Adam Fein: Using technology for private label success

PRIVATE LABEL GROWTH
Our new research study Facing the Forces of Change^®: Lead the Way in the Supply Chain found private label products are expanding rapidly in business-to-business supply chains. As in consumer markets, products are becoming increasingly commoditized as supply chain customers shop for the low cost suppliers.

Wholesaler-distributors have recognized the opportunity to provide alternative products and help customers with sourcing, instead of only providing a sales channel for branded manufacturers. On average, 43 percent of wholesaler-distributors currently sell their own private label products, although there are substantial differences between the six major product types in our study. For example, almost one-half of building materials wholesaler-distributors currently offer private label products, compared to only 23 percent of contractor supplies wholesaler-distributors.

The lower costs and ready availability of overseas sourcing opportunities in Asia and South America are enabling wholesaler-distributors to get their own value-priced private label products manufactured. About 57 percent of wholesaler-distributors with private labels currently source their private label product from an overseas plant. By 2012, 81 percent of these wholesaler-distributors expect to be sourcing overseas.

Our interviews and surveys revealed that wholesaler-distributors are importing private labels from a wide range of countries, including China, Korea, Taiwan, India, (South) Chile, Canada, and Mexico. However, we heard most about China, which has emerged as an important source of imported products throughout the U.S. economy.

The supply chain costs of margin
Private label products offer wholesaler-distributors the opportunity for increased profitability by capturing the branded margin that would otherwise flow to an upstream manufacturer. Since private label products are less expensive to purchase, a distributor can earn a higher margin even when the products are priced at a discount to national brand products.

One wholesale distribution vendor explained the benefit to his customers as follows: “Large manufacturers have relabeled generic accessory products for many years, thus capturing extraordinary gross margins from accessory sales. We sell what are, in essence, the exact same things more economically.”

However, these margin benefits come with additional supply chain costs. Sourcing from China or other countries offers lower product acquisition costs, but the length and complexity of these inbound supply chains can reduce or eliminate any potential margin improvement. Here are a few of the major obstacles facing wholesaler-distributors:

• More inventory. Geographic distance makes planning more difficult because lead times are much longer and more uncertain. Direct sourcing from an overseas contract manufacturer requires a wholesaler-distributor to purchase and warehouse larger quantities than typically ordered from a supplier with domestic logistics. Ironically, global sourcing strategies by wholesaler-distributors represent a trend opposed to the demand-driven channel trend described in the new Facing the Forces of Change® report. 
• Lack of visibility. International supply chains are less automated, so many of the technologies and processes available from domestic suppliers will not be available. However, one recent study found that best-practice companies were able to track activities throughout the global sourcing process using Internet-based technology.
• Unanticipated logistics costs. Global sourcing increases direct shipping and transportation costs. However, most companies without international experience lack internal benchmarks for understanding freight costs and managing discrepancies. For example, China's logistics and transportation infrastructure is much less developed and highly fragmented.   

PLANNING FOR SUCCESS
Integrating supply (purchasing) and demand (sales) operations is essential for successful sourcing of private labels. This process is sometimes referred to as Sales and operations Planning (S&OP). Here are three strategic recommendations for wholesaler-distributors evaluating their ability to source private labels.

Reap the benefits of automation. Wholesaler-distributors with more automated warehouses are best positioned to efficiently source private label products. A warehouse management system (WMS) enables more accurate decisions about inventory levels and product storage, such as real-time stock information that eliminates manual inventory counting. (See The coming automation boom.)

Create demand-driven customer relationships. Distributors can also reduce supply chain risks from private label sourcing by better measuring customer demand and building more accurate forecasts. For example, wholesaler-distributors and their customers can share point-of-sale and product movement information electronically through vendor-managed inventory (VMI). VMI refers to the practice of making an upstream supplier responsible for determining order size and timing by a downstream customer. VMI relationships allow a wholesaler-distributor to gain visibility about a customer’s actual usage rather than just seeing a customer’s orders. (See Demand-driven customer relationships.)

Choose appropriate products. Private label supply chain costs will be lowest for products with more predictable demand, relatively stable raw material input prices, and longer shelf-life. These are often MRO (Maintenance, Repair, and Operating) products that provide superior performance and are not marketed by national brands are particularly successful. Examples include bright copy paper, carbide round tools, mechanical wedge anchors, molded or extruded shapes, spray foam insulation, and floor care products, to name just a few.

Source from the right geography. Some recent supply chain studies recommend that companies with weaker inventory and technology systems should only consider sourcing private label products from local sources in North America. The reduced cost and process fluctuations in the inbound supply compensates for the fact that this strategy rarely yields production costs as low as Asian sourcing.

The growth of private label products reflects the new value proposition for wholesale distribution intermediaries in business-to-business markets. Wholesaler-distributors can best take advantage of this opportunity with modern S&OP processes.