SIX KEY ENABLERS

PAT NATSCHKE LENIUS

Efficient Consumer Response is paying off. Based on their experience to date, manufacturers are projecting a 5.3% increase in sales and 5.5% increase in profits by putting ECR into practice. These figures come from the first annual ECR Implementation Assessment survey by Kurt Salmon Associates, New York. It was conducted in the fourth quarter of 1994.

The biggest area of cost reduction was projected to be manufacturing expense, at 2.3%, attributed to more effective use of production capacity due to a better matching of supply and demand. Promotion overhead was expected to be reduced by 2.1%; selling expense by 1.1%; and warehousing by 1.3%, according to the survey.

The top 10 elements of ECR that manufacturers and brokers surveyed said they had fully implemented, partially implemented, or were planning to implement in the next 12 months were: pre-scheduled delivery appointments, 84%; joint category management programs, 81%; continuous deal or EDLC (everyday low cost) programs, 74%; continuous replenishment programs, 74%; joint teams to reduce invoicing problems, 72%; receiving POS (point-of-sale) data from customers 69%; full-pallet cross docking programs, 64%; variety reduction within selected product lines, 63%; scan-based promotional payments, 60%; and joint teams to reduce handling and damages, 56%.

Brokers were found to be the most involved in category management to date, with 68% of broker respondents saying they are currently involved in a joint category management program. On average, brokers were involved with less than two customers in these programs, but they represented about 43% of the broker's volume. The survey found that 42% of branded manufacturers are currently involved in joint category management programs with an average of 14.2 customers representing 21% of their volume. Nineteen percent of private label manufacturers were involved with an average of 9.2 customers representing 19% of their volume.

The brokers surveyed said they expect to add another 4.6 customers representing an additional 33% of volume to their joint category management program activity. Manufacturers said they expect the double both the number of customers and the percentage of volume represented within the next 12 months.

Manufacturers and brokers involved in joint category management programs reported that sales in the categories they have been managing increased an average of 6.8% versus a 5.9% increase in their own products' sales, according to the survey. A 3.9% average reduction in the number of stockkeeping units in the total category was reported, versus a 1.5% reduction in SKU's for the manufacturer's or broker's own products. Space allocation for the total category was increased by 1.8% despite a 5.3% reduction in retail inventory levels, the survey found.

Of the so-called "key enablers" of ECR, category management and continuous replenishment are where the action is, according to Peter Harding, vice president, Kurt Salmon Associates. Other key enablers of ECR include: electronic data interchange, census quality sales data, geo-demographic mapping, and promotion baseline/lift analysis.

Said Harding: "The real long-term win will go to those companies that can develop a better product faster and get it to market at a lower cost than others. That is what ECR is starting to enable companies to do. You have to build new relationships or get new practices in place before you can do this as effectively as we would like to see. That is where you start to build business."

Brand Marketing interviewed leading manufacturers viewed as experts in each of these key enabler technologies. Here is what they said:

KEY ENABLER

Category Management

Chuck Aldredge vice president strategic sales initiatives category management Del Monte, San Francisco

When executed objectively, category management is a key enabler of ECR. We have engaged with over 70 retailers and wholesalers, primarily retailers, in a complete category management study which involves item rationalization, almost always reducing item count. On average, we have been able to clean out about 11% of the items in the category. I know of one chain that was able to delete 15% of its items in the canned fruit, vegetable and tomato category. A southern chain that had the philosophy that more is better enjoyed a 27% reduction in items. A west coast chain that already offered a slim selection in the category had a 4% reduction in items.

Anyone can tell a retailer to add items. We try to take the retailer's perspective and see what to do about taking SKUs out. There is a lot of fat in our category. At one account, 67 items were deleted, of which six were Del Monte items. If they were poor performers, then they were not doing anything for the customer or for us. That was still a win/win.

Category management has been one of our priorities. The performance of our field people is hooked to category management. For example, a part of their goals is to see that category management studies have been completed with our customers, but not necessarily where Del Monte wins. We just want to make certain we have provided these services to our customers.

This is not a fad. The next thing we see in category management has to be at execution level at the individual store. We want to get into the specific demographics of store. Our primary goal is to keep our head out of the clouds, where we are dealing with executable issues. We can say to a local chain, these stores are at one end of the bell curve, so this is where we want emphasis. We can tell the broker we want our efforts concentrated in those stores. We are willing to give up stores on the other end of the bell curve. Without specific store information, brokers could treat all stores alike. We want to deal with retailers from a micromarketing standpoint, and talk to the category managers and retailers where they live. We have some trademark software that was developed internally. We are adding on to it all the time. We have a new version, 4.0, going out in early April. It is an advanced system that works on Windows in pulling back data. We enabled all of our brokers to have it installed. All of our field employees are also installed.

Chains and wholesalers have told us it is beyond where most of them are. What is nice is that the retailers are willing to make decisions off it. They believe in it enough to act on it. That is the biggest vote of confidence we can get.

Trade acceptance has been excellent. I can put a document in front of a retailer that meets his needs. If we can understand and solve the retailer's problems, we will make ourselves irreplaceable in their eyes -- whether it is directly our problem or not.

KEY ENABLER

Geo-Demographic Mapping

Bill Parsons

vice president of corporate trade relations

American Greetings Corp., Cleveland, Ohio

Geo-demographic mapping is certainly one of our key enablers of ECR. It includes very in-depth reporting and a comprehensive analysis of our reports. Retailers love it and they use it to provide information to go beyond the greeting card department. You could almost consider it a foundation on which they can build an ECR program. Because we identify customers through this mapping, the retailer can perform ECR very well based on knowledge about the specific consumers targeted.

Our Street Smart Analysis II demographic profile service provides the retailer with a 10-page report on the trade area and demographic characteristics such as income, age, religion, family configuration and size, ethnicity and occupation. From that we can do efficient customized promotions. The greeting card assortments are demographically keyed in to each individual store. We can look at inventory levels which helps efficient replenishment. Also, analyzing the demographic information helps with product introductions. You know which ones will go well within that area.

We have been upgrading this over the years, and we will continue to update the program, probably in regard to how we pick out the information, refine the use of the information and reporting back to customer. This type of service extends our partnership. The information can be used in many other areas, beyond the greeting card department.

American Greetings has an exclusive agreement with Market Metrics that allows us exclusive use of this information so that we can provide this data to our retail partners. We have grown this Street Smart Analysis II with Market Metrics. We are constantly working with them to improve the way we get and analyze the information and get it back to our customers.

Street Smart Analysis II is in conjunction with pretesting all product that goes on sale in retailers' outlets. We track industry information and add customized value-added marketing services. That whole area has resulted in more productive greeting card departments in the industry.

Through Street Smart Analysis we can customize sales promotions, targeted specifically to those demographic niches. Our customers, the retailers, can take that information and use it to develop promotions throughout the entire store.

Now, before a store even opens, we know what the demographic radius is for what kinds of promotion. When the new store opens its doors, the retailer knows from day one what his customer base is for the greeting card department. We know what areas to concentrate on instead of having to rely on sales history.

This boils down to providing tools to help retailers. The supermarket industry is really driving ECR. Most retailers are thrilled to have this kind of information because it enables them to get closer to the customer. Trade acceptance has been extremely strong. The reason we have tried to take a leadership role in this area is because our category, the greeting card industry, is so micromarketed. Our cards have to reflect lifestyle, lifestage and other demographic characteristics or the customers won't buy them.

KEY ENABLER

Promotion Baseline/Lift Analysis

Bob Doran manager of marketing information

LifeSavers Co., Winston-Salem, N.C., an operating unit of Nabisco

With promotion baseline/lift analysis, we are able to structure more efficient promotions and we can tailor them better to meet an individual customer's needs. For example, retailers within the grocery class of trade may prefer a different promotion vehicle or different promotion structure compared with a retailer in the mass merchandiser class of trade.

All of the different operating companies of Nabisco are not necessarily set up the same. At LifeSavers we have dedicated a group of professionals to the promotion evaluation area. This involves shipments, volume, and calculating the forward buy factor. First we look at our internal data on what we shipped and spent, then we look at external data, such as what is available from Information Resources or Nielsen, to see how effective those promotions were at retail.

Our main focus at this time with promotion evaluation is to use it largely as a strategic tool. We look at all our major trade deals across the brands we are doing. We are able to incorporate that learning into strategic planning.

Secondarily -- and becoming more prevalent -- is using this as a tactical tool with field sales and the trade for account planning and selling.

For internal data we use a system from Synectics Co. called Account Review. The system, then and now, continues to be one of the leading systems we see in terms of compiling all our internal data, and unlike other systems we have seen, it also allows us to calculate a forward buy.

Say we had a four-week deal for the month of March. If an account ends up buying 13 weeks of volume but does not buy for the months of March and April, the system will calculate an eight-week forward buy. In our analysis we figure this was not just a four- week deal for this customer. As we look from deal to deal, this is a very important measure. The forward buy information is a key piece of information to measure.

As suppliers such as IRI go to more census-based data with grocery, that gives us a better ability to go down to those accounts with utmost confidence. More and more accounts want to see their particular data when talking about this. They are willing to look at the market, but then they ask us how did your brand perform in my account? That is their data. There is no variation between samples. Our customers are more willing to accept that.

We expect this to lead to more pay for performance promotions. Currently this is mostly done with our customers with the account supplying what they sold. As we are better able to look at how much was sold, we can do more pay for performance promotions.

KEY ENABLER

Continuous Replenishment

Sue Phillips vice president strategic customer service

Pillsbury Co., Minneapolis

We are moving well beyond the pilot stage in continuous replenishment. Based on two years' worth of pilot information, we have made the decision that we will have about 30% of our dough business and 20% of our frozen business involved in continuous replenishment by September, 1995. Also we are starting a pilot in our dry business, and are recommending the dry business move beyond the pilot stage in September, 1995. Within two years, we should have 50% of our business fully up in continuous replenishment.

In terms of results, what we have seen pre- and post-CRP is: sales increases of from 1 to 4%; decreased inventory at customers' warehouse around 35%; an increase in case fill level from customers' warehouse to retail from one to three percentage points (from 96% to 98 or 99%); and reduction in unsalables, which can be very challenging on short shelf life products, by more than 15%.

Larger than all of this is the perspective that both the category manager and Pillsbury sales person are freed up from the entire order management cycle and instead are able to focus time on the consumer, building business for our customer and understanding the category. That is a large contributor to increased sales and a new way of doing business."

We started a continuous replenishment pilot with the dough business two years ago. That was perfect because we are dealing with less inventory to start with and the system understood the shelf life challenges.

The frozen pilot began about a year ago. The primary difference between dough and frozen is that the frozen inventories are more extended. Frozen has a longer shelf life, so there is less sensitivity in terms of managing against a shorter shelf life product. Dry inventories are even further extended. The dough business was a little easier for us because it involves three concentrated production plants versus the multiple businesses and multiple plants associated with the frozen business.

Continuous replenishment has really changed the way we look at how we have been conducting business in the past. You can put yourself in the buyers' seat. When you have one additional view into the pipeline of the supply chain, you may learn there is a better way. CRP is one of those better ways. On the retailer side, acceptance has been very positive. The partnership that has begun to occur between Pillsbury and retailers is very strong. On the wholesalers' side, even though we have terrific relationships with them, their mode of operation has been much more heavily into forward buys so this means a big change for them. We are just emerging into the wholesalers' CRP area. There will be a lot of learning there.

In terms of the process, our customers send us their in-house inventory positions and warehouse inventory positions electronically every day. We input that information directly into a forecasting and planning model. In addition we have a methodology involving information that can be transmitted via telephone, EDI or fax to help us understand specific local market intelligence, such as any local promotion activity. We input that into the planning system. The system itself calculates a recommended purchase order which is communicated electronically back to the customer. Then we wait for them to agree with the recommendation. After a couple of weeks when the customer feels comfortable with our methodology then we simply send them what they need and the order goes through normal billing. The trust is there.

Typically in the beginning, we review with the customer what his past practices have been, discuss the new process, assign new responsibilities between the buyer, category manager, our sales people and CRP people, set objectives and discuss service level. We measure ourselves and move forward.

Among the primary premises of ECR is removing inventory out of the system and getting fresher product and better assortment to the consumer. The methodology and technology of continuous replenishment facilitates making that happen.

Their business. Now we can focus on growing sales instead of reviewing the validity of the data. It is performing beyond our expectations because it gives us the information we need to service our customers better. We are able to meet consumers' needs on a direct store level.

KEY ENABLER

Store-Door Logistics

Don VanBuhler director of logistics project management

Coors Brewing Co., Golden Colorado

The beer industry is very interested in ECR. About a year and a half ago, the National Beer Wholesalers Association, recognizing the need for education about EDI and ECR, formed a coalition called the NBWA Electronic Commerce Coalition. It consists of NBWA management and the five major brewers: Miller, Stroh, Heileman, Anheuser-Busch and Coors. We have put together a very cohesive industry team concentrating on the education of beer wholesalers in the whole area of EDI. We are starting with NEX and DEX technology, which are key building blocks for ECR. NEX and DEX have to do with communication and improving technology between the wholesaler and the retailer.

Because most breweries share the same distributors, we have a common stake in this. We put together this coalition to see what we can do to assist our distributors in reacting to retailers who are beginning to demand pieces of ECR of their vendors. The biggest emphasis right now is on EDI and NEX and DEX technology.

Internally, Coors has an EDI group within its information technology department. The EDI group is focusing on the entire spectrum, starting back in the supply chain with suppliers, all the way through our distributors and to our ultimate customer, the retailer. We have invested in the development of software that we are piloting with key wholesalers that are in areas where the ECR concept is being emphasized. We are working with key software vendors in establishing software that works for both the wholesaler and the retailer. We are also working with some key retailers. The trade is pushing ECR. I saw a letter from a major retailer in Southern California that basically said to vendors and wholesalers that by a certain date it will demand its suppliers be on a DEX delivery system or else they could lose some privileges at the back door or even lose some distribution of product when it comes to selection criterion.

From a distributor's point of view, EDI has enabled us to achieve efficient product replenishment. This has been a result of NEX and DEX where both the retailer and distributor have been able to create a relationship and where one has assisted the other in getting into the technology. Our Southern California distributor has been able to realize a dramatic reduction in errors in delivery and errors in billing which helps both sides reduce costs and could even reduce overhead.

KEY ENABLER

Census Scanner Data

Juan Deleon manager internal communications

Frito-Lay, Plano, Texas

We see census quality sales data as a key enabler of our ECR efforts because of its role in category management. Frito-Lay's current system already addresses the efficiencies of replenishment and promotion. We have consistently been a provider of new products in salty snacks. This leaves us with efficient assortment executed through the principles of ECR. By using this category census data, we can really measure the retailer's opportunity. That is good for their business and ours.

Census quality sales data allows us to maintain our leadership in the category. In the future, the combination of using census level sales data with a breakdown of local consumer information will give us an unbeatable combination for the retailer and us. We will be able to tailor our selling strategy to a specific account. That should happen soon. Trade acceptance has been great. This is good for their business. Now we can focus on growing sales instead of reviewing the validity of the data. It is performing beyond our expectations because it gives us the information we need to service our customers better. We are able to meet consumers needs on a direct store level.