How the web bests the beast of private brand production
By Paul Demery
There’s nothing better than a strong private label brand in a retailer’s mix
of products. It goes a long way toward giving a retailer its own style that
sets it apart from other merchants, and it can produce fatter-than-usual profit
margins.
But that’s only if it’s managed well. Retailers have long used a strategy
of merchandising private label brands of apparel and other products, but they’ve
also struggled to maintain control over them. Now the Internet and new web-based
software applications are changing that—fast. In fact, after only a year of
involvement in a web-enabled supply chain management system for private label,
Dillard’s Inc., the Little Rock, Ark.-based chain of 342 department stores,
is sold on the process. “Using an Internet-based collaboration vehicle is the
only way to communicate with suppliers,” says Mike Hodapp, production director
for Dillard’s.
A quantum leap
Because the Internet provides universal access to shared databases, it is
quickly becoming the infrastructure that private label managers need to stay
connected with multiple and often distant suppliers. The Internet itself, of
course, is just an information pipeline. But new web-based applications from
companies like New Generation Computing Inc., QRS Corp., SupplyChainge Inc.,
Freeborders Inc., SPS Commerce Inc. and others are offering merchants new means
of controlling their private label supply chains.
“Because we can all use the ‘Net for free and create databases that all can
see, this is a quantum leap, making it efficient to source around the world
instead of just domestically,” says Alan Brooks, CEO of New Generation Computing.
“Managing effectively many time zones away was virtually impossible before the
Internet because it was impossible to create a proprietary communications network
and too costly to have high-speed network lines all over the world.” He notes
that retailers often source from 30 or more countries.
Although the market for web-based private label sourcing software is still
new, it’s expected to grow significantly. “The two hottest technology investment
areas in retailing next year will be strategic sourcing and retail revenue management,”
says Paula Rosenblum, retail research director at AMR Research Inc. “These are
two areas that can significantly affect margins, and better margins are what
retailers need to get.” She and others note that margins on private label goods
can run 30-40%, compared to 20-30% for national brands sold at retail.
Rosenblum, who is working on a study of sourcing software for the retail industry,
says competition and the overall state of the retail market will force merchants
to improve margins by cutting costs and avoiding excessive markdowns rather
than by increasing prices or expanding sales volumes. As retailers enter 2003
under pressure to improve financial performance, she adds, they will drive up
demand for web-based software systems that help them source and manage production
of private label apparel and other goods. And that will help retailers achieve
their objectives of cutting costs and avoiding markdowns, she says.
The trouble with private label brands is that a merchant has to manage numerous
details on how they are sourced, produced and delivered—difficult tasks to manage
when many suppliers are in Asia and other parts of the world. “The challenge
with imported product is that you expect it to just show up on the assembly
line one day,” Rosenblum says. “But you need to know if there’s a supply chain
problem and how to react to it.”
No more faxes
Because there may be several sources of materials throughout a supply chain,
brand managers must stay connected with a number of companies to assure proper
use of materials and that production deadlines are met. With many manufacturers
in distant parts of the world, brand management can be extremely costly and
time-consuming. On top of that, many chains manage hundreds or thousands of
production projects a year.
At Dillard’s, Hodapp says private label sourcing used to require exchanging
hundreds of faxes with suppliers, who in turn had to exchange production documents
with their tier 2 and tier 3 suppliers. With a web-based system, he says, Dillard’s
now not only gets immediate communication updates from its main suppliers, but
it can also view correspondence up the supply chain to its supplier’s suppliers.
This enables it to check on the production and logistical processes of every
product feature, down to zippers and buttons. Dillard’s, which first implemented
a web-based system last year, is switching to a system provided by QRS Corp.,
Richmond, Calif. “It helps us get products in stores faster,” Hodapp says. “And
we know which suppliers work best.”
Managing inventory risk
New software is also helping retailers better manage the risk associated with
sourcing merchandise that can quickly go out of fashion or out of season. If
a supply of private label fashion doesn’t arrive on time, or arrives on time
but with the wrong components, the retailer runs the risk of losing a major
selling opportunity. “The bane of apparel manufacturing is that you have to
make a big bet up front, months before you sell the stuff,” says Greg Girard,
vice president of AMR.
Still,
the benefits of private label merchandise are so large that such products have
become crucial to retailers’ strategies. But until recently the Internet itself
was not reliable enough or ubiquitous enough to support such broad networks
of foreign suppliers. Now it has reached higher levels of security and global
connections, coinciding with applications designed to run over the Internet
offering real-time data for managing and analyzing the variables of sourcing
internationally.
The pool of new supply chain management products for sourcing private label
brands is continuing to evolve. For example, SupplyChainge Inc. is offering
a Lead Time Optimizer application that helps manage excess raw material supplies
so a retailer can avoid over-production of seasonal merchandise and the typical
markdowns that follow.
New Generation Computing has launched ETMS, a web-based event-tracking and
management application that enables retailers and suppliers to coordinate multiple
calendars for monitoring production according to deadlines. And SPS Commerce
has introduced a web-hosted application for reporting events or changes in production
along the supply chain.
All of these applications help a brand manager to better control and react
to unexpected changes in their supply chains. With the right information soon
enough, they can make alternate plans to avoid being without the right product
for an important selling season, and to avoid having to sell products that arrived
too late at sharp markdowns.
New Generation Computing specializes in the market for retailers that can
integrate supply chain data from multiple sources that include company-owned
as well as outside-contracted factories. “We can manage all details for factories
that retailers own, and also work with outsourcing factories, so that all information
comes back to headquarters for one consolidated view of work in progress,” Brooks
says.
Girard of AMR notes that New Generation appears to control the niche for production
monitoring software that sits on servers at the factories themselves as well
as at the retailer’s headquarters. “Every retailer’s ability to manage sourcing
depends on the factory’s ability to track work in process and commit capacity,”
says Girard. He adds that if factories have effective planning and process control
systems, they have better insight on production capacity and can better meet
production deadlines. In some cases if the retailer is a big enough customer,
the retailer can influence the technology that the factory uses. “So there is
one view in headquarters, regardless of whether information is coming from company-owned
or outsourced factories,” Brooks says.
Controlling the calendar
Many of the web-based supply chain management tools include events calendars
that help retailers and their suppliers monitor production deadlines. At the
beginning of a production cycle, for example, a retailer and supplier would
work out a series of production dates—say, Jan. 15 for a factory to receive
fabric and color dyes, Jan. 20 to receive fabric trimming, and Jan. 25 to begin
sewing. It’s traditionally been difficult for brand managers to get updates
on these deadlines in time to react to any interruptions. But with the automated
systems, production workers must log into the system to record the completion
of each step. If they do not do so, the retailer gets an automatic notification
that a step has missed deadline.
Brooks notes that suppliers often declined to provide brand managers with
useful information on production updates because it was either too time-consuming
or because the supplier did not perceive any benefit in transferring the information,
which was typically maintained in spreadsheets and not set up for data transfers.
But by participating in a web-based management system, suppliers are forced
to report status to the retailer. Suppliers in turn can see how well their own
materials are moving through the supply chain.
Brooks says the price to license ETMS, including set-up fees, averages $5,000
to $10,000, depending on the number of factories. There is also annual maintenance
fee equal to 18% of the licensing fee. There are no transaction fees. ETMS and
related modules of New Generation’s e-SPS suite are currently being tested by
retailer Wilson’s The Leather Experts Inc. and Kellwood Co., a manufacturer
specializing in private label apparel.
In addition to looking into a supplier’s factory, the web enables retailers
to collect information from throughout the supply chain, including data related
to logistics for both raw material and finished product. Having up-to-date logistics
information such as that available from SupplyChainge’s software is helping
retailers consider more cost factors when determining the true cost of sourced
product, Girard says.
“The focus now for earnings is to reduce finished goods inventories, which
expose the retailer to markdowns,” says John Thorbeck, CEO of SupplyChainge.
“There’s a new urgency, because of the poor economy but also from a demanding
investment community, that insists on better profit performance. The habits
of the large inventory environment—high-markups, high markdowns—are no longer
acceptable.”
Broader thinking
SupplyChainge is conducting pilot programs with two retailers, including a
large private label apparel retailer.
SupplyChainge’s Lead Time Optimizer tool enables retailers to conduct what-if
analyses that factor in the costs of logistics and inventory warehousing as
well as the costs of sourced products themselves. This enables them to predict
overall costs related to keeping products that don’t sell out during expected
selling seasons. Thorbeck says the Lead Time Optimizer tool can help lower the
risk of ordering raw materials for finished goods by shortening the lead time
for ordering them. “The retailer can react to changes in sales close to season
and even in season,” he says.
“We’re not a sales forecasting tool or a merchandising plan,” says Thorbeck,
who is former president of footwear manufacturer G. H. Bass & Co. “We’re
providing information to help retailers decide when they should pull the trigger
on committing inventories and when they should delay their decision on making
a commitment to receiving finished goods.”
Information that retailers use in SupplyChainge’s Lead Time Optimizer tool
integrates with their back-end enterprise resource planning systems and can
be shared over the web with trading partners throughout the supply chain.
As promising as the new brand-sourcing software is, successful implementation
will require retailers to think more broadly when figuring costs of merchandising
private labels. “They’re giving retailers the ability to prioritize their sourcing
strategy in view of the fashion and season risk,” says Girard. “But retailers
will have to break cultural norms and common metrics of how buyers’ performance
is measured, such as including logistics costs.”
paul@verticalwebmedia.com
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Here for the 2003 Guide to Web-Based Supply Chain Solutions
