Supply chain CEOs dissect deal making, regulatory issues

Steve Mister, president and CEO of the Council for Responsible Nutrition, hosted a CEO Roundtable at CRN’s conference in Texas in early October. Joining Mister were:   Vic Neufeld, CEO of Jamieson Laboratories Al Powers, president of NOW Foods Jim Hamilton, president of DSM Nutritional Products Excerpted here are portions of the conversation focusing on market trends and regulations.

Mister: What keeps you up at night about this industry?

Hamilton: FDA keeps me up at night. I’m learning what constant mutation and challenge these guys are facing.

Powers: Media. You wake up one morning and there’s something in the news. It’s a constant threat against our industry. There are people who are very adversarial about dietary supplements. We need a positive message to instill trust among our customers.

Neufeld: A big event is something very harmful that has happened in this industry based on a tainted product. We know how the media loves to create a buzz story about negative stories. A big event will put a big sting on this industry.

Powers: For example, tryptophan in 1989. In that case it was a contamination problem.

Mister: What do you do at your company to not contribute to the problem?

Hamilton: We control our supply chain from stem to stern. There’s a tendency to bash third world supply sources. We operate all over the world – it’s not where it’s made, it’s how it’s made. Whether we have plants in Switzerland or China, we make it the same. Control of your whole supply chain is very important.

Powers: I couldn’t agree more. More and more we’re trying to control our supply chain. We need to protect our brand reputation. That’s part of our strategy going forward.

Hamilton: It’s not so easy. There was that publicly-traded China firm – they got knocked out of business.

Neufeld: Leading branded companies should be doing a process of QA/QC. Integrity and efficacy – all of that is ingrained in manufacturers, and you have to communicate that to Mrs. Smith in St. Louis, Missouri. Your company mantra should be, you’re not just a vitamin to buy, you’re the vitamin to buy. “That’s the label I’m looking for,” (the customer) has to think. Your quality seal should be on your every communication, whether it’s advertising or PR. It’s the quality your company stands for. So when the big event happens you have protection for consumers because they trust you.

Adapting to supply chain changes

Mister: To control your supply chain, is it better to go beyond buying from an outside supplier by taking more ownership control?

Neufeld: If companies aren’t thinking that way, they should be thinking that way to control their destiny. We’ve been a manufacturer for many decades. A few years ago we acquired a soft gel manufacturer. Today we have a state-of-the-art,  $20 million facility. That’s taking a step in terms of how to get to market faster. Your whole business model works that much faster when you have everything in front of you instead of working through intermediaries. Soft gel allows us to consider veggie soft gels, makes the world bigger for us.

Powers: It depends upon how our suppliers are responding to GMP regulation compliance. The onus is on the finished good manufacturer. As a result, we need valued partners who can step up. Fact is, it’s dependent on partnerships from vendors.

Hamilton: It’s a really interesting question. You have to differentiate between North America and rest of the world. There’s a lot of margin pressure, a lot of “Walmartization” going on. The market squeeze is forcing a lot of different strategic discussions.

Mister: Carlyle Group recently acquired NBTY. Will there be more of this? How will it change face of industry?

Neufeld: Consolidation will continue. There is so much pent-up hunger, so much money on the sidelines. Private equity firms are looking at this space seriously. Don’t forget the big pharma influence. Global pharmaceutical companies with consumer health care divisions are on the prowl. I can clearly see there will be one or two in the not-too-distant future getting in our space. That’s a good thing, in my opinion. It will be more than Lovaza. They will buy dominant brands. The DNA of the industry will change with private equity firms.

Hamilton: Pharma needs to diversify. DSM has no debt and $2 billion in the bank. [Editor’s note: In fact, after this conversation, DSM announced plans to acquire Maryland-based Martek.] Multiply that by 20 or 30 multinationals, and more acquisitions will come.

Sustainability and quality issues

Mister: What is your view of Walmart’s sustainability initiative? What are you trying to do to reduce packaging?

Neufeld: Walmart to us is the market leader in sustainability. They built it into their scorecard system. Vendors are rated on sustainability, on how well they’re doing in going green. We’ve ranked good on that scale. We export north of 400 metric tons of wood fiber a year – packaging, corrugated cardboard, displays. We attached ourselves to a local conservation authority. We need to give back 7,000 trees a year to give back the footprint we’ve “stolen” from Mother Nature. We bought land from a retired farmer, and we have a 10-year commitment to plant 7,000 trees a year. Walmart was unbelievably excited about that. That’s an example. We need as a corporation to have that culture and commitment. It’s not just a PR objective, but we need to conserve and preserve.

Power: NOW Foods is a sustainable company in terms of waste reduction. We have solar panels on the roof, and we won the Illinois governor’s award for our environmental efforts.

Hamilton: In the last six years we’ve been either No. 1 or 2 on Dow Jones Sustainability Index. Sustainability is a key pillar.

Mister: Quality questions drive consumers. Every time we hear about another egg recall, or spinach, or peppers, we all hold our breath that it’s on the food side and not the supplement side. What about consumer inquiries to your firms?

Powers: We run a 24-hour tech group that answers questions. You’d think that after the Consumer Reports Dirty Dozen report came out we would have been flooded. But we got only about 30 calls. I don’t think a lot of this is filtering down to the level of consumers questioning it. For us, we have not seen consumer questions. Retailers are becoming better buyers. It makes for a higher cost in resources.

Neufeld: The recent trends on inquiries are questions about traceability, about where key ingredients are coming from, about whether we are buying from China. It’s starting to get on the radar and consumers are starting to ask. When those media stories spike, it spikes those calls. If I could think of one growing question from consumers, that’s it.

Mister: It’s not where it’s made, it’s how it’s made.

Hamilton: There’s an inherent trust we need to be mindful of. Consumers increasingly desire transparency on where it’s made. We need to be mindful of that.

Mister: Will consumers demand more legislation?

Powers: We haven’t seen full implementation of DSHEA yet. The jury’s still out. Let’s see if we can make it work.

Hamilton: We have to engage the FDA. I’ve been in this business 25 years. I love this business. I love the people I work with and for. We have great trust with consumers, and we have to hold that trust dear.

Neufeld: The biggest threat is unreasonable regulations. We have to protect and defend DSHEA. The European model is that standards are being dumbed down as a result of regulations. The consumer pays our bills. It’s a healthy balance between freedom of choice and the level of safety inherent in any bottle they see on shelves. The consumer needs to be regarded from both angles.

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