Boosting Return on Sales Through Effective NFR Expense Management

November 18, 2022

Goods not-for-resale (NFR) are the categories of goods a retailer utilizes to conduct business and deliver a product, but are not themselves products.  Some examples are store signage, POS terminals, shipping materials, office equipment, utilities, cleaning services and supplies.

For many retailers, NFR expense management falls to the bottom of the long list of strategic priorities. At first glance, why wouldn’t that be the case? A typical retailer spends less than 20% of sales on NFR goods and services, meaning that when it comes to addressing spend, direct merchandising procurement often receives the most focus.

NFR procurement groups suffer from poor visibility into the organization’s spend, limited influence with business stakeholders and executives, lack of investment and training, and no process for monitoring and tracking ongoing savings. At many organizations, an NFR-focused procurement team might not even exist at all.

Much more commonly, NFR is managed in silos by business functions whose objectives don’t include cost containment. As a result, NFR budgets grow each year without genuine challenge or thought as to true ROI. When functions with limited procurement capability own NFR vendor relationships, stakeholders can also become defensive of suppliers and resistant to challenging or negotiating incumbent providers.

Experience with more than 50 retailers demonstrates that retailers can reduce NFR spend by 6%-10%, and increase margins by 90-150 basis points, through effective NFR expense management. To achieve these results, retailers must make NFR expense management a strategic priority rather than an afterthought.

Before addressing specific best practices that efficient retailers are using to manage NFR expenses, however, it’s important to establish the business case.

Consider the retailer below, who operates at a 4% margin, with NFR expenses representing 16% of sales (illustrated in figure A). A focused effort on reducing NFR expense drove an average cost reduction of 6% across NFR spend. Tracing the impact of this reduction to the P&L (figure B), the retailer recognized an increase in return-on-sales of 96 bps, or almost 1%: 

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The chief financial officer of the retailer above may be surprised to find that, to drive an equivalent impact to return-on-sales, the organization would have to boost sales revenue by 24%.

Following are four strategies for converting bottom-line impact from concept to reality.

Gain true visibility to NFR spend. While NFR spend may typically comprise less than 20% of sales, 80% or more of an organization’s vendors (typically, thousands) are providing NFR goods and services. When vendor fragmentation is coupled with siloed buying, decentralized contract storage and disparate financial systems, many NFR procurement initiatives can quickly lose steam. A necessary and foundational first step toward driving a holistic NFR cost optimization strategy is the establishment of a clean, procurement-centric view of spend that groups vendors providing like products and services into a multi-tier sourcing taxonomy. (UNSPSC or general ledger codes will not suffice.)

Develop a savings roadmap. Once spend visibility is achieved, a detailed execution plan should be developed to define sourcing opportunities, aggressive but attainable savings goals, and specific plans to achieve targets. Interviews with business owners, contract analysis, and benchmarking (where possible) will help validate targets and prioritize identified opportunities. Thought should also be given to resourcing; we recommend a hybrid approach where opportunities are segmented and responsibilities are assigned, considering elements such as the benefit of cross-organization spend aggregation and criticality to business operations.

Importantly, the roadmap should be socialized with, and presented to, an executive steering committee to garner sponsorship and ensure accountability.

Optimize total spend, pushing beyond price reductions. To maximize impact from NFR expense reduction, organizations should assume a total spend optimization (TSO) approach. Sourcing strategies for material NFR categories must consider savings levers beyond price (which can double or triple savings potential), including demand and process levers, as illustrated below:

NFR Category

NFR Subcategory

Example Price Levers

Example Demand Levers

Example Process Levers

Marketing

Creative Agencies

Review agency rates against industry benchmarks, bundle spend across distinct spend areas to increase leverage

Eliminate redundant scopes to ensure there is not excessive content or campaigns, diluting overall impact and efficacy of investment 

Move spend from an external agency partner to the internal team, work to more closely tie performance to compensation

Distribution Operations

Corrugated Boxes

Leverage total spend to implement preferred vendor and reduce unit pricing

Rationalize SKUs across DCs, challenge specifications (e.g., convert from 32ECT to 29ECT box strength)

Develop cost model to evaluate benefits of automated box erector/sealer

Technology

IT Third-Party Labor

Review rate cards to standardize roles and rates across organization, consider fixed price versus T&M models by need

Maximize leverage of offshore resources

Model ongoing expense of 3-5 year managed services model versus model growing internal headcount

Stand up ongoing category management. Research shows that within a year of sourcing execution, up to 30% of procurement savings may evaporate for a myriad of reasons, such as pricing overcharges, “maverick” spending, supplier non-compliance, supplier gamesmanship, and limited savings tracking.

To ensure that the projected financial impact of NFR expense reduction programs materializes in P&L improvements, we recommend developing a thoughtful plan for NFR savings tracking and sustainability.

Best-practice category management entails a highly data-driven approach to managing deals. Retailers need to collect line-item detail data from suppliers, thoroughly cleanse and normalize the data, analyze the data using category-specific analytics, and continually monitor spend and key performance indicators via procurement-focused data visualizations that drive insights into billing errors, SKU rationalization, failure to meet supplier service-level agreements, and incremental demand optimization opportunities.  Establishing strong category management practices for NFR spend might seem cumbersome, but these actions are critical to ensuring P&L impact, driving continuous cost reduction and managing risk.

Curious as to the potential impact on your organization specifically? Fill in the inputs below to “size the prize”:

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 A concerted focus on NFR expense management can deliver rapid impact to retailers’ P&Ls in the form of a 90-150 bps improvement to return on sales. Yet, when finance and operations leaders in retail organizations ask themselves: “Is my NFR expense management world-class?” the honest answer is generally not even close.” Fortunately, the journey to effective NFR expense management can often be measured in quarters, not years, and the ROI to retailers is compelling.

Erik Trum is senior manager; Brian Prantil is senior vice president, and Jake Wojcik is executive vice president, of Insight Sourcing Group.

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