Effecient Consumer Response

7/23/2019 Effecient Consumer Response

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Dr Herbert Kotzab is an Assistant

Professor of International Supply-

chain Management in the

Department of Operations

Management at the Copenhagen

Business School (CBS). Before his

appointment at the CBS, he was a

faculty member of the Department

for Retail Marketing at the Vienna

University of Economics and

Business Administration. In 1998,

he was a visiting scholar at the

Center for Transportation Studies at

the Massachusetts Institute of

Technology. Dr Kotzab is a memberof various associations, such as the

Council of Logistics Management,

American Marketing Association,

Bundesvereinigung Logistik and

Verband der Hochschullehrer fuer

Betriebswirtschaft eV. He received

an MBA in Marketing and

Management and a PhD from the

Vienna University of Economics and

Business Administration.

a report by

Herbe r t Ko t z ab

As si st an t Prof es so r of Inte rnati onal Suppl y Chain Man agement in the Depar tment of Operat ions

Management at the Copenhagen Business School (CBS)

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Ha s S upp l y Ch a i n Manag emen t T ak en

Con t ro l o f t h e G ro c e r y I n du s t r y ?

After 15 years, the grocery industry is facing many

changes. Manufacturers have experienced a power shift

to retailers. Retailers have recognised their abilities in

establishing their own marketing and logisticsapproaches. Both parties have shown how information

technology and co-operative management styles help

to gain competitiveness and economic growth,

although markets have become aggressive.

An example of this is that of Wal-Mart Corporations

distribution strategy. Wal-Mart has consistently made

improvements to its bottom line by streamlining its

distribution operations to better serve its customers.

It is not only Wal-Marts distribution policy, but also

the consumer focus of the policys execution

throughout the retailers operation that has translateditself into greater profitability for the company. The

congenial partner of Wal-Mart at the manufacturer

side had been the Procter & Gamble Corporation.

Both players had launched a partnership that is seen

as the benchmark within the grocery industry:

efficient consumer response (ECR) a strategy

where partners in a supply chain synchronise the

product flow through the distribution pipeline from

point of manufacture to point of final sale.

The key elements that make ECR the supply chain

management (SCM) approach of the groceryindustry, are the integration of business processes on

an interdepartmental and inter-organisational level

and end-user orientation by performing all activities

within the supply chain by customer requirements.

How Doe s E f f i c i e n t Con sumer

R e spon s e Work ?

ECR is primarily related to strategic partnerships in the

distribution channels of the grocery industry to increase

the performance of the consumers. The US-based

Food Marketing Institute introduced, in conjunctionwith the consultant Kurt Salmon Associates, the first

ECR model: a consumer-driven distribution system in

which the production is permanently managed by the

consumerspoint-of-sale activities (see Figure 1).

Organising the supply chain in such a manner seems

to be successful. Beyond the perspective of the

toughgrocery industry that is known for having low

average margins for ECR, it can provide attractive

profit growths as shown by the following examples.

Procter & Gamble reported higher margins (8%),faster category turnover (27%) and greater retailer

market share (12%) effects from the implementation

of ECR principles within the laundry detergent

category in a European country market.

ICA and Lever Sweden presented results from the

ECR partnership between their companies.

Highlights were an increase in turnover of 9%, a

reduction in the number of stock-keeping units

by 20%, a higher market share of 7% and higher

profits of between 3% and 16%.

Johnson & Johnson Company representatives

disclosed two-digit turnover increases in their

respective business segments.

John Menzies Publishing Company implemented

ECR principles during the 1990s by establishing

electronic links between its distribution centres and

the newspaper stands of 20 of its clients. This

partnership resulted in an increased sales volume of

35%, reduced inventory levels of 10% and increased

margins of 2.1%.

Th e T o t a l E f f e c t s o f ECR

Within the ECR-driven channel, no inefficiencies

prevail. Each step of the channel concentrates on its

own core competencies and reduces non-value-

adding activities. A paperless information flow controls

the flow of merchandise. The four major areas listed in

Table 1 ensure the demanded end-user orientation.

The benefit of ECR is calculated for the US grocery

industry with US$30 billion. The savings potential

results from a 41% total-chain reduction of inventoryby speeding up cycle time from originally 104 days

to 61 days. The full implementation of ECR by an

every-day-low-price strategy reduces the consumer

prices by approximately 11% (see Table 1).

Manag ing the Grocery Indus t ry in an E f f i c ient

Consumer Response Manner


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Th e Eu ropean ECR App roa c h

Based on the experiences of the US markets, managers

of leading European businesses formed ECR Europe, a

non-profit organisation headquartered in Brussels. As

the grocery industry in Europe follows different rulesto the US, the European version of ECR is presented

as being more sophisticated (see Figure 2).

The interaction of the focus areas of demand and

supplyleads to improvements of the overall supply

chains performance and consequently to a higher

consumer value represented in the ECR Europe

model as a function of quality, trust, variety, service,

response time and price. The application of the ECR

practices, as suggested by ECR Europe, allows

savings of up to 5.7% based on retailing prices

which is equal to DM50 billion (see Table 2).

Savings in the field of operative costs have led to

reductions of 84% the rest results from inventory

reduction. The total inventory level in the different

channels is from 28 working days in the UK to 50

working days in Germany.

Th e D ev e l opmen t o f ECR

Th e Eu ropean Ex amp l e

Since the first introduction of ECR in Europe, ECR

Europe could establish 14 national ECR initiatives inAustria, Italy, Greece, Finland, Norway, Denmark,

Sweden, The Netherlands, Germany, France, the

UK, Spain, Switzerland and Ireland. Figure 3 sketches

the developments of the conference topics.

In the initial phase, ECR in Europe focused mostly on

the cost-efficiency side of ECR by introducinginnovativeconcepts of SCM, efficient replenishment

techniques and electronic data interchange. In the next

step, demand-side activities had been introduced, such

as category management.

Category management should help to fulfil consumers

wishes on an optimal level by offering exactly the

products and services that consumers are demanding.

From a historical marketingpoint of view these efforts

can be seen as putting the two halves of marketing

togetherbased on the ideas of Converse, 1954 by

recognising both an appropriate market appearance anda well-functioning logistics function behind.

In 1998 and 1999, the consumer orientation was fully

implemented by consumer enthusiasm and consumer-

value initiatives. The goal behind these two approaches

is to ensure that consumers are enlightened in order to

guarantee stable increases in market share and sales.

How F a r a r e ECR Te chn i qu e s A pp l i ed

W i th i n t h e S upp l y Ch a i n s ?

The implementation of ECR was and is permanentlyevaluated either by the ECR member companies

Figure 1: Vision of the US ECR Model

A single ECR Grocery Supply Chain Without Buffers

Demand Flow

Product Flow

Consumer

Household

Retail

Store

Distributor

Warehouse

Supplier

Warehouse

Table 1: The ECR Strategies

ECR Strategies Scope of the ECR Strategies Total Savings

Eff ic ient Store Assortment (ESA) Providing a complete, easy-to-shop assortment

of products desired by the consumers 1.5%

Efficient Replenishment (ER) Maintaining high in-stock levels of the

required assortment 4.1%

Efficient Promotion (EP) Harmonising the promotion activities

between manufacturer and retailer by

communicating benefits and value 4.3%Eff icient Product Introduction (EPI) Developing and introducing new products that

the consumers really want by meeting their

ultimate needs 0.9%

10.8%


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themselves or by other independent academic or

research institutions. The studies identify the state of

the art of the execution of the suggested standards;

rules and processes within the related supply chains.

In 1996, the Joint Industry Project on Efficient

Consumer Response published its second progress

report on ECR. The results showed that over 50% of

the respondents had fully or partially implemented

some ECR practices. More than 90% of the high-level

management showed a strong commitment towards

ECR. The study predicted reaching the critical mass

of 30% of all industry volume to be treated under

ECR in 1997. In 1998, the Joint Industry Project on

Efficient Consumer Response presented its 1997

ECR Industry Benchmarking Survey that was based on

an ECR scorecard approach. The calculation of a

special ECR maturity index that specifies the level of

ECR implementation is shown in Table 3. The

maturity indices in 1999 show a slow growth in the

various areas except category management, where

most of the efforts have been applied.

Tracking surveys on a European level show the same

results. The studies provide the information of a broad

top-management support of ECR within the

organisations and huge knowledge of the effects, but

still low application of the principles. As these studies

are conducted on a national level, there are problems

in comparing the results of the different countries.

In order to generate more valid results on the ECR

progress, also on a global level, Pricewaterhouse

Coopers introduced the idea of a global ECRscorecard at the recent fifth Official ECR Conference

in Torino (http://www.ecrscorecard.com). The

scorecard should be used to evaluate the different

ECR movements worldwide (see Table 4).148

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Figure 2: ECR Europe Model Focus Areas

Table 2: Top ECR Activities to Reduce Logistics Costs

90% of the savings in the field of operative 95% of the savings by reducing inventory are

costs are made by the following: made by the following:

New product introduction 17% Optimal assortment 10%

Efficient promotion 16% Continuous replenishment 24%

Synchronised production 13% Crossdocking 10%

Reliable production 17% Synchronised production 40%

Integrated suppliers 28% Integrated suppliers 11%

Figure 3: Conference Themes and Topics from 1996to 1999

Consumer Value Initiative, Paris 1999

Consumer Enthusiasm, Hamberg 1998

Category Management,Amsterdam 1997

Supply ChainManagement,Genf 1996

ECR-Europe Initiatives

Footprint Global ECR Scorecard

Demand Management Enablers

Supply Management Integrators

Demand Strategy & Capabilities

Optimize Assortments Optimize Promotions

Optimize NewProduction Introductions

Consumer Value Creation

Common Data &

Communication Standards

Cost/Profit and ValueMeasurement

Supply Strategy & Capabilities

Responsive

Replenishment

Operational

Excellence

Integrated Demand

Driven Supply

Collaborative PlanningForecasting and Replenishment

E-Business

Business to Business


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Managing the Grocery Indust ry in an Ef f i c ient Consumer Response Manner

Vendors and retailers can apply the scorecard for self-

assessment procedures and for evaluation of the

trading partners. The approach is structured around

the existing ECR improvement concepts. The

scorecard approach can help the organisations

involved to clarify the gap between their current and

their desired state.

What i s Nex t ?

As ECR was introduced as the strategic weapon to

dramatically change the way business is performed in

the grocery supply chain, several studies have indicated

that companies can gain huge savings potentials. The

rules to adopt can be condensed as follows:

Table 3: ECR Maturity Index in the US

ECR Field 1997 1999 Change (%) Goal in three years

Efficient replenishment 38 38 90

Category management 33 46 39.4 95

Efficient promotion 31 21 -32.3 93

Efficient assortment 30 37 23.3 93

Efficient product introduction 25 25 92

Table 4: Global ECR Scorecard The Example of the Assessment of Optimal Assortments

Global ECR Scorecard A Capability Assessment Tool, Detailed Descriptors

Concept D2. Optimise Assortments

Alignment of assor tment strategies w ith the needs and business goals of each category then selection or elimination of specific products, including

execution and evaluation of this assortment strategy.

Considerations

Assortment Planning Assortment Execution Assortment Evaluation

Score General Meaning The process of optimising the The process to translate the The degree to which assortments

assortment mix to fulfi l the assortment plan into eff icient/ are evaluated jointly against

needs of target consumers. effective implementation. a common set of objectives.

0 Nothing planned No clear understanding o f the No cons is tent process exi st s. No effor ts to evaluate the impact

role of the category in meeting Measures are not def ined or of assortment dec is ions oncorporate objectives or of individual collected to assess. consumer satisfaction, inventory,

products within the category. cost and out of stock.

1 Plans agreed but The category role is understood Systems and processes are being An understanding exists of the

implementation has but little understanding of the developed to formalise the need to measure assortment

not yet been star ted role o f products. Recogni tion assortment execut ion process and effect iveness. Some bas ic analysi s

of the value that trading partners some efforts to measure and is routinely conducted.

provide, but not yet involved in co-ordinate assortment execution

the assortment decisions. are being developed.

2 Pilot tests being Some consumer and market data Some efforts to implement an Assortments are evaluated based

conducted used to make segment dec is ions . e ffective assortment execution on a trad it iona l costs -and-volume

Developing an understanding of process exist limited success. basi s. Some reviews w ith t rading

the role of categories, brands and Slow shelf implementation or partners are conducted.products. Involvement of trading manufacturer range adjustments,

partners is limited. high remnant inventories.

3 Rol lout of Clear understanding of products An assortment execut ion process A broader set of resul ts and

implementation in meeting category objectives. has been implemented and is process measures are evaluated

started Some trading partners are involved usually followed. Improvements related to category objectives,

and a wide range of consumer, in compliance and inventories are such as category growth, consumer

market and trading-partner being realised. satisfaction, market basket or

information is used. closure rate. Joint reviews with

trading partners include

consumer data.

4 Fully implemented Clear understanding of the impact A highly effective assortment process An agreed set of measures are

of assortment on the category, other is routinely used. It is a short cycle evaluated jointly by tradingcategories and corporate object ives . from assor tment deci sion to par tners and related to the

Routine involvement of trading complete implementation. Remnant category and corporate objectives.

partners using joint information. inventory is almost eliminated. These targets are routinely

being met.


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centralise;

standardise;

co-operate;

view in a holistic and systematic way;

integrate;

pull instead of pushing; and

postpone.

ECR is expected to develop further. Formerly, the

approach concentrated on the logistical and/or SCM

issues of replenishment, category management and

consumer value and the upcoming of electronic

business models, such as e-commerce, Internet-based

distribution channels, etc. will push ECR into

another dimension of business growth.

Other industries are doing likewise. The movement

for such collaborations among channel members has

spread to the food services efficient food serviceresponse and healthcare industries efficient

healthcare responsepromising huge savings within

these industries.

R e f e r e n c e s :

D Biggs (1999), Efficient Consumer Response. Where We've

Been and Where Were Going, Presentation at the Council of

Logistics Management Annual Conference.

R Celada and S Mei (1998), Category Management at

Johnson & Johnson, Presentation at the third official ECREurope Conference, Hamburg, 12 April 1998.

A de Luca and G Swoyer (1999), Customer and Supplier

Satisfaction Through Supply Chain Integration,

Presentation at the Frontiers of Global Supply Chain

Management MIT Executives Forum, Paris, 1516

November.

ECR-Danmark (1999), Mling af ECR, implementering,

holdninger og-barrierer, second official ECR conference, Bella

Centret, 28 October.

ECR-Espana (1997), Results of Phase I of ER in Spain.

The Vision of ER-Spain, Opportunity Framework and

Pilot Projects Definitions, ECR-Espana, Barcelona.

ECR-Italy (1997), The supply chain pilot projects

results, Management Summary Report, ECR Italia,

Milan.

ECR-Scorecard, (2000), ECR Global Scorecard,

http://216.247.25.35/Default.asp

ECR-Austria, (2000), Efficient Consumer Response,http://www.edi.org/ecr/start.html

ECR Europe, (1996), European Value Chain Analysis,

Final Report.

ECR Europe (1997), CEO Overview Efficient

Consumer Response.

D Fleury ( 1997), Best Practices Category Management

Category Tactics, Presentation at the second official ECR

Europe Conference, Amsterdam, 1314 March.

N Hven and J De Soysa (1998), Joint ECR-Europe Project

Lever/ICA, Presentation at the third official ECR Europe

Conference, Hamburg, 12 April.

Joint Industry Project on Efficient Consumer Response

(JIPOECR) (1998), 1997 ECR Industry Benchmarking

Survey, Grocery Manufacturers of America.


(JIPOECR) (1996a), ECR 1995 Progress Report,

Grocery Manufacturers of America.


(JIPOECR) (1996b), The ECR Scorecard, Grocery

Manufacturers of America.

H Kotzab, (1999), Improving supply chain performance by

Efficient Consumer Response? A critical comparison of

existing ECR-approaches, Journal of Business

and Industrial Marketing, Vol. 14, Issue 5/6,

pp. 364377.

K Salmon (1993), Efficient Consumer Response.

Enhancing Consumer Value in the Grocery Industry,FMI, Washington.

K Salmon (KSA) (1999), ECR Outlook 1999 Eine

Studie von ksa zum Status und zur Weiterentwicklung

von ECR in Europa, Dsseldorf.

J Schmitz Whipple, R Frankel and K Anselmi (1999), The

effect of governance structures on performance: A case study on

Efficient Consumer Response, Journal of Business

Logistics, Vol. 20, No 2, pp. 4362.

G Stalk, P Evans and L Shulman (1992), Competing onCapabilities: The new Rules of Corporate Strategy,

Harvard Business Review, Vol.70, No 2, pp. 5769.

M Tosh (1998), Whats up with ECR?, Progressive

Grocer, December, pp. 812; 21.

C Troyer (1997), ECR Past, Present & Future. Carrying the

Learning Forward, Presentation at the Council of Logistics

Management Annual Conference.

Webs i t e s

http://www.fmi.org

http://www.ecrnet.org

http://www.ecr-central.com

http://www.ecrasia.com150

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Effecient Consumer Response