Product mix on store shelves is expected to come under greater scrutiny this year as distributors and suppliers tackle in earnest the Efficient Consumer Response issue of efficient assortment.
The initiative -- which has been relegated to near back-burner status during the past several years as the industry has focused primarily on understanding and implementing ECR programs in areas such as category management and continuous replenishment -- may be about to come into its own.
Not only is the industry now ready to commit to the challenge of efficient assortment, but also the technological tools, such as data warehousing and decision-support systems -- necessary to master the art of optimizing product mix -- are gaining acceptance at a growing number of companies.
According to the long-awaited report on efficient assortment from the Joint Industry ECR Committee, titled "Efficient Assortment -- The Process and the Benefits" and released this past fall, the industry stands to gain more than $4 billion in savings from enacting efficient-assortment practices.
While some observers expressed skepticism about the size of the potential savings, most agreed the numbers are simply too large to ignore and said that the report, one of the about 35 ECR documents published to date, is especially well written and compelling in terms of documentation.
"This will be a hot topic in 1997," said Jack Haedicke, vice president of ECR finance at Kraft Foods, Northfield, Ill., and co-chairman of the ECR Operating Committee. "Category management and efficient replenishment have been, and will continue to be, extremely important, but I think efficient assortment will emerge as a big topic in 1997."
"Retailers have always been working on assortment and trying to provide the right variety," said Dan Raftery, president of Prime Consulting, Bannockburn, Ill.
"What's new within ECR is the notion that you can sift through offerings from manufacturers and be able to define an efficient variety assortment. In this new era, efficient assortment means understanding shoppers and what they want."
So what is efficient assortment anyway? Initially, it was considered one of the four pillars of ECR, along with efficient replenishment, efficient promotion and efficient new-item introduction.
The latest ECR report, though, defines efficient assortment as "a collaborative supplier-distributor process of determining the optimal product offering within a category" by fulfilling consumer needs and improving business results.
Even more to the point, efficient assortment is one of five "tactics" within the framework of the category management process, alongside pricing, shelving, promotion and supply.
"For distributors, product assortment expresses the strategic differentiation of the store perhaps more than any other aspect of retail management. When assortments are optimized within the specific parameters of the category strategies. . . the entire business system can work faster, better and more efficiently," the report stated.
Until recently, however, progress toward implementing advanced efficient-assortment programs has been slowed, at least in part, by a lack of sufficient analytical tools -- a situation that is quickly changing as powerful hardware and software solutions are brought onto the market.
Another factor holding back change in the product assortment arena involves financial considerations and long-standing business practices, such as decision-making based on manufacturer promotional funds and slotting allowances.
Another factor that should speed the efficient-assortment process will be the acceptance of industry standards for measuring item profitability and performance, according to Kraft's Haedicke.
"A lot of retailers in the United States work strictly on a gross margin basis, which doesn't take into consideration shelf space and all the supply chain costs," he said. "One of the things we're working hard on [at Kraft] is to make sure that we've got a true [tool to measure costs]."
Kraft is testing a program, using activity-based costing practices, that allows both suppliers and distributors to evaluate assortment recommendations more effectively and get a better read on the profitability of certain stockkeeping units.
Eric Leininger, Kraft's director of sales information and technology, said the supplier has started making a bigger investment in efficient-assortment initiatives. In December, for instance, the company trained 80 people in the concept's principles.
"If it's done right, there can be some significant payoffs," he said. Such projects in the past have achieved powerful results, even using what would now be considered outdated methodology. In one category, for example, distributors achieved sales gains of 5% to 12% in one year by adjusting their SKU assortment based on Kraft's recommendations.
Armed with even better data analysis tools today and new technology, many supermarket retailers are now planning to expand their traditional category management methods to take a more thorough approach to efficient assortment.
Big Y Foods, Springfield, Mass., for example, has been actively involved in category management for two years, but expects to accelerate its efforts, especially in the area of efficient assortment in 1997, said Claire D'Amour, vice president of corporate affairs.
Big Y is midway through analyzing all its product categories and developing strategic plans for boosting assortment effectiveness. The 41-store chain has found that category management becomes easier with experience and with the use of the more powerful and effective analytical tools, she said.
"We believe in the process and continue to analyze categories and develop plans. Essentially, it's a fine-tuned planning process. Frankly, our category managers love it," D'Amour said.
The payoff from its initiatives in category management and efficient assortment for Big Y includes giving the chain "better control over the real estate in our stores," she said.
Another major East Coast chain conducted a widespread efficient-assortment analysis about one year ago, and based on the results, reset 27 major categories in 1996. The chain expects to finish implementing business plans for the remainder of its product groups by the end of 1997.
"We're doing better than I thought we were going to do," said an executive at the chain, who asked not to be named. "We're doing more categories and the results are coming through as projected, or better than projected, so I think that's a positive move."
In addition to increasing sales and lowering costs, an efficient assortment program can lead to market share gains and a "more productive shelf in terms of the return on that asset," said the executive.
The keys to achieving proper efficient assortment are discipline, following best practice guidelines and aligning the assortment with the strategy for the category, he added.
"It doesn't make any sense to take a category in which you're trying to grow the total transaction size and shift the assortment to a lot of smaller or inexpensive products. You want to make sure that the assortment supports the strategy, just as any other component of the plan does," he said.
Another critical step is finding consumer-based information that provides insight on product substitutability.
"The true focus of efficient assortment is to understand what products meet a given need, and therefore, which products might be substitutable. If you're trying to optimize the assortment, you may not need all the products that meet a need as long as that need is covered," the executive said.
Achieving efficient assortment, however, is not simply deleting SKUs, he stressed.
"We've found some categories where we totally missed a segment or have no or minimal representation in a given segment." Most often, efficient assortment is created by "tweaking" the mix rather than making major deletions or additions, he said.
On the supplier side, Procter & Gamble, Cincinnati, is another company that credits efficient-assortment initiatives with enhancing bottom-line profits.
The manufacturer's attempts to rationalize its product roster have helped it achieve record sales and profit increases. Between 1992 and 1995, P&G reduced the number of stockkeeping units by 14%, an official who asked not to be identified said.
"This doesn't suggest variety isn't important. But P&G needs to avoid defining variety the way we see it, avoid introducing a new item just because a competitor has launched a similar SKU. Instead, we need to build variety and maintain assortments based on real shopper and consumer needs," the official said.
When it began the SKU-winnowing process, P&G said it feared deleting items would hurt the short-term shipment increases it gained by introducing new SKUs, and alienate those customers who had been loyal to the discontinued items.
"Our fears are proving to be largely unfounded, and we're pressing ahead to further rationalize our product lineups," the official said.