TOP-TO-TOP 1994-03-07

Benjamin Ball

Mention the words Efficient Consumer Response these days and get ready to stand back. The responses you'll get will range from outrage to flat dismissal to simple confusion, whether you're talking to retailers or manufacturers. As with all complex business management theories, ECR has its share of misconceptions about purpose, functions, implications for daily business and ultimate beneficiaries.

Two of the more prevalent misconceptions define ECR as either a replacement for category management or as a dressed-up continuous replenishment program. While both perceptions harbor some aspect of the truth, they're really only part of the larger picture and don't do justice to the far-reaching implications and benefits of ECR theory for retailers, manufacturers and consumers. In practical terms, category management and continuous replenishment are the foundation for implementing ECR.

It's easiest to understand the relationship of category management, continuous replenishment and ECR by looking at the bigger picture. ECR is a broad-based business management theory that looks specifically at re-engineering work processes and industry practices to achieve maximum efficiency in four primary areas:

1. Store Assortments: This is really one aspect of category management, which we can simplistically define as "what to put on the shelf." A more complete definition of category management is "the process of applying category-specific information to merchandise management in a way that improves total category productivity and profitability." Using electronic data interchange and other information sources, including scanner output, category management works to optimize future sales. Traditional shelf management is more narrowly focused on "what was" and "what is" rather than on "what can be achieved."

2. Product Replenishment: If category management represents "what to put on the shelf," continuous replenishment is "how to get it there as cheaply as possible." Quick Response is the umbrella term for the process of getting products efficiently from the manufacturer's warehouse to the retailer's store shelves. Continuous replenishment only addresses the link between the manufacturer's and the retailer's warehouse.

Continuous replenishment works by integrating operations and technology between retailers and wholesaler-suppliers to replenish products based on actual and forecast store-consumer demand, rather than on the old methods of ordering products to meet bracket requirements or take advantage of a forward buy or diverting opportunity.

3. Promotion: The goal of ECR is to improve efficiency in trade and consumer promotion by eliminating such industry inefficiencies as forward buying and diverting. Instead, ECR theory recommends a system where retailers only receive manufacturer allowance money for products they sell to consumers at reduced prices.

In theory, since fewer manufacturers' dollars will be "wasted," they will invest instead in more frequent and deeper promotions. In turn, the retailers will reap more incremental sales, and everyone will benefit.

4. Product Introductions: ECR theory advocates a team approach between retailers and manufacturers to develop products that anticipate and respond to consumer needs and demands -- rather than the wasteful practice of me-too products and the subsequent retailer demand for slotting and failure fees.

That's the big picture of ECR theory. Its benefits? The Food Marketing Institute Council Report on ECR projects the following results: $30 billion in total systems savings, $10 billion in savings for warehouse-supplied dry grocers, 41% less total system inventory, and an 11% reduction in retail prices for the consumer. So where's the "reality" of ECR implementation in the midst of all this theory? In practice and in the near-term, the most practical and painlessly achieved applications will be the dynamic duo of category management and continuous replenishment. Achieving maximum efficiency in trade promotion and product introduction practices will be a tougher goal to achieve, one that means giving up some familiar, comfortable and profitable (in the short term) practices in exchange for the longer view that will ultimately benefit everyone -- retailer, manufacturer and consumer.

Benjamin Ball is executive director of Dechert-Hampe & Co., Chicago.