A PUBLICATION OF THE TRADING PARTNER ALLIANCE

2010 Survey of Collaborative

Supply Chain Effectiveness Report
About The Trading Partner Alliance
The Food Marketing Institute (FMI) and Grocery Manufacturers Association (GMA) industry affairs agendas are strengthened
through the creation of a joint industry affairs-industry relations leadership group known as The Trading Partner Alliance (TPA).
The TPA works to develop a common agenda on supply chain efficiency issues, the application of information technology, the
adoption of environmentally-friendly business practices and other issues.

About Kurt Salmon Associates

Kurt Salmon Associates is the leading global management consulting firm specializing in the retail and consumer products
industries. We leverage our unparalleled industry expertise to help business leaders make strategic, operational and technol-
ogy decisions that achieve tangible and meaningful results.

About The Joint FMI / GMA Supply Chain Committee

Comprised of members of the FMI Supply Chain Committee and the GMA Logistics Committee, the retailer and manufacturer
committee members identify emerging supply chain trends in the industry with the goal of promoting increased collaborative
effectiveness and efficient business practices between retailer and manufacturing partners to better serve consumers. The
Joint FMI / GMA Supply Chain Committee will accomplish its mission, under the FMI and GMA Trading Partner Alliance (TPA)
by sponsoring forums for developing and sharing best practices, completing periodic assessments of emerging trends and
issues, and publishing results and recommendations aimed at driving real improvement, and collaborating with customers
and other industry associations to develop and implement standards and best practices. The Joint Committee sponsors the
FMI / GMA Supply Chain Conference. Members of the Joint Committee are generally vice presidents and director-level per-
sonnel with the ability to affect positive change within the supply chain.

In adherence to member requests for environmentally sustainable practices,

the publication is available for free download on the FMI and GMA web sites under Publications.

© 2010 by the Food Marketing Institute (FMI) and Grocery Manufacturers Association (GMA) Trading Partner Alliance (TPA)
and Kurt Salmon Associates (KSA). No part of this publication may be reprinted or reproduced in any way without written
consent from FMI, GMA or Kurt Salmon Associates.
 CONTENTS

CONTENTS On the Shoulders of Giants ........................ 1

Introduction ...................................... 3

Infrastructure ..................................... 7

Insight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

‘Info-lationships’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

A Call to Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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ii 2010 Survey of Collaborative Supply Chain Effectiveness Report
ON THE SHOULDERS Harnessing the Building Blocks to Deliver Supply Chain Excellence
OF GIANTS s the legend goes, sometime in the 1660s a young mathematician named Sir Isaac

A Newton was sitting underneath an apple tree, pensively reflecting on the puzzles
of the universe. As Newton drifted into a state of slumber, a lone apple that
hung above unhinged itself from its branch and smacked the mathematician squarely
on the head.
Who would have thought that history’s most famous concussion would lead to
arguably the most important discovery in human history…The Theory of Gravity.
By Newton’s time, man understood many of the basic building blocks of the universe.
Thanks to intellectual heavyweights like Ptolemy, Copernicus, Kepler and Galileo, we
knew the earth was round.
And thanks to courageous adventurers like Columbus, we began to exploit this new
found knowledge, slaying the myth of sea serpents that inhabited the edges of our
known world while discovering the riches that lay beyond.
Newton recognized that his discovery would never have been possible without the
understanding provided by his predecessors. He famously observed that:
“If I have seen a little further it is by standing on the shoulders
of giants”.
Pretty humble given that Newton managed to synthesize the work of hundreds of sci-
entists over thousands of years into a workable construct describing the inner workings
of the universe!
In the centuries that have followed, Einstein and others have leveraged the Newtonian
foundation to push our understanding of the universe to even greater heights.
But despite these advances, Newton’s achievement represents a true watershed moment
in human history. Before him, man understood most of the fundamental building
blocks. After him, man understood, and benefitted from the power of leveraging these
building blocks in new and exciting ways.
The story of Newton and his apple remains instructive today for partners across
the consumer packaged goods supply chain challenged with finding “New Ways of
Working Together”.
Most of the building blocks of supporting efficient and effective supply chain opera-
tions have been “discovered”. What separates the leaders from the rest of the pack is a
Newtonian understanding of how to synthesize the building blocks, and the courage
of Columbus to venture into an uncharted world to realize the benefit.

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2 2010 Survey of Collaborative Supply Chain Effectiveness Report
 INTRODUCTION

INTRODUCTION he 2010 Supply Chain Effectiveness Survey updates the findings from a similar

T effort conducted in 2001.

More than 40 retailers and suppliers participated in this effort involving a quantitative
survey as well as senior executive interviews focused on understanding individual
company priorities and perspective.
Seventy-five percent of companies and executives participated in both surveys pro-
viding unique insight into the evolution of supply chain operations over an eight
year period.

We found a profound difference in this year’s interviews, indicating that the definition
of “Supply Chain” has broadened, and that supply chain initiatives are increasingly
focused as much on driving top line growth and mutual profitability as they are on
bottom line productivity and cost control.
This year, with fundamentally the same group of supply chain executives and compa-
nies participating, the conversation broadened from the more tactical issues prevalent
in 2001. We think this indicates that the definition of supply chain is evolving along
with the role of supply chain executives who increasingly enjoy a seat at the table
where corporate strategy is developed and executed.
The seeds of this shift were likely sown in several places:
• Industry Evolution — The Grocery Manufacturers Association (GMA) and Food
Marketing Institute (FMI) are working together as never before towards truly
collaborative business practices driving mutual top and bottom line benefit.
The construct of the “New Ways of Working Together” program is driving more
strategic connections across a broader range of enterprise activities. It serves as a
powerful beacon illuminating the initiatives that will lead to mutual success.

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 INTRODUCTION

INTRODUCTION
(cont.)

Source: 2007 ‘New Ways of Working Together’ by GMA, FMI, NACDS, GCI, GS1

• The Market — Grocery market share continues to fragment across an increasing

array of channels, putting pressure on traditional grocers from every angle. This
hyper-competitive environment drives the need for more creative approaches
resulting in delivery of enhanced shopping experience without increases in price.
• Homogenization of tools — The past decade has witnessed incredible advance-
ment of strategic and tactical systems and processes. As companies transition
from home grown ‘host’ systems to more robust enterprise resource planning
systems (ERPs), we find more trading partners sharing access to a broader set of
foundational information supporting next generation advances in collaborative
supply chain operations.
Regardless of the reason, we see the broader discourse of the 2010 survey as an indica-
tion that the traditional grocery industry is on the verge of its own Newtonian synthe-
sis, reflecting a recognition of what needs to be done, an understanding of the tools
available to support the mission, and an ever more present willingness to work togeth-
er to drive mutual benefit.
As one retailer indicated,
“We believe that most of the building blocks required to support
effective collaboration are in place. What we have to do is find
the best way of using the blocks with each of our suppliers to
drive mutual benefit.”
We heard similar sentiments from many other respondents leading to the conclusion
that there is a continuum describing how effectively companies are evolving in their
discovery and collaborative use of the building blocks of supply chain excellence.

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 INTRODUCTION

‘Flat Earthers’ — To have survived into the new millennium has required adoption of
a set of enlightened internal systems, processes, infrastructure and HR practices which
have moved all survey participants beyond the “flat earth” thinking of the past. But
while most understand the need for evolution, the realities of upgrading systems and
infrastructure while enhancing internal and external practices, all within a very diffi-
cult economy, have left some further behind the curve than others.
‘Copernicans’ — Copernicans, while still primarily internally focused, look outside
of historic functional silos to seek enterprise-wide benefit. A great example of
“Copernican” evolution would be one retailer whose leadership team has adopted a
strong, shared set of internal performance metrics focused on margin and customer
service. Individual functional areas within this organization are not punished for his-
torically “negative” results such as increased transportation or handling costs so long
as the added cost supports the common goals.
‘Newtonians’ — Newtonians begin to realize the benefit of extending the concept of
internal collaboration and shared metrics to their external relationships. Perhaps the
best example are those companies which adopted the pursuit of Data Synchronization
early on and have begun to realize the tremendous benefit associated with trading from
a foundation of accurate and shared data.
‘Einsteinians’ — Einsteinians operate their supply chains as a true end-to-end entity in
which all participants share the same set of goals and work collaboratively to achieve
those goals.
While no single partnership has evolved to this level across all areas, we heard evidence
of a number of retailer/supplier partnerships dedicating themselves to the kind of
open exchange of information and ideas which will fuel the evolution toward this
final frontier.
Through our interviews, we have developed a sense that since 2001 most companies
have evolved from an “early-Copernican” to a “pre-Newtonian” state in which the tools
have been assembled, and a growing awareness of the best collaborative use of the tools
is taking hold.
The challenge of the next decade, it seems, will be to leverage the power of this invest-
ment in infrastructure to define, deploy and deliver the benefit of collaborative
processes leading to achievement of shared goals for success.
Through our interviewing, four broad areas were identified by a majority of respon-
dents as being important focal points for their businesses. Not all of these areas have

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 INTRODUCTION

INTRODUCTION obvious connections to supply chain. We think that’s wonderful!

(cont.) Supply chain executives are obviously connecting more than ever with the broader
business, in the process helping to create more comprehensive capabilities for execut-
ing corporate strategy.

Infrastructure
• Significant progress has been made in the definition, development and
deployment of the fundamental building blocks supporting a consumer demand
driven supply chain which will lead to improved shelf service levels. While every-
one’s certainly not at the same level, all are now able to play with the same pieces
if they choose.

Insight
• Virtually all retailers and suppliers are investing as never before to more scientifi-
cally and collaboratively understand and react to the needs of the end consumer.

Innovation
• Advances in understanding end-to-end item profitability have led to increased
private branding, market localization and an increased focus on expanding the
ways in which we interact with customers.

‘Info-lationships’
• We’ve coined this new phrase to capture the essence of successful retailer/suppli-
er relationships of the future. While Efficient Consumer Response (ECR) in the
80’s, Collaborative Planning Forecasting and Replenishment (CPFR) in the 90’s
and Data Synch/RFID in the 00’s all promised to deliver the benefit of increased
collaboration, the industry just wasn’t ready to capitalize. In this year’s survey,
we see retailers and suppliers on the verge of leveraging all of the foundational
building blocks that will finally allow us to exploit the power of crystal clear
consumer demand information.
The remainder of this document will explore each of these four areas in more detail.

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 INFRASTRUCTURE

INFRASTRUCTURE ost companies reported having sufficiently developed their physical “brick

M and mortar” capability, even if they are working to find new ways to wrestle
better utilization out of these physical supply chain assets. Similarly, almost
all respondents indicated that they had implemented some form of direct labor per-
formance measurement and/or management program to help control the cost and
quality of labor.
With this strong foundation in capable facilities and efficient labor, it is no surprise
that respondents indicated far higher spending expected in the areas of systems and
process enhancement. Given that many companies are emerging from significant
enterprise systems implementations, we suspect that the systems spending being
contemplated will be more tactical in nature, and focused on driving towards the
realization of a consumer demand driven supply chain.

Brick and Mortar

Brick and Mortar:

The vast majority of respondents identified that they have a relatively good handle on
the physical space required to support future business requirements. As one supplier
noted:
“We found that we were in the right place, but that we could
leverage the components of our network more effectively.
We realized that we needed to be more flexible in utilizing our
assets, and view them not as a burden, but rather a competitive
advantage.”
With a strong physical foundation, most companies are turning attention to how to
optimize the return on those assets, exploring a variety of creative
Category/Vendor/SKU merchandise flow alternatives as well as better understanding
of the power of automation in historically very manual facilities.
Long a component of supplier distribution networks, the concept of “mixing centers”
is taking hold in retail supply chains allowing for consolidated, efficient procurement
of low velocity, or short shelf-life product, while preserving the benefits of cross-dock-
ing through traditional retail distribution centers (DCs) handling store service.

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 INFRASTRUCTURE

INFRASTRUCTURE
(cont.)

While respondents provided significant commentary on internal product flow and

flexibility initiatives within their supply chain network, there seemed to be a level of
frustration and missed opportunity when asked to discuss collaborative product flow
programs. One supplier accurately summed up the frustration felt on both sides in
regards to the status of jointly reviewing and rethinking traditional product flows.
“We hear it and there is a lot of talking on both sides,”
commented the executive. “We know that retailers, like us,
are looking for ways to leverage their current infrastructure and
gain a competitive advantage. As business conditions continue to
evolve, hopefully the right decisions will drive the right processes
and actions.”

Process:
The majority of participants indicated having undertaken inward looking process
review initiatives.
One longtime retail leader in the charge toward stronger, more effective trading part-
nerships admitted that for them 2009 was a year of introspection and self-improve-
ment. They realized that there existed a strong opportunity to simplify their internal
business processes and make them both more prescriptive and disciplined. This pro-
gram not only has driven strong improvements in such areas as inbound purchase
order (PO) planning, but also has put them in a position to become a better trading
partner in 2010 because of simplified internal processes.

Systems:
The past eight years has seen a keen focus on strategic systems investment. Several
respondents indicated that they had been virtually consumed over the past several years
dealing with the “haze” of ERP implementation and were just now starting to be able
to investigate how to leverage the power of the new tools they had deployed.
As participants wind down these strategic implementations, the majority are quickly
recognizing benefits due to the data transparency the new systems provide. One sup-
plier maintains that comprehensive visibility to previously unattainable data is the pri-
mary reason for the significant improvement they have achieved in on-time delivery
for nearly all customers, categories, and regions.

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 INFRASTRUCTURE

Investment in enhanced demand planning and forecasting tools was repeatedly men-
tioned as a high priority initiative across the vendor community despite frustrations in
the perceived ability of retailers to provide the data necessary to efficiently fuel these
applications.
In the retail community, computer assisted ordering (CAO) stood out as one of the
most beneficial systems investment companies can make. While few retailers had CAO
back in 2001, a majority of this year’s respondents have either deployed CAO or have
it on the calendar for near term implementation. Where implemented, the benefits of
CAO were reported to be significant and consistent including reduced inventory,
increased turns, reduction in out-of-stocks and, most important, sales lift.
Direct store delivery (DSD) suppliers generally agree that using SKU movement data
as a component of order generation is beneficial as a shelf order guide for warehouse
delivered product. However, suppliers feel that there remains a system gap with the
suggested order information from retailer CAO to DSD vendors, requiring suppliers
to adjust the order and reformat it for the supplier system. This creates a less than
win/win scenario with increased cost-to-serve.
One retailer has taken the concept of CAO a step further in providing store level order
quantity guidance to one of its DSD vendors. The results of this program have been
astounding with sales increases as a result of reduced out of stock and unsaleables up
by 10percent+.
In all cases, respondents described the significant change management effort involved
in bringing CAO, and similar enhancements to a retail environment with strong feel-
ings about the value of store level interaction
“I found that the best form of advertising when getting people to
accept change is word of mouth. So I made sure that stores that
weren’t completely bought into the new system saw the strong
benefits and results of the stores that were using the tool.”

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 INFRASTRUCTURE

INFRASTRUCTURE
‘Bullish’ on the Rewards of ERP Implementation:
(cont.)
One supplier couldn’t be happier with the initial results they have seen following the emer-
gence from a self-described fog of a multi-year ERP implementation project. They are already
seeing double-digit improvement in their demand planning and forecasting accuracy.
They look at this progress and potential as key ‘unlocks’ in the future for both the ability to
manage freshness and operate with lower levels of inventory across the network.
Another retailer attributes better than expected sales growth in 2009, even given the sluggish
economy, to the ERP implementation and re-organization that they began in 2006: ‘It was not
an easy implementation, but the benefits that we have received far outweigh the pain we had
to endure.’

People and Metrics:

There is evidence of great progress having been made in the integration of supply
chain activities within the overall business. Most companies described organizational
enhancements having been implemented to create more cross-functional daily inter-
action between merchandising, procurement, manufacturing, supply chain, informa-
tion technology and stores management.
In many cases, this increased integration has led to the adoption of a set of perform-
ance metrics, including at least some that are shared across functions. Examples of
commonly identified shared metrics were net margin and shelf service, both critical
metrics impacted in some way by almost all functions across an organization.
We heard the same desire, expressed back in 2001, for the industry to evolve towards
metrics shared between trading partners. While many respondents indicated that stan-
dardization of metrics and report cards presented a strong opportunity for collabora-
tion, some retailers indicated that standard metrics across the industry may not be
practical.
“(Most retailers) have developed their metrics for a particular
reason and I don’t think that they would be willing to give
those up,” said one retailer. “They see value in their metrics.
Why would (a retailer) sacrifice efficiency and the ability to
gather desired information just to make it easier on the vendor
community?”

Talent Procurement and Training:

A number of respondents identified the ‘war for talent’ as a key corporate initiative for
their organization over the next five years.
“We want to be an employer of choice for our knowledgeable,
skilled, and high valued employees,” stated one supplier.
Competition for talent across the industry is not surprising given the need for com-
panies to create the capability of exploiting the power of the higher level systems and
processes in which they have invested. And a majority of respondents indicated that
in addition to acquiring talent, they are looking to create more robust internal training
programs focused on upgrading the capabilities of existing assets lacking experience
with advanced technologies.

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 INFRASTRUCTURE

On the direct labor front, if your company does not have a comprehensive labor man-
agement program supported by engineered standards and integrated with your ware-
house management systems, you’ve fallen behind and will not be able to match the
productivity of your competition. Most respondents indicated they had some manner
of a performance management program, the most advanced of which are seeing sus-
tained productivity improvements of 25 percent or more by offering associates an
opportunity to earn incentive pay for exceeding prescribed levels of performance.

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 INSIGHT

INSIGHT ust as Newton’s discoveries unleashed a fervor of scientific activity and exploration

J in his day, unlocking the behaviors and needs of the end consumer has generated
tremendous interest in today’s grocery supply chain.
Consumer insights is certainly not a new concept, but it has historically been the
domain of the marketing department, not an area of strong focus impacting supply
chain management and executives.
Not anymore.
Respondents almost universally identified consumer and customer insight as a key area
of strategic focus within their organizations.
For retailers, insight is primarily focused on understanding the behaviors and buying
patterns of the end consumer, and the initiatives associated with this are still primarily
handled through the marketing department.
Suppliers have the added challenge of understanding the unique requirements of retail
customers as well as the shared end consumer.
For both suppliers and retailers, we have categorized their ‘insight’ initiatives into three
major areas: market, consumer and customer.
“From a retailer/supplier collaboration effort, focus has moved
out of the warehouse and into the store. This is not because
everything has been fixed in the warehouse, but because the
area that needed the most attention was in the store.”
We discuss the differences below, but it is interesting to note that the majority of the
supply chain effort spent on insight now involves the customer or shopper in over 80
percent of the initiatives:

Market:
The fragmentation of the grocery industry continues with no end in sight. Mass retail-
ers and club stores have become more powerful, the “dollar” format has emerged as
formidable competition and the acquisition of smaller retailers by larger chains has
continued to shape the traditional grocery.
For retailers, this market evolution requires that keen attention be paid to the format
and location of stores, and the assortment and value propositions associated with the

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 INSIGHT

increasing variety of banners under which retailers market themselves.

Supply chain executives will feel the impact of evolving market strategies thorough the
need to service more SKUs and a wider variety of stores with different service profiles
from essentially the same physical supply chain network.
In many ways, suppliers have had the more difficult task of keeping up with the
widening variety of channels through which their product is made available, and the
dizzying differences in the characteristics of serving each new channel and customer
that is added to the mix.
The companies that are winning in this environment are those that view market shifts,
such as the rise in the value channel, as an opportunity for growth and have leveraged
their existing supply chain to produce and distribute customized category offerings for
the channel.
One supplier detailed that after building up a sizable presence with value market cus-
tomers, they now view the channel as non-core. The company made this decision after
determining that constraining opening price points and product design requirements
resulted in limited opportunities for profitable growth for its brands.
Not surprisingly, no respondent claimed the foresight to accurately gauge the sharp
downturn of the market. One respondent accurately summed up the majority of feel-
ings on both sides on the impact of the current economy:
“From a supply chain perspective, there is always going to be the
ongoing challenge of trying to anticipate the next crisis around
the corner. The economy changed so quickly in the last 18
months that it postponed a lot of conversations we would nor-
mally have had at this point. What this economy has driven home
is the need to have the flexibility in all of our supply chains to
adapt to the next known or unknown challenge we will face.”
However, more than one supplier claimed that although they had no way of predicting
the extent of the decline, previous supply chain network initiatives had created a level
of flexibility that enabled them to more effectively react to volume and service changes
across channels and individual customers.

Consumer/Shopper:
The majority of respondents expressed that consumer insight and behavior plays a
much bigger role in strategic decision making than it did seven years ago. Participants
discussed such activities as leveraging internal and external insights in order to have a
deeper understanding of both a consumer’s use of a product and the decision making
of the shopper in a store environment.
This is likely due to the increasing relevance of customer loyalty card programs cou-
pled with the growing sophistication of systems supporting analysis of store and SKU
level data for insights and trends.
Regardless, the almost universally identified focus on consumer insight will have a
profound impact on supply chain operations. From shelf set and packaging design to
replenishment cadence and service level management, supply chain operations are inte-
gral to the commonly expressed mantra of getting the right product to the right place
at the right time.

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 INSIGHT

INSIGHT
(cont.) Consumer Insight and the Supply Chain?
Working with a specific customer to better understand shopper insights and the impact of
product placement and aisle location, one supplier has identified that sales for one of its
items are consistently 10 to 15% higher when that product leads an aisle.
This type of insight drives such supply chain behavior and cooperation as continuous evalua-
tion of packaging effectiveness. Not only is packaging reviewed from a quality and product
enhancement perspective, but also from a ‘shelf-ready’ capability to assist the partner retailer
in the area of labor productivity.
The same supplier is also currently examining methods to leverage DSD capabilities to
enhance in-store merchandising.’

The enhanced focus on consumers and execution on the sales floor has also resulted
in the development of new organizational teams within many of the respondent com-
panies. One supplier provided the example of the inception of a retailer marketing
department. This cross-functional department’s purpose is to “unbundle the con-
sumer insights and bring both the innovation and consumer demand to life at
the shelf.” Multiple respondents mentioned the addition of similar organizational
departments and teams to assist with similar goals.

Location, Location, Presentation!

Aisle location is not the only positive driver for affecting shopper behavior. A packaged food
supplier’s complete overhaul of their product presentation of retail shelves has helped not
only in driving sales, but also with stock rotation and a reduction in unsaleables.
In reviewing shopper video footage of both ‘before’ and ‘after’ the setup of the new product
fixture, it was very evident that not only did the consumer exhibit a positive reaction to the
new display, but also had a much easier time finding the variety of the product they desired.

Customer:
Retailers and suppliers mutually benefit from a better understanding of their shared
end consumer. Suppliers have the added challenge of understanding the particular
requirements and nuances of the many different retail customers within each channel.
As we talked with the supplier community, it became evident that most believe store
level point of sale (POS) and forecast data to be the lifeblood supporting implemen-
tation of enhanced relationships with their retail partners.
Evolving from the historic environment where retailers share DC withdrawals, if
anything at all, to one where store level data is exchanged poses challenges. Store level
POS represents a quantum increase in data to be exchanged. And there is not a univer-
sal understanding of exactly what information is required in order to drive the benefit.
As one supplier noted:

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 INSIGHT

“The (key) driver of improving service at retail is POS data.

We get some (POS data) for free, some we have to pay for, and
from most (retailers) we don’t get any. We are not going to pay
for it from a lot of customers. And if you (the retailer) are not
sharing it, you will fall behind.”
Equally passionate, a number of retailers cite examples where store-level data was
provided to vendors, and vendors “did not know what to do” with the data.
One retailer participant noted,
“We haven’t found a supplier who can articulate what (data) they
want and how they would use it. If we had a clear vision of what
the supplier needed, how they wanted it delivered, and, most
importantly, what difference it would make to our consumers,
then we probably could help… (As an organization), we under-
stand the power of information sharing. But we need an ROI on
any kind of project, and suppliers seem to be either unable or
unwilling to provide this.”
It is clear the industry should consider investing in better understanding the benefit
of exchanging store level data and defining the key requirements and expectations
associated with this level of exchange.

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 INNOVATION

INNOVATION n the 2001 survey, it was evident that supply chain executives were primarily

I focused on solving a number of thorny, but primarily tactical problems impacting

overall supply chain operations. In this year’s survey, essentially the same group of
executives provided much broader insight into the challenges facing their organiza-
tions. In addition to the importance of Insight, Innovation was identified as an area
of focus by almost all retail and supplier respondents
Three key elements of innovation were identified as focal points by a majority of
respondents: product, outreach, and social responsibility.

Product:
It was clear that retailers and supplier alike see the need to differentiate themselves by
the products they bring to their shared consumer. Elements of product innovation
described by a majority of respondents included:
• Private Label
• Localization
• Inventory Optimization
Private Label
Virtually all retail respondents indicated the growing importance of private label
programs with expectations for private label growing to almost 30 percent of sales by
2015. And the breadth and depth of private label programs is evolving with many
focusing more than ever on multi-tier programs aimed at a broad cross-section of
demographics.
And while most of the suppliers we interviewed choose not to manufacture private
label products, it is clear they understand and are reacting to the growth of private
brands.

Although sensitive to private label’s strong surge over the last couple of years, the
majority of suppliers mentioned innovation as key to their strategy in combating
development. “As long as you innovate,” observed one supplier “you will not get
replaced by a private label.” Another supplier remarked, “Whether a product is
a success with the consumer or not will continue to be primarily based on inno-
vation that private label can’t lead.”
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 INNOVATION

The New Face of Private Label

Historically, private label has represented the ‘value-brand’ in a retailers offering. However,
more and more retailers are adopting a multi-level private label strategy that offers everything
from the value-brand to the luxury-brand within a category. With that luxury brand typically
comes some type of innovation not historically a part of private label.
Suppliers are taking notice, leading one supplier to comment, “Multi-levels of strategy of
private label is much more concerning that private label itself.”
To combat this, suppliers need to differentiate themselves to the consumer. Those that are
successful at this will not have as much to worry about from private label competition.

Challenge of Private Label Drives Both

Product and Supply Chain Innovation
One supplier of packaged goods looked at the challenge of private label as a positive event
that has provided a catalyst for both products and the supply chain. “It (private label) has
really driven us to become a much more innovative organization on all fronts,” said the
supplier.
“Innovation isn’t just isolated to the development and refinement of the product,” noted the
supplier. “There is also innovation in designing and reviewing the entire process to ensure that
we are minimizing total delivered cost. Even when ingredient prices are rising or fuel prices are
going up significantly, we constantly are asking the question ‘what can we do to bring innova-
tion to the supply chain relationship to drive costs down.’”
While there is a place for private label, conceded the supplier, the overall goal is to show that
there is a point of difference with their branded option. “As long as we are able to stay
focused on what the consumer and customer wants, as well as continue to minimize total
delivered cost, then we will experience success.”

Localization
Most retail respondents indicated an increasing focus on tailoring their assortments to
meet the unique needs of customers in different geographies. This finding is extremely
consistent with a recent Kurt Salmon Associates (KSA) study indicating that localiza-
tion of assortment is of importance to almost 80 percent of over 200 retailers surveyed.
Retailer respondents indicated a variety of reasons for the interest in localization, with
those who have begun rolling out programs realizing significant benefits in the form
of sales lift, net margins improvement, inventory turn improvement and market share
increases.
The challenge of localization, voiced by more than one respondent, is “How do we
connect with the consumer in a way that is both profitable and does not over-
burden the supply chain?”
In a recent national business daily, one grocery CEO used the term ‘hyper-local’ when
describing his company’s point of distinction going forward. The executive used this
phrase to describe a localization movement that isn’t focused only on fresh foods, but
also looks at opportunities within every store aisle and shelf space.

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 INNOVATION

INNOVATION The impact of localization on supply chain operations is obvious as smaller quantities
(cont.) of more SKUs are procured, stored, picked and shipped through an infrastructure not
necessarily designed for that purpose. While this will likely be a challenge to some in
the short term, one retailer described the longer term reality perfectly when he said
“as we continue to innovate and align our business processes to address the
challenge of localization, the impact on supply chain will become a much more
routine and less taxing issue.”

The “Slap” of Localization

One retailer respondent provided a very illustrative example of localization at the store level.
The example centered on a national brand of sauces and seasonings that were performing
poorly in a specific region (where one would expect those seasonings to do well). Working
with the local management, the retailer discovered that the region had an affinity toward a
different brand—with a rather provocative name (‘Slap Yo Mama’)—that their stores did
not carry.
The retailer made the decision to both carry the line and dedicate more space in these mar-
kets, and received an immediate outpouring of positive consumer feedback for the inclusion
of the products. Needless to say, sales for that category are up considerably!

Inventory Management
In the past, buyers, working with category managers, made most of the decisions
resulting in a retailer’s inventory position. Stores ordered from DCs based on the
philosophy of filling empty holes on the shelf. Lots of moving parts with none of them
fully informed.
This year’s survey showed evidence of many retailers looking at inventory in a very
different way — as an asset to be managed and optimized. Respondents identified
a number of initiatives aimed at improving the performance of their inventory and,
in the process, reducing inventory investment while actually improving service levels.
Some of the changes we heard were organizational, with retailers changing structure
to decouple assortment decision making with the “nuts and bolts” of procurement
and distribution. Other changes have come in the form of advanced CAO capabilities,
leveraging systems to provide improved replenishment ordering guidance to store
resources that lack all of the information to make optimal decisions.
Regardless of the focus, it is clear that optimizing inventory performance is a highly
visible initiative for most retailers, and many suppliers.
Our interviews confirmed a KSA-developed structure to describe the various elements
of inventory management.
Many of our respondents identified one or more of the six key levers (blue boxes
in diagram) as being focal points for their company’s inventory focused initiatives.
Beyond the understanding of the six key elements, retailers reflected a strong under-
standing that optimizing inventory performance is a truly cross-functional activity
requiring input from a wide variety of functional areas across the enterprise.

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 INNOVATION

Source: 2009 Inventory Effectiveness Study by Kurt Salmon Associates.

One retailer identified a current trend in their organization as ‘Category Management

101’ resulting in a much deeper focus on understanding the total end-to-end cost of
carrying a category, vendor or SKU and then making assortment decisions informed
by this knowledge.
One supplier indicated that his organization “had a long history of being bad at this”
having found it historically very difficult to discontinue even the slowest of movers.
However, as the rationalization process has gained steam, a key driver that has assisted
in providing traction is line capacity. As non-performing SKU’s are discontinued, line
capacity is freed up for identified core items, which helps ensure service levels on these
popular products remains high.

Back to the Basics…With the Right Tools

An internal top-down, bottom-up review by one retailer prompted a retooling in the way the
company viewed inventory. “It’s kind of the ‘back-to-basics’ approach,” explained the retailer.
“We, like most others, took a long hard look at our company and financials. The result was
that we saw inventory a little bit differently than we did in early 2000. We reminded ourselves
that it is an asset that we needed to utilize.”
The result of this ‘reminder’ was providing people with more visibility of inventory and more
effective tools to manage inventory. “It was actually pretty simple, obvious stuff,” said the
retailer “but went a long way in driving a better behavior towards inventory management.”

Outreach:
The days when TV ads and the weekly circular represented the primary method of
communicating with customers are forever gone. And while retailers and suppliers are
unsure of how to leverage the expanding universe of social networking options, most
have integrated one or more of these innovations into their corporate outreach strate-
gies such as recipe guidance on the web, nutritional information on shelf labels, local
community involvement and outreach and creative approaches for communicating
with customers through Facebook and Twitter.

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 INNOVATION

INNOVATION These social networking outreach mechanisms represent only a few of the many ways
(cont.) respondents indicated they are reaching out to a customer base with less time than ever
and more choices for how they gather information.
As one retailer respondent observed, the ongoing challenge is to figure out how to
leverage both this new technology and availability of loyalty data to both expand a
company’s value offering to the consumer and provide insight on how to improve
the supply chain. “Do consumers want to be our friends on Facebook,” mused
one respondent. “If they do, what are they and what are we going to get from
that relationship?”
There seems to be many more questions than answers in this area, with the majority
of suppliers and retailers going with a ‘testing the waters’ approach over a ‘taking the
plunge’ alternative.

Deconstructing Consumer ‘Clicks’

In the beginning of the sharp economic downturn of the last couple of years, one supplier
noticed a heavy increase in the number of hits to their website. As they drilled down to
understand what consumers were looking for, it became apparent that searches were heavily
focused on high value family recipes. The company was able to quickly change the organi-
zation and content of the website to feature more of these types of recipes, as well as offer
other information and benefits that consumer ‘click’ behavior appeared to desire.
According to the supplier, only a couple of years ago the company would have missed these
signs and signals by the consumer. As the company has become more data driven and fact
based, it also has become more flexible and quicker to respond to consumer indicators such
as these.

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 INNOVATION

Sustainability and Social Responsibility:

All respondents noted that sustainability and social responsibility initiatives are
increasingly receiving more attention and resources. Departments and positions have
been created with this topic as their sole focus. These initiatives go well beyond merely
marketing to the consumer that an organization’s activities and products are touching
and improving lives. Rather, these initiatives touch and influence every link of the
supply chain.
Virtually all respondents indicated that their companies have undertaken formal pro-
grams focused on sustainability and/or social responsibility. There were several com-
mon elements to these programs including:
(1) Reducing carbon footprint. Achieved primarily through controlling and con-
serving such elements as electricity, refrigerant, natural gas (heating), water,
and transportation.
(2) Reducing waste to landfill. Accomplished by recycling efforts throughout the
supply chain.
(3) Implementing “Green” culture throughout the entire organization. Ensuring all
aspects of the business, to include headquarters, implement an environmental-
ly focused mindset.
(4) Marketing of products, services, and messages that consumers identify as
eco-friendly and socially responsible. Includes the use of reusable bags and
partnerships with food banks.
As one respondent observed, the challenge and goal is to get everyone on board with
the idea of a ‘green’ culture. In elaborating how to accomplish this, he stated, “Store
director and above, you emphasize the dollars you save. Below the level of store
director, which also includes the consumer, you emphasize saving the planet.”

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 ‘INFO-LATIONSHIPS’

‘INFO-LATIONSHIPS’ he pioneering scientists and explorers of our modern world did not operate in

T silos. Rather, they learned from the masters of the past, collaborated with their
colleagues of the present, and made discoveries that drove the engine of progress
for the future.
The grocery industry has a long history of talking about the need for more collab-
orative relationships between retailers and suppliers. And yet, at the end of the day,
whether it was ECR in the 80’s, CPFR in the 90’s or Data Synch and RFID in the
2000’s, we seem to have failed in delivering the full promise of all the theory.
As evidence of that, when survey participants were asked about the most frustrating
aspects of the retailer/supplier relationship, they overwhelmingly identified a lack of
the “ability” to collaborate as the biggest issue. Without the perceived ability to collab-
orate, it’s not too surprising to find that trust remains a significant issue as well.

Lack of win/win opportunities

So what’s wrong with this picture?

On the one hand, our interviews found that the vast majority of retailers and suppliers
agree that most of the fundamental building blocks required to support effective
collaborative relationships already exist. The survey, on the other hand, indicates a
fundamental lack of ability to collaborate.
The answer goes back to our old friend Newton.
The day the apple whacked him on the head, there was no better understanding of the
elemental nature of the universe than there had been the day before. What Sir Isaac
accomplished was a remarkable synthesis of the many individual building blocks into
a cohesive theory. Same thing here.
We have a theory, and a new term to describe what we hear the industry adopting as a
mandate for moving forward…the Info-lationship.
While previous attempts to drive collaborative relationships were academically sound
and well meaning, the average retailer and supplier just didn’t have the right combina-
tion of systems and processes in place to ensure the kind of broad based information
exchange required to support the variety of collaborative initiatives we invented.

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 ‘INFO-LATIONSHIPS’

We see this changing as more and more retailers and suppliers realize the benefits of
robust enterprise systems (in many cases the same systems) and powerful tactical tools
providing more automation of previously manual processes.
Info-lationships will be based on the reality of a shared base of information enabling
retailers and suppliers to set shared goals for performance and to execute jointly against
those goals. Info-lationships will move away from the emotional and more towards the
synthesis, construction, and implementation of ideas and initiatives in a manner that is
cooperative, logical, and jointly beneficial.
We will explore several components of the Info-lationship that came out of our inter-
viewing in the following segments.

Relationships:
In the 2001 survey, two diagrams illustrated the current and desired states of the rela-
tionship between trading partners. The ‘Butterfly’ symbolized the current state, a sin-
gle function relationship between the seller and buyer. The ‘Diamond’ represented the
goal of a more multi-functional collaboration between trading partners.

While there still seem to be some ‘butterflies’ in the trading partner relationship, the
good news is that many partners have found the benefits of ‘diamonds.’ Respondents
on both sides stated that the team approach is gathering steam in the trading partner
relationship. More than one supplier respondent also commented that many retailers
are placing more emphasis on resources focused on the supply chain and flow of goods
(including outside their network) than in the past, and are more open in discussing
these strategies with their trading partners.
Overall, suppliers appear to be the primary drivers in expanding this team cooperation
with their retail trading partners.

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 ‘INFO-LATIONSHIPS’

‘INFO-LATIONSHIPS’
(cont.) Examples of Reorganizing to Better Serve the Customer
Supplier respondents provided numerous examples of internal organizational changes in order
to better serve or align with their retail trading partner. One supplier divided the position of
Customer Service Representative into 3 separate positions:
1) VMI planner;
2) Order replenishment associate; and
3) Resolver of customer issues
The purpose of this change was to remove the ‘jack of all trades’ mentality and enable people
in positions to become more specialized and focused in a specific area in order to better
serve the customer.
Another supplier said that their organization launched a lengthy internal study to determine
both how to strengthen the interface between customers and the impact it has on the supply
chain. A result of the study was the creation of a department to specifically address partner
collaboration (Customer Supply Chain Department).
Retailer respondents provided little evidence of similar activities or reorganizations on their
side of the partnership.

While respondents on both sides provided evidence of a rise in partner teamwork,

there remained as much, if not more, evidence that the partnership has a long way
to go. One supplier respondent went as far as saying that over the past five years,
collaboration with the majority of retailers had deteriorated. He blamed a return by
many retailers to a silo management structure for this development. The majority of
respondents were not nearly as pessimistic in their outlook. They remained, however,
frustrated by the continual gaps (chasms, in some cases) and slow progress in the evo-
lution of the relationship.
One of the primary frustrations centers on the recognition (or lack of recognition) of
supply chain efficiencies. Supplier respondents consistently lamented that they struggle
with many retail trading partners to get credit for shared supply chain efficiencies.
They contend that theses shared efficiencies and savings do not transcend to the
‘buying desk’ of many retailers. Regardless of the shared savings, the procurement
departments of these retailers want to focus exclusively on margin and trade dollars.
In spite of these frustrations, most suppliers agreed that the majority of retailers are
much more open in taking part in procurement decision discussions. “Most retailers
are at least open to sharing their data and allowing trusted trading partners to
assist in a deep dive to analyze a buying decision or change a procurement system
setting or assumption,” one supplier noted. “The sharing of this information,
though, is based on the trust that the supplier is not trying to sell them more,
but rather trying to sell them more effectively.”
As one retailer noted,
“We are very open to working and collaborating with vendors.
But it is a relationship that is built on trust. Some are very good
and understand this, and some are purely driven by their own
self-interest.”

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 ‘INFO-LATIONSHIPS’

Relationship Continuums:
A common thread heard throughout the interviews was the mention of trading
partner relationships increasingly defined by a progressive level of capabilities and
commitment.
While the details differed by company, most are characterized by a tiered approach
where both the sophistication and commitment level of the trading partnership
increases as higher levels of collaboration are achieved.
We have synthesized findings into a three level structure that captures the essence of
most of the relationship continuums we heard described.
• Tier 1: The basics/cost of doing business. The foundational level services
provided to all customers. Includes quality product, on time delivery, order
accuracy, etc.
• Tier 2: The potential for partnership opportunities and growth. At this level,
the partnership has been identified as possessing potential for growth, however
not in a strategic sense (due to potentially the silo nature of the partner or the
appearance or belief that the partner is not overly willing to take a strategic
approach and view with the relationship). Identified as cost effective at this
point to examine optimization potentials and opportunities.
• Tier 3: High potential for not only growth, but also integration and collaboration.
This level of partnering is strategic in nature. As one participant noted, at this
type of level there is a commitment from both sides to truly work “on the
engine.” In order to reach this tier, there must be buy-in not only at the middle
management level, but also at the senior level.
It was interesting to note the consistently small number of partnerships that had
graduated to the final tier. One supplier stated that they had only elevated two key
customers.
“We see the opportunity to expand but are holding this final tier
out as a carrot for customers who effectively collaborate rather
than leapfrog customers into this final level of strategic partner-
ing. We’ve been burned by doing that.”
One retailer respondent detailed that, while they do not have a program in place akin
to the relationship continuum, they leverage the data they compile from their supplier
scorecards to gauge both the effectiveness and potential of supplier partnership and
collaboration. “Even though we call it a ‘supplier scorecard,’ it goes both ways,”
said the retailer respondent. “We also measure ourselves with this tool. Suppliers
have the opportunity to call us out on areas in which we need improvement.
We’ve made changes (to this tool) to accommodate and improve the evaluation
process to ensure it includes gauging our performance as well. It’s all about
improvement.”

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‘INFO-LATIONSHIPS’
(cont.) Evidence of Info-lationship in Action: A Collaborative Win-Win
For one supplier and retailer, the resulting metrics proved more than enough evidence on
the benefits of a recent collaboration project. The supplier had long maintained that store
stock-outs were primarily the result of stores either ordering the wrong amount or the wrong
mix. After hearing this theory, one retailer decided to take the supplier up on a proposal that
would allow the supplier to manage promotions at the store level. “Basically, the retailer said,
‘OK, here is the data, now go fix the problem,’” said the supplier.
Based on the post-promotion numbers compiled by the retailer, the project has been a huge
success. Improvements include:

• Around 1% increase in service levels

• 15% improvement in sell-thru rate
• 5–10% decrease in lost sales

Data Synchronization and Standardization:

The 2001 survey highlighted information shortfalls and the need to synchronize
data via the Global Data Synchronization Network (GDSN) as key issues. In 2009,
a majority of survey participants identified that there still remains opportunities to
develop and implement industry wide standards supporting GS1 Global Registry
synchronization of information between trading partners.
Overall, it appears that the industry has not evolved as far as expected in this area.
“From an IT perspective, there needs to be more of an emphasis
on collaboration, enabled by technology, and getting into the
right touch points across the different functional areas,” com-
mented one retailer participant. “Standard feeds, integration,
and metrics across a broad set of suppliers and retailers should
be the goal of the industry.”
From a supplier perspective, respondents also consistently commented about the bene-
fits of standardization that would help both sides of the partnership. “The more that
we can mutually take variability out of the supply chain, the more opportunities
we have to drive efficiencies for both the supplier and the retailer,” commented
one supplier participant.
One thing that both sides agree on is the significant upside to efforts supporting data
synchronization and standardization. One of the more progressive and active data
synchronization retailers identified the potential savings from their efforts at around
$1 million for every $1 billion in sales. The retailer noted that in order to truly reap
the benefits, synchronized data is not enough. It is also essential to ensure that data
synchronized and shared between trading partners is of both a high level of quality
and completeness.

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 A CALL TO ACTION

A CALL TO ACTION ur industry has experienced an epic decade of change on all fronts. The compet-

O itive landscape has become more complicated. Our customer has become more
unpredictable. Technology has continued to develop at a speed that makes it
hard to keep up.
These remarkable changes in our environment have been met with an equally remark-
able elevation of the role of supply chain across our businesses. Previously viewed
as cost centers to be managed in silo’s and seldom integrated into strategic decision
making, almost all respondents have earned a seat at the table where corporate strategy
is debated.
The benefit of this “promotion” can be heard in the language used by the supply
chain executives in describing the initiatives they deal with day to day. While we all
still fight the tactical battles that enable us to deliver merchandise to the store shelf at
a cost that preserves required margin, we are obviously engaged now at a more strategic
level as well.
And while not everyone has assembled all of the elemental infrastructural and infor-
mational building blocks required to support the collaborative “Info-lationship,”
we’re getting close.
There are emerging examples of partnerships acting, as did Newton, to harness the
power of existing but disparate ideas into strategies supporting pursuit of shared goals
and mutual benefit.

At the outset of the decade, most had made a successful transition from Flat Earth to
the enlightenment of the Copernicans. Great progress has been made and we stand on
the verge of mastering the elemental building blocks to realize the benefit of our own
Newtonian synthesis.

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 A CALL TO ACTION

A CALL TO ACTION The results of our survey lead us to the following call to action as we find “New Ways
(cont.) of Working Together”:
• Recognize that the tools are there—Across the board, someone, somewhere in
our industry has implemented the individual process, systems, material handling
equipment (MHE), or Human Resource (HR) related building blocks support-
ing “Einsteinian” collaboration. Let’s create a landscape map of this “universe”
of capabilities and begin teaching ourselves what it can mean within our own
organization and for our key partnerships
• Continue to break down the silos—Achieving the benefit associated with mold-
ing the building blocks into your winning strategy will require increasingly cross
functional, and cross-organizational shared metrics and consequences. When we
achieve them, all parties should benefit. If we fall short, each partner should
experience the same level of pain.
• Understand each others requirements—Now that most of us can share highly
descriptive data of use by our trading partners, it is time to figure out exactly what
to share, how to share it, and what benefit comes from the exercise. Much as we
tackled the thorny issues of backhaul and “perfect order” we should focus an
empowered committee on defining the landscape of tactical information exchange.

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© 2010