From concept to cash register faster and more profitably

This article is brought to you by Retail Technology Review: From concept to cash register faster and more profitably.

More and more retailers are attempting to improve profits and customer loyalty with the launch of own-label products.  But success is never guaranteed.  Gurdip Singh and Chuck Kramer from i2 Technologies explain why retailers must optimise their supply chain cycles to succeed.

Many retailers today have turned to private-label product strategies to help them stand out in an increasingly crowded market. By designing and manufacturing their own products, retailers can leverage their customer knowledge to create one-of-a-kind offerings that are customised to the needs of their local stores, while also maximising their profit margins.

The potential payoff is huge.  A recent study by AMR Research states: Survey responses show consistent growth in private-label penetration from 2006 to 2008.  37% of total sales were derived from own-brand products in 2007 and [this category] is expected to grow by 11%. (AMR Research Report, April 2007, The State of Fast-Moving Consumer Goods Retailers: the 2007 Technology and Process Review, by Mike Griswold and Fenella Sirkisoon.)

Certainly, private-label products offer the opportunity for higher profits, greater differentiation and increased loyalty.  However, retailers are discovering that there is enormous financial risk in assuming responsibility for the entire design-to-shelf process.  Retailers may wield significant power when purchasing finished goods, but that power disappears when they become the designer and the manufacturerand there is no longer anyone to accept their product returns. Every private-label strategy represents a tremendous financial investment, with no guarantee of success.

Minimising the risks

Cycle-time optimisation plays an absolutely critical role in the private-label business model. To accurately predict and capitalise on fashion trends and regional preferences, retailers must drastically reduce cycle times so that they can delay decisions as close to the start of the selling season as possible.  They must also extend their traditional supply chains to include raw-materials suppliers and manufacturing organisations around the world.  In short, retailers must embrace collaboration and visibility and view each supply chain process as an opportunity to cut time and costs.

There are five key areas in which enhanced visibility and collaboration can eliminate months in private-label cycle time:

1.      Integrated design and demand planning.  Eight to ten weeks can be taken out of the product development cycle by sharing information about designs at a much earlier stage. Buyers can actively collaborate with designers, as well as with a core group of suppliers, to choose the most cost-effective materials and manufacturing processes.  In addition, the forecasting team has a much greater opportunity to study market trends and create accurate demand projections.

2.      Strategic sourcing.  Early notification also allows buyers to consolidate orders for raw materials across numerous products, pre-position materials that may be difficult to find and create flexible supplier contracts that include options to purchase additional materialsor withdraw from contractsas demand projections shift.  While actual purchase orders are not formalised until closer to the selling season, buyers can gain an earlier understanding of supplier costs and capacity constraints.

3.      Integrated manufacturing planning.  Own-label product teams can cut significant cycle time by using early design specifications to choose the most cost-effective manufacturer, as well as to plan exactly how products will be made and shipped.  For example, the sourcing team can weigh the positive financial implications of manufacturing in large quantities against the costs associated with carrying inventory. 

4.      Dynamic inventory utilisation.  Similarly, buyers can work with multiple raw-materials suppliers to allocate materials in the most timely and profitable manner. The own-label buying team can consider such factors as material costs and capacity levels to make more strategic decisions about acquiring raw materials, and to ensure that materials are shipped just in time to keep the overall supply chain running efficiently and profitably.

5.      Flexible distribution.  A flexible approach to the distribution process can save significant time and costs by allowing retailers to analyse data on prices, profit margins and capacity constraints at various supplier facilitiesand make more fluid decisions about how to move products through the supply chain. If retailers have visibility across all their own-label offerings, they can ensure that the right assortments hit the right stores at the right time, and in the most cost-effective manner.

Maximising the opportunities

While many retailers may be initially reluctant to share so much of their strategic information with their global supply network, it is the only way to achieve the dramatic time and cost improvements that todays new retail environments demand.

Its also the only way to manage the financial risk and demand uncertainty that come with private-label strategies. By fostering greater collaboration with worldwide partners, retailers can delay critical decisions until closer to the start of the selling season. When retailers can make more intelligent and timely decisions about their private-label offerings, they maximise their opportunities to sell products at full priceand minimise the real financial risks associated with excess inventory and markdowns. The tangible results are lower inventory levels, higher rates of in-stocks and faster inventory turnsleading to significantly enhanced profitability.

Gurdip Singh is vice president of services for i2s Retail and Consumer Industries sector, and Chuck Kramer is the senior vice president for that sector.