A New Definition of Contract Manufacturing

At the same time it seeks to expand its network of manufacturing partners outside the U.S., Elizabeth Arden is also actively working to change the nature of its relationships with contract manufacturers. “Historically,” Beattie says, “we looked at [contract manufacturing] as more of an external-manufacturing operation where the manufacturer provided a very basic service, and we tried to minimize costs on a competitive basis.”

Now, however, the company is looking to partner with what it likes to refer to as “supply chain service providers,” whose capabilities go way beyond basic manufacturing to include a whole host of related tasks, from raw material purchasing to product replenishment. “What we really need,” explains Beattie, “is much more value-added contract servicing organizations that can be more integrated into our planning and material management and production processes – true partners that can be fully integrated into our extended supply chain.”

By handing over some of the tasks it used to perform itself to contract manufacturers that ought to be better suited to the job, says Pirard, Elizabeth Arden can focus its attention on what it does best: brand-building, entering new markets and product development. “Manufacturing is not our area of expertise,” he explains, adding that it’s just good business practice to outsource tasks that don’t fall within the company’s core competencies.

But perhaps the biggest benefit of expanding the role of the company’s contract manufacturers is the fact that capital previously earmarked for planning, purchasing and other tasks related to manufacturing can be reinvested elsewhere.

“It doesn’t make sense for us to have all that planning capability and all of that inventory on our balance sheet,” Beattie explains. “Even though we’ll pay more for the finished product, the benefits to us in terms of simplifying demand planning and organization, and deployment of capital currently tied up in inventory will more than make up the difference.” He adds, “Reducing our fixed costs will give us a real competitive advantage.”

But are beauty industry contract manufacturers willing and able to take on the added responsibility? Those that want to succeed are, answers Pirard, citing a broad industry shift not just to outsourcing but outsourcing “with benefits.” But because so many key beauty industry players supported their own in-house manufacturing operations for so many years, contract manufacturers serving the rest of the industry didn’t see the need to expand their capabilities beyond the basic until more recently, putting them a good eight to 10 years behind manufacturers of other consumer packaged goods.

And to be frank, says Pirard, the beauty products industry didn’t necessarily need contract manufacturers’ help with supply chain management in the past. Traditionally, he explains, prestige beauty products were distributed primarily through department stores, “which generally aren’t as ‘demanding’ from a supply chain capability point of view as large mass merchandisers.” Nowadays, however, Elizabeth Arden sells more of its products through Wal-Mart stores (about 18 percent in fiscal 2007) than any other single retail outlet. Says Pirard, “Wal-Mart and Target, in particular, really changed the game,” forcing companies that want to do business in the mass channel to boost their supply chain capabilities.

Though not every contract manufacturer has taken the steps necessary to help its brand owner customers succeed under the new paradigm, those that jumped on the bandwagon early are already reaping the benefits, Pirard says, pointing to faster top- and bottom-line growth among the early adapters. “More importantly, however, they’ve established lasting relationships with marketers because they’ve become so integral to the running of those companies.”

Consolidating the Network

According to Pirard, Elizabeth Arden currently works with about five contract manufacturers in each of three areas: color cosmetics, skin creams and lotions, and fragrances. But as it works toward its goal of transforming contract manufacturers into supply chain service providers, the company would like to consolidate its network to include just two or three manufacturers in each area with which it can partner more deeply. “Some companies [we work with now] just don’t have the capabilities we’re looking for as we move forward,” explains Pirard. For ensuring business continuity, however, “We need to essentially have dual sources of supply [for every product],” with perhaps a third company on deck to help pick up the slack during periods of peak demand.

By limiting the number of manufacturers it does business with, Elizabeth Arden also will be able to place a bigger piece of its total portfolio with its remaining partners, ensuring itself a more favorable spot on each manufacturer’s client roster. Pirard is quick to point out, however, that the company doesn’t want to be too deep at any of its external manufacturing sites. “We believe it defeats the purpose of outsourcing if you become the largest customer of a single manufacturer because that company then becomes very tied to your volume fluctuations. And when a company also manufactures for our competitors, they’re exposed to a lot of different management approaches and new ideas, which ultimately makes them a better partner for us.” So, he continues, while it doesn’t want to fall below the 10-percent mark, “We don’t like to represent more than, say, a third of any one external manufacturer’s business.”

Looking for a Few Good Partners…

Although Elizabeth Arden is seeking partners that can provide a broad range of supply-chain services, quality remains job No. 1. “Without the minimum GMP level,” confirms Pirard, “companies can’t even play.” Cost also remains a critical determinant. “And not just today’s cost, but the ability to drive costs out of the system over time.” As a result, “A company that has a robust cost management system will win the business even if current costs are a little bit higher because they’ve shown the ability to reduce costs,” he says.

Another increasingly important consideration is proximity to Elizabeth Arden’s sole U.S. distribution center in Roanoke, Va. “It really wasn’t a factor 10 years ago,” Pirard says, “but with the cost of oil now, manufacturers with factories in the vicinity definitely have an advantage.”

The company also looks at potential partners’ research and development capabilities. Elizabeth Arden’s in-house product development team is more market- and consumer driven than technology driven. “So we rely on contract manufacturers as well as contract labs, scientific organizations, universities and other external groups to bring to us new technologies in skincare, packaging and other areas,” Beattie says.

“It’s a very open source-type of approach that, I think, gives us a significant advantage,” adds Pirard.

The Pay-Off

For those companies able to meet Elizabeth Arden’s standards, the rewards can be great. “We want to take a selective number of players and actually grow the business with them,” Pirard says. “It’s not all about us. We’ll establish a robust gain-share mechanism that allows both parties to benefit.”

Central to the success of any partnership the company enters is the development of a shared business plan, followed by the creation of scorecards that allow both parties to rate the other’s performance. “That’s something we just started doing over the last six months,” Pirard says, “but it’s already dramatically improved the quality of some of our relationships. By measuring the key levers of performance in a way that’s very open and putting the results on the table, a lot of business problems that were fairly painful are being resolved. We’re bringing a new approach to the external manufacturing relationship that we think will be beneficial to all involved.”

Another change Pirard hopes to initiate is an exchange of talent designed to raise the capabilities of both partners and help them understand the other’s needs a little better. “One of the few drawbacks associated with our almost exclusive use of external manufacturers is that, without any factories of our own, it’s very difficult to train junior people in supply-chain management.” He adds, “Good supply-chain management starts with learning how a factory operates, so we’re hoping to create a training program with the help of our partners.” Until then, he notes, Elizabeth Arden is looking to add new team members who already have some manufacturing experience.

Supported by a fairly large in-house quality assurance department, the external manufacturing team will eventually include six high-caliber, high-energy individuals, who will pair off to assume responsibility for the cluster of the factories that manufacture a particular type of product, whether cosmetics, creams and lotions, or fragrances. While that may seem like a tall order for such a small number of people, Pirard insists, “You can successfully oversee external manufacturing with a limited staff when you select capable vendors. If you don’t have capable vendors, however, you need an army of people to move the business forward everyday.

“That’s why it’s so important for Elizabeth Arden to align itself with companies that consider themselves supply chain service providers vs. simply external manufacturers,” he concludes. “It’s manufacturing, of course, but it’s also planning, purchasing, product replenishment and cost management. Companies like ours absolutely need those services. And manufacturers that can provide them will grow along with us.”