Private Label products form a significant and growing portion of the consumer products market.  Retailers are partnering up with manufacturers to create store brands or, for smaller retailers, to sell a “generic” a private label brand to gain strategic market advantages. According to the Private Label Manufacturers’ Association (PLMA), one of five items sold in supermarkets, drug chains and mass merchandisers in the US is now store brand.  Selling private label goods can increase margin, add differentiation of the retailer and its brand, improve customer loyalty, and keep the retailer focused on its core competence.

 

Private label has become a cornerstone of successful retail strategy – and not just as a low-priced option.  Premium private label products are coming to the fore.  These products offer consumers a quality private label choice as well as providing retailers with an additional selling point for their stores. 

Recent Information Resources, Inc. (IRI) research published by the Private Label Manufacturer’s Association (PLMA) shows that sales of store brands increased by nearly $1 billion in supermarkets and $270 million in drug stores for 2003 versus the prior year. (Figure 1.)

 

The pattern of increased sales and greater market share for private label was also true in IRI’s report on the combined channels, which consists of US supermarkets, drug chains, and mass merchandisers (except Wal-Mart). Private label annual unit share increased from 19.4% to 19.6%, out-gained national brands by a nearly three-to-one margin in dollar volume, and accounted for 31% of all new business across the combined channels.

 

As a result, many manufacturers are turning to private label.  Private label production offers opportunities, but also poses challenges.  Defining and achieving success in private label manufacturing requires disciplined processes and systems – both human and IT.

 

Opportunities: Private label manufacturing opportunities offer good growth potential.  For branded companies, it can increase utilization of manufacturing capacity.  When compared to branded products, private label has simple sales and marketing and minimal need for trade funds or promotional strategies.  Furthermore, private label manufacturers’ R&D costs are lower, because they are fast followers, not innovators.  Private label supply makes a manufacturer the steward of the retailer’s brand.  In some cases, branded suppliers build relationships and gain shelf space at key retailers for their branded lines by agreeing to supply private label also.

 

Challenges:  Despite the growth opportunity, private label manufacturing presents many challenges.  Perhaps foremost among these is that manufacturers have less visibility and control of planning than with their own brands.  The retail customers have the control, but usually don’t understand lead times, packaging and run minimums, procurement and wash-down for special ingredients, or other basic operating issues involved in production.

 

While the manufacturer spends less by not planning promotions, most retailers can’t give them accurate forecasts.  A few major retailers have the supply chain prowess to supply the requisite data, but most do not.  Rather than point-of-sale data, they often send unconnected warehouse data, or order in large quantities to save freight costs.  This creates unreliable numbers on which to plan, as well as artificial spikes of demand.  Worse, retailers expect to have their private label stock available, even if the buyer forgets to mention a promotion or special need.

 

Private label can also lead to enormous product variety and mix.  For each private label product, either the label or package will be customized to the retailer; therefore, more private label customers means more SKUs.  In many cases, the addition of premium private label products has led to a proliferation of SKUs for individual retailers.  Some customers may own or specify unique recipes, packaging, and raw materials. Worse still, retailers have larger private label lines than is economical. 

 

Successful private label products deliver value. They compete well with some of the best-selling branded products, and thus increase the retailer’s income for a product slot.  To deliver value, producers must be agile in R&D and production to keep up with branded product changes.  At the same time, they must take care to avoid patent issues with makers of the branded products they are designed to compete with on the shelf.

 

While having many private label customers forces SKU proliferation among manufacturers, having only one or a few key private label customers presents risk of business volatility because most retailers don’t treat these as strategic relationships.  Many retailers change private label suppliers fairly freely, based on per-unit price.  As a result, manufacturers struggle to educate retail buyers on their differentiators, quality, and the costs of changing suppliers.

 

Process Disciplines to Define and Achieve Private Label Success

 

Since private label products generally sell for 10-20% less than branded goods and up to 40% less in Europe, manufacturers must be low cost producers to generate acceptable margins. (Figure 2.)  Retailers benefit only if consumers perceive their store brands to have consistent and comparable quality and availability in relation to branded products.  Therefore, certain disciplines are critical to achieving margins, quality, speed, and agility.

Evaluate Margin Potential: A manufacturer may or may not ever sell high volume on a given SKU or retailer’s label, which makes it challenging to achieve a profit.  In addition, private label service targets – for which fines are levied when not met – are often set, not negotiated.  As a result, manufacturers must manage the risk-reward-benefit equation for each customer, and be willing to turn down unprofitable business.

Measure Service: To grow a private label business, priorities, processes, and systems must all converge on keeping the retail customer happy.  Kim Schindler, Customer Service Manager for Cliffstar, North America’s largest private label juice manufacturer says, “Being private label, with most trading partners it’s make-to-order. It’s not like they can order today and we ship tomorrow because a private-label manufacturer’s inventory levels aren’t high. We need to produce our product and ship it out in 10 days.”  Private label manufacturers must educate their retail customers’ buyers, so they understand the tradeoffs between high customer service levels and low-cost production. 

 

Cost Each Customer: Perhaps more critical, private label manufacturers need to calculate the cost of doing business with various customers.  Based on the complexity of distribution, as well as number of labels, families and SKUs for a particular customer – and how much visibility retailers provide and the terms of the contract – the cost to accept and fulfill orders for each customer will vary.  (Figure 3.) Some customers may not be profitable.

 

Prioritize by Profit: Based on how much it costs to satisfy a customer, manufacturers should employ different rules in handling service issues or stockouts.  When there is contention for constrained resources, companies can calculate the tradeoff between using capacity vs. incurring fines for missed shipments.  Savvy private label manufacturers will run a profit and loss (P&L) financial statement for each customer in preparation for contract negotiations.

 

Know the Channels: There are differences between retailers.  Major mass merchants have focused on supply chain issues and are usually easiest to work with.  However, they tend to demand lower prices, dictate terms and dominate volumes.  Many grocery chains are not as sophisticated in planning, tend to want more SKUs than is cost-efficient, and try to push costs down to the suppliers.  Smaller retailers tend to be less automated, but are pragmatic about costs – so they may be agreeable customers, but the manufacturer must do most of the planning. A new channel is emerging as well – dollar stores. Industry experts say that by 2010, there will be more dollar store outlets than supermarket units, so private label manufacturers need to have a strategy in place.

 

Manage Risk: Risk is particularly high in private label, since the manufacturer does not set strategy and retailers can easily switch suppliers.  One approach is to create a customer team for each major account with representatives from all departments.  Mapped-out procedures with checkpoints can help ensure nothing is left to chance.  Branded manufacturers that want to use capacity for private label but are not primarily building a relationship with the retailer might consider two business units with shared resources.  Private label has different and conflicting business issues, cost structures, and even goals than branded products.

Supply Chain Planning System Requirements

 

Private label manufacturers have particular needs for supply chain planning (SCP) software, because they have critical issues around customer service and cost, and don’t have visibility into consumer demand.  They also have shorter planning windows due to lack of planning control and the make-to-order (MTO) process.  As a result, planners must aggregate demand at the packaging level (when the customer’s private label is applied) or manufacturing level (for custom products), not at the shipping point as with most consumer products. 

 

Critical components of supply chain planning applications can help manufacturers meet retailers’ service levels and maintain profit margins.  This involves certain functionality and characteristics against which companies should evaluate solutions.

 

Performance management: If you can’t measure it, you can’t manage it.  One role of software is to set plans and measure against them.  Another is to manage by fact, not feeling – and give people reliable information to see tradeoffs and make sound business decisions.  As noted above, costs will vary for each customer.  A measurement system that includes ABC analysis helps people focus on the critical items and customers to ensure profitability and service. 

 

Frequent S&OP: Balancing supply with demand, the core functionality of Sales & Operations Planning (S&OP), must be a frequent exercise to produce what customers need despite short notice of real demand patterns.  S&OP – or one-number planning – is a way to keep all departments working to the same plan.  The S&OP concept is that rather than separate sales, marketing, production, distribution, and financial plans, all of these departments will come to consensus about a single plan, and build their departmental plans using appropriate views of the same “one number” of what to plan for in a given period.

 

Demand planning – Most retailers do not provide as much information about demand as a company would have for its own branded products, so the private label manufacturer must build history for each customer on which to forecast and plan demand.  Because of the MTO nature of private label, the demand plan needs to break out details by customer and item – not just product family.  The key in private label is to take multiple demand streams from various customers to create a single plan for the company.  Demand planning is key to procurement, and provides a platform for sales to review plans with customers, to help gain more visibility into demand and events.

 

Inventory planning – The most sophisticated retailers will ask for Continuous Replenishment Planning (CRP) or Vendor Managed Inventory (VMI) so that the manufacturer will replace what was sold.  Even with the retailer’s input of min/max levels or days on hand based on scans, service levels can never reach 100%.  Still, the SCP applications can help increase inventory turns and in-stock levels while also reducing inventory on both sides, and minimize claims or fines. Private label manufacturers also need to manage soft and hard new product rollouts for the retailer, which is made more challenging by the lack of control.

 

Production planning – The cost and efficiency of production and packaging operations relies on a system to plan, schedule, and sequence materials through the production process.  Planning rules that respect the impact of changeovers, focus on packaging line bottlenecks, and synchronize other operations are valuable, as are those that support quality, wash downs, and issues such as Kosher certification.  Quick re-planning is key to success, since demand often becomes visible fairly late in the process. 

 

Technology Characteristics – In addition to functionality, private label manufacturers need the following system characteristics:

§            Rapid Change – The system must help people react quickly to inventory, production, or distribution issues as well as outside news, trends, or new branded products.  These may trigger changed plans and strategies or just alert users to a problem so they can handle it.

§            Alarm on Exceptions – Management by exception prevents being overwhelmed by data.

§            Visibility & Collaboration – Collaboration is particularly critical to private label manufacturers since retailers generally don’t provide good point-of-sale data.  Major mass merchants will have a system for this, but others won’t, so the manufacturer must own the ability to improve forecast accuracy.

§            Integration Among Planning & Transaction Systems – To set inventory policy and avoid out-of-stocks, companies must gain the holistic view of forecasted and planned vs. actual.  This requires all of the above SCP functions to integrate with each other and core transaction systems.

§            Track Key Metrics – Key performance measures keep everyone synchronized on the company’s priorities.

§            Manage Different Rules per Customer – Inventory and service levels will be based on contracts as well as the cost/profitability of each customer.

§            Deliver History To Help Sales Negotiate Based On P&L Per Customer – Sometimes the best way to get better visibility into demand is to show the customer what the costs are.

 

Lean Systems and Staff – SCP systems must minimize risk and be low cost to own, implement, and operate, since cost is a key factor in private label operations’ ability to turn a profit.  Private label manufacturers aim to run lean, and often have fewer people and minimal IT bandwidth.  They cannot afford risks in implementation or operation. Many are also mid-size companies, not Fortune 500 giants with large staffs.  So the system must be intuitive and encourage even relatively non-technical people to make full use of the systems’ ability to improve their decisions.

 

Prescient, sponsor of this paper, is a leading provider of retailer-centric supply chain planning software and solutions with the functionality needed to handle the complexities of private label manufacturing, including visibility and collaboration.  Customer Kim Schindler of Cliffstar says, “We chose Prescient because we can map our systems to our trading partners’ requirements.  And because Prescient gives us real-time inventory data, Cliffstar can make the product on demand and ship it out in days.  We know what’s on the retailers’ shelves, how fast it’s moving, and when that’s likely to change.  Prescient has become our eyes at the shelf and reduces the number of ‘we want it in three days!’ requests from happening.”

 

 

About Industry Directions Inc.

 

Industry Directions is a hands-on manufacturing and supply chain industry analyst and consulting group.  The company delivers operational strategies, industry intelligence, and leadership perspectives that result in strategic advantage to manufactured product supply chain participants and solution providers.  Its senior team applies industry intelligence and methodologies to help companies of all sizes achieve growth and market leadership.

 

For more information, visit www.industrydirections.com, or call (800) 635-2175 or (508) 362-3480.

 

 

 

About Prescient

 

Prescient empowers consumer products manufacturers and distributors, enabling them to maximize their relationships with retailers and trading partners.  Prescient gives suppliers the ability to adapt to each of their customers’ changing business and compliance needs while improving their own decision-making across the entire supply chain. The company’s supply chain software and services incorporate greater visibility into real-time demand and point-of-sale information, delivering more accurate demand, replenishment and production plans to ensure higher service levels without the financial burden of excess inventory.  Household brand names like The Dial Corporation, Domino’s Pizza, Binney & Smith (Crayola Brand), Russell Stover, AAi.FosterGrant and Wyeth Consumer Healthcare rely on Prescient. 

 

For more information, visit www.prescientsystems.com on the web, or call (888)-610-1800, ext. 365.