December 31, 2002, 12:00 AM

How the web bests the beast of private brand production

New web-based applications are offering merchants new means of controlling their private-label supply chains.

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.

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