With an eye on reducing inventory, improving cash flow and forging stronger vendor relationships, a number of leading retailers have stepped up their efforts to buy merchandise from manufacturers on consignment.
Initial tests of consignment buying -- which allows retailers to delay paying for product until it's scanned at the front end -- show promise for both retailers and manufacturers, executives said.
As a result, more chains are testing programs and some pioneers are evaluating whether consignment buying can move beyond direct-store-delivery vendors to also include to also include packaged-goods manufacturers.
The developments tie in with the Efficient Consumer Response initiative's goal to reduce inventory in the distribution pipeline and could possibly affect the way manufacturers design and run promotional programs in the future, specifically as it relates to pay-for-performance incentives, executives said.
While the list of stores and suppliers working with consignment buying remains small, it is growing. Hughes Family Markets, Irwindale, Calif., ran a consignment buying trial with Dreyer's Grand Ice Cream, a DSD vendor based in Oakland, Calif., late last year and has subsequently rolled out the program to all 54 units and added a second vendor, Pioneer Bakery Co., Venice, Calif. The chain is hoping to sign up even more vendors for the program by early next year.
Giant Food, Landover, Md., also has implemented a consignment buying program with Edy's Grand Ice Cream, a sister company of Dreyer's, and has completed pilots with two other unnamed local suppliers. The chain is considering expanding programs with the latter vendors and a decision could come early next year.
At least three other West Coast chains also are reported to be buying on consignment or preparing to roll out programs with Dreyer's. They are: Ralphs Grocery Co., Compton, Calif.; Vons Cos., Arcadia, Calif., and both divisions of Lucky Stores, Dublin Calif.
Lucky has completed the launch of consignment buying at its 245-store southern California division, based in Buena Park, Calif., and is about halfway through the rollout in its 182-unit northern California division, based in San Leandro, Calif. Dreyer's expects all Lucky stores in northern California to be working on consignment buying shortly after Jan. 1.
"I believe [consignment buying] could change the industry's thinking and bring everyone, especially those in the distribution business, into the 21st century," said Michael W. Shultz, a senior vice president at Hughes.
"Everything we experienced proved out based on our projections of benefits on both our side and the supplier side and this equates to a true win-win situation."
Shultz said he believes the only obstacles to widespread consignment buying among stores and DSD vendors are "change and fear of the unknown."
"A lot of retailers are now beginning to get into it, or at least seriously look at it," added Jim Peterson, Giant's director of systems research. "We're very pleased and, most importantly, the Edy's people are also pleased."
Gary Giblen, an analyst at Smith Barney, New York, said he believes the logic behind consignment buying is compelling.
"It's a logical evolution of supply chain management and ECR," he added. "Implementation is difficult because to some extent it's a discount to the retailer."
Giblen also noted that while consignment buying could reduce store-level inventory, it may also shift costs to the manufacturer and might not work in high-shrink categories like razor blades and batteries.
The major advantage in consignment buying, according to retailers, is that they don't have to pay for inventory until it's sold, which increases cash flow. It also puts the onus on suppliers to gauge inventory needs and plan shipments appropriately.
Other advantages are fewer invoices and reduced paperwork at store level and shorter delivery times for vendors who don't have to be checked in.
"We cut paperwork, and we also reduced the time that the supplier spends at our stores," Peterson said. "That's the big benefit for the supplier."
Still, Peterson said Giant's efforts to expand consignment buying with other vendors is moving slowly because many prospective partners must "re-engineer and do some retooling in order to be able to pay off scan."
He said Giant has not determined whether consignment buying would work with manufacturers who are not DSD, but said it's probably not likely. "When you're in a pay-off-scan mode, you're paying off what is scanned at the front end of the store, not off what is delivered at the warehouse," he noted. "So there would still have to be a check-in process at the warehouse."
Nonetheless, Hughes' Shultz noted that his chain is in discussions with some nonDSD vendors about consignment buying, but declined to name them.
"We do not have any nondirect vendors, however, we have been talking to a chosen few brave hearts," he said. "I don't actually know what the benefits from the supplier side will be with direct-ship vendors other than a closer relationship with the retailer."
Asked whether a move to consignment buying ties in with changes in manufacturers' promotional efforts, specifically pay-for-performance incentives, Shultz said, "It certainly does." He declined further explanation.
Mike Corby, director of Dreyer's DSD, also said he believes consignment buying can help manufacturers improve their promotional efforts.
For instance, he noted that Dreyer's now sees from each participating store what specific products sold during a promotion -- rather than what was delivered to each store -- so it can be more sensitive to price elasticity and the way it plans promotions.
"It gives us the opportunity to go back to the buyer and really do an intelligent assessment of the effectiveness of the promotion and see what worked and what didn't work," he added. "The data are very powerful tools."
Corby said other major advantages to consignment buying for vendors are more accurate reporting of consumer demand and shorter delivery times because there's "no longer a need for us to stand in line with all the other DSD vendors to get checked in."
He also noted that once a vendor and retailer synchronize their computer systems to allow for the transfer of scan data, many other nonvalue-added costs, like disputed invoices, can be taken out of the distribution system, which is another goal of ECR.
"We don't have tag rejections and we don't have billbacks any longer because we know going in we are synchronized with one another," he said. "It makes the process far more efficient and smoother. We're not paying people to go around and fix mistakes because we didn't get it right the first time."
Still, consignment buying is the exception rather than the rule.
Ken Robb, senior vice president, marketing, at Brodbeck Enterprises, Platteville, Wis., said the company is not currently testing any new consignment buying programs, but historically has bought newspapers and DSD seasonal merchandise, such as sunglasses and holiday items, on consignment.
He said Brodbeck might consider buying other merchandise on consignment if manufacturers made the programs available in its market.
Brodbeck, which is heavily involved in category management and new technology, operates eight stores under the Dick's Supermarkets banner.
"I don't think we've given it much thought because it hasn't been something anybody has discussed with us," he said. "But I think we would take a look at it and, right now, I imagine it would be something we would look at pretty favorably."
Robb added, "There are certainly cash-flow advantages for the retailer because the retailer doesn't have any cash tied up in the inventory. I can't think of any reason why you wouldn't want to do consignment unless it would be security as it relates to people coming in and out of the store. As a retailer, you probably would want to control access to your store and have standard delivery times."
Robb noted that, excluding labor, inventory is among a retailer's largest expenses.
Corby of Dreyer's said the manufacturer's long-term goal in southern California is to get enough stores in specific delivery zones buying on consignment that it would make sense to ship at off hours when the highways are not as congested and trucks can move more efficiently from stop to stop.
Currently, with only Hughes and Lucky's southern California division up on running on consignment, Dreyer's trucks have to bypass too many stores that are not on consignment where the store's delivery times are less flexible because of the required merchandise check-in process.
"The idea is to achieve a critical mass of stores that will allow us to leverage the distribution efficiencies," he said.
"As we move toward this, we are beginning to move back the clock in terms of when we dispatch our trucks. As soon as we truly have a critical mass -- for instance once we get a full district of Ralphs up -- then there will be geographies where we have the critical mass and where it would make sense to actually do a night delivery."