For retailers, the lure of private brands is irresistible. Products bearing a store's name build customer loyalty and corporate identity, even as they deliver higher margins. But any strategy that places a greater reliance on privately branded merchandise must also address a host of complications on the supply-chain side.
Office Depot, with nearly 1,000 stores in North America, is working to boost the use of its private brand. Already the retailer offers some 3,000 SKUs in that category, ranging from copy paper to printer cartridges. The goal is to increase private brands from 15 percent to 20 percent of all products in the coming year, according to H. Dennis Cohen, director of private brand operations.
The benefits are compelling. "The first thing is margin and sales enhancement," Cohen says. Office Depot is out to create a national brand that consumers will associate with greater value, either through lower prices or more features than branded products. Margin improvement is especially important in retail, where promotional costs and other types of overhead can take a big bite out of profits. For the most part, privately branded goods don't require extensive advertising and promotions, so merchandisers can offer them at lower prices than branded equivalents, yet still make more money on them.
With private brands, however, comes the need for greater control over the supply chain. Office Depot manages its house brand every step of the way. It begins, says Cohen, with qualifying the factories that will turn out product. Typically, purchase orders for branded merchandise will indemnify the retailer against risks. "On the private-brand side, we take a lot of that on ourselves," Cohen says, "because it's our name on the product."
Quality is paramount. Private branding began as a way of offering consumers cheaper versions of popular products. But Office Depot won't associate its name with low-quality merchandise, Cohen says. It works hard to ensure that all vendors are producing to its strict standards, while meeting the company's ethical guidelines for working conditions and safety. That becomes even more important as Office Depot extends its private brand into items that are more technologically sophisticated.
Controlling the whole process is the Office Depot supply chain. "It's the operational backbone to the private-brand business," says Cohen. Internal managers oversee product design, sourcing, testing, new-product introduction, packaging, logistics, financial controls, security and environmental requirements. On the direct import side, the company is intimately involved with all supply-chain partners, including factories, carriers and third-party logistics providers. It asserts control over inbound carriers for direct imports, while allowing more leeway for domestically sourced goods. And it operates a nationwide network of 10 cross-docks to service stores, and 20 customer service centers for business customers.
Office Depot doesn't have many vendor-managed inventory (VMI) programs for privately branded products. "Since it has our name on it, there's a reluctance [among vendors] to hold on to it," says Cohen. But that's not always the case with private-label producers. Cott Corp., the world's leading manufacturer of retailer-branded carbonated beverages, sees big opportunities in VMI and other forms of collaboration with its customers, according to director of supply chain Jeff Stites. Speaking at the Logicon conference in Las Vegas last year, he called VMI "the holy grail from my standpoint. It demonstrates maximum value to customers. And getting to that point is very, very critical for me."
Still, said Cott, when it comes to the accurate forecasting of demand for privately branded goods, "there's no room to mess up." Demanding retailers won't tolerate stockouts caused by exclusive suppliers who don't make enough product; nor will they accept excess merchandise when forecasts turn out to be overly optimistic. And there's no secondary market or alternative channel for most unwanted, privately branded products.
Private branding is also gaining a strong foothold in higher-end retailing. In 2003, the Saks Department Store Group launched an exclusive home-fashion line under the name of actress Jane Seymour. "It's a unique product offering that creates a destination brand," says Karin Bursa, vice president of marketing with supply chain software vendor Logility Inc., Atlanta. (Kmart's popular Martha Stewart line is an even more familiar example of designer products that are really private brands.) But the deal meant Saks had to manage a full-fledged sourcing business, with all its accompanying supply-chain processes.
Saks has moved gradually into the private-label arena, with the Jane Seymour line representing its biggest effort to date. Like many who try out the concept for the first time, the company turned to an independent sourcing provider to oversee manufacturing. When retailers become more comfortable with such programs, they often hire internal teams to manage the whole process, Bursa says. Either way, Saks must keep close tabs on the progress of its goods from raw materials to store shelves.
Similar demands exist for producers of private brands. Rockline Industries, the largest supplier in North America of store-brand baby wipes, moist towelettes and coffee filters, needs access to real demand at the point of purchase, says Bursa. Yet, despite their close relationships with retailers, private-brand suppliers often aren't privy to promotional plans and other events that require a surge of inventory. Branded merchandise usually has better information because its producers engage in co-promotions with retailers. Unless they have tight information links to customers, Bursa says, private-brand vendors could find themselves without enough lead-time to meet changes in demand. And that could severely damage the relationship between vendor and retailer.
Logility's Global Sourcing Management Tool is designed to coordinate activities between retailers and offshore manufacturers, who are becoming an increasingly important part of consumer goods supply chains. Given the price points of most private brands, manufacturers of such items are especially drawn to low-cost countries such as China. Yet a longer supply line complicates the ability of vendors to exchange information with their customers, and get product to market in a timely manner.
Key processes that require strict oversight by retailers include requests for proposals (RFPs) from vendors, as well as systems for achieving real-time visibility of production and shipping status. Asian-based manufacturers can update their customers via an internet browser, replacing labor-intensive modes such as fax, phone and e-mail, Bursa says.
From Soup to Nuts
A retailer launching a private-brand strategy often will begin by researching consumer trends, especially in the fashion sector, says Jennifer Loverude, product manager of Minneapolis, Minn.-based Retek Inc. (The vendor of software for retailers recently was acquired by Oracle Corp.) Internal designers or consultants scrutinize everything from product type to color and style, then set sales goals and margin expectations.
Retek's design software serves as a collaboration tool for designers who need to work closely with suppliers to match ideas with reality, through "storyboards" or other types of documents that can be conveyed electronically. They must also be able to make changes in items and develop appropriate packaging, Loverude says.
Suppliers respond by attaching images of the products they have on hand, including such specifics as fabric, fiber count, and garment weight. In the process, they build out specification sheets that can be easily altered. It's vital that both parties work from the latest version of a design scheme, says Loverude.
Next come key sourcing decisions. The retailer determines whether it will manufacture the product itself, or turn to a third-party agent. Either way, the supply-chain partner must be able to comment on the retailer's request and deliver specific information on price and quality. On the cost side, the parties must come up with an all-inclusive estimate that figures in the many details of transportation.
The pre-production phase has retailer and supplier focusing on quality, to ensure that the product to be manufactured matches the customer's standards for materials and workmanship. Here, actual samples of the product are sent by courier or parcel carrier, but the partners also must be able to upload electronic images to a centralized database so that the supplier receives timely feedback on its production plans, Loverude says.
Finalization of manufacturing involves both parties agreeing to a given design and order quantity. The accompanying information is stored in case the retailer wants to make use of it for the next season. In addition, the system creates reporting capabilities which track such vital statistics as sales and adoption rates.
The collaboration software isn't just suited to apparel, says Loverude. Retek has customers that sell furniture, candleholders and a variety of other home accessories. It hasn't been deployed, however, in the grocery sector, where strict regulations on product formulation and recipe management call for a somewhat different approach. Still, says Loverude, grocery and consumer goods retailers must achieve the same high level of collaboration with suppliers, consultants and third-party agents in order to ensure the success of a private-brand strategy.
Of equal importance to all privately branded products is the issue of cost control. Loverude says retailers need a system that can provide detailed cost breakdowns-the kind of information that isn't usually available with branded merchandise. (For apparel, they must factor in such elements as customs duties and display costs, especially for garments on hangers.) When it comes to private labels, Loverude says, "the goal is to get better margins-and that all comes down to cost."
The Source of Savings
Where private brands sit side by side with branded merchandise, the former aren't always cheaper to make, says Tillman Estes, director of business development with SAP Labs LLC in Waltham, Mass. Privately labeled products might even be coming from the same manufacturer as their branded equivalents. For the retailer, savings come from supply chain efficiencies, allowing it to offer the brand at a lower price.
What's needed, says Estes, is an adaptive supply chain, one that permits the sharing of data across all trading partners, whether manufacturers, subcontractors, distributors or transportation providers. Such a network is especially vital for private brands, because retailers often will have no history of a product's performance in the marketplace. Every new privately labeled product amounts to a gamble by the retailer that consumers will be motivated to purchase it. Until a private brand gains its footing, it must compete with goods that carry years of hard-earned brand identity, made by established consumer products manufacturers and backed by massive advertising budgets.
Matching supply with demand is essential. Sellers of private labels are out to source and move goods at a lower cost, even as they struggle to create brand recognition, says Estes. The last thing they want is to be forced to put product on sale simply to clear shelves of unsold inventory-or dispose of it outright.
SAP's Inventory Collaboration Hub allows all supply chain partners to come together in the planning, manufacturing and execution of private-brand strategies. "Everybody needs to understand where product is," Estes says. "They have to match process expectations with product performance."
The goal, as with every type of retail product, is to create a "pull" environment, in which shipments are geared to actual demand instead of imperfect forecasts. But Estes says the notion of a pull-based supply chain is even more important on the private-label side. As a product nears the end of its life, the retailer needs real-time signals that will allow it to retire the item at the right moment. Food products require a similar system, given their reliance on freshness and expiration dates.
Estes touts the idea of "responsive replenishment," whereby retailers can restock shelves more than once a day. That dream is inching closer to reality, he says, thanks to a combination of portal technology for supplier-retailer communications, radio-frequency identification for inventory tracking and control, and the integration of point-of-sale data with planning systems.
Advance planning and optimization (APO), coupled with Web-based portals, help suppliers to forecast demand based on real- world consumption, Estes says. They even allow suppliers to practice VMI, reducing the retailer's inventory burden until merchandise is needed for sale. Portals link the customer with transportation providers, who can get information about loads in advance, and forecast their equipment needs accordingly.
Gurdip Singh, director of retail services with i2 Technologies in Dallas, agrees that private brands are on the rise. In consumer electronics, up to 60 percent of the production line might be private label, he says. "It's a unique way to look at the supply chain, not just as a cost center, but as a potential differentiator for the business."
One i2 customer, a consumer-electronics retailer, has been altering its merchandise mix to place a greater emphasis on private-label goods. The strategy forces the company to confront "a clean slate" with regard to issues of sourcing and control. In place of prepaid arrangements with providers of branded products, the retailer must start from scratch in such areas as vendor selection and determination of demand variability.
A key factor in that process is deciding which products can be made overseas, creating a longer pipeline, and which are better produced closer to the customer. Retailers must distinguish between high- and low-margin goods, and account for the risks inherent in each type, Singh says. Assortment planning, therefore, begins to assume a higher degree of importance in retailers' supply chain management efforts. That task might previously have been left to the suppliers of branded merchandise.
Companies must be able to translate so-called range plans for merchandise assortment into actual plans for the receipt of goods from the producer. "Gaining that control," says Singh, "can easily extend information that the shipper considers absolutely critical to drive the supply chain."
Private-brand producers share with their branded counterparts the need to exchange information across the organization, as well as with outside supply chain partners. Various departments must cooperate in driving the planning process down to the smallest details, Singh says, "as opposed to throwing it over the wall."
Another i2 customer, looking for greater control of its private-label business, found it necessary to reorganize the company so that planners and supply-chain managers were working closely together, instead of in completely separate worlds. The project began with the company's desire to make the supply-chain group more knowledgeable about tracking both products and demand, Singh said. Now, inventory managers use the information to do replanning on a daily basis.
Private-label retailers can't avoid spending money on systems that permit greater control over the entire supply chain. But the result can be a boon to the company's ability to compete on all fronts. It prompts retailers to share their vision of long-term materials and capacity requirements with their manufacturing partners, says Singh. When it comes to working off a forecast of demand, all parties possess "one version of the truth." And that can only lead to a leaner, more responsive supply chain.
As companies increasingly turn to Asia for sourcing of both branded and private-label merchandise, the need for tight collaboration with suppliers becomes greater, says Eric Lamphier, director of product management with Atlanta-based Manhattan Associates. The internet becomes the primary tool for the exchange of information, as partners seek to overcome the problem of distance through relatively low-cost technology and easy-to-manage systems.
Software from vendors like Manhattan offers capabilities such as inventory visibility and purchase-order negotiations over the Web. The system can even oversee basic warehousing activities such as order processing, pick and pack and labeling. In the process, retailers gain a precise picture of which shipments are on the way from suppliers. And they can participate in dynamic routing, making last-minute changes in line with the needs of individual stores.
In essence, the act of managing private-label supply chains is no different from that of branded merchandise. Office Depot makes no distinction within its physical network of carriers and warehouses. But it values the ability to manage a complex, end- to-end supply chain for products sold under its own name. "We require more benchmarks and self-auditing," says Cohen. "There's a higher standard of requirements that we ask of our vendors."
|Private Labels Are Growing|
|Sales of private-label brands in U.S. supermarkets grew by nearly $1bn in 2003, the last full year for which figures are available, according to the Private Label Manufacturers Association. Store-brand sales were up by 2.2 percent, versus growth of 1.4 percent for national brands. The numbers come from PLMA's 2004 Private Label Yearbook, based on data from Information Resources, Inc.|
Drug chains saw growth in private labels as well, rising by 7.7 percent in dollar sales for the year, compared with 1.7 percent in national brands. One out of every three new dollars entering the drug channel, and two out of every three new units sold, came from private labels, PLMA said.
Combining the figures for U.S. supermarkets, drug chains and mass merchandisers (minus Wal-Mart Stores, which doesn't release figures), private-label annual unit share grew to 19.6 percent from 19.4 percent during the year.
Over the past five years, PLMA said, store brands have seen an overall sales increase of nearly 18 percent, versus 14 percent for national brands.
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