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| Volume 5, Issue 8 - August, 2006 • Manufacturer Cuts Cost, Improves Profitability and Controls Destiny! VF already has 305 full priced shops and 220 outlet stores. It has been dabbling in the retail arena for some time, but the addition of the new stores is a daring attempt to reinvent themselves. Like so many other industries including hardware, the apparel industry is suffering from a stagnant market and distribution and retail consolidations. Just like the hardware industry, VF has to walk the fine line of expanding into the retail arena without alienating existing retail customers. At the same time, retail customers never take on a manufacturer’s entire product line, so VF can offer a broader selection than that of there existing customer base. These VF stores will endeavor to build the brand image while most traditional retailers try to down play recognized brands in favor of their own more profitable private label brands. While this may not be acceptable to the traditional retailers, the manufacturer still has the opportunity to create products for the traditional retail customer base that is different than the product sold in there stores. Domestic manufacturers really don’t have many options in today’s environment. Consolidations in distribution and at retail have shifted the power in negotiations from the manufacturer to the retailer or distributor. In many cases, one or two customers can amount to 40% or more of a manufacturer’s output. With that much business at stake, it makes saying no to the customer demands extremely difficult. This is happening in virtually every industry I know and results in shrinking margins. At the same time, additional pressure is coming from product produced in lower cost countries. Low cost countries have advantages that go beyond just labor costs to include reduced overhead from not having to provide the same level of benefits, conforming to government mandated minimum wages, OSHA, EPA, Social Security, Workers Comp, and other government imposed restrictions. Most are also benefiting from lower tax structures. Faced with products from lower cost countries and shrinking margins from gigantic customers who could destroy them in a heartbeat, Manufacturers have to find a different way to market their products. I particularly liked the quote from Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York retail consulting and investment banking firm when he said, “These days, if you are a supplier and want to control your own destiny, you better open your own stores.” Earlier, I mentioned that I felt justified by the Journal article because I have been preaching the same sermon with a few slight modifications for a dozen years now. In the worst case scenario, 60% of the cost of the product to the consumer is in the channel of distribution. Most manufacturers have already been forced to ship smaller orders more frequently to their distributor and retail customer base because their customers don’t want to have money tied up in inventory. Consequently, distributors and retailers have pushed the inventory problem back up the channel of distribution to the manufacturer. The greatest opportunity for manufacturers to survive and prosper in the future comes from finding ways to reduce the costs in the channel of distribution of their product so that they can be more competitive with the product from low cost countries. They can then restore reasonable profit margins and they can control their own future. Certainly, this is what VF is attempting with their move to retailing their own products. Another opportunity exists in utilizing the Internet to take costs out of the channel of distribution. A few years ago we called this idea “disintermediation.” “Disintermediation” never achieved its true potential because there were no truly ingenious new approaches developed and because manufacturers were too afraid of disturbing their existing customer base. As the pressure from offshore competition increases and margins are forced lower by the power retailers, something has to give. I happen to believe there are several ways for manufacturers to utilize the Internet to break out of this downward spiral, but it is going to take leadership that is willing to take a calculated risk. Sometimes it seems that leadership with “guts” is in short supply, but the action of VF Corp. is exciting and gives me hope for our manufacturing future. • Management vs. Leadership Recently Bruce exposed me to his three ring binder of work entitled “Return On Intelligence.” It is an incredible tool for creating what I call “Enlightened Leadership” in organizations. Currently we are working together to create a fast, easy and constuctive approach to the top 10 burning issues in organizations. The first chapter of our upcoming book is already down on paper. Meanwhile, workshops and seminars are available for organizations. Ideally, we like to work with groups of 16 to 20 managers at a time. If you are interested in a powerful training program for your management team, please give me a call toll free at (866) 598-8450. If you have a subject that you would like to see covered in future issues of “Taking Aim,” please send me an email at aim@CannonAdvantage.com.
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Robert E. Cannon "Best Practice" Sales Force
Development Change Management Customer Service Assessment for ISO Requirements Smart Thoughts from Smart People “When Success turns a person’s head, he is facing failure.” Unknown
“Education is learning what you didn’t even know you didn’t know.” Daniel J. Boorstin
“The art of progress is to preserve order amid change and to preserve change amid order.” Alfred North Whitehead
“Start with where people are before you try to take them to where you want them to go.” Jim Rohn
Taking Aim © 2006 Bob Cannon, The Cannon Advantage Newsletter. All Rights Reserved. The Cannon Advantage visual branding by Zarney Creative. For contact information, click “Resources.” |
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