CANCUN, Mexico -- The Efficient Consumer Response initiative confers upon retailers a special responsibility to differentiate between vendors who are offering ECR-related value-added services and those who are not, according to John A. Haedicke, vice president of activity-based management, Kraft General Foods, Northfield, Ill. And, he said, ECR also sets up a conflict of goals between manufacturers and retailers, but one that may be ameliorated through partnering.
Haedicke, who co-chaired the recently-issued ECR report on value-chain analysis, was a speaker at a session on ECR presented at the Pan American Retailers Executive Conference, a meeting sponsored by the trade group ALAS (Asociacion Latinoamericana de Supermercados). ALAS is an umbrella group of several trade associations in Latin America. The Food Marketing Institute, Washington, is also affiliated. In his talk to the 200 meeting attendees here, Haedicke said that in a sense, retailers and wholesalers have a responsibility to learn to recognize the non-price value inherent in product and service offers made by ECR manufacturers as compared to offers made by non-ECR manufacturers -- and to channel business accordingly.
"Let's take a look at a manufacturer who is an ECR manufacturer, and at another who isn't," he told the session.
"The non-ECR manufacturer may, in fact, be a cheaper supplier when you look at case price alone. But if you have a manufacturer who has made investments -- for example in continuous replenishment -- that manufacturer may be able to stage pallets properly so they can be sent to your warehouse, then cross-docked right to your store.
"That manufacturer may also be linked by electronic data interchange directly to you."
The bottom line, Haedicke said, is that value-added services rendered by the ECR manufacturer may be such that the net cost of doing business with that vendor's products is less, despite a higher per-case cost. "What I'm saying here is that retailers have a lot of responsibility to measure manufacturers appropriately; to find out properly who is doing a good job for them, and who is doing a bad job for them.
"If a manufacturer is doing things the ECR way with you, if he is helping keep inventories low and turning them quickly and if he is offering the right product assortment for the shelf, that can be worth a lot."
And, he said, such manufacturers should be encouraged down the road to intra-industry efficiency. "If I'm a manufacturer that has invested millions of dollars in ECR efficiencies and I don't get any reward from the retailer, what's my incentive to keep going?," he asked. Also during his talk at the conference held late last month, Haedicke highlighted the dichotomy that exists between the goals of manufacturers who are following the ECR path and the efficiency goals of ECR-driven retailers and wholesalers.
"Here's a problem we have," Haedicke said. "Manufacturers ask themselves, how do we increase our productivity?
"Well, what we do to increase productivity is to increase the flow-through of production, which means we are using our capital more effectively. We try to reduce costs by increasing the efficiency of our labor. It comes down to this: The more product we push through, the more cost-effective the activity becomes."
"But, he said, "the goal [of driving productivity] is in direct conflict with [what retailers and wholesalers seek]. They tell their folks to turn product very quickly and keep inventory levels low because that helps reduce costs.
"We've got a problem here. Because of unbalanced performance measures, there is as much as four months of product in the grocery distribution supply chain, according to the ECR report.
"Four months," Haedicke repeated. "That is a scary, scary number to manufacturers. "Look at it this way: If there is that much excess inventory and the continuous supply chain is implemented, then we have to shut down our plants for four months."
Indeed, Haedicke pointed out that some manufacturers have already halted production for a time in a bid to wring out excess inventory.
Although Haedicke offered no specific solution to the challenges highlighted during his talk, he said the chief task facing the industry is to get started with ECR by forming proper partnerships.
"ECR is probably the most important thing you can do to ensure your future survival," he
said. "It's not difficult, but there are some basic things to do to get started, and the number-one place to start is forming partnerships. Partnerships provide the key to understanding how to get ECR going."
In another speech at the ALAS conference, Mike Mulligan, vice president of sales, Supervalu, Minneapolis, Minn., offered a primer on the ECR initiative, labeling it as "arguably the most sweeping and all-encompassing initiative ever undertaken by the industry."
The wholesaler executive told the group that "perhaps the biggest job we have to do in [the conventional-store] industry is to ameliorate the sustained price disadvantage we had as compared to mass merchandisers and wholesale clubs.
"Studies showed there was a 15% difference in the market-basket price between product sold in a grocery store as compared to that sold by a mass merchandiser.
"It was found by those that studied the situation that if there were no change in the way the grocery industry did business, by the year 2000 mass merchandisers and wholesale clubs would be doing the lion's share of business."
As for implementation of the changes ECR mandates, Mulligan pointed out that "obstacles are not usually financial, not usually technological; they are usually organizational because all change involves loss. And this type of change involves giving up many time-honored practices. "But those organizations that embrace change are those that will benefit the most."
Mulligan didn't mention how Supervalu might view or implement ECR.
In a presentation about the discount-store-driven food format, or supercenters, Thomas Schaeffer, principal of the Columbia, S.C.-based consulting firm that bears his name, told the meeting that although the format is strong, many conventional retailers are properly preparing to do battle. "For example, Kroger Co. is a company that has had its problems, but it is now getting stronger," he said. "Kroger faced Meijer [supercenter operator] and thought how it could compete on price; this after Kroger was attacked and attacked.
"Kroger implemented the strategy of zone pricing. This was their counterattack. They priced differently in different zones to maintain an image. This is not new but a very basic tool."
As a result, he said, Kroger built market share in all of Ohio and portions of Michigan. "For supermarkets to lead, they must be oriented toward quality in all cases and have a strong image. And they must be able to walk a tightrope, balancing everything needed for a good image, or the result will be disaster."