Postponed – And That’s a Good Thing!

Why would a Chinese fabric supplier buy a downstream furniture manufacturing customer in the U.S.? As a fascinating look at the furniture business in today’s Journal points out, labor costs in China are under $1 an hour whereas they’re closer to $15 in North Carolina. Doesn’t that mean more expense for the furniture supply system, not less? Labor costs do turn out to be part of the answer, but to get at the real answer, you have to read between the lines.

In a word, the answer is what distribution and supply chain academics call “postponement.” Component value added and final assembly activity is delayed longer in the system - typically closer to end consumption points, to reduce the risk (and costs!) of big inventory and availability bets placed long in advance.

In fact, in a under-appreciated shift emerging in global industries and their supply chains, once passive overseas component manufacturers (read: China) are making bolder moves downstream in local market distribution. To get closer to their ultimate end customers.

For good reason in the furniture example: 90% of exported fabric ends up in U.S. homes. Forward-integrating into local market assembly gives the Chinese a much more complete and timely picture of their prize market, reduced inventory carrying costs, improved end product availability, reduced supply chain disruption costs, and smoother production levels and scheduling back in Asia. And that's just a start.

The Chinese benefit from ownership in several other postponement-related ways as well. They shift some of the assembly costs from North Carolina to China, lowering final product costs and raising competitiveness, by shipping to what is now a US "assembler", pre-cut, pre-sewn Chinese fabric “kits” designed to the State-side assembler’s requirements. And a tighter materials/assembler supply chain gooses U.S. demand by helping the assembler assure on-time, to-spec delivery. The local market "assembler" wins new business by impressing retail furniture chains with its ability to develop living room “settings” unexpectedly fast and better than the retailer hoped.

Meanwhile, competing manufacturers in the US, with their arms-length fabric supplier relationships (and tensions) suffer miserably, even as they brag of "lower overseas manufacturing and sourcing costs".

Side note: one unstated moral of the Journal’s story seems to be that if a supplier wants postponement benefits it has to buy its customers, maybe even their customers too. While I don’t think ownership is always required, it certainly helps. It has other risks I'll discuss another time.

You can get postponement other ways. But that’s also another story.

Big D distribution

Surviving the distribution revolution won't be easy, and is not for the fait of heart - espefcially in the current global economic environment.

But there's way to not only stay out of the line of fire - but thrive. It's through big D-style distribution. And you achieve it by building differentiation, diversification, and discipline into your routes-to-market strategy.

A few words about each.

Differentiation. Start with a straightforward strategic exercise: figure out experience gaps most important to customers, evaluate the current distribution system’s capabilities to create the desired outcome, and proactively negotiate “who does what” to close critical performance gaps.

• Market leaders take an end-customer view of distribution and from it create precise refinements in how their channel systems meet the distribution needs of end customers. Their ultimate goal is ensuring that end-customers’ distribution experiences with their own products are demonstrably better than with competing products.

Diversification. Market leaders know deep down that there is peril in viewing distribution needs as homogenous. They work diligently to see the trees for the forest. They ensure that unique channel solutions are crafted individually for every potentially profitable segment of customers. Diversification is just as essential in distribution as it is in other portfolios. One-size-fits-all never works everywhere or always.

• Thus, attractive as low-cost channels can be, both Dell and Wal-Mart have seen their growth stall as they reach the saturation point of efficiency-minded customer segments. Both are now struggling to branch out. If they are successful, it will be by structuring direct sales, the Internet, and channel relationships into a portfolio of activities designed for unique customer distribution experiences.

Discipline. There is a critical distinction to be made between unhealthy channel conflict and healthy channel competition. Conflict tends to be marked by price wars between distribution channels that lack differentiation from each other. Healthy competition, on the other hand, flourishes when different channels create distinct sets of distribution experiences to attract different segments of end customers.

• Minimizing conflict and invigorating competition requires discipline in channel portfolio design and management. Above all, it requires making sure that channel mix, intensity, and management decisions are true to customers’ experience demands and shared manufacturer-distributor beliefs about how customers segment.

* * * *

Manufacturers and distributors can do a much better job of acting in concert with each other, assigning and coordinating downstream programs and activities to create powerful new total customer experiences.

By focusing together on experience innovations, they will give end customers higher, more desirable value and drive market share and profitability gains.

Retailers Morphing into CPG Players?

I've been describing for some time the danger to 'old school' CPG manufacturers of the ravenous retailer appetite for private label growth. In fact, for some grocery categories it's getting harder and harder for shoppers to find anything new and interesting - unless it's private label.

Ouch, that must hurt when the subject comes up in executive meetings at national brands and big name CPG companies.

And now we see retailers rubbing salt in the wounds, or maybe showing mercy by driving a stake through the CPG players' hearts. Strategy advisors to these retailers have encouraged them to take the last step and actually become "integrated CPG manufacturer-retailer" powerhouses.

Translation: forget independent manufacturers and brand developers - we can do it all ourselves!

That's certainly very big news, and only the tip of the iceberg froim what I'm hearing.

And check out this striking news from a recent New York Times article by Rob Walker:

..."Safeway has initiated the Better Living Brands Alliance, with the highly
unusual goal of selling these two store-brand lines in places other than the chain that created them — school cafeterias, foreign markets and, ultimately, other U.S. grocers. In the judgment of the trade publication Refrigerated and Frozen Foods Retailer, which recently named Safeway as its retailer of the year, the experiment is “breaking the mold on what we all thought we knew about private label.”

These strategic moves are bound to restructure consumer markets in ways we have not seen before. And it won't be confined to just the grocery sector. Keep your eyes out for similar developments in other markets- especially Home Centers and Consumer Electronics.

McKesson to Focus on Sourcing as Advantage

Just like their retail cousins, large business market distributors are moving to lock in power and marketplace negotiating advantage from their sourcing systems. Pharmaceutical distributors, such as McKesson Cardinal Health, and Amerisource-Bergen, are evaluating opportunities to change out their largest generic drug makers in favor of smaller contract manufacturers. The hope is that increased margins follow increased market power.

Exim-Pharm, an India-based provider of bulk pharmaceutical drugs and formulations, is one company hoping to benefit from the move to more aggressive drug sourcing by leading distributors. In fact, India is a popular destination for aggressive buyers seeking out and evaluating new low-cost generic drug supply opportunities.

Not surprisingly, internet-based portals and services such as "trade2gain.com" have emerged to help eager drug buyers link up with hungry players in the fragmented overseas drug manufacturing sector. Yet the parallel activity in the retailing sector offers the B2B marketplace and its distribution powerhouses some important lessons.

In fact, the largest U.S. retailers are in the midst of a major re-evaluation of what many are now calling an era of "rushing to the bottom" in prices and service levels. After years of obsessive strategic focus on private label and house brand sourcing from overseas contract manufacturers, these retail distribution powerhouses are increasingly calling it quites and returning to their critical roots as 'merchants'. Why? Because end-customers have become numbed into price-only shopping behavior. Not because that's all they care about (look at Apple's astounding retail store profitability!) but because that's all they're being presented with in most U.S. retail systems. And commoditization is an unattractive growth path for anyone involved, be it manufacturers or retailers. It's a treadmill with no upside.

So McKesson - and other B2B distributors - would be smart to balance their short-term drive for sourcing advantages against increased differentiation in service levels. But finding ways to create real 'distribution value' for pharmaceutical customers requires collaboration and more strategic manufacturing relationships. Commmoditization only requires an internet portal.

Industrial Distributors Tracking Consumer Channels' Move to Private Label

Key findings from Industrial Distribution magazine’s 61st Annual Survey of Distributor Operations suggest that channel players in industrial B2B markets are following their consumer market brethren a dangerous move away from trusted brands and greater use of private label products. Key findings form the August, 2007 research:

• Internet sales to end-users not significant
  1- 10% of revenue for over half of distributors
  70% order products from suppliers on the Web

• Distributors ramping up value-added services - 64% do not charge for them
  Engineering capabilities
  Plant audits
  Special lead times
  Set up and installation
  Employee training
  Technical product support
  Integrated supply

• 79% sourcing overseas - over 35% ramping up private-label
  Top-50 Interline Brands, a major MRO products distributor of plumbing, electrical, hardware, security hardware, and HVAC parts says that over 20% of their sales come from private-label product

• Major reason for winning business from customers
  36%: product availability
  20%: technical support
  9%: customer service/relationship or delivery time
  5%: price

But even with all the emphasis on value-added services (albeit without charging for them), distributors say their top rated strategic concern is: price competition (43 percent)

Physical Distribution Intermediaries Thrive in Global Economy

With branded product manufacturers focusing more on product innovation, and downstream mega-retailers returning to their merchandising roots, a new window of opportunity has opened for best-in-class wholesale (physical) distribution intermediaries.

In fact, the rapid growth of overseas suppliers to growing U.S. markets has been a major boon to independent wholesale distribution companies that once regarded themselves simply as small warehouse and distribution businesses. Three small to medium-size companies in particular are on the cutting edge of technological and social trends, from Internet commerce to evolving Latino markets, writes the NYT's James Flanigan:

• Weber Distribution has 11 warehouses in three states, 500 employees and more than $120 million in revenue distributing products that come mainly from Asia through the enormous Southern California ports. The company invested heavily in computing and communications systems, and gives clients information about products all the way from factories in China, on ships across the Pacific and through the ports of Los Angeles to final delivery. In its warehouses, forklift operators now use personal digital assistants to keep track of goods stacked on shelves several stories high.
  
• CaseStack has 320 employees and will bring in $74 million in revenue this year through its network of half a dozen warehouses and 1,000 independent trucking firms, linked by the Internet, and transporting goods from manufacturers to retailers nationwide.
  
• Source Logistics helps food companies in Latin America gain access to supermarkets and specialty stores in the United States through its warehouses and distribution centers in Texas and Georgia. It has 50 employees, $7 million in annual revenue and serves 80 companies in Latin America.

And economist John Husing has said that at $900 billion in annual revenue, logistics now accounts for some four million jobs nationwide and it is the largest single source of employment in Southern California.

Industrial Products Leader Focuses Distribution on Tangible Value

French aerospace electronics and systems group, Thales, is making a bold strategic statement about its approach to aftermarket parts and services business. The company has taken steps to localize parts distribution support and has employed Web-based technology to boost service levels.

In a trend we're seeing in more and more industrial markets, Thales has moved its aerospace support and distribution activity closer to its end customers. The moves resulted from abroad strategic review which found that fewer and fewer airlines were choosing to repair avionics systems because the total costs of stocking spares combined with test equipment, training and documentation is uneconomic unless the service provider achieved scale and logistics advantages.

Favorable to the OEM, the company also learned that most airlines preferred to subcontract their electronics maintenance to OEMs. This enabled Thales to develop offerings ranging from turnkey services, which include line maintenance at an airline's stations, to new logistics support for spares, repairs and replacements to individual spares or services.

Here's an example of the innovative distribution services that Thales has structured to create tangible value for its customers and partners:

• Repair, distribution, logistics support and "Integrated Supply Services", ranging from repair contracts based on flat-rate, cost-per-hour use to more comprehensive avionics-by-the-hour (ABTH), which includes replacement, repair, overhaul and guaranteed spares availability plus a line maintenance service.


• Repair parts stock has been moved to in-country facilities to support smaller airlines


• Repair operations have been moved to new regional repair facilities


• Set up a centralized center to provide specialist support for every fleet equipped with Thales products


• IT tools are being developed that can integrate with airline operations systems to track each aircraft's location or next destination on an hour-by-hour basis -- thereby providing the center with complete visibility of any IFE problem wherever it occurs.


• For fragmented product markets, such as helicopters, Thales is setting up network solutions with partner OEMs using Web portals.


• Developed an online data interchange to help airlines with their engineering and technical activities: for example, downloadable component maintenance manuals. Ultimately, creating a centralized portal for all services


• Joined together an OEM Services consortium with Diehl Aerospace, Liebherr Aerospace and Zodiac to provide component support on a cost-per-hour basis for a group of parts on major aircraft platforms with large global fleets

Creating tangible value through sophisticated, customer-driven distribution is an astute direction for Thales and one we expect to see players in other tough, global markets employing. An excellent go-to-market case study!

Consumer Electronics Should Learn From Apparel

Players in the Consumer Electronics marketplace - branded product manufacturers and retailers alike - have much to learn from opportunities and miscues experienced by their comrades in the apparel industry.

Brooks Barnes writes in the NYT (SpongeBob Pushes Deeper Into Electronics Aisle) that Nickelodeon is introducing a line of consumer electronics branded with personalities from some of its most popular shows. SpongeBob, for example, is used for an alarm clock and a portable media player, among other things. The merchandising effort reflects a bid by Nickelodeon to sell more expensive products that will appeal to core fans as they age. The cable network and its licensing partner, Imation, are pushing retailers to stock the items amid their higher-end electronics. The brightly colored line, which also includes a DVD player and a digital photo frame, will arrive in stores like Best Buy and Wal-Mart this month.

The product line was in development by Memcorp and Nickelodeon and was continued after Imation purchased Memcorp (a U.S.-based consumer electronics marketing and distribution company) this year. Followers of the apparel industry will immediately recognize this strategy of "unbundling" branded products from integrated manufacturers. They will undoubtedly see firms such as Nickelodeon and Imation sign up overseas wholesalers to front the sourcing challenges, and retailers willing to pay for exclusive deals.

It all sounds so easy - and lucrative.

It can be, for a while. But as vendors and retailers are finding out amidst all the current recalls and health and safety scares, there's more to the 'trusted consumer brand' game than the smart low-cost sourcing and cross-licensing deals struck in hotel conference rooms. But then, Nickelodeon is probably very familiar with the risks since their partner Memcorp was involved in a 2006 product recall related to battery burn hazards in Disney®-Brand personal DVD players they managed.

But once leading in this area, major apparel retailers are now starting to abandon such arrangements in favor of more integrated - and accountable - branded product makers. Nickelodeon and others would be wise to see what's happening there before they move too quick! See my related post here.

China Wholesaler Leads U.S. Retail Apparel Back to Independent Vendors

The apparel industry is leading the way in re-establishing the benefits and strategic rationale of seperating product innovation, manufacturing and supply from core retailing activity. Large dominant retailers who once obsessed about lowest-cost sourcing and discount-focused retail formats are returning to their roots. These forward-looking retailers are concluding that they have allocated too much time, resource, and investment in squeezing vendors and sourcing private labels and are starting to show signs of a new direction: enhanced retail customer experiences.

It's important to remember how we got here. As retailer power increased through consolidation and concentration in market after market, they used their newfound influence to extract price concessions and private label deals with strong branded product makers. Afraid to turn their backs on such seductive volume promises, the brands focused on driving down costs. Overseas contract manufacturing companies had a heyday with all the new manufacturing, and increasingly retailer-direct, buyers looking for low-cost alternatives. For a while, the game played out to Wall Street's enthusiastic reception. Mega-player volumes spiked, earnings soared, smaller competitors often sank. But lost in the shuffle was the consumer. And consumers buy excitement and lifestyle enhancements - not earnings expectations.

Evidence is mounting that the pendulum is swinging back.

Take JC Penny for example. The retailer has abandoned significant portions of private label activity managed internally at the retialer in favor of a Ralph Lauren relationship. While the "American Living" line will be exclusive, RL will have extensive control - as branded players used to have - over product design, material selection, sourcing, supply, pricing, positioning, and advertising.

Macy's is also getting in on the act. With their own private store-sourced labels accounting for over 70% of sales in many popular apparel categories, the company is striking new deals with an innovative wholesaler based in China (Li & Fung). The wholesaler is buying up a treasure trove of 'sleeper brands' and marrying them with the company's lowest-cost global supply chain capabilities. End result? Macy's will be exiting a significant portion of their role as internal private label sourcer in favor of mid-range branded vendor offerings.

It is critical that branded product makers leverage this new window of opportunity

to encourage and support their retail channel partners to refocus on retailing. Consumers are increasingly responsive to non-commoditized retail options, and are making it clear that uninpsired price-only formats are a niche - not the norm. Let's see how this plays out in apparel - and other sectors.

MRO Distribution and the Need for Improved Plant Maintenance

The opportunity for industrial distributors to add greater and greater tangible economic value to struggling manufacturers is greater now than it ever has been. That's good news for product manufacturers looking for differentiation opportunities, and points to their distributors as a growth engine that has been under-leveraged for too long.

But to do so, the manufacturers and their distribution partners must get beyond the already commoditized basics: speed, reliability, quality and availability. If that's the only focus a manufacturer-distributor team brings to a potential customer the sales process will quickly and deservedly sink to a price conversation.

So the opportunity is to provide tangible value elements that create real economic improvement opportunities for plant managers. That will inevitable mean system solutions, integrated offerings, Tier I responsiblity, distributor consortiums, and outsourcing whole chunks of a plant's headaches. For a much more detailed discussion of how outsourcing plant maintenance could be better leveraged, read this excellent article by author Steven Welsh here.

Wesco Distribution has always been a shining example of an industrial distributor leading with value-added customer strategies. The company is a leading distributor of electrical construction products and electrical and industrial maintenance, repair and operating (MRO) supplies, and is the nation's largest provider of integrated supply services. Headquartered in Pittsburgh, Pennsylvania, the company maintains relationships with over 24,000 suppliers, and serves more than 100,000 customers worldwide. Learn more about Wesco's customer programs here.

Step 1: Wal-Mart to Restructure Wholesaling in India

India's local preservation oriented retailing laws currently prevent international behemoth Wal-Mart from opening its own branded stores or even partnering with other retailers to sell its own brand private label products in the country. But in a shrewd move to build a solid foundation for the inevitable change in those laws, Wal-Mart has begun doing what they do best - restructuring the critical back-end retail supply system.

With growth in the US market grinding to a close, the company is successfully exporting its model to new overseas growth markets. Success in Mexico has been stellar. But what's particularly heartening about their India strategy is its ties to the company's strongest core competence: wringing inefficiencies and middlemen out of lengthy, cumbersome, poorly organized supply chains. They then pass the savings from those strategic advantages on to consumers.

In a quiet first step to dominate retailing in India, Wal-Mart has created a carefully structured joint venture with local retail company Bharti Enterprises to start the pincer move that will establish Wal-Mart's future market dominance in India.

Meanwhile, Wal-Mart competitor Metro Cash & Carry continues to focus on "one stop shopping" and traditional "assortment" strategies. The company says it offers commercial customers in numerous countries of the world an assortment competence in food and nonfood products at wholesale prices. The assortment and service portfolio are geared to meeting the special needs of professionals, mainly from the restaurant and retailing sectors.

Nothing wrong with paying attention to assortment of course. But if I were Metro, I'd be picking up the pace and accelerating strategic moves in valuable southern hemisphere growth markets. Wal-Mart's entry will be anything but slow - consider Mexico where the company now accounts for the majority of all retailing.