By Brian Kilcourse, Managing Partner
1/6/2009
“Supply chain collaboration” is a true retail paradox. Retailers and manufacturers have held starkly different views of each other’s value in the extended retail ecosystem. But the idea that retailers and their partners in the retail ecosystem should work more closely together isn’t a new concept. For example, VICS (“Voluntary Inter-industry Commerce Solutions Association”) was constituted in 1986 to begin the development of cross-industry standards to enable technology-assisted collaboration. And although technology-aided collaboration really began to take form in the 1990’s with the ECR (“efficient consumer response”) movement in grocery, business ideas such as 3rd party consolidators (a model which inherently implies “collaboration,” particularly among manufacturers serving one or more retailers) have been around a lot longer – ever since global supply chains started to become SOP.
There have been many inhibitors to collaboration between retailers and their partners– technical, attitudinal, and philosophical. But as assortments grow larger and more complex and companies spread their networks globally, there is much less room for error. Retailers and manufacturers both must operate with a greater degree of precision and greater responsiveness in order to accommodate the twin pressures of greater, more granular assortment and decreasing inventory levels. For that reason, there is a more willingness to address the collaboration agenda than ever before. What gives this special impetus is that literally every penny counts in these economic times. Manufacturers want to push inventory through the pipeline faster and have less of it, while retailers look to reduce costs associated with moving inventory- and both continue to attack persistent out of stock and speed-to-market challenges. So it’s no surprise that there’s a great willingness on the part of trading partners to collaborate, as RSR’s forthcoming report Retail Supply Chain Collaboration: Moving Beyond Coercion highlights:
The only question might be, why isn’t “willingness” close to 100%? To get some answers, RSR had a conversation over the New Year break with Joe Andraski, CEO of VICS and a long time collaboration advocate to retailers, suppliers, 3rd party providers, and technology solutions providers. “We’re moving forward as an industry,” the CEO asserts. “Everybody realizes that it has gotten much more complex than when we were manufacturing products in the States and had relatively short lead times. If you don’t have a collaborative strategy, you’re going to have one hell of a time competing, whether you’re building cars, or are into medical supplies, or apparel – whatever it is, nobody can do it by themselves.”
Collaboration Affects Whole Verticals
The extent to which collaboration strategies are being executed depends on the retail vertical, according to VICS’ CEO. “When people say ‘retail’, they tend to throw a retail blanket over everything. The fact of the matter is that some of retail is struggling and taking pretty dramatic steps to take costs out and make numbers. Others are in fact moving along, taking collaborative steps to do things differently.” This observation closely echoes what we at RSR have seen repeatedly seen in our research, that “winners” actually accelerate game changing strategies in tough times, while other companies tend to get to try to cost-cut their way to out of the box they’re in. But this behavior extends to whole verticals, according to Andraski. “Take the Sporting Goods vertical, for example,” says Joe, “they’ve hooked up with EDIFICE, which is a company that provides point-of-sale information along with other mission critical information like inventory-in-transit, inventory-in-storage, inventory at distribution centers – they help trading partners answer questions like, ‘how can we get more hot selling products to the stores that are selling them?’ or ‘if something isn’t selling, how do we slow down and stop shipments to those stores?’ Sporting Goods is a good example of a vertical that has seen that there are advantages to doing business differently and taking more of a collaborative approach.”
According to Joe, “Some retailers have said, ‘we’ve got to change, and we need to get to our top suppliers to get them to help us change’, but then they fall off the wagon. But then you’ve got companies like H&M and Zara who have taken lead times down to 6 weeks (compared to 9 months). They call their programs ‘runway to rack’ and they’ve done it by re-engineering their businesses. They use the same material but they cut it differently with different designs, while other companies start over every time.”
In the RSR study, retailers put a great deal of importance on reducing transportation and handling costs, and this is an area where collaboration can really help. According to Andraski, “research that we have shows that logistics costs can be reduced by 10-20% by changing the packaging.” But the opportunity is a lot bigger, according to the CEO. “Back in the ECR days and even prior to that when I was at Nabisco, we did something called ‘3d party consolidation’ that made it possible for retailers to consolidate shipments from different manufacturers that then ship in smaller quantities while still getting truck-load prices. This idea has been around forever. Now there are companies in Asia taking that very same approach, consolidating multiple manufacturers of garments into a container for shipment to a retailer’s DC in the States. The number of miles that can be reduced is phenomenal. This isn’t Star Wars. It’s basically a collaborative effort. The first step is to get the merchants to buy by distribution center differently than they did before.”
Tearing Down the Tower of Babel
The major challenge for all retailers, according to Andraski, is in getting the merchants to think about how to collaborate with suppliers that they’ve never collaborated with or shared information with in the past. To help the process, VICS develops and promotes standards that are intended to break down ‘language’ barriers that stand in the way. For example, the organization is developing ‘collaborative materials standards’. Andraski explains: “If I’m a manufacturer in China and I’m doing business with 30 different retailers in the U.S., they all have inner-linings in their design, but they all call the materials – button or bolt – something different. So in my system I’ve got to have 30 different data catalogs so that I can understand what they’re asking for. Sixty percent of the lead time is in the planning piece. So once the parties decide what it is they’re talking about, then the supplier sends a sample and the retailer says ‘yeah, that’s what I want’ – and only then can the process to source the material get started followed by manufacturing. This obviously happens on fashion but … name the product! It’s the same for anything. If you don’t have common definitions, you get into this whole discussion of ‘am I really getting what I asked for?’ – especially when sourcing globally.”
How To Get Started
“Collaboration” isn’t only a process between the buyer and the seller; it has to go all the way down to the store, according to Andraski. Collaborative planning and forecasting is good as far as it goes, but it won’t work if the stores don’t execute. So how to know where collaboration is important? “First, do an internal assessment,” says Joe, “you’ve got to know where your own strengths and weaknesses are. Then even before you decide whether you’re prepared to collaborate with your partner, you have to decide whether you’re willing to collaborate internally. If you’ve got technology issues, or if you don’t have the support of the leadership of the operations, marketing, or finance organizations – if your compensation structure isn’t designed to support collaborative planning, you won’t be able to get very far.”
One aspect of the self-assessment should be just how proprietary internal processes need to be. For example, Joe observes, “When it comes to technology, you might have 15 retailers that all have SAP, and every one of those 15 companies will decide to add features or functions to the system that they feel are important to their business. But now a manufacturer has to do business with each of those 15 retailers differently.” As we at RSR have observed before, differentiating between what’s important and what is merely interesting is a critical step to optimizing the business. But VICS’ CEO emphasizes that companies need to get their internal house in order before they can successfully tackle optimizing their trading relationships.
Given the potential gains from “doing it right” and the consequences of “doing it wrong,” re-designing the business with collaboration in mind should be a strategic goal of every company in the extended retail ecosystem.
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