Best Buy Recall Shows Draw and Danger of Private Label

Last week, the U.S. Product Safety Commission announced a recall of Insignia brand 26-inch flat panel LCD televisions because of two reports that power supply had caught on fire. The interesting part: Best Buy was the manufacturer. The appeal for retailers to either become manufacturers through outsourced relationships or to private label models from manufacturers can be counted in extra margin points. But as Best Buy now knows, and as competitors that envy the position might learn, there are some significant considerations when embarking on your own product lines.

Best Buy, which stresses that it voluntarily undertook the recall, had sold about 13,300 units, made in China, a few years ago. The problem was "defective parts that were difficult to catch," according to Fernando Silva, the company's vice president for exclusive brands.

"In hindsight you have 20-20 vision," Silva says. "Obviously what we've done is continue to audit and improve our quality processes. This particular case that we're talking about, I'm not sure there's anything that we could have done specifically different. Since then we've hired very capable safety engineering and testing teams. We have made sure that the oversight and the partners that we pick are carefully assessed. Our processes have gotten continuingly better. But you'll find any manufacturer with this breadth of brand and product, sometimes you can't catch everything. Then the question becomes how do we treat our customers?"

It's been a learning experience, to say the least. Having its own lines of products has been important to Best Buy, not just for the financial incentives, but market opportunities that it sees. Particularly on the low end, vendors will create one product to sell globally rather than an assortment with features tailored to particular geographic regions. With the amount of insight it can get into customer trends, Best Buy wanted to take advantage of what it saw as market opportunities -- for example, adding stronger hinges and rubberized grips to portable DVD players so they could more effectively stand up to use by children.

"To be able to dictate requirements and turn products around in a timely fashion -- would take a long time, and frankly some of [the vendors] would not be willing to give exclusivity on those ideas and features," Silva says.

But a lesson that Best Buy may or may not be learning, even with a growing engineering and design team in-house, is knowing what it takes ahead of time, before problems manifest themselves, to manage outsourced electronics manufacturing. The main problem is the dizzying array of contractors, subcontractors, and suppliers that can be involved in designing, engineering, and producing even a single product, according to Joanne Friedman, CEO of consulting firm ConneKted Minds. Often, engineering of electronics, electrical, and mechanical systems proceed on parallel paths. Often the designs don't work with each other.

"If they don't have the expertise in house and need collaboration throughout the process, then they need to get on that," Friedman says. "That activity stream has to have some teeth behind it to be sure that the quality is always there, otherwise they will continue to not be able to produce goods for their customers without the assurance that [they won't have problems]."

One of the classic issues in a case like this is that the true cost of such a mistake can be hidden. A company might look at the margins of a product line and not go back and reanalyze the business results, adding the cost of tracing the problem, replacing all the televisions, and loss of reputation and brand value. Thus, a company may never see a complete picture of revenue and cost attributed to a product line.

Friedman says that many companies (though not necessarily Best Buy) turning to outsourced manufacturing simply don't want to spend the money necessary for a solid process to oversee and control the product, from concept to end-of-life. But when things go wrong, the ultimate cost to the company is probably three to four times as high.