Value Engineering, as a result of Negative Inflation
Hyman made the point that retailers need to be lean and fit, making sure supply chains run super-efficiently. Lead times need to be as short as possible, while still continuing to drive the kind of volumes that businesses need to survive.
For years retailers have kept things very simple in terms of pricing. A buying team sourced the product, did the deal with the supplier and put a mark up on the product; cost plus. But now, to avoid being priced out of the market, some analysts suggest doing things in reverse.
Instead of starting from the sourcing end, it’s been suggested that beginning the process at the consumer end is the way forward. First, you work out what consumers are prepared to pay for a particular product – for example a cup, and then work backwards from that. A buyer is told to meet a supplier and is instructed to pay a maximum price of, say 35p.
This kind of value engineering in products is done selectively by companies such as Sainsbury’s. They understand that this method can only be applied to certain products, so that people recognise the value, whether it be cashmere sweaters against acrylic sweaters.
“I don’t think there’s a hope of getting prices up significantly.”
Richard Ratner
