefits the consumer most in its journey to a more digitized supply chain.

“Things like speed and cost of material become side benefits, but the focus is really on the consumer,” Callileri said.

And that consumer is going to benefit most from a company that has nailed process optimization, according to Peng. Companies have the ability to run parallel processes now, and should embrace it.

“You’re no longer going one step after another. You need to manage multiple speed models and have calendars that are overlapping each other,” she said. “I don’t think the goal should be for speed or for cost or transparency alone, but really to deliver a better customer experience.”

Offering at least one silver lining, Peng said when asking sourcing executives what they envision for the sector in 2030 they said it will be: fast, transparent and flexible.

The vision at least is there, but whether companies can get out of their own way will be the deciding factor.

“There’s some skepticism here but I think [digitization] just hasn’t been embraced overall across the organization,” Peng said.

Companies will have to come to terms with digitization being the way of sourcing in the future, they’ll have to invest in new talent, bring in data scientists and engineers, equip designers with the new tools they need, focus on fewer, more strategic suppliers and develop partnerships with the entire ecosystem. Those that don’t will be on the losing end of the widening gap between retail’s haves and the have nots.

“The speed of change is only going to accelerate over the next few years,” Peng said. “I know that fashion is always going to be a mix of art and science, but I think there needs to be a shift more to the science side.”