Strengthen The Weakest Links
Retailers need to make sure every part of their private label supply chain is running as efficiently and lean as possible — and not hurting their profit margins.
In recent years, "running lean" has been a popular phrase for companies trying to survive in the turbulent economy. To stay afloat, operations and find places to make cuts — in staff count, inventory, third-party spending or even the number of stores.
Retailers also have had to watch supply chain costs on the store brand side and eliminate unnecessary spending. Karin Bursa, vice president of marketing with Logility, an Atlanta-based provider of supply chain software applications, says retailers need to bring store brand products to market as cost-effectively as possible if such items are to be price-competitive on-shelf.
"We're trying to reduce costs so that we can protect the margin contribution to the retailer," she says. "You've got to be able to plan effectively."
What's the forecast?
Forecasting is critical for planning effectively, Bursa says. If a product is over-ordered, retailers could end up with a cluttered stockroom or (in the case of perishable items) spoiled products. Under-ordering can be just as harmful — potentially leading to loss of customers.
"The Grocery Manufacturers Association tells us that the first time [a brand is missing from shelves], the consumer is likely to select an alternate brand," Bursa says. "But on the second or third time, they're likely to leave the store and shop elsewhere."
So how does a buyer determine how much product to order? Obviously, there is no magic number that retailers can give to their supplier partners — although stores sell more cans of soup in the winter than in the summer, and more beer during the football season than in the off-season. And when a product becomes part of a special promotion, Bursa says demand could increase by as much as 300 percent.
But software providing real-time information could prove useful to retailers as a means to better forecast demand. Ted Vaughan, partner with the retail and consumer product practice of Chicago-based consultancy BDO USA LLP, recommends investing in logistics systems/service providers that offer greater visibility and real-time information to ensure stock levels are optimized.
Bursa says her company's software has a basis of more than 60 algorithms built into it to help forecast a specific SKU's performance. A retailer could use that forecast information to determine how much of a product to stock and how often to replenish it.
On the move
Beyond forecasting and ordering, a retailer needs to ensure it is using the best method of shipment. Is it better for a retailer to handle its own distribution, or should a third party be involved? For larger retailers, a third party might not be necessary, says Patrick Penfield, assistant professor of supply chain management at Syracuse University's Whitman School of Management.
"Any time you go through a third party, you're going to pay more, expense-wise," he explains. "That's one of Walmart's initiatives — they're going to see a pretty sizeable increase in profit margins."
Earlier this year, Eduardo Castro-Wright, vice chairman of Bentonville, Ark.-based Walmart, announced plans to consolidate global sourcing as "a major source of leverage for the company in the years to come." A Jan. 4 article in the Financial Times said the retailer spends roughly $100 billion on purchasing private label products, but it sources less than one-fifth of those goods directly from manufacturers. Walmart plans to increase that share to 80 percent.
"[Walmart expects] an increase of 5 to 15 percent margin just by going to a manufacturer," says Steve Robinson, senior vice president of operations for Transplace, a Dallas-based third-party logistics provider. "But the reason Walmart can do that is because they have volume, and if you have volume, you have the ability to work [directly] with manufacturers."
But small- and mid-sized retailers still might need to rely on a third party to manage distribution. And unfortunately for them, the distribution process for store brands can be more complicated than that for national brands. Retailers generally outsource manufacturing for store brand products, so the bulk cost for transportation and logistics are allocated to that particular product's volume, Robinson notes.
"A national brand, on the other hand, is typically manufactured and distributed more broadly to multiple retailers, and thus in higher unit volumes across many different geographies within a given retail channel," he says. "This volume discrepancy is a major factor in determining the cost leverage a product enjoys in regard to transportation and logistics costs."
Robinson points out that private label products — which generally are distributed in smaller volumes than national brands — tend to move via less-than-full-truckload shipments to the distribution center. On the other hand, national brands are more likely to move in larger quantities via less-costly full truckloads.
"Of course, these [private label] products are typically manufactured at costs at or below that of the national brands," he adds. "Thus, retailers can most likely enjoy higher overall margins, despite what could be a slightly more expensive supply chain," he adds.
Don't settle for less (than a truckload)
Penfield says solutions are available to help retailers move own-brand products in cost-effective full-truckload shipments. Specifically, he points to a program from Kane is Able, a Scranton, Pa.-based consumer packaged goods logistics company.
Called LoadCon, the software combines smaller loads based on factors such as when and where an order was placed, ship-to points and the customer's requested delivery date. When shipment requests come in to Kane from multiple suppliers, they are downloaded into the program, which then builds full-truckload shipments. The truckload's cost then is divided between manufacturers that have products on the truck.
Customers have complete online visibility of their order status throughout the process. According to Kane's website, the software provides a 20 percent to 35 percent savings over less-than-truckload freight costs.
Mind the pack
In addition to avoiding partially full trucks, Dick Metzler, chief marketing officer for Dallas-based Greatwide Logistics Services, advises retailers to use less packaging — enough to protect the product while taking up as little trailer space as possible.
Penfield agrees that over-packaged products are an often overlooked money-waster.
"It's an unnecessary expense if you have a huge monster box and you're shipping a small item in that box," he says.
Penfield also believes retailers can use the package reductions and fewer trucks going out as a marketing advantage. The initiatives equal a reduced carbon footprint, which makes the retailer more appealing to the eco-conscious consumer.
Cost-reduction opportunities don't end with full trucks and less packaging, though. Lewis Taffer, chief marketing officer with iGPS, an Orlando, Fla.-based global pooling systems provider, says plastic pallets with RFID tagging — such as the ones his company produces — might cost more than traditional wood pallets, but they can weigh up to 30 percent less, resulting in a better return on investment and a reduced carbon footprint. In addition, a plastic pallet's solid deck provides more rigidity than slats, which Taffer says reduces the chance of product damage. And with RFID tagging, retailers can keep track of their product throughout the distribution process.
Mark Barratt, Ph.D., assistant professor in the Department of Supply Chain Management at Arizona State University's W.P. Carey School of Business, says it's more important than ever for retailers to have full visibility of their private label items, no matter where they are in the supply chain. Retailers then are able to pinpoint where unnecessary distribution costs might lie, as well as to reduce the chance of products becoming lost.
Retailers also want to decrease the chances of product damage during distribution. To help keep products intact, CHEP — another Orlando, Fla.-based global pooling systems provider — built an "Innovation Center" to evaluate the performance of its customers' products, material-handling equipment and packaging within the supply chain. Through the Innovation Center, CHEP can simulate the conditions products experience in the supply chain — including extreme heat and cold, humidity, compression, vibration and impact.
Making the cut(s)
Retailers aren't just keeping a careful eye on distribution, however. Barratt notes that more retailers are keeping a close watch on their manufacturing partnerships and consolidating where necessary.
"Retailers ... are also working more closely with product designers to produce products that are more distribution-friendly in terms of being easier and cheaper to distribute," he explains. "This is supported by retailers' rationalizing their contract manufacturing supply base, which, in turn, increases the volume for the manufacturer, which, in turn, reduces their production unit costs."
Certain retailers have a particular advantage when it comes to cutting production costs, Barratt adds. If a retailer is large and has a national market presence, it often is able to leverage its economies of scale and scope to drive down the cost of private label goods.
"This leverage can be further increased by the level of dependency created by the retailers in terms of absorbing manufacturers' production capacity," he notes.
Walmart is one retailer that leverages its size here, Barratt notes.
"Once these contract manufacturers have 'tasted' the benefits of, for example, Walmart's presence in so many parts of the United States — which has the potential to drive high levels of sales — this forces the contract manufacturers to commit more of their resources to meeting demand for Walmart's private label products," he explains.
The situation becomes a self-perpetuating cycle, according to Barratt. When the manufacturer commits more resources to the retailer, it becomes more dependent on the retailer's business. In return, the manufacturer is faced with meeting the retailer's ongoing drive for cost reductions — or else it will risk losing a large chunk of business. As a result, the retailer has the privilege of being able to make demands to lower costs on its store brand goods.
The SKU roll call
Along with saying goodbye to some of their manufacturing partners, retailers also are examining their SKUs and determining which should stay and which should go.
"There's too much variety," Penfield says. "The SKU proliferation is just incredible, and unfortunately, it could really be costly from an inventory and cost standpoint. So you're going to see more with this SKU reduction just because of expense."
But how can a retailer best determine whether or not it should dump a slow-moving or unprofitable SKU? The "2010 Food, Beverage and Consumer Products Financial Performance Report," released in July by PricewaterhouseCoopers and the Grocery Manufacturers Association, contends that a retailer should keep a slow-moving or unprofitable SKU if it generates a larger basket ring or differentiates the store from its competitors.
In the end, retailers need to make sure they're examining every SKU in their stores. After all, if a product isn't making money, it doesn't matter how efficiently it is sourced, moved or stocked — it will end up hurting profit margins. Penfield believes that an open discussion is important between the retailer and the manufacturer not only on the distribution side of the supply chain, but also in product development.
Vaughan agrees, saying that research and development is a critical process when it comes to the private label supply chain. As consumers continue to turn toward private brands, retailers will need to better understand who their customers are and what products they want.
"This information is valuable in improving the quality of store brand products," Vaughan concludes, "which consumers have developed a greater expectation [for] as the private label market has matured in the U.S."
Top 5 Supply Chain Cost Drivers
- Overall transportation costs
- Labor productivity
- Truckload rates
- Sales forecast accuracy
- Coordination between supply chain functions
Source: Members of the Supply Chain Consortium of Tompkins Associates, Raleigh, N.C.