Persistence beats resistance. At fashion retailer Ann Taylor Stores, procurement was not generally regarded as one of the company's key competencies. One executive set out to change that by establishing strategic sourcing as a driver of business value. To do this required a procurement transformation. This is the story of a change management program done right.

By Anthony M. Romano and Foster Finley

Supply Chain Management Review

October 1, 2006

For more than a decade now, we've heard about the large and sustainable benefits that accrue when strategic sourcing is applied as a disciplined regimen. However, many organizations still resist adopting these disciplines and processes. If your organization is one of those — if you have yet to chalk up demonstrable gains from a structured strategic sourcing program — the chances are that you are facing some of the same challenges we encountered at Ann Taylor.

Three years ago, our company had little strategic sourcing to speak of — at least not as far as industry best practices were concerned. Today, 30 months into a very successful procurement transformation program, we have achieved striking gains, both quantitative and qualitative, which have produced solid wins for shareholders and laid the foundation for continuing benefits. In this article, the authors will outline key implementation approaches used to overcome many barriers and potential setbacks along the way. We hope that you will find many of them applicable in your work environment as well.

In Need of a Procurement Transformation

Ann Taylor Stores is a publicly traded, leading national specialty retailer of women's apparel, shoes, and accessories sold primarily under the “Ann Taylor,” “Ann Taylor Loft,” and “Ann Taylor Factory” labels. Founded in New Haven, Conn., more than 50 years ago, the company exceeded $2 billion in sales for the first time in its fiscal year ending Jan. 28, 2006. The store base includes 824 retail stores in 46 states, the District of Columbia, and Puerto Rico.

Ann Taylor's purchasing profile requires both merchandise held for resale (direct materials) and non-merchandise goods and services (indirect materials). Merchandise purchases represent about 48 percent of total sales, or more than $1 billion. Store rent, store supplies, advertising, payroll, and a host of the other items necessary to run a successful retail business cost more than $900 million annually.

Like many retailers, our non-merchandise purchasing activities were historically decentralized and functionally aligned. For example, the construction team — the group responsible for building new stores and maintaining existing ones — had complete responsibility for setting specifications, selecting suppliers, negotiating with suppliers, implementing contracts, executing against contracts, and managing the relationship with the supply base. Similarly, other indirect functions managed strategic sourcing within their own boundaries. Marketing, for instance, purchased and managed all marketing spend such as print, photography, and models.

This structure is relatively common. A function has procurement needs and manages them internally. Item specifications and project needs are tightly integrated with purchasing activities. Each function tends to evolve — consciously or not — an approach to purchasing that is unique to its own requirements. Exacerbating this condition in retail is a general lack of attention to indirect goods and services. Seemingly inconsequential items such as bags are there to contain the goods the consumer has purchased. The store-level feedback would be intense if there was a bag shortage. This stands in sharp contrast to the relative lack of feedback if the bags cost a little too much.

In a fragmented environment such as ours, it was certain that we were not extracting the greatest value from our indirect purchasing spend. Our challenge would be to transform procurement practices through a strategic sourcing and purchasing center of excellence that would help us generate greater value while meeting the functionally-driven product and service needs of the business. Strategic sourcing would provide us with defined objectives, practiced skills, processes, approaches, and techniques.

Co-author Anthony Romano joined the company in June 1997 as senior vice president of logistics with a focus on building a global transportation network to support Ann Taylor's newly acquired merchandise sourcing division. Even at that early stage, the company's CEO foresaw the opportunity for expanding logistical operational excellence into the realm of indirect procurement. However, it was a full three years before Romano could begin to fulfill that vision by adding corporate purchasing to his responsibilities.

Strategic sourcing was not new to Ann Taylor. It had been applied successfully to store supplies (bags, boxes, hangers, register tape, and so forth). This initial, narrow thrust was aimed at rationalizing store supplies with a focus on improved service by: placing one individual over the category, aggregating “the spend,” thoroughly reviewing company requirements, and negotiating improved arrangements with a single-source supplier.

The resulting improvement in store-supplies logistics reduced average per-store expense by 40 percent a year. This success, even in a limited area, validated Romano's suspicion that there were significant opportunities throughout Ann Taylor that could be realized through sound purchasing disciplines — with no compromise to service or quality. These gains would safeguard profitability during the most challenging periods.

There remained two formidable obstacles to embarking on Ann Taylor's procurement transformation. First, despite our early success in store supplies, many functions lacked confidence that new procurement approaches would be beneficial. The fear of service failures, adverse merchandise impacts, and disruption from supplier changes all contributed to what can only be termed outright resistance. The second, and equally daunting, challenge was from senior management. The then-CEO and COO were hesitant to allocate funds to this exercise because of their concerns about shareholders' expectations for a publicly traded company. Would a significant undertaking on non-merchandise procurement dilute precious managerial time and attention? Worse, would it consume scarce financial resources that could otherwise be reinvested in higher-yielding activities?

To develop enthusiasm in the face of a skeptical organization, we therefore developed the following implementation “outline.” It comprises five sequential steps, with an additional two foundational steps applied as needed throughout.

Sequential Steps:

1. Appreciate the Business Context

2. Develop the Strategic Sourcing Vision

3. Plan for Success

4. Drive for Results

5. Harness Momentum for Success

Foundational Steps:

I. Overcommunicate

II. Align the Organization — Tactically and Strategically

A detailed look at each of those steps follows.

1. Appreciate the Business Context

In the fashion retail sector, it is generally held that good real- estate locations and outstanding products are the key success levers. While real-estate locations are more “static,” the upside potential of a promising new retail assortment can have a dramatic impact on key business results. Hence, the lion’s share of managerial attention is on store locations and on building the product assortment. In retail, good sales can cover a multitude of sins. In our case, while sales grew impressively, bottom line profit was inconsistent, and the sales and general administration (SG&A) expense accelerated more quickly than other major financial categories.

On top of that, Ann Taylor’s merchandise is highly “perishable.” The creation (that is, design) and sourcing activities must be coordinated to ensure that the goods arrive in the stores at the same time to “unveil” each new season’s fashion. The clothing elements that make up a season’s wardrobe — for instance, a blouse of a particular size, color, and cut along with a scarf and leather accessory — are designed as an ensemble but manufactured separately, and then matched into the requisite wardrobes at the distribution centers. Unsold items often find their way into outlets at drastically reduced prices. Optimizing this retail mix puts the emphasis on time sensitivity, artistic creativity, and flexibility.

Strategic sourcing can never eclipse seasonal product assortments or store locations as a business priority — nor should it! While the tactical application of strategic sourcing will deliver value to a specific category, systemically ingraining it in the entire organization will require a procurement transformation — starting with a compelling vision.

2. Develop the Strategic Sourcing Vision

Romano firmly believed that sound purchasing fundamentals embedded across the organization would ensure greater profitability even during the retail sector’s less robust cycles. His vision was to reach a sustainable level of procurement excellence for all goods and services by implementing a centralized team and employing consistent strategic sourcing approaches and methodologies. The measure of success would be explicit cash benefits on existing categories, subject to the same or better service and quality levels. For example, building the stores more cost-effectively would generate significant up-front cash and reframe the expense structure of each subsequently built new store. Successfully sourcing print marketing would free up funds that could be allocated to print media.

As a seven-year veteran of the company at the time, Romano was keen to expand his infl uence beyond the logistics network and beyond the relatively small buy of store supplies. He realized a “big bang” approach was needed to get beyond the painfully slow progress in non-merchandise purchasing. There would be only one chance to succeed. If successful, we would have earned the ability to move toward the goal of truly strategic sourcing.

That realization had several immediate implications. First, it required that we start small and grow by choosing categories that were substantial enough to produce financially material results but “low profile” enough not to encounter undue resistance. It also meant that the effort would have to be self-funding. At Ann Taylor, we always assess the timing of expenses relative to the timing of savings. Internally, performance changes can have a direct impact on bonus plans. Externally, unexpected negative variances to quarterly profit may be tough to explain to Wall Street. We knew these conditions would require that we sequence our activities carefully and preserve as much implementation flexibility as possible. We would therefore have to develop and follow a plan that would accommodate these requirements.

3. Plan for Success

Reflecting on how to transition from thought to action, Romano realized he would need to address four key questions:

1. Should Ann Taylor go it alone or work with a partner?

2. What implementation requirements would shape the program?

3. What strategic sourcing categories would provide a sufficiently compelling business case to launch a successful implementation “wave”?

4. What would be the longer-range transformation plan?

Researching various approaches, Romano soon saw how much knowledge about strategic sourcing was available externally. And he quickly developed an appreciation for the implementation expertise that could be harnessed to avoid common pitfalls and improve chances for success. His decision: A qualified partner would be very worthwhile. In the spring of 2003, Romano was introduced to Foster Finley, then a vice president with a well-known management consultancy. They rapidly developed mutual trust, a shared perspective regarding Ann Taylor’s objectives and constraints, and an ability to work effectively together. These attributes would be tested in jointly addressing the other three questions.

Meeting the requirements of the second question proved challenging. The CEO and the COO, who was Romano’s direct superior, were hesitant to allocate funds to a strategic sourcing program. They were particularly concerned about the potential impact on quarterly earnings. A series of joint, exploratory discussions with them led to the criteria under which we could launch the project. First, we had to achieve at least a five-to-one return on the consulting investment. Second, we had to preserve “expense neutrality” — matching dollars out with dollars in within each quarterly reporting cycle from the second quarter forward. Given the financial scrutiny the program would receive, we requested that the CFO join the COO, and us — Romano and Finley — as the core group responsible for its execution. We then developed an overall pro forma quarterly projection drawing from the categories chosen (in answer to part of the third question) and reviewed it in detail with the core executive team. (See Exhibit 1.) Recognizing the plan as realistic, the team gave its stamp of approval.

Answering the third question regarding which categories to include in the initial wave involved a process of iteration. First, we realized we would have to start small within SG&A to prove the effectiveness of strategic sourcing and expand from there. Little of our indirect goods was sourced in a disciplined manner, which meant that SG&A represented a ripe financial opportunity. By collecting baseline data, we identified the most attractive categories based on annual spend, anticipated impact, and degree of diffi culty. (Exhibit 2 depicts those “kickoff” categories.) Admittedly, another prominent criterion for category selection was control. Romano wanted to ensure unwavering category support, and he also wanted, as a personal sponsor, to “take his own medicine”. But, he realized that he had to include categories under other executives’ responsibility to build support and unambiguously prove success.

Based on these criteria, six categories were selected for the first wave. The first three were Romano’s direct responsibility: store supplies, parcel freight, and surface freight. The other three categories were the responsibility of his peers. Fixtures, store equipment, and store maintenance were the construction group’s bailiwick; print products were the responsibility of marketing. Close examination of Exhibit 2 suggests that construction services was another attractive candidate. However, we took a pass on that area, recognizing that it was one with a high likelihood of internal resistance.

We forecasted nearly $10 million in ongoing annual savings from the categories we picked. Impressive though this forecast was, it did not give us a longer-term road map for transforming the company’s procurement capabilities. We were insistent that the success of this effort be parlayed into further gains. The CEO and COO were hopeful but skeptical. They were concerned that while a strategic sourcing effort might mean lower cost, it could also result in commensurately lower quality and value, which would impose big risks to the company’s core merchandising activities. So we continued to stress the objective of overall value improvement as opposed to costcutting. To ease their concerns further, we needed to associate the anticipated savings with a procurement transformation. Toward this end, we prepared and communicated to them the long-term plan shown in Exhibit 3 along with underlying organizational design alternatives, attractive categories, and financial projections.

After 10 months, we were equipped with a compelling business case, a specified list of sourcing categories, an experienced business partner, and a longer-range road map. We had cleared the first set of hurdles. Now we needed to deliver.

4. Drive for Results

The race began on Jan. 19, 2004. Following a competition within the team, the program was dubbed APEX, for “Ann Taylor Procurement Excellence”. Our responsibility now was to achieve or exceed the goals on which we had predicated the program. To maximize our probability of success, we focused on four core fundamentals: a consistently applied strategic sourcing process, intimate involvement and “ownership” from knowledgeable category resources, rigorous program management, and a relentless drive for results.

It’s not our intent here to get into the tactical steps of strategic sourcing. Rather, we will stress several key principles of a successful procurement transformation program. Our top eight include:
• Apply the process uniformly.
• Manage it as a program, not as a confederation of smaller projects.
• Don’t waste time sourcing categories that have inadequate or uncertain sponsorship.
• Communicate with and involve the whole organization as much as possible.
• Obtain and exploit data to support decisions.
• Ensure a consistent face to the supply base.
• Introduce a sense of competition with suppliers.
• Challenge how things have been done in the past.

As a signal of our commitment to the strategic sourcing initiative, we dedicated, part-time, the six most knowledgeable frontline managers for each sourcing category. This was not easy nor was it accomplished with a few phone calls.

Romano worked tirelessly and personally to secure the commitment of key sponsors including the CFO and the senior vice president of real estate and construction. Those executive sponsors came to realize it was better to have their best resources directly involved than to relegate important decisions to others more peripheral to the category. This step also served to extend the sense of ownership within the organization — and to generate buy-in for the hard decisions ahead.

We also dedicated a vice president-level resource to serve as the full-time project manager and to co-lead the overall initiative. To reinforce the sense of a comprehensive program, we kicked things off with a formal, two-day preparation program to familiarize the team with the process and path forward. Later, during the second phase of the project, we instituted a full-time dedicated team consisting of the same vice president and three direct reports.

Following the final approval, we sought to fill at least two of the positions from internal talent so that the team could get up to speed more quickly. We then mapped out a three-year project plan and assessed potential sourcing opportunities to maintain the ongoing five-to-one payback.

Regardless of how well-staffed a program is, it is essential to control, monitor, forecast, communicate, risk-manage, and compensate for the many unexpected occurrences that pop up. So we built a program management office headed by the full-time vice president. We chose Craig Dana, formerly our vice president of strategic planning. It was a great opportunity for Dana to transition into an operating role. He brought strong project management skills, respect from all levels, an intimate working knowledge of the corporate culture, a clear understanding of the change management challenges, and a demonstrated ability to get the job done. Jointly, we simplified protocols, set meeting schedules in advance, and established other practices to make effective use of peoples’ time and to reuse information for as many audiences as possible.

Simple status update forms, like the standard weekly template shown in Exhibit 4, fueled periodic steering committee updates and formed the basis for revised projections.

As in any complex system, individual components may draw too little or too much attention. However, reviewing the system as a whole reveals the necessity of each component. Our agreed measure for our strategic sourcing objective was explicit cash benefits. Remember that we can conservatively put annual savings at almost $10 million across the six categories. But our category team for store fixtures and equipment had their doubts. While they saw that savings were achievable by switching suppliers, they did not wish to introduce business risk and miss the opening schedules for new stores. So we thoroughly unbundled costs, assessed them in detail, introduced competitive bidding, and succeeded in getting substantial gains from many of our incumbent suppliers.

The marketing team was tentative too; they felt that disciplined sourcing would mean less creativity. We identified each option for them and slowly built a comprehensive requirements tool, demonstrating that a limitless portfolio was inconsistent with either their objectives or their past practices. As their requirements became clearer, we were able to work through our sourcing approaches and build a program that generated savings of 52 percent over marketing’s baseline procurement costs. The improvements were so substantial that incumbent print suppliers were required to provide retroactive rebates in order to be considered for future business. We soon swapped out the suppliers that declined our terms.

For its part, the logistics team headed by Romano naturally believed that the best pricing and service were already in place — and doubted anyone could do better. Yet by using detailed lane-level analysis and network review, we even made the best a little bit better.

By being vigilant in the implementations described, our actual results were more than 150 percent of original expectations, including better pricing in our domestic transportation program. The CEO and CFO were excited. The creative types were still a bit nervous, but they were warming up to us. And we had won a few strategic sourcing converts along the way! Now we had the latitude to drive further gains for the organization.

5. Harness Momentum for Success

With Romano’s original vision for strategic sourcing in mind, the plan was to re-establish new leveraged run rates for each of the categories sourced, with clear visibility of the expected savings. We now had the proof of concept and some attractive financial returns for the time and effort expended.

However, without additional effort, we would fall short on many key aspects: sustainability, center-led team, and impact on all goods and services. Fortunately, we had the planning tools and techniques — proven in the first wave — that enabled us to mobilize for the next steps. The first phase began in January 2004 and concluded approximately six months later. Prior to the first wave’s conclusion, we started to plant the seeds for wave two. We forecasted that it would run for four months after the conclusion of the first wave.

We also took this opportunity to gauge the organizational “temperature”. Not surprisingly, many naysayers and fencestraddlers were by now far more enthusiastic about the benefits of strategic sourcing. Our technology team was anxious to get access to the center-led resources to improve their procurement efforts. The construction team was now willing to look at construction services.

Reviewing the plan, we saw that many key aspects were still relevant. But we still had to keep applying good project management principles to accommodate changing circumstances.

By this time, though, we definitely had momentum on our side: We had predicted success on the 5:1 return, but we had achieved a ratio of 8:1.

The second phase concentrated on the newly won converts from the construction team and targeted the significant spend in the construction services category. We also embraced IT’s desire to join the program. And we added another marketing category: advertising and agency media.

We’re pleased to report that phase two achieved payback and results on a par with those of the first phase. Let’s address the two foundational steps mentioned earlier: communications and organizational alignment. These steps apply to any change-management program anywhere. They are relevant whether an organization embraces or resists strategic sourcing.

Overcommunicate

The benefits of a well-structured and - executed communications program are enormous, and the risks are few. We identified four core audiences — each with unique needs, messages, and expectations:
(1) the strategic sourcing team itself,
(2) senior leadership,
(3) Ann Taylor employees overall, and
(4) the supplier community. Here’s how we communicated to each group.

At first glance, it might seem unnecessary to communicate formally to the strategic sourcing team. However, there is a great deal of value in ensuring consistency in the team’s level and depth of knowledge. A logical training program supported with on-the-job actions is the best way to drive a common and shared understanding. A frequently-asked-questions (FAQ) log can be another excellent way to codify information and ensure uniformity. Also, this small, yet core, group is not only an audience but a rich source of information from inside the organization. It is crucial to make sure that the lines of communication are two-way.

The senior leadership team includes category sponsors, the steering committee, the CEO, and the board of directors. Any communication should first concentrate on the topic of greatest interest. The big message for this group is the financial impact of the program (or latest outlook) with an emphasis on maintaining or improving quality and service. Then comes the detail, such as where the team is relative to the plan and whether there have been setbacks with planning or execution.

Once these details have been discussed, the way is clear to address other items of importance. For instance, top management is uniquely placed to clear obstacles or provide resources necessary for successful execution. But prematurely introducing issues such as these can derail discussions and confuse the message. Our results-oriented message, straightforward updates, and plain truths earned us credibility early. Although we were frequently anxious to share details from recently conducted negotiations or updated supplier pricing, such details would have been very distracting. In the end, our focus was rewarded with strong support for a second phase and with clear justification for the dedication of staff resources.

The broad employee base will formulate its own stories about strategic sourcing if one is not proactively provided. Past experience has proven that those versions are seldom preferable to the developed one. Hence, there is a premium on getting the message out and making the first impression. APEX started issuing a newsletter named “Peak Points” aimed at answering reasonably expected questions and communicating key points.

Suppliers constitute the other formally defined audience. They can be divided into two broad groupings: those directly involved with strategic sourcing and all others. The messages should reflect this distinction. For suppliers related to sourcing categories, it is imperative that there be one authoritative focal point for commercial matters. This single point of contact must reinforce the message that a pre-existing relationship, while important, will no longer be key to awarding business or establishing commercial terms. Suppliers have a very strong incentive to retain and grow profitable business. Some suppliers’ reactions may be that this is a passing fad that will come and go quickly enough to have little impact. Other resourceful suppliers will start working their customer contact list to shore up support, revise specifications, and otherwise frustrate your attempts at organization.

We found that a clearly defined message to Ann Taylor employees on acceptable scope of responsibilities — delivered from Ann Taylor team members operating in unison — goes a long way toward curbing undesirable supplier activities. Failing that, we discovered that withholding requests for information (RFIs) or requests for proposal (RFPs) from noncompliant incumbents is a fairly effective attention-getter.

Strategically Align the Organization

There are two aspects of organizational structure in procurement: managing the day-to-day personnel involved and managing progress toward the longer-term vision.

We have reshaped the company’s centralized procurement activities. We defined and began to work toward development of three elements of the procurement function: strategic sourcing and program management, category management, and execution.

Prior to our project, procurement was in functional silos with all three activities in each department and in many cases under one person. In effect, those people were purchasing managers but they had little time or skill to perform strategic sourcing. The organization had more than 50 such managers. We mapped out a plan that would build the center-led strategic sourcing team, reduce those category managers to approximately 32, and redefine purchasing responsibilities to focus on execution against contracts. The cuts did not mean significant headcount reductions; many of the 50-plus individuals were reassigned. Much has been accomplished along this path, but there is still more work to do.

Strategic sourcing is a specific field of expertise that is improved with practice and experience. In creating this centralized group, we focused them on project-like work defined around specific categories. They are typically the keepers of the “methodology” as well. For us, this group is small, analytic, and agile. They are carefully trained in RFP document preparation, detailed analysis of rate schedules, contract terms, and supplier negotiations.

The second element, category management, is just what the name implies. It refers to the individuals who maintain relationships with suppliers, establish requirements expectations, monitor the categories, manage the category strategies, interpret the organization’s needs and expectation on the categories — and periodically team up with the strategic sourcing group to manage a particular sourcing project.

A recent example of this would be our loss prevention team and their category management of alarm services, guard services, and armored car cash pickups.

The final group is execution. These are the many people at all levels who are empowered to make transactions against an existing contract with a supplier. The group can include an administrative assistant booking travel or a store manager sending a parcel package.

Sustaining Peak Performance

Remarkably, we succeeded even though we had an unusual period of senior leadership turnover. During just the three phases of project implementation from January 2004 through July 2005, the COO resigned, the CEO retired, and the department heads for construction, marketing, and information services turned over.

Each executive-level reorientation took on its own life with its own challenges. The new CIO readily embraced the support of a center-led team and was quick to align with the program. Our new marketing officer was more skeptical of strategic sourcing. We compensated by staying involved, providing grass-roots support, and assisting opportunistically. We have maintained momentum and have continued to succeed.

The key ingredients to sustaining our course include:
• Project team perseverance — and consistency of purpose.
• An enduring internal champion (Romano).
• Continued visibility and executive support.
• Consistent communications.

So here we are in mid-2006. We have re-established good run rates in key parts of the business — from global transportation contracts to store fixture packages, to print marketing materials, to technology purchases in both hardware and software. The annual cash-flow savings generated from these activities continue to exceed our internal goal of 5-to-1 payback. 2006 has seen Ann Taylor’s gross margins soar, and our sourcing excellence has certainly helped produce higher operating margins. In fact, we find that categories managed through the process have saved 16 percent on average while improving quality and/or service offerings. We have improved the value equation. Many categories are coming up for their first renewal cycle in 2007.

Kay Krill, who was promoted to CEO in the fall of 2005, is a major champion of operating excellence. She has addressed the product side of the business and turned her eye toward SG&A improvement for the 2007 fiscal year. As we embark on our budget process and build plans for a successful 2007, we are confident that our APEX initiative will continue to be a major weapon in our arsenal for achieving sourcing excellence. It will help give us the right quality, right service, and appropriately identified specifications for the task at hand at competitive market pricing.

As chief supply chain officer, Romano also sees opportunities within merchandise sourcing disciplines. While this function has historically been a very disciplined and strong part of our operations, it represents another area where APEX can make a positive impact. Because of the size of the spend, even a one-percent improvement will yield $11 million in savings. We are exploring how to integrate lessons learned from APEX into the merchandise purchasing category.

An important question remains. How do we know if our transformation has been successful? We have met or exceeded our financial goals. We have positively affected product and service quality. We have trained many internal resources on sourcing methodologies and techniques. We have modified the organizational structure to better support excellence in procurement. But none of these outcomes satisfactorily answers the question.

Perhaps the best answer is found in an analogy we see between a successful procurement transformation and a successful retail offering: There is demand for our offerings.

When we launched our initiative over 30 months ago, we had to continuously promote strategic sourcing, push for involvement, and compete for team resources.

But over time, we have received more inquiries about how we can help. We no longer number our program “waves” because strategic sourcing is now part of the fabric of Ann Taylor. It has been a sustained team effort that has withstood many trials that might have derailed lesser teams.

We did not focus on implementation actions instead of tactical strategic sourcing. We focused on implementation actions as well as tactical strategic sourcing. We are sure that simultaneous attention to both issues has made all the difference.

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