I recently had conversations with two companies about what’s going on in their business and supply chains, which I believe neatly sum up where a large percentage of companies are at right now.
These were casual conversations, not meant as formal interviews, so I am going to keep the companies anonymous, and actually create a single composite company out of these two very similar stories. But I think many of our readers will see themselves in this description.
The company is a consumer durables manufacturer. After decades of U.S. manufacturing and market leadership, a variety of pressures has led it to announce it is closing some U.S. production capacity and moving to China, with rumors that more U.S. facilities – maybe eventually all of them – will suffer a similar fate.
This is despite the fact that the company had considered itself a very “Lean” manufacturer, and operated traditionally in a very just-in-time mode. What happened? Perhaps the biggest change is the mix of distribution channels. The company has a huge amount of its business now going thru Big Box retailers, versus a more traditional dealer network in the past.
That means more price pressure. Traditional channels were fairly price insensitive. This comes not only from Big Box retail buyer expectations for pricing, but because the retailer may offer its own private label alternative – sourced from China, of course. Gross and operating margins are decreasing.
In fact, the company’s number 1 competitor, and the number 2 brand in the market, is one of its retail customer’s own private label brand. Which makes things very interesting, because of course the retailer knows all there is to know about what they can buy the name brand for, what sells and what doesn’t, etc. In fact, it generally waits for the branded product line to innovate, observes what sells and what doesn’t, and then knocks off the most successful models.
The private label goods are lower quality, but when the consumer, with little expert sales help in the aisles, sees nearly identical products from a visual perspective side-by-side, the name brand and the private label, and the private label offers a nice discount, it’s a tempting choice. It is believed the retailer manipulates things to maintain the balance of name brand and private label sales that makes the most sense for it at the time.
They would love to sell direct over the web, but the retailers go ballistic at that idea.
Are the savings from China really materializing? No, not yet. They know they are not really good at global sourcing and global logistics yet. Plus, this is requiring major changes in their supply chain network and distribution strategies, and therefore short term cost increases there as well. They feel at one level they are taking some backward steps, as again they are in many respects moving from a very Lean supply chain model to one characterized now with lots of inventory and very long lead times.
The future: Figure out this global supply chain thing. Try to use advertising and other techniques to promote the value of the brand. Keep analyzing the network and inventory flows to squeeze out costs. Keep their head above water for now, and hope a better model emerges over time.
Obviously, this is from the perspective of a consumer goods manufacturer. The perspective of the retailer of course would be quite different.
There is no implied editorial comment here. It simply represents I think a reasonable meta-type for so many companies and their supply chains for 2006.
Right now, I am pondering on what it all means. One thing for sure, as I suggested earlier this year, is that if you want to survive, you better get good at the Global Supply Chain. Beyond that, I’m not sure. I’d love your thoughts in helping me sort it out.
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Does our “case study” represent a good summary of where many companies are in their supply chains in 2006? What does it mean for how companies should be thinking about their futures and their future supply chains? Or are we off the mark? Let us know your thoughts.