Retailers who support efficient supply chain processes stand to share in a $12 billion to $16 billion opportunity along with suppliers who create pricing programs that more accurately reflect the true costs of service, according to research from AT Kearney.
“All along the supply chain, there are additional labor and transportation costs that really don't need to exist,” said Jim Singer, partner at the Chicago-based firm. “These costs are mostly incurred today by manufacturers, and many of them aren't fully aware of their true costs. They are bad for the traditional supermarket channel and ultimately bad for the consumer.”
Costs associated with these retailer-driven supply chain inefficiencies, referred to by Singer as the “move inefficiency premium” (MIP), translate into inflated costs of goods for all retailers. The MIP equates to between 3% and 5% of CPG manufacturers' gross sales, but a very small portion of that — at most, one equal to 0.3% of gross sales — is recovered from retailers through bracket pricing enforcement, efficiency program penalties and chargebacks, and unearned cash discount penalties.
“Today's model encourages a siloed view of distribution, with metrics and rewards associated with specific departmental activities rather than reducing total transactional costs,” said Singer. “Manufacturers have attempted to build additional terms of sale into their programs, but their approaches are typically not holistic, and they're missing quite a bit. They're often focused on price brackets, in which the larger orders get a discount and the smaller orders are upcharged.”
Singer proposes that manufacturers create pricing programs that more proportionately charge/refund retailers for the resources required as orders are taken, picked and packed, shipped, unloaded at the customer docks and payment collected. For instance, retailers would be charged more for order corrections, manual load-building and case-picking than they would for no-touch orders of full-pallet, single-SKU products delivered at standard intervals.
“Inefficient isn't necessarily always bad, it's just more expensive,” said Singer. “On the other hand, efficient isn't necessarily always good if the benefits of efficiency aren't passed on to the end consumer. The idea here isn't to punish or reward in and of itself. It's to create a better, lower-cost distribution system that rewards best-of-class logistics so that the manufacturers' brands and retailers' stores both remain as competitive and attractive to customers as they can be.”
Singer cited the picking and packing inefficiencies associated with Wal-Mart Stores' Remix program, which aims to speed the delivery of fast-moving items like paper products and bottled water.
“Wal-Mart is making big, complex orders at the case load level that are really expensive and inefficient to service,” he said. “Although it's inefficient to service, it may be effective for Wal-Mart, since it reduces out-of-stocks and keeps their customers happy. That cost has to be communicated back to them and shared in a program. That takes a lot of courage, but in many cases transparency will always win out, even in an inbound relationship.”
Singer anticipates retailer pushback, especially from those with substantial buying power.
“Every CPG company counts Wal-Mart, Costco, Kroger and Safeway among their largest customers,” he said. “But when presented with a logical plan that shows costs and how they might be paying more for this particular piece but less in an area where they are highly efficient, they may see that they still have the potential to come out way ahead of where they are today. Retailers stand to gain reduced costs associated with more streamlined and transparent logistics.”
When properly executed, these programs may give some retailers incentives to give up their current indifference. “A lot of retailers don't know how efficient or inefficient they really are,” Singer noted.
Before creating an effective terms-of-sale program, CPG manufacturers must accurately measure their MIP.
“The first step is to get past the internal hurdles inside manufacturing organizations, which support existing processes,” said Singer. “This means that all the internal distribution stakeholders, from sales and marketing to logistics and finance and everyone in between, have to begin sharing information and start working on solving their common problem. Improved communication, data sharing and rewards and metrics which span departments will go a long way to changing this picture.”
When built correctly, a pricing program that adequately reflects a retailer's true cost of service, and presents retailers with a choice to improve, will create value for both the retailer and the manufacturer, noted Singer.
He advised manufacturers to keep in mind that retailers will choose to improve only if the allowance received as a result of change is greater than the net cost of change.
Once such a program is in place, suppliers must ensure they have accurate customer reporting to enforce the terms of sale.
Manufacturers should also consider eliminating cash payment discounts — generally, a 2% discount granted to retailers for payments received within 10 days — or shift them to trade funding accounts or new trade deals, said Singer.
Cash payment discounts, which total $6 billion industrywide, are outdated and unnecessary, he said.
“The 2% cash payment is unique to this industry, and it started during the Civil War,” said Singer. “There were reasons for it back then, to cover the cost of inflation.”
Retailer customers of Minneapolis-based wholesaler Supervalu are reevaluating the efficiency of the supply chain services that they require due to a new market advantage pricing program that the wholesaler will introduce this month. As part of the new system, vendor allowances will be passed along to retailers rather than being used by Supervalu to defray the cost of delivery. Delivery costs incurred by retailers will increase as a result, while the cost of goods will drop because of vendor rebates.