Opportunities for cost reduction are identified by specific distribution channels for the first time in the first of 19 major reports to be issued by the Joint Industry Executive Committee on Efficient Consumer Response.
About $9.9 billion in operating costs can be eliminated from the self-distributing retailer channel -- which holds the largest potential for cost reduction -- if all the proposed ECR initiatives are embraced to streamline distribution, according to the report, to be released this week.
Companies operating within the wholesaler-supplied and direct-store-delivery channels could reduce operating costs by an estimated $8.4 billion and $5.7 billion, respectively, the report stated.
The report is titled "Performance Measurement -- Applying Value Chain Analysis to the Grocery Industry." A companion computer diskette contains a spreadsheet program that individual companies can use to assess their own cost-saving opportunities.
"The report presents a framework for companies to evaluate potential savings from ECR and also to help out in evaluating internal company projects that are interdepartmental, which is always difficult to do," explained Paul Gannon, co-chairman of the Performance Measurement Operating Committee and vice president of information technology systems at Shaw's Supermarkets, East Bridgewater, Mass.
"I think for retailers, in particular, this is new territory," Gannon told SN. "Instead of the 'stovepipe mentality,' which is the way systems and accounting and buying and most departments
had worked, we're presenting some tools so you can look at things cross-departmentally."
The report for the first time identifies potential savings in each of three primary distribution channels: the self-distributing retailer, the wholesaler-supplied system and manufacturer direct store delivery.
The study further examines cost reduction opportunities for individual trading partners -- retailers, manufacturers, wholesalers, suppliers and brokers -- within each distribution channel.
In the self-distributing retailer channel, for example, manufacturers could reduce costs by $4.6 billion, followed by retailers, $3.8 billion; suppliers, $1.4 billion, and brokers, $127 million.
Because various ECR working groups have not yet developed their own cost-reduction estimates, the report based its findings on data contained in the renowned ECR report prepared by Kurt Salmon Associates and published in January 1993.
Gannon said the committee had hoped to work from new data generated by various ECR working groups. However, "there's a timing issue. Until companies have implemented some of the best practices, you really can't get firm estimates of the benefits of ECR strategies."
The Kurt Salmon report, titled "Enhancing Consumer Value in the Grocery Industry," determined that streamlined distribution practices could result in total industry savings of $30 billion, with $24 billion derived from cost reduction and $6 billion stemming from financial savings.
"You read a lot about this $30 billion number in savings from ECR [cited] in the original KSA study, but I think this [new] study really does a good job of breaking that down. It made it a lot more understandable to me," Gannon said.
The new report, prepared by the Performance Measures Operating Committee, examines only the $24 billion in savings attributed to cost reduction. Further, the report uses the same 1992 estimates of total U.S. grocery sales, $376 billion, and total internal operating costs, $307 billion, cited in the Kurt Salmon report.
Among the key findings of the new performance measurement report:
· "Most companies may be able to enjoy significant benefits through the application of ECR within their own organization, and these benefits may multiply if their trading partners embrace ECR operating principles."
· "ECR-related costs and reduction opportunities vary significantly by product category, distribution channel and trading partner, and assessments should take these differences into consideration."