Case study Product range management: a case study ...

4 downloads 0 Views 87KB Size Report
their supply chain operations adequately to meet the new ... operations and its role in achieving efficient consumer ... primarily from specialist retail outlets (e.g..
Case study Product range management: a case study of supply chain operations in the European grocery industry Jan Holmström

The author Jan Holmström is based at the Department of Industrial Management, Helsinki University of Technology, Sweden. Abstract A particular problem for European suppliers to the grocery trade is the requirement for country or region specific product variants. A large number of local variants dramatically reduces the supply chain performance of a European supplier in the smaller markets. Focuses on the issue of product range management in European supply chain operations and its role in achieving efficient consumer response in the many regional markets within the EU. Discusses the importance for supply chain management of well-defined roles for the product range in different markets and for different customers. Assesses the supply chain performance of a European supplier from the perspective of a regional market. Presents some alternative tactics for achieving the strategic goal of continuous supply in small regional markets.

Introduction At the heart of many consumer packaged goods companies is the brand management system, which has also been a role model for other industries. Recently, the picture has changed. New retail formats, private label and generic products and market changes have undermined profit and raised doubts about the supplier organization (Armstrong et al., 1996). The industry’s answer is to improve its operating efficiency and service (Pontin et al., 1995). This effort is known as Efficient Consumer Response (Robins, 1994; Yohalem, 1995). The goal is to eliminate waste and increase service by building up a demanddriven supply chain. The focus of both suppliers and retail chains is to improve profitability and market share by responding better and quicker to consumer demand. In the retail trade, the roles of product brands and product line extensions are diminishing and the importance of strategic product categories is increasing (Quelch and Kenny, 1994). The essence of this shift in focus is the alignment of service with consumer needs. An important part of this is the critical examination of the role of each product variant from a consumer perspective. However, European suppliers have found it difficult to change their supply chain operations adequately to meet the new challenges of a stronger consumer focus in the retail trade. This article discusses the problems encountered by a European multinational supplier that in recent years has both consolidated production to fewer sites and expanded into new markets. The case company is a supplier of household products to the grocery trade. The study attempts to show why European suppliers have difficulties in efficiently serving small markets at the same time as servicing the major retail customers.

Poor supply chain performance in Europe – the result of bad product range management?

Supply Chain Management Volume 2 · Number 3 · 1997 · pp. 107–115 © MCB University Press · ISSN 1359-8546

The actors in the packaged goods industry are the supplier, the marketer, the distributor, the wholesaler, the retailer and the consumer. The case company acts in the operational roles of supplier and marketer. In this scenario, the suppliers provide the products for the European market and the marketers 107

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

promote brands locally and sell to wholesalers, who in turn distribute to retailers. Before the integration of the European market in the early 1990s, supply and distribution were essentially conducted at a local level. However, through a process of specialization in supply, the regional supply chain structure has been extended to cover a number of regional markets. The consequence of this development is a supply chain with diverging flows in each supply chain echelon (Figure 1). With a supply chain structure of this kind, service and efficiency can be kept at satisfactory levels in the large and central regions of the European market, but severe problems are encountered in the smaller markets. A particular problem for the supply chain in this case study is the requirement for country or region specific product variants, which dramatically increases transaction volumes. Due to regional differences (e.g. language and taste) the goods cannot always be the same throughout Europe. Instead of supplying one product to the European market, the supplier is expected to provide a number of countries and regions with their unique product variant, resulting, in many instances, in an increase in the number of product variants by a factor of ten.

category of products and/or services which the consumer perceives as interdependent or as substitutes. The objective is to maximize consumer value in the category. Product range management is the extension of category management upstream in the supply chain. The goal is to organize the supply chain in response to consumer requirements as identified in category and sub-category roles. Category management takes the viewpoint of the retailer. The objective is to create distinct manageable groups of products that consumers perceive to be inter-related or substitutable and to define the strategic role of the category in the retail echelon (ECR Best Practices Operating Committee, 1995). Typical strategic roles for categories are: • destination; • routine; • seasonal; and • convenience.

Product range management – linking supply with demand The starting point for a demand-driven supply chain is the consumer (Armstrong et al., 1996). In the retail echelon, consumer needs are met by the systematic management of a Figure 1 A complex “many-to-many” supply chain structure Supplier Chain Supplier

Chain Marketer

Chain

Supplier

Supplier

Marketer

Chain Chain Chain

Supplier

Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail

A destination category aims at being the primary provider of the products to the target consumer through consistent superior value. A destination category is very important from the consumers’ point of view (e.g. nappies for families with babies). Categories that establish the retail chain as the store of choice by providing consistent, competitive value in meeting consumers’ routine stock-up needs are routine categories. Seasonal categories also contribute to the “choice” element, providing consumers with products which consumers expect at particular times of the year (such as certain types of fruit and vegetables). Competition in these categories is primarily from specialist retail outlets (e.g. greengrocers, butchers). Finally, categories that reinforce the retailer’s image as a full service store by providing for the target consumers’ unplanned “fill-in” needs are convenience categories, which have a strategic role. The definition and function of a category is common to the retailer, the marketer and the supplier. Based on this definition, the marketer and supplier can start aligning their supply chain operations to maximize consumer value in the retail echelon. The cornerstone of this alignment is product range management – controlling supply of the items in the product range according to the importance of their respective categories at the retail level. For example, in a destination category, a high level of supply service is needed for a wide product range. On the other hand, in a

108

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

convenience category, stock-outs for individual items are less critical. For a supplier, it is important to correctly determine how the individual product items in its product range respond to consumer needs. Each product item of a category has a distinct role to play. To get a better understanding of what roles its products play at the retail level, the supplier in this case study conducted a survey of 45 shops in a small market. The objective was to determine, in terms of shelf space, sales and inventory turnover, how different products within the product range were performing. The products were chosen from a particular category of household items – the key category of the supplier but a routine category for most consumers and retailers. The results of the study are presented in Figure 2, within the framework of trafficbuilding, profit-generating and imageenhancing roles. A traffic builder is a product that draws consumer traffic into the aisle in the store. The profit generator is a sub-category or product that increases category gross profit. The image enhancer is a sub-category or item that reinforces the retailer’s desired image to the consumer. Figure 2 shows the performance of the product range in terms of sales and shelf space at the retail level. The traffic-building items of the range can clearly be identified by their large shelf space and high sales. The profit-generating items are distinguished by a good inventory turnover in the stores. The image-enhancing items have the most shelf space, in proportion to sales. In most product categories, a large number of image-enhancing items do not increase consumer value. It is only in the destination categories of the retailer that a wide range of product offerings brings increased consumer value. In routine and convenience categories,

competition for space drives up costs and undermines the opportunities for introducing demand-driven replenishment practices. In order to use point-of-sales data for replenishment control, a systematic setting of inventory levels at the retail level is necessary. The results from the initial study revealed that the competition for space (i.e. the practice of selling in large quantities to retailer customers) already distorts demand at the retail level. In the traffic-building subcategory, several shops in the study had shelves and displays with stock for over 100 days of sales. A follow-up study of 43 retail outlets produced very similar results. In a situation with demand distortion already at the retail level, it is a virtually impossible task for supply chains to operate efficient replenishment. Only with the co-operation of the retailer – careful monitoring of sales activities, pipeline inventory and consumer out-take – can good supply chain performance be secured. The objective of product range management is to provide a supply service based on the role of individual product items in the stores. In a European supply chain, the service a supplier provides a market should not depend on absolute volume, but on the importance of the product in its market. Thus, for example, traffic builders in a small regional market require more attention than image-enhancing items in large markets. Supply service is therefore based on consumer values, not sales volume. Figure 3 shows the position of the trafficbuilding items from the initial shop survey in the local sales and marketing organization’s

Figure 3 The position of the traffic-building items in the local sales and marketing organization’s product range and in the European supplier’s product range Cumulative volume (per cent) 100

Figure 2 The product range of the case supplier in terms of sales and shelf space in the sample of retail outlets Shelf space

75

Image enhancing

50

Traffic building

25 Profit generating

Key European supplier Local sales organization

0 1 51 101 151 Stock keeping units by rank

Sales

109

201

251

301

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

product range and in the European producer’s product range. The products are ordered by rank, both for the marketer and the producer. It is evident that for the European production unit the key items of the local marketer are marginal. The challenge then becomes to ensure that delivery service from the European supplier to the local market lives up to the requirements of continuous replenishment to the trade. Supply chain assessment We now look at supply chain performance from the perspective of the small sales and marketing organization, in order to understand what problems are encountered in European markets when appropriate attention is not paid to product range management. The marketer sources a range of goods for its market from half-a-dozen production facilities all over Europe. The frequency of delivery of stock-keeping units varies with sales volume, on a weekly, monthly or quarterly basis. The average delivery frequency is 15 times a year with a stock cover of five weeks. The goods are sold and distributed to large retailer chains and individual discount stores. The main operational problems facing the marketer are: • long lead times in sourcing for all items, irrespective of category role; • the service level of supplying factories is equally poor for all items in the product range; and

• high variability of incoming order volume from retailers. The long lead time and poor accuracy of deliveries is aggravated by demand distortion at the retail level. To secure high service levels, the marketer needs to buffer both against supply disruptions and unpredictable retail orders. This in turn distorts the demand that the supplying factory perceives. The key measure for determining how well demand and supply is synchronized is variability. High variability increases the risk of demand distortion. Demand distortion was first described by Forrester (1961) in his classic supply chain model, but it is only recently that the full extent of the problem has been recognized (Towill, 1996). Figures 4 and 5 illustrate how well synchronized the retail store, marketer and supplying factory echelons are to consumer demand for one of the traffic-building and profit-generating products of the shop study discussed. Consumer demand, shop orders, orders placed by the retailer to the marketer, supply requests to the factories and deliveries from the supplying factories, are shown for both the traffic-building and profit-generating items. Table I presents the standard deviation of weekly demand as a percentage of the average for the traffic-building and profit-generating products of the supplier’s range in the example category. For the profit-generating product, the variability of shop orders is three times greater than consumer demand, the retail order

Figure 4 Consumer demand, shop orders, orders placed by the retail chains to the vendor, supply requests to the factories and deliveries from the supplying factories for a traffic-building product in the category Shop orders

Quantity Quantity Consumption

Quantity

Chain orders

Time Time Time

Quantity Supply Quantity Supply requests Time Time

110

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

Figure 5 Consumer demand, shop orders, orders placed by the retail chains to the vendor, supply requests to the factories and deliveries from the supplying factories for a profit-generating product in the category Quantity

Shop orders

Quantity

Quantity Chain orders

Consumption Time Time

Quantity

Time

Supply Quantity

Supply requests

Time Time

variability ten times greater, and vendor supply request variability 23 times greater. In total, the relationship between weekly variability of supply and demand is 29:1. For the traffic-building product, the corresponding values are 3, 8 and 5, and the relationship between variability of supply and demand is 9:1. The analysis shows that the supply chain is badly adapted to provide sufficient service for key segments of the product range. Consumer demand is already distorted beyond recognition in the retail chain echelon because of trade loading. The other critical problem is that supply is discontinuous, even for trafficbuilding products. The increase in variability through the supply chain is partly a result of delays in information flow and miscalculating changes in consumer demand. The accumulation or consumption of buffer stocks affect the order levels in each echelon, thus further delaying

and distorting the information on changes in demand (Fincke and Goffard, 1993). This effect is dominant for the traffic-building products in the range of the supply chain in this case study. It is evident from Figures 4 and 5 that the European production unit does not continuously supply the local sales organization. Reducing production and delivery frequency for small volume items at the European supplier level is, in effect, a reduction in the service level provided to small markets. The result is that it becomes much more difficult to achieve a fast and reliable response to consumers in these markets. The marketing and sales organization cannot achieve the levels of cost efficiency and service required to develop a close partnership with wholesalers and retail chains. Since small markets together constitute a large portion of the total European market, the supply chain also has to cope with high levels of demand uncertainty.

Table I Weekly variability from average in each supply chain echelon of the traffic-building and profit-generating products of the supplier’s range in the example category

Supply chain echelon Consumer out-take at retail outlet Shop orders Retail chain orders to local sales organization Local sales organization’s requests to European factory Supply from European factory 111

Variability for traffic-building product (%)

Variability for profit-generating product (%)

10 26 75

7 22 67

54 90

160 200

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

Supply chain strategy – continuous supply for destination and routine categories The goal of efficient consumer response in the packaged goods industry is to develop a responsive, consumer-driven system in which suppliers, marketers and wholesalers work together to maximize consumer value and minimize the supply chain cost (Cahill, 1995). To achieve that in a complex European supply chain operation requires decisive changes in the way all supply chain participants act and co-operate. A well-defined and managed product category is pivotal to enhance consumer value, sales and profit at the retail level. The task for the supply chain operation is to support the retail outlet by efficient replenishment – providing the supply service required for the items of the product range, depending on the category and their role in the category. The ability of the supplier to efficiently use demand information for planning decisions is critical. The key factors are the product range, capacity and required delivery frequency for the supplying factories. For the marketer, the service and delivery frequency for its key items is the main concern. To attain the retail customers’ goal of demand-driven continuous replenishment, the marketing and sales organization must itself have a continuous supply from the factories. A sourcing lead time of six to 12 weeks is highly insufficient. However, the biggest problem is a low delivery frequency.

Supplying factory to marketer The problems associated with matching supply with consumption are exacerbated by unsychronized planning cycles (Towill, 1992). This is an important contributing factor to the demand distortion for smaller volume products in the product range. The cumulative effect on the load of supplying factories can be severe. Even with a limited product range, an unsynchronized delivery schedule can result in significant variability. Figure 6 demonstrates how variable planning periods for individual items in the product range of the vendor results in a variable load on the supplying factories – the load surge effect (Burbidge, 1994). The high inventory and complex control procedures associated with the situation described above can be avoided by synchronizing supply with demand on a periodic basis. This is done by assigning marketers with a regular delivery slot for the range of products with high-profile roles in the retail echelon of each distinct market. With a regular delivery schedule, the supplier knows the timing of demand and can adjust to small changes as long as his production follows the same regular schedule (Fincke and Goffard, 1993; Lehtonen et al., 1996). This synchronization of supply and demand provides continuous supply for all marketers, regardless of size. Provided that changes in demand can be quickly identified, a very high level of service can be achieved without high inventory levels, in both small and large volume markets.

Figure 6 The effect of variable planning periods for the product range in a marketing and sales organization Marketer

Supplying factory

Delivery schedule for product range Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P13 P14 P15 P16 P17 P18 P19 P20 P21

X X

X X

X X X

X

X X

X

X X X X X

X

X X X X

X

X X X X

X X X X

X X

X X X X

X

X X

X X X

X X X X X X

X X X X

X X X X

X X X

X X

X

Load

X X

X

X

X X X X X X X

X X

X

X X

112

X X

1 4 Week

7

10

13

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

The key challenge lies in improving supply service by increasing delivery frequency from supplying factories. Only then can the marketer provide high service levels to distributors and retailers without excessive buffers. The first step is to reduce the product range complexity from the supplying factory’s viewpoint. The second step is to reduce the transfer batch of individual products from the marketing and sales organization’s perspective. Packaging is the main source of variation in the supply chain in this case study. Every European language has to be on the label of the product if it is to be sold throughout Europe. Due to marketing requirements, it has been necessary to create several package variants for exactly the same product. As a result, products destined for small markets spend most of the time waiting in production and transportation schedule queues. One possible solution to this problem would be to take more account of supply chain considerations in product design (Lee and Billington, 1992). A reduction in the number of product variants from a supplying factory’s perspective can be achieved by using packaging solutions where label differentiation is possible according to demand (i.e. by separating packaging and labelling). The product is first packed in unmarked cartons. Only when the requirements from the different markets are known is a stick-on label attached and the product packed in wholesale units. An alternative solution would be to increase the delivery frequency for products to small markets. Frequent deliveries of a product range can be made possible, even to a small market, by periodically consolidating its volumes with those of larger markets before labelling and despatch. Labelling and delivery of the product range can then be synchronized to demand regardless of whether it is, say, the German or Finnish market that the product is sold in. This period batch control strategy of labelling before assembling deliveries enables a high-delivery frequency of all label-specific packaging variants. For small markets, the periodic despatch of product ranges is critical, as it makes it possible to combine several stock-keeping units into the same delivery and reduce transportation costs. These potential solutions imply a change in the structure of the supply chain. A consolidation of volumes before labelling and the periodic despatch of product ranges would be

possible with a hub-and-spoke structure. Labelling could then be conducted for daily or weekly despatches to the different European marketers or directly to retail outlets. This structure makes a continuous supply feasible to small markets and opens up the potential for breakthrough improvements in supply-chain performance. Marketer to retail chain In the relationship between the retail chain and the marketer, the goal is efficient high service and good profitability. To achieve this the sales and distribution process has to be demand driven. The basis for demand-driven distribution is to operate according to actual requirements, not budgets or plans. The role of budgets and sales planning is to direct sales and marketing activities with the objective to promote demand. The practice of consignment or vendor managed inventory (VMI) can improve information flow and responsiveness. The benefit is a better quality of information from the market. By gaining direct access to the retail chain’s stock and demand situation, a fast and accurate feedback for better supply chain control is achieved (Gregory, 1994). Levy (1995) found, in a simulation study of complex supply chains, that demand-related disruptions do not decline over time, whereas production related disruptions do. Therefore, feedback is critical for efficiency improvements. Some local marketers in the European supply chain in this case study have started to directly manage inventory for key customers. When marketers are allowed to monitor and control inventory in the supply chain, the information delay between consumer and supplier is significantly reduced. The marketer can monitor demand with only a short delay, based on sales and stock reports from the retail chains. This information provides the basis for replenishing the different chains according to demand. The implementation of VMI does not need complex technology, the key is co-operation and a common understanding of process and procedure (Heard, 1994). In the marketing and sales organization, where the category analysis was also conducted, good results have been achieved with a very simple system. The application developed for administering replenishment deliveries is based on receiving an inventory report by EDI from the retail

113

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

chain warehouse. The customer stock is kept in the sales and distribution information system as unvalued stock. The inventory report is processed using a standard physical inventory transaction and the replenishment order is created according to customer specific re-order points. By eliminating one delaying echelon in the information flow, the demand variability for the marketer in this particular case study was reduced from 75 per cent to 26 per cent for the key product in the pilot implementation. With the full implementation, delivery and administration costs were significantly reduced and the savings were used to lower the consumer price. The results from the retail chain’s perspective have also been encouraging, with highly improved service levels. However, the full benefits can only be realized with a reliable supply from production units and an extension of the practice to more retail chains.

of wine would mean that competition for shelf space for established product categories will increase. To improve profitability, retailers strive to reduce costs. With smoother demand, suppliers can themselves reduce supply chain costs and transfer this to the trade without cutting margins. A permanent low price and a reduction in wholesale unit package size to enable fast turnover, even in smaller shops, would make possible a fast flow throughout the supply chain. Here, a potential benefit for both retailers and marketers is a positive cash flow.

Conclusions

Marketer to retailer The retail level is pivotal for the performance of the supply chain. It is here that success or failure for a product is determined. It is the demand changes occurring here that the whole supply chain should be geared up to respond to. For the retailer, a well-balanced category, fulfilling its role, is of primary interest. For the supplier, the measure of success is both profitability and market share for his brands. The issue here is how to align retailer interest in providing consumer value with the supplier objective of category leadership and profit. In order to control more effectively the undesired side effects of marketing and sales actions, a first step is to start measuring the effects of sales/marketing actions on consumer sales at the retail level wherever there is access to point-of-sales data. Measuring stock days per retailer can be effectively used to assess and follow up start-up time and inventory investments for new product launches. From the retailer perspective, profitability of a category is considered relative to other product categories. The product range of the marketer must be at least as profitable as that of competitors in the same product category, as well as other product categories. For example, in Finland, the competition from new categories is increasing in the grocery trade. After joining the European union pressures to allow the sale of wine and other alcohol in supermarkets is building up. The introduction

The key business decision for a supplier operating in the European market is whether to provide good service for customers in all regional markets or not. If the decision is to operate throughout Europe, then supply service levels can no longer be based on sales volume. Instead, supply service must be provided according to the role of individual products in specific markets. Product range management has been overlooked as a way of achieving efficient supply chain management. The importance of product range management is pronounced in Europe, where language and regional differences necessitate product variety in the packaged goods business. In destination and routine categories, retailers require continuous replenishment according to consumption. To achieve this, the marketer must acquire the ability to respond quickly and efficiently across the full product range in these categories. In the supply chain in this case study, one tactic successfully used to improve responsiveness was separating packaging from labelling. An extended local supply chain with a complex “many-to-many” supply chain structure, cannot achieve good service efficiently. There is a need for alternative structures. The findings from this case study suggest that the hub-and-spoke supply chain structure is a viable alternative. References Armstrong, A., Enright, H., Lempers, E. and Rauch, S. (1996), “What’s wrong with the consumer goods organisation”, The McKinsey Quarterly, No. 1, pp. 126 -35.

114

Product range management

Supply Chain Management

Jan Holmström

Volume 2 · Number 3 · 1997 · 107–115

customer acceptable delivery time in the implosive industries”, International Journal of Production Economics, forthcoming.

Burbidge, J. (1994), “The use of period batch control (PBC) in the implosive industries”, Production Planning & Control, Vol. 5 No. 1, pp. 97-102. Cahill, J. (1995), “ECR: The vision, the reality”, Beverage World, Vol. 114 No. 1589, pp. 16-18. ECR Best Practices Operating Committee (1995), “Category Management Report – Enhancing Consumer Value in the Grocery Industry”, Joint Industry Project on Efficient Consumer Response, USA.

Levy, D. (1995), “International sourcing and supply chain stability”, Journal of International Business Studies, Vol. 26 No. 2, pp. 343-60. Pontin, M. and Hutter, L. (1995), “Colgate-Palmolive: meeting our customers’ needs”, Logistics Focus, Vol. 3 No. 7, pp. 2-5

Fincke, U. and Goffard, E. (1993), “ Customizing distribution”, The McKinsey Quarterly, No. 1, pp. 115-31.

Quelch, J. and Kenny, D. (1994), “Extend profits, not product lines”, Harvard Business Review, Sept-Oct.

Forrester, J. (1961), “Industrial dynamics”, MIT Press, Cambridge.

Robins, G. (1994), “Sailing into ECR’s uncharted waters”, Stores, Vol. 76 No. 10, pp. 43-4.

Gregory, A. (1994), “Adopting the SCM frame of mind”, Works Management, Vol. 47 No. 12, pp. 32-5. Heard, E. (1994), “Quick response: technology or knowledge?”, Industrial Engineering, August, pp. 28-30

Towill, D. (1992), “Supply chain dynamics – the change engineering challenge of the mid 1990s”, Proceedings of the Institute of Mechanical Engineers, No. 206, pp. 233-45.

Lee, H. and Billington, C. (1992), “Managing supply chain inventory: pitfalls and opportunities”, Sloan Management Review, Spring, pp. 65-73.

Towill, D. (1996), “Time compression and the supply chain – a guided tour”, Supply Chain Management, Vol. 1 No. 1, pp. 15-27.

Lehtonen, J-M, Holmström, J. and Slotte, J. (1997), “Balancing product range and capacity within the

Yohalem, K. (1995), “Is the consumer your CEO?”, Sporting Goods Business, Vol. 28 No. 2, p. 30.

115