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Retail Value Chain 101: The Importance of a Strategic Value-Added Services Program

Posted By Administration, Thursday, December 7, 2017
Updated: Wednesday, December 6, 2017


Many retailers require merchandise suppliers to offer value-added services (VAS) in order to do business with them. VAS refers to services a supplier provides to ensure a product is floor or consumer ready when it arrives at the store or can be immediately shipped directly to the consumer. This makes it possible for cartons to be cross-docked through the retailer's distribution center. Store associates can then open cartons and either place the floor ready product on a sales floor shelf or ship the consumer ready product to a consumer without adding price tickets, labels, polybags, hangers, etc.

In addition to saving time and labor for the retailer, floor and consumer ready products provide value to the end consumer at the point of sale and receipt. Common examples of floor and consumer ready VAS include:

  • Retail price marking
  • Ticketing
  • Hang tags
  • Hanging
  • Garments on hangers (GOH)
  • Sizers
  • Folding
  • Size strips
  • Polybags
  • Polybag labels
  • Electronic article surveillance (EAS)
  • Packaging materials
  • Item-level radio frequency identification (RFID)

While beneficial to both the retailer and the end consumer, VAS can require significant labor and time, and the costs can add up quickly. In recent months, suppliers have told us that they're struggling to wrap their arms around the different services that must be performed, particularly those that are on the high end of the cost spectrum such as EAS and RFID. For example, if only a handful of retailers are requiring a certain, high-cost VAS, it can cause an expensive hiccup in a supplier's operations.

Instead of shouldering the full burden of VAS in terms of expense, labor, and time, suppliers should be taking a strategic approach to VAS. That means working with the retailer to determine exactly what services are needed, why they're needed, and whether each service results in more benefits than consequences. Before entering into new agreements with retailers, suppliers need to take a hard look at the VAS process they currently have in place and determine how effective they are.

There are steps suppliers can take to meet the expectations of the retailer or consumer depending on the channel, but still minimize costs and avoid creating additional delays caused by disruptions to normal operations.

To recuperate VAS costs, suppliers might consider building the costs of materials and labor into the product price or upcharge for VAS. Some suppliers do both. To share costs, suppliers can enter into co-op agreements with retailers. Some retailers have preferred providers who offer a discount or advantage to the retailer in exchange for high product flow. Suppliers who use a retailer's preferred provider often realize small cost savings that can actually have a significant impact on profitability.

Suppliers should also consider the cost of materials and labor associated with offering VAS. Based on this information, would it make sense to ticket products in-house, via a third-party service provider, or at the factory? The more that can be done at the factory, the better. Shipments can cross-dock from the supplier distribution center to the retailer distribution center with minimal handling and reduced risk of errors. At the same time, if you're carrying a product for both brick-and-mortar and direct-to-consumer, you'll likely have to perform VAS of some kind before the order is shipped.

In some cases, it could be beneficial to carry separate sets of inventory for certain retailers, channels or order types. You also have to consider system capabilities and limitations. If your technology system isn't or can't be programmed to accept and segregate certain types of information and pass it along to the appropriate areas, you have to determine if it's more cost-effective to update the system or handle it yourself. Cheaper materials and labor could help, but they could also create delays.

Other factors to consider when evaluating VAS requests include a review of past and projected sales as well as the overall cost vs. margin. In other words, will the cost of VAS be adequately supported by future sales and current margins? The answer might be "yes" for some retailers and "no" for others.

Also, what is your offset experience with a particular retailer with respect to floor or consumer ready requirements? Requests for complex services might require renegotiation of terms or exemptions. Is there a promise of a minimum order quantity? It could be worth it to jump through hoops if you have a minimum guarantee.

When it comes to VAS, merchandise suppliers need to analyze the cost and benefits of their offerings strategically instead of saying "yes" to every VAS request. While certain services will be required to work with certain retailers, there are ways for suppliers to reduce, share, or recuperate the costs of VAS while meeting the expectations of the en

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Tags:  Consumer Ready  Floor Ready  Value-Added Services  VAS 

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