The Authors Stuart E. Jackson, Vice President at L. E. K. Consulting LLC, Chicago, Illinois, USA Abstract Purpose – Many product organizations recognize the benefits of outsourcing manufacturing of key components or even entire product lines to China and other low labor cost countries. But while the cost savings are obvious, many product companies fail to grasp the parallel risk of their own distributors or retailers by- passing them to source products directly from offshore suppliers.
The author discusses case examples of companies that do a good Job of anticipating and addressing this threat through a range of approaches to building strong connections to end customers. The author proposes SIX key strategies for companies In this situation. Design/methodology/approach – In this article, Jackson cites a number of case examples of businesses that have built strong connections to end customers even though they typically reach these through distributors or retailers. Examples industries Included in the article are durable consumer goods and medical products.
The author then draws lessons that can be applied broadly by any company concerned about the risks of distributors or retailers sourcing private label product directly from off-shore suppliers. Findings – The author proposes six priorities for defending against disintermediation by distributors and offshore suppliers: acknowledge the urgency of the threat; reinforce brands; find new ways to link to customers; look for mass-customization opportunities: enter Into creative partnerships; be serious about services.
Originality/value – This article sheds light on the risk of disintermediation for product impasses using offshore suppliers, and strategies that can be used to mitigate this. Things used to be simpler for product companies. You manufactured products in your own factories. You had customers who wanted those products. You either had your own captive distribution system, or – more likely – you had a network of distributors who made the vital link between you and your end customers. Then came globalization.
Given the labor differentials and the decreasing costs of transportation, offspring your manufacturing capabilities first became tempting, from a competitive standpoint. Then it became absolutely essential. Either you found low labor cost manufacturing suppliers for your products, or your company would find Itself uncompetitive against others In the Industry. This dynamic has been much the changing role of the distributor in the midst of this transition. Are your distributors still committed to you, or are they tempted to bypass your organization and source products directly from suppliers in China?
Are your customers more loyal to you or to the distributors from whom they procure your products? I began pondering these questions recently when my firm did some work with a health-care many supplying medical products for the hospital setting. This company was a manufacturer for the better part of a century. It still called itself that, and still thought of itself that way. In fact, however, the majority of its production had long since been outsourced to offshore factories, mostly in China.
The time had come for the company to renegotiate its contracts with one of its largest distributors which had enjoyed exclusive rights in a number of countries, and something interesting was happening. Even in the middle of the worst recession in decades, this distributor was acting more than a little cocky. Our manufacturing client was hoping for more of the pie this time around. The distributor made it clear that it wanted to slice the pie differently too – to its own advantage. The discussions were amicable, there were certainly no explicit threats landing on the table.
But the distributor was showing a new kind of fustiness, and it wasn’t hard to figure out where that new self-confidence was coming from. Hadn’t that firm attended multiple trade fairs in China in recent years? Wasn’t it likely that a Chinese manufacturer had proposed to do business directly with the distributor, and cut out the middleman? Now our client faced the key question posed above: Whose customers are they? If worse came to worst and the distributor decided to compete with its former supplier, what steps could the company take to defend its position?
Of course, many companies have wrestled with this challenge in recent years across all types of industries. For a company that really stands out in meeting this challenge, I’ll turn to the area of consumer products and use the example of NIKKEI. This astonishingly potent footwear brand, famous for its “swoosh” logo and its brilliant marketing campaigns, began as a distributor for a Japanese shoe manufacturer. Phil Knight – a competent middle-distance runner at the University of Oregon who later earned his MBA from Stanford – went into the running-shoe distribution business with his former Oregon track coach, Bill Borrower.
Then, using Borrower’s own designs for an improved running shoe, Knight dumped his Japanese supplier, contracted with some Japanese manufacturers of his own, and began competing directly in the athletic footwear market. It’s worth noting that NIKKEI was a Mortal company’ from Day One: it manufactured almost nothing itself, and sold most of its product through retailers such as Footlocker. But its combination of innovative designs, endorsements by legendary athletes (notably Michael Jordan, Tiger Woods, and Lance Armstrong), and ubiquitous ad campaigns (“Just do it”) have kept NIKKEI in the front ranks of athletic-shoe companies.
Equally important, Knight and his colleagues managed the manufacturer/distributor relationship, and its inherent challenges, deftly – not surprising, since they had lived on both sides of that fence! How does NIKKEI reinforce its relationship with customers on the other side of fence, and make it hard for its distributors and retailers to steal those customers? One of Nine’s techniques is to partner with other companies to build unique capabilities into its products.
For example: NIKKEI and Apple teamed up about time, distance, calories burned, and pace during your morning Jog is captured through an in-shoe sensor, wirelessly transmitted to your pod, and displayed on its screen. You can also get audio encouragement through your headphones, if you choose. Apple created a NIKKEI Sport Music section in its tunes on-line store; if you get into trouble on Heartbreak Hill, you can poke a power-boost button on your pod, and your favorite power-running song will come flooding into your ears. Does this high-tech/low-tech marriage help people run better, or more often, or more happily?
