April 1, 2004
When the conversation turns to global sourcing, everyone likes to rant about the of U.S. jobs to China, India and other countries that offer low-cost

When the conversation turns to global sourcing, everyone likes to rant about the “offshoring” of U.S. jobs to China, India and other countries that offer low-cost manufacturing, design and service operations.

But there's another aspect of global sourcing worth some discussion: private labeling. In a global private-labeling agreement, a company draws up a contract with a foreign manufacturer to make a product and then markets that product under its own brand in the United States.

Because of the cost savings it offers in packaging and advertising, private labeling is quite common in the retail arena. Private labeled products account for 20 percent of Wal-Mart's total sales, according to the “Facing the Forces of Change” study recently published by the National Association of Wholesaler-Distributors (NAW), Washington, D.C., through its Distribution Research and Education Foundation (DREF).

Private labeling is already common in some segments of the electrical market. Several dozen Asian manufacturers exhibited at LightFair 2004 to meet manufacturers who want to private label their products in the United States, and to meet U.S.-based reps who could market their product lines.

Reps from other lines of trade are interested in private labeling and global sourcing, too. Due to the success of his 2003 trade mission to China, Joe Miller, CEO of Manufacturers Agents National Association (MANA), Lake Forest, Calif., is leading MANA members on a second trip to China this July. The MANA group will visit with Chinese manufacturers who want independent reps to market their products in the United States.

Closer to home are the two large industrial distributors that offer private-label products sourced in Asia: W.W. Grainger Inc., Lake Forest, Ill.; and Fastenal Inc., Winona, Minn. These companies depend on private labeling for a surprising amount of their sales.

Grainger Global Sourcing, based in Hong Kong, functions as the international procurement organization within the corporation. The parent company is a direct importer of more than 4,500 products, which it sells under private-label brands. Grainger says this division's mission is to “procure high quality and cost competitive products from reliable Asian manufacturers to meet the private branded product needs of the various business units.”

Grainger sells approximately 24 percent of its products under company trademarks such as Dayton motors, Lumapro lighting, Westward hand and power tools, and Condor safety products. It sells many of these private-labeled products through global sourcing ventures.

Fastenal takes a slightly different approach. It sources 15 percent of all its products directly from Asia (including many of the SKUs in its core fastener product offering), and its product managers have identified opportunities to source another 15 percent to 20 percent of its products direct.

Like Grainger, Fastenal also has a facility in China. In fact, the company is so serious about global sourcing that its corporate purchasing manager recently moved his family from Minnesota to China. Fastenal has 12 employees in China and wants to add up to five additional employees this year when it opens a trading company in Shanghai called FASTCO. The company had been buying products in China through an importer.

There's some credible evidence that this trend will spread much further in the distribution business than these two companies. Twenty-six percent of the contractor-oriented distributors and 40 percent of the MRO-oriented distributors who responded to a survey for NAW's “Facing the Forces of Change” study said they plan to develop and market their own private-label brands by 2008. The study also said that distributors using private labels will have to position these brands as more than just lower-cost versions of these products.

There would seem to be many shelf-good electrical products that an electrical distributor could source overseas and sell under their own brand. But the trend won't take root in this industry unless the economics make sense, the quality of the products is consistent and customers will prefer the products more than familiar brands.