PALM DESERT, Calif. -- A supply chain dependent upon fee structures rather than selling activity is failing to produce needed efficiency, Patrick W. Collins, retired vice chairman of Ralphs Grocery Co., Compton, Calif., said here last week.
Instead of efficiency, retailers dependent on promotional allowances for profits and vendors dependent on slotting allowances for distribution have created an atmosphere of distrust and expedience, he said.
"If retailers suffer from the opium of allowances, let me suggest manufacturers suffer from the cocaine of item proliferation -- in fact the two are tied intrinsically together," Collins declared in a keynote address to the Western Association of Food Chains convention.
In his hard-hitting address Collins suggested a move to information-based selling would eliminate some issues of contention. Speaking to an audience heavily weighted to the supplier sector, he questioned the commitment of vendors to eliminate inefficiencies in their businesses.
"The current orientation toward allowance generation would seem to encourage manufacturers toward item proliferation because the easy access to slotting allowances makes it relatively inexpensive for them to gain instant distribution," Collins said.
"But if the retailer's orientation was one of selling, then we wouldn't accept a new item unless a manufacturer put major money behind a product to create consumer demand.
"So retailers must start with the premise that we are going to make money on what we sell rather than on what we buy, while vendors must return to rational price and deal structures and reward performance -- and that performance should be determined by scan movement."
Collins said he would like to see the industry move to an information-based selling system that makes greater use of scan data to determine retailer payments to vendors.
"If we want to take the concept of Efficient Consumer Response to its highest level of trust and cooperation, why don't we embrace the idea of pay-on-scan?" Collins asked.
"Why not allow the retailer to pay for the vendor's product, on or off promotion, based on a mutually approved scan-audit trail? This would in turn facilitate a move toward continuous replenishment based on the same data because it would eliminate excess inventories, diverting and complex accounting structures. "What this information-based selling concept brings is the highest form of efficiency. And assuming that price lists for products in all classes of trade are published, information-based selling would eliminate much of the basis for distrust."
Information-based selling isn't a panacea, Collins added, "but I suspect it is the way of the future since by its very nature it will facilitate the elimination of many inefficiencies as well as eliminate some of the underpinnings for the distrust that now exists in this industry."
Information-based selling would take a lot of expedience out of the business, Collins said. "We would both make money when we earned it. No more making the quarter by selling two months' worth of inventory in advance or by investing in excess inventories or by selling an under-performing promotional package that doesn't deliver the cases.
"And if manufacturers move toward scan-based performance rather than off-invoice incentives, then diverting will be in the spotted owl category -- not dead but certainly endangered."
Diverting began in the mid-1970s, Collins recalled, after a proliferation of uneven promotional allowances prompted retailers to seek products more cheaply in other markets.
He was initially opposed to diverting, Collins noted, "until someone explained that I was missing $100,000 or more per week in profits."
Vendors began putting allowance structures into play "that bordered on the silly" after the government-imposed price freeze in 1973, Collins said. "And the retailer began to live on this allowance-driven playing field," he added.
"Now, after almost 20 years, the retailer has become dependent on allowances, and making money on what we buy has become more important than making money on what we sell."
Slotting allowances developed when new-product proliferation made retail shelf space critical, Collins added. "In the beginning it wasn't the retailer asking -- it was the manufacturer offering."
Trust between retailers and manufacturers has eroded over allowance issues, as well as class-of-trade irregularities, Collins pointed out. "The retailer has taken advantage of the manufacturer in about every way imaginable, which has resulted in a victim ethic on both sides -- retailers blaming manufacturers and manufacturers blaming retailers.
"Current economic pressures and uncertainties have caused stress, which has led to cost-cutting, restructuring and finger-pointing."