Health Strategy Spotlight: Case Study: Nutritional Laboratories International

January 1, 2005

Case Study: Nutritional Laboratories International

Business Description: Nutritional Laboratories International (NLI), Missoula, MT, is a privately-held contract manufacturer, which services the dietary supplement industry.

Theme: NLI’s business requires producing custom formulated products to support its customer’s businesses. The challenge is to leverage a set of fixed assets to ensure that its capabilities—in terms of the type and volumes of products—meet the needs of their current customers and anticipates the needs of their future customers

Background: NLI was founded in 1997 by an experienced group of industry professionals, many of which were former employees of Montana Naturals. Its focus from the beginning was to utilize its contacts and knowledge of the dietary supplement industry to service companies that needed to outsource their production and place a greater emphasis on quality processes to reduce their overall operating risk. NLI develops, manufactures and packages custom vitamin and mineral formulations, botanical and herbal products, and weight loss or other formulas for recognized branded product companies. NLI has found creative ways to become a top tier contract manufacturer by offering unique solutions to its large customers. The company helps its customers create an advantage in their own markets through product development, laboratory testing support, quality assurance, customer service and an unwavering approach to confidentiality.

Situation Assessment:Within the U.S., the annual contract manufacturing market for dietary supplement products is fragmented. Essentially there are over 150 competitors competing in this $1.8 billion market, which has two distinct segments: (1) private label producers that typically produce store brands for retailers and represent about 23% of the market and (2) contract manufacturing, where products are produced specifically for branded marketers. Each business produces similar products, but due to the differences in the customers, the way the businesses operate differ considerably, leaving competition in the private label market more concentrated. NLI is focused only on contract manufacturing of custom formulated products. After subtracting out the private label business and looking solely at VMHS products, NLI is competing for business in over a $1 billion market. The market is led by about six to eight top tier players that are vying for business from the leading marketers. In 2005, GMP’s are expected to be implemented, and it is expected that it will create some level of rationalization within the competitive landscape. Since a connection with one’s contract manufacturer is an integral part of a branded marketers supply chain strategy, this business is highly dependent upon relationships. These relationships are hard to establish, but offer stability when a company is ensuring that they meet their customers’ needs.

Opportunities: All businesses need to provide value to customers and NLI’s business is no different, but since it is capital intensive with a finite amount of capacity, it must match its ability to deliver value with the right set of customers. In the contract manufacturing business, not all customers are attractive, and one must match its ability to produce against a set of customer requirements. This drives how a company plans and invests, and with high fixed costs, it’s essential that it is supported by getting enough orders to keep the shop full with work. NLI has established a strategy on working closely with a select group of customers to drive cost out of their products, help with product development and “do what it takes” to help them grow. By absorbing the risk of meeting the needs of a defined customer base, NLI’s growth is tied to the success of its customers’ products. A common challenge is that many companies have a majority of their business concentrated in a few customers. (According to a recent HSC study, most players generate more than 50% of their business from just two customers.)

Lessons Learned: NLI is a great example of a company that offers great value to its customers, and its focus will be rewarded as it continues to meet and exceed its customers’ needs. However, the focus on its current customers highlights some things that make its growth more challenging. (1) Since its facilities can only handle a set number of customers, it must first look to its existing customers to gain larger shares of their production. (2) NLI still needs to grow its list of customers, while not sacrificing any of its current relationships. In this respect, the company needs to be very selective in acquiring customers, so that each new customer “fits” with its philosophy. (3) The business requires a continual effort to invest in new processes and capital, but it’s essential that NLI compile only those capabilities that are valued by its customers. Its first step in taking on new capabilities should be to fill gaps in their current service portfolio. (4) NLI has confidence that its potential customers will be pleased with its capabilities, however, the key is to get the first order. Many competitors claim the same capabilities, so it’s crucial that NLI succinctly demonstrate how it can bring more value to its customers over its competitors before it get the first order.

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