By Brian Kilcourse
1/15/2008
Are retailers and their partners ready to really work together?
When RSR advises technology providers about working with retailers, we always point out that above all, retailers are great buyers. Although the line between the “art” and “science” of buying is constantly debated, the competency bar has been set so high by such companies such as Wal-Mart, Target, and Home Depot, that many retailers are seeking to merely even the playing field on the buy-side of their businesses. One thing that the above-mentioned retailers share in common, that other retailers should emulate, is that they take a collaborative rather than a coercive approach towards their wholesale and manufacturing partners, working with them to co-manage categories of merchandise for mutual benefit. Regardless of these success stories, many retailers still tend to think of their manufacturing partners as “suppliers” while manufacturers tend to think of retailers as part of the distribution network for their branded products.
What stands in the way of these partners in the retail value chain from truly integrating their inter-corporate processes? I asked André Martin this question, to get his insights into the challenges and opportunities that retailers, manufacturers, and wholesalers face in making this happen. Martin is co-author of “Flowcasting the Retail Supply Chain” and founder and CEO of Factory2shelf. His company is now working with several large retailers and manufacturers to implement “flowcasting,” a process to improve forecasting and replenishment accuracy and timeliness.
According to André, there are three enemies to true cooperation and collaboration in the retail value chain.
First, “There is a deep misunderstanding about what truly drives the retail supply chain. Companies must address this first; otherwise they will continue to seek solutions that don’t apply. When people don’t understand a problem, they seek complicated solutions,” he says. “Once they understand the problem, they realize that the solution is really straightforward.” Martin points to the fact that even after decades and billions of dollars spent on complicated technologies, the retail ecosystem is still clogged with huge inventory levels and a persistently slow turn rate. According to the author, this fact alone should encourage decision makers to think differently.
The second enemy of true collaboration is unwillingness on the part of retailers to share information with their partners. “The pendulum swings between retailers who will only ‘sell it’ and those that empower manufacturers with infrastructure,” according to Martin. “Those retailers that put the infrastructure into place so that manufacturers can co-manage the supply chain with the retailer are winning.”
André cites unwillingness to work as a team as the third enemy.
Enemy #1 is the fundamental problem. Martin simply states, “The real driver of the supply chain is the consumer, plain and simple. But if we conducted a study asking retailers, wholesalers, and manufacturers what drives the supply chain, we’d get all sorts of different answers. Ultimately, it boils down to whether or not the consumer buys the product.” Although this might seem obvious, Martin discussed two recent examples where a manufacturer his company is working with lost millions on a new product promotion that didn’t go as planned. “The manufacturer spent a lot of money to create the demand, manufacture the product, and get it into position to be sold. Then they spent more money taking back the unsold inventory – all as a result of poor assumptions in the plan.”
So where does it go wrong? According to Martin, the answer is twofold: the wrong information is often used in forecasting demand in the first place, and there was not enough visibility into the entire chain to take quick corrective action when it was needed. By “the wrong information,” André means “aggregations,” and specifically, aggregations of demand data one or more levels up from where consumer demand is serviced- in the selling environment. “Aggregating hides inaccuracies, and it takes away your ability to look,” he says. Even for very well run retail companies, Factory2Shelf has been able to measure differences between DC-level demand forecasts and per-store forecasts of up to 15%. It is typically aggregated forecasts that are being shared with manufacturers, and the result is almost invariably an over-inventoried supply chain – to avoid the even more damaging problem of out-of-stocks.
Martin offers a different approach. The author advises, “Don’t forecast what you can calculate,” (perhaps borrowing the phrase from his years of involvement in DRP practices). Here’s how he explains it: a retailer typically generates both store-level and DC-level forecasts; the manufacturing partner will produce a forecast for its distribution network and another for its manufacturing plants. All four of these forecasts are performed independently of each other, using different units of measure (eaches, case pack, pallet, etc.) and often different time frames. At every step of the way, a different result is generated, and those differences create “friction” (inaccuracies that should be - but often aren’t - resolved). Martin suggests that if the retailer shared true demand data at the transactional level, that data could be used to calculate appropriate quantities at each point upstream in the supply chain. The result would be both better order quality and improved service levels, while reducing inventory in the pipeline. And to the extent that the data is made available daily, all the partners co-managing the chain can react to changing conditions at the store level.
If this sounds familiar, it’s because the problem is not new, as every retailer knows. I asked Martin how Factory2Shelf’s approach differs from or augments the VICS CPFR (“Collaborative Planning, Forecasting, and Replenishment”) process. Martin sees the “Flowcasting” process as taking CPFR to the next level by refining the current collaborative planning concept. He explains: “With CPFR, retailers share information about what they think they will sell with their manufacturing partners. The information is aggregated for all the stores supported by a retail DC. Manufacturers take on the responsibility to replenish the retail DC’s after the partners agree on service level and inventory turn objectives and on what each DC will require. This is an excellent start but, by aggregating to the DC level, the partners miss a key ingredient – what is happening on a store-by-store basis. Flowcasting uses unaggregated store-level demand data.”
Are retailers ready to try something new? If Loblaw’s is any indication, the answer is yes. The Canadian retailer recently went public with their intention to use the flowcasting methodology.
Oh, and what about Enemies #2 and 3? Martin advises: “To solve the fundamental problem, retailers just have to get over it.”
What do you think?
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