Retailing in a SCM-Perspective [1 ed.] 9788763099615, 9788763001267

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Retailing in a SCM-Perspective

Herbert Kotzab & Mogens Bjerre (eds.)

Retailing in a SCM-Perspective

Copenhagen Business School Press 2005

Retailing in a SCM-Perspective © Copenhagen Business School Press Printed in Denmark by Holbæk Amts Bogtrykkeri Cover design by Morten Højmark 1. edition 2005 e-ISBN 978-87-630-9961-5

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Table of Contents 1. Introduction...................................................................................... 9 2. Retailing in the context of IT and distribution .............................. 14 Distribution, marketing channels and retailing ............................. 14 Technology and Information technology ...................................... 23 Consequences of IT for managing retail distribution .................... 27 Applying IT to retailing - the case of Internet-based grocery retailing............................................................................. 29 Example of an on-line shop - www.billa.at................................... 36 3. Retailer strategies .......................................................................... 48 Retail Market Development........................................................... 48 Retailer Strategy Development...................................................... 49 The 8 Positioning Elements........................................................... 53 The Cost Leadership Strategy and its Elements ............................ 59 The Differentiation Strategy and its Elements .............................. 62 Status of Retailer Positioning ........................................................ 70 4. Retail logistics and Supply Chain Management............................ 74 Introducing the concept of logistics and Supply Chain Management........................................................................ 74 General aspects of retail logistics .................................................. 75 A model of retail logistics ............................................................. 76 Retail logistics decision parameters .............................................. 78 The concept of retail oriented supply chain management............. 80 Retailing as a result of value constellation in supply chains......... 84 5. IT-Applications for retail store management ................................ 94 Essential elements of IT-driven retail management ...................... 94 IT-based retail marketing processes .............................................. 96 Modern supermarkets in European business practice ................. 104 6. The automation of retail logistics ................................................ 114 Combining IT with just-in-time oriented retail logistics systems - Information or inventory?............................................ 114 Electronic data Interchange (EDI)............................................... 115 Barcodes ...................................................................................... 119 Scanners....................................................................................... 122 Combining EDI, barcodes and scanners to automated logistics . 122

5

Retailing in a SCM-perspective Future outlook - Radio Frequency Identification (RFID) ........... 125 General introduction to specific applications of IT-based retail logistics systems ................................................................. 128 Applications of IT-driven retail logistics systems – the case of Swiss Migros, US-based Wal-Mart and Rewe Austria......................................................................... 141 7. Retail Marketing Processes ......................................................... 160 Various retailer strategies ............................................................ 160 Implications of various retailer strategies on processes and SCM...................................................................... 166 Implications for SCM .................................................................. 177 Efficient Consumer Response – Demand Side............................ 178 Category Management................................................................. 181 8. Special IT-based retail trends ...................................................... 190 IT-based retail trend # 1 – Efficient Consumer Response.......... 190 IT-based retail trend # 2 – Collaborative Planning, Forecasting and Replenishment (CPFR) ..................................... 205 IT-based retail trend # 3 –............................................................ 214 The Global Commerce Initiative ................................................. 214 9. B2B Relationships in Retailing ................................................... 223 Introduction.................................................................................. 223 Defining a Key Account .............................................................. 224 Supplier – Customer Relationships ............................................. 227 The Role of the Key Account Manager....................................... 229 Organizing towards Key Accounts.............................................. 231 Marketing to Key Accounts – Trade Marketing ......................... 237 Conclusion ................................................................................... 243 10. Customer Relationship Marketing (CRM) in Retailing .............. 247 The increasing importance of customer orientation .................... 247 Customer satisfaction as a fundamental concept......................... 248 Customer retention in retailing .................................................... 252 Perspectives of Customer Relationship Marketing in retailing... 259

6

Preface

We decided to write a book about Retailing and Supply Chain Management because we realized the importance of the two subjects and their interdependence. We wanted to illustrate how they are linked and what impact they have on each other. The duality is therefore to be found in all chapters and it remains as our mutual point of departure – being researchers in Logistics and Marketing. Retailing, Logistics and Supply Chain Management are fascinating topics that gained importance in business practice and in academic research over the past years. Although it seems that the subjects are so far apart, we identify a matching relationship between them. This is mainly due because of our research that is placed within the area of distribution, which deals with connections. Distribution connects so to say the world of retailing with the world of logistics and supply chain management. However, without the recent developments in IT, retailing and SCM would not be in that position where they are right now. Furthermore the book illustrates that competitive strategy is no longer merely a matter of choosing to pursue one type of strategy but much more a question of balancing different types of competitive strategies at the same time. We show in our book how to combine these three areas and demonstrate how this specific interconnection leads to a value constellation in retail supply chain management, which differs from traditional retail management and logistics. We see innovative logistics and procurement processes to emerge between the different actors and existing organizational borders disappear. We also illustrate how retailers can be managed in a real-time customer oriented way, which will help to gain sustainable competitive advantages in a fast changing business environment. This book documents the results of our ongoing research and engagement with the topics and should therefore be rather understood as a starting point than a final chord. Following the notions of Bowersox and Closs, retailing – just like logistics – is unique and is 7

Preface under permanent development as the recent market trends shows. About 15 years ago, nobody thought that the largest company of the world in the 21st century is going to be a retailer, today it is a reality and Wal-Mart is still growing and setting new trends for the supporting activities that are smart (= IT-driven) logistics and marketing processes. The book also documents partnerships in academic research and therefore shows that research activities are also partnership driven – such as Retailing in a Supply Chain Management perspective is. The involved authors represent an Austrian, German and Danish marketing and logistics background, which makes to book in that sense interesting as the presented case examples will not only refer to the already well known examples. The realization of this book was due to the active support of different people. We want to thank first all our business contacts that helped us to provide the reader with interesting facts of the case companies. We thank especially Kerstin Neumayer from Rewe Austria, Rene Meyer from Migros Switzerland, Albrecht v. Truchsess from Metro who all provided us with recent information of the companies. A special thanks goes to H. Lee Scott from Wal-Mart for his active support in a very early stage of this endeavour. We thank Frieda Steffel for helping us to reduce “Denglish” and/or “Genglisch” expressions, but also for her valuable comments regarding some expressions that might be understandable for researchers, but not for practitioners. Of course we want to thank Hanne Thorninger Ipsen, who was not getting tired of the many layout variations of the manuscript, figures and tables and helped us a lot in getting the manuscript ready for print. We are also grateful to Axel SchultzNielsen and Ole Wiberg from CBS Press for their patience. But would this book be completed without the support of the family? We believe not and we therefore dedicate this book to our families, Veronika and the youngsters Jakob and Caroline and Helle and Christina.

H.K. & M. B.

8

CHAPTER 1

Introduction Herbert Kotzab, Mogens Bjerre, Thomas Foscht, Thomas Angerer & Bernhard Swoboda Trade plays a major role in today’s economy (Fisher/Raman 2001). With more than 23 million people working in retailing and wholesaling in the EU 15, this sector is one of the most important employers (e.g. GB: 17.1%; Germany: 15.1% of total employment; OECD 2004). Its economic impact with a share of more than 10 % of the GDP is significant (e.g. GB: 11.7%, Germany: 10.4%; OECD 2004) and the importance of the trade sector is increasing as Levy/Weitz (2004) indicate by reporting on a forecast of the US Bureau of Labor Statistics that predicts a share of 17 % or 26 million people being employed in the retailing sector. Which are these companies that generate this economic value? Table 1 presents the world’s largest retailers, where the majority is US-based followed by companies based in Japan, UK, German and France. The total sales volume of the 250 largest retailing companies totaled $ 2.6 trillion, and still US-retailers were dominating too, but German retailers held the second position (Kutyla 2005, p. G7). What is also of specific interest is the fact, that nine out of ten retailers sell food and the dominating store formats among these retailers were still supermarkets, cash-and-carry and convenience (Kutyla 2005, p. G9). Although these big players dominate the retail scene, the majority of retail companies belong to the group of micro, small- and medium sized companies - about 75 % of all retailing companies are small to medium sized with sole proprietorships. In Austria for example the majority of the 62,000 retailing companies employ less than 10 people. The dynamics in the trade industry is mostly contributed by the “big retail players” like Metro, Aldi or Rewe (all German retailers), the Dutch Ahold, UK’s Tesco or Sainsbury, and of course Wal-Mart, a retailer that also is the world’s largest company (Fortune 2004).

9

Introduction As Schnedlitz et al. (1996) say: “There is no industry dynamics it’s a firm’s dynamic in the retailing scene”. However, any manager in this sector has to make very complex decisions in order to provide consumers with products and services needed. They use certain technologies and perform trade on an extraordinary level by combining different decisions regarding location, assortment, selection of target markets, negotiations with suppliers, motivation of staff and other typical marketing mix decisions, such as pricing and merchandising and all is done in a very competitive and global environment (Levy/Weitz 2004, p. 4; Fernie 1999). From an academic point of view, the concept of retail and wholesale might be difficult to study as these activities can be looked at from different management angles. Both phenomena of course, can be seen from a general marketing perspective, as Mulhern (1997, p. 103) defines retailing as “the culmination of the marketing process”. Levy/Weitz (2004) or Liebmann/Zentes (2001) can be seen as prominent examples that present a particular general management approach to retailing. It could also be discussed from a marketing channel or distribution point of view, where Coughlan et al. (2001) define retailing as a member of the marketing channel that helps to overcome the distances between production and consumption. Sparks (1999) appropriately makes the point that these activities are very much concerned with product availability where logistics and Supply Chain Management can also be taken as a possibility to analyze retailing and wholesaling processes. Nevertheless retail logistics has gained importance since the 1990’s (see Fernie et al. 2000; Sparks 1999; Paché 1998; or Kotzab/Schnedlitz 1999). In the last 20 years, more and more managers in trade companies have recognized that logistics could generate competitive advantages by increasing product availability at lower costs. This especially succeeds with the use of IT that makes retail operations more efficient, which many of the retailers listed in Table 1:1 impressively demonstrate. Some authors call this combination Rocket Science Retailing where IT is so to say the missing link in retail execution (see also Fisher et al. (2001), Raman et al. (2001). The discussion in this book combines these viewpoints and discusses the consequences of ITdriven retail marketing and IT-driven retail logistics/SCM.

10

Kotzab, Bjerre, Foscht, Angerer, Swoboda Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 30 31 44 46 50 51 55 80 90 94 102 112 145 146 153 155 163 172 164

Company name Wal-Mart Stores Inc. Carrefour Home Depot Metro AG Kroger Tesco Target Ahold Costco Companies Aldi Rewe Intermarché Sears Safeway Albertsons Schwarz Group (Lidl) Walgreens Auchan Lowe’s Ito-Yokado Tengelmann AEON J Sainsbury Edeka E. Leclerc Delhaize Group Woolworth El Corte Ingles Loblaws IKEA COOP Italia Migros Genossenschaft Lotte Shopping Kesko Hutchinson Whampoa/AS Watson Spar Austria Group Dansk Supermarked Sonae/Modelo Continente Shoprite Holdings Norges Gruppen Musgrave Pao de Acucar Soriana Shanghai Friendship

Country of Origin USA France USA Germany USA Great Britain USA Netherlands USA Germany Germany France USA USA USA Germany USA France USA Japan Germany Japan United Kingdom Germany France Belgium Australia Spain Canada Sweden Italy Switzerland South Korea Finland Hong Kong SAR Austria Denmark Portugal South Africa Norway Ireland Brazil Mexico China

Retail sales (in US $ mil) 256,329 79,796 64,816 60,503 53,791 51,535 46,781 44,584 41,693 40,060 38,931 37,472 36,372 35,553 35,436 33,435 32,505 32,497 30,838 30,819 29,091 28,697 28,630 28,330 27,936 21,306 19,941 13,686 13,441 12,118 11,784 10,704 7,633 6,812 6,585 6,125 5,346 3,894 3,894 3,809 3,782 3,581 3,323 3,545

Table 1:1 The world’s largest retailers in 2003 (Source: Deloitte/Stores 2005; the first 25 showed, afterwards the position of the largest retailer of the specific country) One characteristic of this book is it’s global perspective with a European focus. Many of the practical examples stem from Scandinavian or German speaking countries, which is due to the research background of the authors.

11

Introduction However, some of the most innovative retailers have European roots (e.g. Zara, Tesco, IKEA, Hennes & Mauritz, REWE, Metro, Migros and many more). This book’s understanding of retail marketing not only includes the development of new retail channels such as Internetbased retail formats, but presents also innovative ways of how to organize the interface between suppliers and end users by introducing alternative cooperative assortment strategies such as Category Management, which allows customized shopping experience. When it comes to retail logistics, the implementation of just-in-time-oriented replenishment systems by connecting the electronic point-of-sale(EPOS) systems with the manufacturers’ ERP-systems is in the center of the discussion. The book portrays how IT-driven distribution center operations with no-inventory holding transit terminal structures can be executed. We also raise the question whether to ‘outsource’ inventory management to vendors, which reduces inventory levels and improves order cycles. We also look at new ways to organize the whole interplay between vendors, retailers and end users by discussing the concepts of Efficient Consumer Response and Collaborative Planning Forecasting and Replenishment. And finally, the book presents how retailing companies execute customer relationship marketing.

References Coughlan, A., E. Anderson, L. Stern & A. El-Ansary: Marketing Channels, 6th edition, Upper Saddle River NJ, Prentice-Hall, 2001. Deloitte, Stores (ed.): 2005 Global Powers of Retailing. January 2005, Section 2, 2005 Fisher, M., A. Raman & A. McClelland: Rocket science retailing is almost here: Are you ready? Harvard Business Review, 78, 2000, 115124. Fisher, M. & Raman A.: Introduction to Focused Issue: Retail Operations Management, Manufacturing & Service Operations Management, 3, 2001, 189-190. Fernie, J.: The internationalization of the retail supply chain. In: Fernie, J. & L. Sparks (ed.): Logistics and Retail Management, Kogan Page, London, Boca Raton, 1999, 47 – 65.

12

Kotzab, Bjerre, Foscht, Angerer, Swoboda Fernie, J., F. Pfab & C. Marchant : Retail grocery logistics in the UK. International Journal Of Logistics Management, 11, 2, 2000, 83-90. Fortune: 2004 500. America’s largest corporations, 6, April 12, 2004. Kotzab, H. & P. Schnedlitz: The Integration of Retailing to the General Concept of Supply Chain Management Concept, Journal für Betriebswirtschaft, 49, 1999, 140-153. Kutyla, D.: Global 250 Highlights, Stores, January, 2005, G7-G10. Levy, M. & B. Weitz: Retailing Management, McGraw Hill-Irwin, Boston et al., 2004. Liebmann, H.-P. & J. Zentes: Handelsmanagement, Vahlen, München, 2001. Mulhern, F.: Retail Marketing: From distribution to integration. International Journal of Research in Marketing, 17, 2, 1997, 103 – 124 OECD (2004): Stan new database. Online: http://www.oecd.org/ home/, 15.04.04. Paché, G.: Retail logistics in France: The coming of vertical disintegration. International Journal Of Logistics Management, 9, 1, 1998, 85-93 Raman, A., N. DeHoratius, Z. Ton: Execution: The Missing Link in Retail Operations. California Management Review, 43, 2001, 136-152. Schnedlitz, P., E-M. Waidacher & H. Kotzab: Kennzahlen zum Handel in Österreich und zum Einsatz neuer Informations- und Kommunikationstechnologien. In: Schnedlitz, P. (ed.): Schriftenreihe Handel und Marketing, Band 1, Wien: Institut für Absatzwirtschaft/Warenhandel, 1996. Sparks, L.: The retail logistics transformation. In: Fernie, J. & L. Sparks (ed.): Logistics and Retail Management, Kogan Page, London, Boca Raton, 1999, 1 – 22.

13

CHAPTER 2

Retailing in the context of IT and distribution Herbert Kotzab “Retailing is such a part of our everyday lives that it’s often taken for granted” (Levy/Weitz 2004, p. 4).

Distribution, marketing channels and retailing Retailing is a part of distribution and is closely connected with the concept of marketing channels (Coughlan et al. 2001). Distribution can be defined as the total sum of all activities and related institutions, which are necessary to guarantee a successful connection between production and consumption. According to Sparks (1999, p. 1), a successful connection is granted if needed products are available. Distribution always occurs while connecting a point of consumption with a point of production by overcoming certain differences in time, quality, quantity and space (e.g. Ahlert 1991; see Figure 2:1). Distribution activities are typically called flow activities and refer to the flow of products, flow of information and flow of nominal goods (Specht 1998; see also Figure 2:1). This particular notion of flows makes distribution and marketing channels process-oriented. A basic configuration of a direct channel is outlined in Figure 2:2, while Figure 2:3 shows how different independent economic institutions could be integrated in an indirect manner. The way these (independent) institutions are connected, how these institutions interact, and how a product is made to come to a consumer is called a marketing channel (Coughlan et al. 2001). Different combinations of these flow activities, completed by different organizations within the channel lead to different channel outcomes (= performance of the channel).

14

Kotzab Distribution flows Flow of goods

Flow of nominal goods

Discrepancies Space Time Quantity Quality Transfer of goods from point of production to point of consumption Moving from Holding Break bulk Changes in point of origin inventory and/or the nature of a to point of consolidation product destination activities Transfer of legal tender from point of consumption to point of production Transferring of payment

Flow of information

Advance Collecting and Conversion of financing by sharing of the modes of different payment (e.g. payment and institutions, discount rules) securities loans, etc. Transfer of information from point of production to point of consumption and reverse Transmission Collecting, Collecting and Condensing, from point to storing and partitioning commenting, point planning interpreting, adding

Figure 2:1 Distribution flow model (according to Ahlert 1991). Bowersox/Morash (1989) introduce several strategies of how these flows can be organized. The strategies refer to Separation of the flows in order to allow specialization, which leads to intermediaries; x Postponement of the flows in order to allow customization as late as possible in the channel, x Acceleration of the flow of money and/or flow of information that helps to reduce the uncertainty in the channel; x

and should improve the channel’s efficiency in terms of lowering costs and increasing services (Boxersox/Morash 1989, p. 63).

15

Retailing in the context of IT and distribution

Time

Space

Quantity

Quality

Point of consumption

Point of production

Flow of goods

Flow of information

Flow of nominal goods

Figure 2:2 Basic configuration of a direct marketing channel

Time

Space

Quantity

Quality

Point of origin

Channel Member

Channel Member

Channel Member

Channel Member

Flow of information

Point of consumption

Flow of goods

Flow of legal tender

Figure 2:3 Integration of independent institutions within an indirect marketing channel

16

Kotzab The management of such flows and/or marketing channels can be organized in a continuum between markets (by intermediaries, also called indirect distribution) and hierarchies (in-house also called direct distribution) (see e.g. Coughlan/Anderson 2002). Retailing occurs whenever distribution is organized over the market and can be explained from an academic perspective in two different ways (e.g. Berekoven 1995; Hansen 1990; Levy/Weitz 2004 or Liebmann/Zentes 2001): Retailing is a set of functions that adds value to products/services that are sold to end users = functional understanding; x Retailing is a specific institution within a marketing channel that executes retail functions = institutional understanding. x

The first view explains retailing as an exchange activity in order to connect a point of production with a point of consumption (e.g. Barth et al. 2002) and represents distribution as described earlier. This understanding is illustrated in Figure 2:4, where the exchange processes refer to three different types: Marketing processes that include all activities that provide a customized set of products/services as demanded by customers/consumers x Logistics processes including all activities that help to transfer this specific set of products/services to the markets x Easing processes, which refer to all activities that facilitate the purchase. x

The in Figure 2:4 outlined distribution processes occur in any circumstance, also if different members in a marketing channel are inter-connected (see Figure 2:5). In case of inter-connections, these relationships occur as co-productive relationships (Normann/Ramirez 1994), as the interactive combination of the three basic distribution processes creates value not in a sequential, but in a multi-directional level. Normann/Ramirez (1994) call the result of such an interconnection value constellation, which is understood here as distribution value constellation. In that sense, retailing/wholesaling is defined as the result of distribution value constellation in a marketing channel.

17

Retailing in the context of IT and distribution

Point of consumption

Point of production

Figure 2:4 Functional understanding of distribution

18

Kotzab

Result of the interaction of channel institutions and activities

Point of consumption

Channel member

Channel member

Channel member

Point of production

Figure 2:5 Integration of channel members within a functional understanding of retailing/distribution

19

Retailing in the context of IT and distribution In case of a market-driven marketing channel organization, specific institutions specialize in the performance of these processes, which explains the institutional perspective of retailing (see e.g. Berekoven 1995, p. 2; Hansen 1990, p. 1 or Müller-Hagedorn 1998). Economic and legal independent entities that exchange products/services without changing their nature in a technical manner are called retailers. From this institutional point of view, retailing can be defined as an exchange activity relating to the different flows but performed by specialized institutions (Anderson/Coughlan 2002). In that sense, retailing exists in many variations (see Figure 2:6). The results of these variations are called retail store formats and refer to characteristics, such as the overall economic classification (retailer for end users, wholesalers for professional clients), the way the processes are performed and which input factors are necessary for the completion (e.g. store based, distance- based) or the use of the marketing mix. Store formats can therefore be interpreted as a specific outcome of institutional retailing but could of course also be understood as the result of a positioning and segmentation strategy (Coughlan et al 2001 pp. 403; Liebmann/Zentes 2001, pp. 345). Though different classes of retailers offer different customer service in terms of assortment and convenience. In today’s fast changing economy, successful retailers try to serve as many target groups as possible by following a multichannel strategy (Retail Forward 2003; see Figure 2:7). Although store-based retailing has the most economic impact in today’s retail life (Zentes & Schramm-Klein, 2001, p. 290), most of those retailing classes are considered to be either at the end of the growth-stage or in the maturity-stage of a retailing life cycle (PWC, 2000), while new forms of non-store based (= distance) retailing, using the Internet technology, are in the growth phase.

20

Kotzab

Figure 2:6 Institutional understanding of retailing

21

22 Telemarketing Teleshopping Infomercials On- Line- Shopping Cybermalls

Electronic Commerce

specialist mailorder

general mailorder

non- store retailing non

Vending machines Kiosks Catalog show rooms Gas Stations

otherother typestypes of store of based retailing

General merchandise retail stores Conviniencestores Supermarkets Warehouse supermarkets Supercenters Department stores Discount stores Specialty stores Category specialists Warehouse clubs Factory outlets Hyper markets Mass Merchants Duty free shops

retail stores

store based retailing

Retail formats

Street markets Market halls Multilevel sales networks Party plan systems Home delivery Door to door sales Demonstrator sales Mobile trade

Hybrid retailing– semi-

Retailing in the context of IT and distribution

Figure 2:7 Retail store formats (e.g. Berekoven 1995, pp. 28; Hansen 1990, p. 31; Müller-Hagedorn 1998; Scheuch 1996, p. 512)

Kotzab

Technology and Information technology In business administration and management, the term technology is used widely, but understood differently. In operations management, technology is used to rationalize production processes (e.g. Chase et al. 2004). New technologies can help to produce better, faster and/or cheaper (e.g. Ulrich/Fluri 1992, p. 40; Sullivan 1988, p. 113;) and the need to structure and organize an organization differently arises (Turban et al. 2004, p.67; see also Gaynor 1991). Strategic management views technology as a source for creating sustainable competitive advantages (e.g. Carr 2004). As technology changes and new forms replace older forms, technology can change the structure of an industry by setting up entry or exit barriers (Wildemann 1986, p. 133; Porter 1986). But of course, technology also plays a major role in distribution and logistics, f.i. technology for inventory and transportation (e.g. Pfohl 2000, pp. 144; Bowersox et al. 2002, pp. 222 or Lambert et al. 1998, pp. 265). Overall, technology can be understood as the sum of specific knowledge that can be used to solve a specific problem. This is different to the term technique that is seen as the application of technology. However, this distinction is not always used in an accurate manner. According to Busch (1981, p. 805) technology is often seen as a different expression for engineering. An example can be found in McNeil’s (1992, p. 3) approach, which defines technology as the possibilities „to find practical ways to use scientific discoveries profitably, ways of turning scientific knowledge into utilitarian processes and devices“. Based on that background, Perrillieux (1987, pp. 12) defines three types of technology as outlined in Figure 2:8. Out of these, basic, key and pacemaker information technology might be of specific importance for the purpose of distribution (e.g. Specht 1993 or Perrilieux 1987): Basic technology has no impact on the industry structure as any player in an industry can use it without problems. An example of basic information technology in distribution is the fax machine that can be used for order transmission. x Key technology has a major impact on the specific competitive situation in a market, as not every player can use it, and use is still growing. One relevant example of key information technology for distribution issues is the EDIFACT-standards that allow paperless communication between distribution channel members. x

23

Retailing in the context of IT and distribution x

Pacemaker technology is in an early stage of use, but has the potential to influence the competitive situation of an industry. Referring to distribution, RFID or eXite can be understood as relevant pacemaker information technology examples (see chapter 6).

Technology classification

Relationship

Complementary/ Competitive technology Substitution technology

Neighbor technology

Potential usage

Field of application

Strategic importance or life cycle position

Specific technology

Process technology

Basic technology

Cross section technology

Product technology

Key technology

Pace maker technology

Impulse technology

Figure 2:8 Classification of technology (Perillieux 1987, pp. 12 or Specht 1993,) Generally speaking IT can be seen as the total knowledge on the procedures that can be used to process, collect, transmit and store information (e.g. Lange et al. 1982, p. 47; Fletcher 1990, p. 5). IT is used to exchange information by bridging temporal and spatial distances (e.g. McNeil 1992, p. 686). Elliot/Sparkings (1998) introduced the term business information technology that is “concerned with the rigorous engineering of computer-based information systems for competitive decision making within the business environment” (p. 7).

24

Kotzab This understanding of IT is of major interest for our purposes, which can be seen as the hard-, software, operating and transmission devices that help to solve distribution specific problems. Table 2:1 lists a number of different forms of IT and classifies them as technology to collect, to store, to process and to transmit information. However, the list does not claim to be complete. IT has always been considered to be the key for tomorrow’s business success (Keen 1991, Picot et al. 2001 or Carr 2004). Until the mid 1990’s companies invested more than 1,000 billion US-D in IT in order to gain additional productivity by automating processes (e.g. Stern et al. 1996, Coughlan et al. 2001, Fröschl/Yalcin 1994). The use of IT allows customized solutions also in the field of distribution (see Link/Hildebrand 1995; Fröschl/Yalcin 1994) and consequenctly, the competitive advantages of using IT in distribution refer to the following three areas: Decreasing costs: IT helps to increase productivity by reducing inventory levels across the marketing channel (e.g. Lewig 1993, p. 72). Another cost savings aspect can be seen in the reduction of administrative work (e.g. Thompson 1988, p. 116). x Increasing speed and flexibility: IT ensures organizations act and react faster to changes in the markets (e.g. Johnston/Lawrence 1988, p. 94; Turban et al. 2004). Furthermore, IT helps to shorten distances between consumption and production and reduces the so-called information float that describes the time that passes between information demand occurring until it is met (e.g. Keen 1991, p. 5). Innovations can be introduced to the markets faster and are accepted more readily as McKenna (1995, p. 88) points out: „A product that cannot win customers quickly will not compete well against a product that has a ready base of customers“. x Increased Services: IT helps to improve the dialogue between all channel members from the raw material producer to the end user. This allows tailored solutions and a sustainable reach (McKenna 1995, p. 90; Link/Hildebrand 1995a, p. 30). x

Contrary to Porter’s (1986) generic competitive strategies, IT can help to gain these advantages simultaneously. However, as Porter (2001) claims, companies focusing solely on IT without any strategies will not gain any competitive advantage.

25

Retailing in the context of IT and distribution Function of IT in terms of operating Collecting information x

Scanner technology

x

Mobile data

Storing information

Processing information

x

Internal/external

x

Main frame

Data base systems

x

PC’s

x

Transaction

terminals

x

Video tapes

x

Labels

x

Optical video disk

x

Light pens

x

x

Barcodes

x

Cards

x

Microfilm

x

Sensors

x

etc.

x

RFID

x

etc.

Optical electronic

processing x

Information Retrieval

x

Decision support

x

Expert systems (MIS,

disc

systems systems management support MSS) x

etc.

Function of IT in terms of communicating Services

Networks

Devices

x

Telex

x

Videoconference

x

Telephone

x

Teletex

x

Teleconference

x

Mobile phones

x

Fax

x

Voicemail

x

PDA’s

x

Datex-L

x

x

Datex-P

x

Email

x

EDI

x

FTP

x

WAIS

x

WWW

x

SMTP

x

TCP/IP

x

HTTP

x

HTML

x

XML

x

ISP

x

etc.

Digital or analog

x

TV

transmission

x

Radio

Broad band or

x

Computer

narrow band

x

Fax machine

x

ISDN

x

Etc.

x

LAN, WAN,

x

WLAN x

etc.

Table 2:1 Synopsis of existing IT (Source: Kotzab 1997; Augustin 1998, Hansen/Neumann 2001 or Chaffey 2004).

26

Kotzab

Consequences of IT for managing retail distribution „The first firm in an industry to implement a real-time, interactive logistics information system will have a competitive advantage; the last firm to do so doesn’t need to spend the money“ (Lambert/Harrington 1989, p. 58).

Especially in an economic setting, where time is the crucial competitive factor, logistics and distribution managers have been asked to design innovative solutions in order to be competitive (Lambert et al. 1998). IT can increase the speed of order transmission, so that companies can gain competitiveness due to real-time reactions (e.g. Lalonde/Mason 1993, p. 39; Magee et. al. 1985, p. 187). IT in the form of a computerized logistics information system improves the management of the flow of information that plays a major role in distribution and logistics (e.g. Dröge/Germain 1991, p. 22; Lambert/Stock 2002; Closs 1994, p. 700; Norris 1988, p. 717). Today’s technological solutions are able to satisfy the demands made on logistics (e.g. Kerr 1989, p. 15; Keen 1991, p. 5 or recently Grieger 2004) as requested by many academics in the 1960’s: „... physical distribution offered the potential for placing high-speed digital computers to work in day-to-day operations“ (Bowersox et. al. 1968, p. 11). The informational dimension of retail distribution is discussed within literature as being retail information systems (e.g. Dunne & Lusch 1999, pp. 562 or Tietz 1993, pp. 1024) (RIS) or computerized retail information systems (e.g. Zentes 1989, p. 26) (CRIS). Both systems refer to the systematic collection, analysis and reporting of accurate data on the assortment and inventory, in order to optimize all relevant order and payment arrangements (see Tietz 1993, p. 1097 or Dunne & Lusch 1999, p. 562). The typical tasks of a RIS are: x x x x x x x x

Merchandise Planning in order to prepare a purchase Order Management Order receipts Invoice control Sales Payment Inventory control Reporting like article specific sales statistics

Based on their integration power, RIS can be grouped into open, closed or integrated RIS. While open RIS collect either incoming merchandise or outgoing merchandise data, closed RIS get all relevant

27

Retailing in the context of IT and distribution merchandise data on an article specific basis in real time. According to Zentes (1988) or Zentes et al. (1989) the basic structure of a closed RIS consists of four specific modules: an inbound module that collects all information on incoming articles including control of the incoming invoices; x an outbound module, which controls all information on outgoing articles and includes direct posting of the inventory levels, sales people and customer information; x a replenishment and Ordering module that manages the whole operational area of replenishment and order management and x a marketing management module that is used for reporting issues and management control x

While closed RIS do not consider the integration of external information flows, integrated RIS incorporate interfaces to suppliers, customers and other distribution channel partners (e.g. banks, market research companies, advertising agencies, governmental institutions, etc.) (e.g. Trommsdorff et. al. 1988, p. 180). Such integration allows uniform article numbering (e.g. EAN.UCC), automation on several stages in the supply chain and an unbroken flow of information of all merchandise actions, as Sittig (1977, p. 89) already pointed out. However, it took another 20 years to see the advantages realized in business practice (e.g. Buzzell/Ortmeyer 1995). Nowadays use of channel wide IT seems to confirm Bowersox’s (1969) notions on eliminating unnecessary costs in a distribution channel by diminishing traditional borders of the firms leading to hybrid arrangements within in a channel setting (e.g. Thompson 1988, p. 188; Picot et al. 2001). One example of an RIS can be found in the RETEK systems (see Figure 2-9). RETEK is a company that “offers software solutions that support virtually all of the operational activities of a typical retailer“ (RETEK 2005). The RIS-approach here is broadened to a supply chain wide decision systems that connects all informational stages of a retail business and does not only focus on distribution operations. This is also shown by Bange/Schinzer (2000), who have turned a RIS into a data warehouse for grocery retailers. Also Veiring (2004) presents how to use a RIS to implement integrated business processes that make the retail activities more efficient and more profitable. In that sense an Normann/Ramirez’s (1994) notions on value constellations be again confirmed as IT helps to design interactive strategies that rely on multi-directional exchange and co-production.

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Kotzab

Applying IT to retailing - the case of Internetbased grocery retailing The general development of Internet-based retailing A recent report of Retail Forward (2003) makes a prediction that some store formats such as department stores and malls will dramatically lose market share to experiential retail concepts, which Liebmann/Zentes (2001, p. 137) call Retail Theatre, and to ecommerce. While in 1998 total E-commerce retail sales were US-$ 5 billion, this number is predicted to be 46 (!) times higher in 2010 (RetailForward 2003, p. 24). Electronic commerce by using the Internet, as a distribution channel is easy as it includes a lot of changes in the way retailing is done (Burt/Sparks 2003). The basic characteristic of these companies is that they do not have any physical stores but market directly to the consumers through the Internet (e.g. Green, 1999). As a result, electronic retailers are able to offer their products cheaper than their store-based competitors. This means that Internetbased retailers will massively “attack” the market position of storebased retailers and “dotcoms” or “virtual stores”, like amazon.com will take serious market share from the existing players, especially when the new generation of consumers, who grew up with the Internet, will appear on the market (Retail Forward 2003, p. 24). However, after the initial hype, the recent development showed the limits of pure internetbased retailers (Ring and Tigert 2001 or Dichtl 1999). Webvan.com was not able to generate 3,000 customers/day and went bankrupt (Schnedlitz, 2001). Other examples prove Porter’s (2001) critique with New Economy and their loss of strategy. According to Doherty et al. (1999), the adaptation of the Internet as a channel of distribution depends on the accessibility of consumers, the direct communication possibilities, and cost savings (especially transaction costs) in new markets. The negative impact is due to technical issues (e.g. interface problems and speed of data transfer), a heavily planned buying pattern, complex product differentiation and positioning.

The diffusion and the use of the Internet More than 400 million people use the Internet as a specific tool to search for information and / or to buy goods/services (Pastor 2001). A lot of studies show a steady growth in accessing and using the Internet.

29

Retailing in the context of IT and distribution Fessel&GfK (2004) present a usage of the Internet in European countries in a range from 1 % in Albania to 75 % in Denmark and Sweden. But as Pastor (2001) also points out, only 6 % of the earth’s total population is online and he/she also makes out / identifies a resistance of interest towards the technology. There are certain barriers referring to time, legal, security and psychological issues as Hofstätter (2002) found out. We can also observe that the usage of the Internet is still dominated by seeking activities. Ernst & Young (2000) indicate that only one out of ten US households uses the Internet for shopping purposes. Hofstätter (2002) refers to a study by Fessel&GfK, which investigated the usage amongst Austrian Internet users showing that the main activities of Austrian Internet users are: searching for information (57 %), private e-mailing (49 %) and surfing (41 %). Online-shopping was on the last position (6%) (Fessel&GfK 2001b). Beck/Leutenegger (1999) conclude that there has to be a certain experience with the technology before consumers tend to shop over the web. The authors presented a specific internet-development/usage model consisting of five stages: e-leisure, e-info, e-contact, eshopping, e-service. The meaning of the model is that the Internet can be fully used when consumers are through all the stages. Reitsma (2000) validated this model with her longitudinal Internet user behavior study. She showed that 70 to 80 % of all users have used the Internet immediately for web-related activities, such as surfing or emailing. Only 10 % of all users were expected to use the web for basic shopping transactions after two years. This means, that pure online-retailers lack a critical mass of visitors and potential consumers, as the webvan.com example certainly proved.

Typologies of E-consumers In her work, Hofstätter (2002) discussed different studies that presented different typologies of Internet users in different geographical contexts (USA and Germany). Again, she confirmed the notions of a specific behavior that is needed to make an Internet user to an e-shopper. The Boston Consulting Group (BCG 2000b) thereby analyzed the on-line behavior of specific European country markets and developed the following clusters: early adopters (e.g. Sweden) with a high online-penetration but a small market size, x awakening giants (e.g. UK and Germany) with medium onlinepenetration but high market volume, x middleweights (e.g. France or Italy) and x

30

Kotzab x

small but connected countries (e.g. The Netherlands, Austria or even Denmark) with a moderate online retail penetration but rapid growth rates.

AC Nielsen Denmark provides a Danish Internet shopper typology consisting of three groups: the critical user (approx. 25 % of the population), who is reluctant towards the internet; the goal-oriented user (approximately 31 % of the population), who uses the internet only for special purposes but generally has a positive attitude towards the technology and the convenient user (approximately 21 % of the population), who uses the internet instead of catalogues (AC Nielsen Denmark, 2001. Fessel & Gfk, 2001). For the UK, CACI Ltd introduced seven groups that position according to their life stage specific consumer groups within a life cycle of Internet. Those eTypes are “the first classification of consumer behaviour on the Internet” (CACI 2002). This typology should help to understand how consumers behave and transact online. The seven groups are then subdivided into a total 23 types that specify the online consumer behavior. Another segmentation typology that has been presented by Orler/Friedman (1998) is the Consumer Direct Typology, which presents specific groups of consumers that are of specific interest for grocery retailing (see Table 2:2). Consumer direct services refer to all online-services for food and grocery items, where private users use electronic means for ordering purposes (e.g. Corbae/Balchandani 2002). This is an additional form to existing distance shopping possibilities out of which mail order still plays a major role (e.g. Berman/Evans 1998). The basic notions of consumer direct suggest that certain groups of consumers appreciate the value that consumer direct offers as consumer direct services are presented as a handy way for a lot of consumers to shop their groceries, as the majority of shoppers are not satisfied with their shopping experience (e.g. Siebel 2000). The different segments demand consumer direct services in a different manner, but Orler/Friedman (1998) as well as Corbae/Balchandani (2001) see fast growing market shares of consumer direct. However, the authors also refer to the logistical challenges of home delivery services and a low consumer loyalty towards such services (see also Gsaller 2004). Considering the buying behavior as general segmentation criteria, Reitsma (2000) presents Internet shoppers as a critical group of buyers being very educated and not spending too much time on the net. Such shoppers buy due to the convenience of the channel, the unlimited shopping hours and the immediate order status information. Typical products bought over the web are books, CDs or soft- and hardware. 31

Retailing in the context of IT and distribution Consumer direct consumer typology after Orler and Friedman (1998) and Corbae and Balchandani (2001) Consumer direct Shopping

attractiveness

avoider/ Dislike grocery shopping, lack time but

passive shoppers

are technology-friendly

Necessity users

Unable to go to the store

New

Consumer direct

Characterization

consumer group

High

technologists/ Young and technologically interested,

modern responsibles Time starved Responsibles

High

have no time for shopping Dual income household with kids, time pressed Have time but shopping is part of their ‘job’

Medium Medium/high Low

Technology avoiders, enjoy shopping, Traditional shoppers

mainly

housewives,

high

shopping

Low

frequency

Table 2:2 Typology of home delivery target groups

The market volume for electronic retailing Due to the dynamic and fast changes in the relevant industry, assessing the real market volume of virtual retailing is very difficult (see Turban et al. 2004, p. 83 or Ring/Tigert 2001). In the past, different empirical studies presented various numbers for the global market volume of electronic commerce. Sanders and Temkin (2000) predicted a US online sales volume for 2004 to be USD 3.2 trillion. Other studies were not that optimistic and delivered smaller numbers. The Nua Internet Surveys (2000) predicted global online shopping revenues between 3.9 billion to 36.0 billion USD. According to this report, the United States were the area where electronic retailing would be most developed. BCG (2000a) noted that Europe is about two years behind the USAmerican standard. The Forrester Group (2000) predicted that European on-line sales in 2005 might reach 55 billion Euro (!) or 5 % of total sales. Contrary to these optimistic numbers, a Finnish study by Kallio et al. (2000) presented a future stagnation of on-line-sales. According to the US Department of Commerce e-commerce is increasing, as retail ecommerce sales in the third quarter of 2004 reached over US-$ 17 billion. Though only 1.4 % of total sales, this sales volume was 22 % higher than in the third quarter of 2003 (Census Bureau 2004). Hudetz (2002) validated this for the German market where the electronic retail market has 1.6 % of the total market volume. 32

Kotzab However, in order to get a valid result on the market volume one has to divide the total retail market into specific segments, as not all products can be sold in an electronic manner (Turban et al. 2004). Looking for example at the grocery business, Corbae/Balchandani (2002) recently assessed the market for consumer direct services in Europe to be over EUR 100 billion in the year 2010. This would represent a market share on total sales of 10.3%. The logistical assumptions behind this prediction are challenging, because over 900 million deliveries have to be carried out to 35 million households. Although these numbers let Internet-driven commerce to private households (b2c) appear attractive, the electronic commerce between organizations (e.g. b2b or b2g) will get more important and will take a 70 % market share of total electronic commerce (O’Connor/Galvin 2001). Some interesting facts for the US grocery markets were presented by O’Connor (2004). US consumers were spending $ 585/person for buying groceries online. In 2008, this share is expected to be $ 780 per buyer. Thus total online sales for groceries increased from $ 2.64 billion in the year 2002 to $ 3.7 billion in 2003, which means a growth rate of 40 %.

Internet-based retail formats and logistical challenges The electronic shopping world offers a lot of virtual store formats, e.g. intelligent agents, virtual malls, virtual auctions, portals, and virtual communities (Schnetkamp 2000, p. 36). Similar to store-based retail formats, the electronic counterparts also have to deal with the strategic questions of attracting and satisfying customers (Paul & Runte, 1999 or Garczorz & Krafft, 1999). Internet shopping will influence store size in the future - however it is quite difficult to predict what the effect will be, but is seems certain that there will be one. The practicalities in relation to payment, delivery/pick-up of goods etc. will, when these issues are solved, also influence store location, parking facilities, store layout, staffing etc.. After the fall of ‘webvan.com’, experts rather see clicks-and-mortar retailers as a promising alternative to pure Internet-players. Here the keyword is multi-channel-retailing, where format-based and mail-order retailers add electronic distribution channels to their channel portfolio (Kotzab/Madlberger 2001). The example of ‘tesco.com’ seems to strengthen this argument from a practical point of view. With a turnover of £ 577m in 2004, tesco.com is up till now the worlds’ largest online retailer and shows grocery competition of how to implement electronic distribution channels (see O’Connor 2004). Tesco.com administers about 120,000 orders a week and holds a share of 65 % of the UK online grocery market (Tesco 2005). 33

Retailing in the context of IT and distribution Mail-order companies also converge their ‘classical’ services into virtual mail order, including food services in their service portfolio. Such companies have experiences in home delivery of small order units and also have the necessary infrastructure behind it (e.g. Berman and Evans 1998). Lancioni et al. (2000) present some challenges while using electronic distribution channels, such as shopping with no human contact but permanent client contact, improved customer service with improved flexibility (365 days a year, 7 days a week, 24 hours a day) and overall visibility of the order activities and status. While this part of electronic commerce can be perceived as the convenient part, we can identify logistics as the “trouble maker” as electronic retailers now have to perform activities that traditional retail has outsourced to consumers (Schnedlitz et al. 2004). This problem of consolidating individual consumer orders based on electronically submitted orders is discussed within literature as a “last-mile”-problem (e.g. Kopczak 2001, Lee/Whang 2001 or Siebel 2000). Kopczak (2001) presents different last-mile-models consisting of the two dimensions of assortment creation and home delivery. The basic question is whether these activities are performed in-house or are outsourced. While amazon.com follows a model that has the assortment creation in-house and outsourced distribution, Walmart.com has opted for the in-house alternative in both dimensions. Tesco.com serves from 270 stores in the UK covering 96 % of the UK-market (Tesco.com). In 2002, Prockl/Pflaum (2002) presented in their consumer direct logistics study a tool box of different home delivery design alternatives, that can be used to detail the individual process steps that occur while passing goods through the last mile (see Figure 2:9). Product requirements also have to fit to a virtual retail concept as well as being aware of security issues because consumers are holding back on use of the internet as a distribution channel due to lack of security (Cleven 1999, p. 973).

Consequences for Internet-based channel adaptation Kotzab and Madlberger (2001) and PWC (2000) expected the top retailers and mail-order-companies to adapt virtual store formats to their existing multi-channel portfolios. The list of the Top-100-internet retailers published by Stores Magazine already shows six “brick-andmortar”-companies with e-channels among the top 20 etailers. In order to serve future consumer groups, the leading retailers include more and more electronic distribution channels in their channel portfolios.

34

Kotzab

Figure 2:9 A toolbox of logistical design alternatives. (Source Prockl/Pflaum 2002, pp32).

35

Retailing in the context of IT and distribution It seems that these retailers have the financial resources, which allow a long-term investment in this risky business. Wal-Mart Stores Inc. is a prominent example. In the year 2000 the company opened and shut its web site several times; nevertheless, Wal-Mart’s strategy was still anticipated to affect the electronic commerce strategies of its competitors (Anonymous, 1999).

Example of an on-line shop - www.billa.at1 In 1997, Rewe Austria launched the first online grocery shop on the Internet in Austria. The goal of the web-approach was to position a modern information-, entertainment- and e-commerce platform, as the internet-based store-format is seen as a promising customer relationship management tool allowing customized one-to-onemarketing activities in the future. The content is offered on approximately 3,500 web pages, which are grouped into nine areas: x x

x x

x x

x x x

My Billa – personalized login possibility Billa-Assortment – up to date information about new products, promotions, best-buys, mobile phone value cards, vouchers and photo-online Billa-Shop - online shop offering virtual shopping experiences. Food and Drinks – including (among other things) recipes, advantage-club, nutrition news, gourmet advisor, and basic food groups Billa advantage member club – contact, membership affairs, downloads, traveling, member club shop, FAQ About Billa – company information, including corporate information and job offers, store-Locator - virtual tours and information on new store openings Magazine - including weather reports, travel and tourist information and travel shop, pet section Fun – including games, chat-possibilities, e-communities, ecards, e-auctions and short messaging services Kids - virtual greeting cards, children’s games, riddles and news

Focusing on the online shop, Billa has chosen a restricted model, as the strategic goal for the Billa online shop is to operate on a profitable basis. The online store concentrates its service on 3,000 products for the geographic area of the capital city Vienna, where nearly 25 % of 1

Adapted from Kotzab et al. (2003). The author gratefully thanks Mag. Kerstin Neumayer (REWE Austria) for her support.

36

Kotzab the eight million Austrians live. Viennese online consumers can shop “365x24x7” and purchase the products at the same prices as in the store (including promotions). In case of any assistance needed, a special telephone hotline is offered. The order is confirmed by e-mail and processed four hours after order receipt. The delivery is completed between 8 a.m. and 8 p.m. Monday through Friday and between 8 a.m. and 6 p.m. on Saturdays within a 3-hour delivery window. The payment is cash or check when delivered. The minimum order is € 25 (excl. delivery fee and pledges) and a fee of € 5.99 per 50 kg is charged additionally. The orders are picked from one special store in the Vienna area. The prices for the articles are the same as in the stores, but consumers will get exclusive on-line promotions. An interesting aspect of the web activities can be found in using the website as a possibility for new supplier-collaboration. Suppliers have the option to manage certain content pages in cooperation with www.billa.at. The web can therefore be identified as a new application area for a joint consumer approach. Recently www.billa.at and an Austrian Dairy company (NÖM) offered a specific diet program, where consumers had access – over 60 days – to specific websites that informed on diets, recipes, etc. While in 1997, 1.8 million visitors per month clicked on www.billa.at, recently 7 to 8 million visitors per month are registered. The average time spent per visit is approximately 7 minutes. The goal is to have 10 million visitors per month. The increase in visitors can be seen as a result of two issues: a focused strategy of www.billa.at, meaning that the content is emphasizing the core competencies of a grocery retailer, i.e. delivering value for a consumers everyday life in terms of nutrition and living style. x an increasing use of one-to-one marketing that allows tailored communication between the retailer and their clients. This is documented by their newsletter strategy, where two types of newsletter are sent out bi-weekly, one for the member-clubmembers and one for the registered users, who could be different persons. The website is considered as an additional format to remain in touch with club members. x

37

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Retailing in the context of IT and distribution Keen, P.: Redesigning the Organization through Information Technology. Planning Review, 19, 3, 1991, 4 – 9. Kerr, A.: Information Technology - Creating Strategic Opportunities for logistics. International Journal of Physical Distribution and Logistics Management,19, 5, 1989,15 – 17. Kopczak, L.: Designing Supply Chains for the 'CLICK-ANDMORTAR' ECONOMY, Supply Chain Management Review, 5, 1, 2001, 60-66. Kotzab, H. & M. Madlberger: European retailing in e-transition? An empirical evaluation of Web-based retailing - indications from Austria, International Journal of Physical Distribution & Logistics Management, 31, 6, 2001, 440-462. Lalonde, B. & R. Mason: Some Thoughts on Logistics Policy and Strategies: Management Challenges for the 1980s. International Journal of Physical Distribution and Logistics Management, 23, 5, 39 45 (reprint of Lalonde, B. & R. Mason.: Some Thoughts on Logistics Policy and Strategies: Management Challenges for the 1980s. International Journal of Physical Distribution and Materials Management, 15, 5, 1985, 5 – 15. Lambert, Douglas/Harrington, Thomas (1989): Establishing Customer Service Strategies Within the Marketing Mix: More Empirical Evidence. In: Journal of Business Logistics, Vol. 10, 2, 1989, 58 Lancioni, R., M. Smith, & T. Oliva, T.: The Role of the Internet in Supply Chain Management, Industrial Marketing Management, 1, 2000, 45-56. Lange, B.P., H. Kubicek, J. Reese & U. Reese: Sozialpolitische Chancen der Informationstechnik. Zur staatlichen Förderung einer Sozialen Informationstechnologie. Frankfurt/New York, 1982. Lee, H., V. Padmanabhan & S. Whang: The Bullwhip Effect in Supply Chains, Sloan Management Review, Spring, 1997, 93 – 102. Levy, M. & B. Weitz: Retailing Management, McGraw Hill-Irwin, Boston et al., 2004.

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Kotzab Lewig, D.: Beziehung zwischen strategischer Planung und Informationsmanagement. In: Scheer, A.-W. (ed.): Handbuch Informationsmanagement: Aufgaben - Konzepte - Praxislösungen. Wiesbaden, 1993, 69 – 77 Liebmann, H.-P. & J. Zentes: Handelsmanagement, Vahlen, München, 2001. Link, J. & V. Hildebrand: Mit IT näher zum Kunden. Harvard Business Manager, 3, 1995, 30 – 38. Magee, J., W. Copacino & D. Rosenfield: Modern Logistics Management. Integrating Marketing, Manufacturing, and Physical Distribution. New York et.al., 1985. McKenna, R.: Real-Time Marketing. Harvard Business Review, 5, 1995, 87 – 95 McNeil, I.: Basic Tools, Devices and Mechanism. In: McNeil, Ian (ed.): An Encyclopaedia of the history of technology. Bungay, 1992, 1 – 44. Müller-Hagedorn, L.: Der Handel. Kohlhammer, Stuttgart et al. 1998. Normann, R. & R. Ramirez: Designing interactive strategy. From value chain to value constellation. Chisester, John Wiley & Sons, 1994. Norris, R.: Electronic Data Interchange. In: Umbaugh, Robert (ed.): Handbook of MIS Management. Second Edition. Boston, New York, 1988, 717 – 732. Nua Internet Surveys : Online shopping Revenue Estimates. Marketing News, July 3, 2000, 20 O´Connor, J. & E. Galvin: Marketing in the Digital Age. 2nd edition, Financial Times/Prentice Hall, London, 2001. O’Connor, M. : E-Commerce : Who’s doing it internationally ?, http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/trade2337?o pendocument, 05-06-2004. Orler, C. & D. Friedman: The consumer behind consumer direct, Progressive Grocer, 2, 1998, 39-42. 43

Retailing in the context of IT and distribution Pastore, M.: Europeans Slow to Move Shopping, http://www.clickz.com/stats/sectors/geographics/article.php/801811, 16-07-2001, 2001. Paul, C. & M. Runte: Community Building, in: Albers, S., M. Clement, K. Peters & B. Skiera (ed.): eCommerce - Einstieg, Strategie und Umsetzung im Unternehmen, IMK-Verlag, Frankfurt am Main, 1999, 49-64. Perillieux, R.: Der Zeitfaktor im strategischen Technologiemanagement: früher oder später Einstieg bei technischen Produktinnovationen? Berlin, 1987. Picot, A., R. Reichwald & R. Wigand: Die grenzenlose Unternehmung. Information, Organisation und Management, 4th edition, Wiesbaden, Gabler, 2001. Porter, M.: Strategy and the Internet, Harvard Business Review, 3, 2001, 63 – 78. Porter, M.: Wettbewerbsvorteile. Frankfurt, Campus, 1986. PriceWaterhouseCooper (PwC): Europan Retailing 2010. http.//www.ideabeat.com/ResLib/pricewaterhouse/euroretail2010/page 1.htm, 2000, accessed June 24, 2000. Prockl. G. & Pflaum, A. : Consumer Direct Logistics. Germa Press, Hamburg, 2002. Reitsma, R.: eCommerce Enters Europe. Presentation of Forrester Research Inc., 2000 Retail Forward : Twenty Trends for 2010: Retailing in an Age of Uncertainty, Retail Forward, Columbus OH, 2003 RETEK (2005): http://www.retek.com/solutions/Default.asp, accessed 2005-02-09. Ring, L. & D. Tigert : Viewpoint: The decline and fall of Internet grocery retailers, International Journal of Retail & Distribution Management, 29, 6/7, 2001, 264-271

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Kotzab Sanders, M. & B. Temkin, B. : Global eCommerce Approaches Hypergrowth, http://www.forrester.com/ER/Research/Brief/0,1317,9229,FF.html, accessed October 4, 2000. Scheuch, F.: Marketing. 5th edition, Vahlen, München, 1996. Schnedlitz, P.: Internet-Shopping. Rechnung ohne die Menschen, Die Presse, 2001, 2001-08-27, 2 Schnetkamp, G.: Zukünftige Erfolgsfaktoren des Electronic Shopping. In: Ahlert D., J. Becker, P. Kenning & R. Schütte (ed.): Internet & Co. im Handel. Strategien, Geschäftsmodelle, Erfahrungen (Roland Berger-Reihe: Strategisches Management für Konsumgüterindustrie und -handel), Springer Berlin-Heidelberg, 2000, 29-50. Siebel, L.: Food Logistics: Lebensmittel via Internet, Düsseldorf, 2000. Sittig, C.: Das einheitliche europäische Artikelnumerierungssystem (EAN) rationalisiert die europäische Warenwirtschaft. Der Markt, 16, 2, 1977, 89 – 96. Specht, G.: Distributionsmanagement. 3rd edition, Stuttgart, 1998

Kohlhammer,

Specht, G.: Technologiemanagement. In Wittmann, W., W. Kern, R. Köhler, H.-U. Küpper & K. v. Wysocki (ed.): Enzyklopädie der Betriebswirtschaftslehre. Band 1: Handwörterbuch der Betriebswirtschaft. Teilband 3. R - Z mit Gesamtregister. 5th edition, Schäffer-Poeschel, Stuttgart, 1993, Sp. 4154 – 4168 Stern, L., A. El-Ansary & A. Coughlan: Marketing Channels. 5th edition. Upper Saddle River, New Jersey, 1996 Stock, J. & D. Lambert: Strategic Logistics Management, 4th edition, Boston et al., McGraw-Hill Irwin International Edition, 2001. Sullivan, C.: Looking for Competitive Advantage. In: Umbaugh, Robert (ed.): Handbook of MIS Management. Second Edition. Boston, New York, 1988, S. 107 – 113.

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Retailing in the context of IT and distribution Tesco (2005): A Tesco Plc annual review and summary financial statement 2004, http://84.40.10.21/presentResults/results2003_04/ Prelims/site/e/e6.html, accessed 2005-02-08. Thompson, J.: Leveraging Information Technology. In: Umbaugh, Robert (ed.): Handbook of MIS Management. Second Edition. Boston, New York, 1988, 115 - 119. Tietz, B.: Der Handelsbetrieb. 2nd edition, Vahlen, München, 1993. Trommsdorff, V., H. Fielitz & S. Hormuth: Integrierte Warenwirtschaftssysteme im Handel. In: Trommsdorff, V. (ed.): Handelsforschung 1988. Schwerpunktthema: Standortfragen. Jahrbuch der Forschungsstelle für den Handel Berlin (FfH) e.V.. Wiesbaden, 1998, S. 179 – 191 Turban, E., D. King, J. Lee & D. Viehland: Electronic Commerce 2004: A Managerial Perspective, 3rd edition, Prentice Hall, Englewood Cliffs, N.J., 2004 U.S. Census Bureau (Census Bureau): Quarterly retail e-commerce sales, 3rd quarter 2004, Press Release 19-11-2004, 2004 Ulrich, P. & E. Fluri: Management: Eine konzentrierte Einführung. 6th edition, UTB, Bern, Stuttgart, 1992. Veiring, O. : Erfolgreiche Geschäftsprozesse durch moderne Warenwirtschaftssysteme – Aber welches ist das richtige System ?, 2004. Wildemann, H.: Zeitaspekte bei der Einführung neuer Technologien in Produktion und Logistik. In: Hax, H. (ed.): Zeitaspekte in betriebswirtschaftlicher Theorie und Praxis. Wissenschaftliche Jahrestagung des Verbandes der Hochschullehrer für Betriebswirtschaft e.V.. Stuttgart. , 1986, 131 – 144. Zentes, J. & H. Schramm-Klein, H : Multi-channel retailing – Ausprägungen und Trends. In Hallier, B. (ed.), Praxisorientierte Handelsforschung, EHI, Köln, 2001, 290 – 296. Zentes, J., R. Exner & M. Braune-Krickau: Studie Warenwirtschaftssysteme im Handel. Über den Stand und die weitere Entwicklung von Warenwirtschaftssystemen im Einzelhandel mit Konsumgütern des täglichen Bedarfs. Essen et.al., 1989. 46

Kotzab

Zentes, J.: Neuorientierung der Logistik im Handel. Thexis, 1, 1989, 26 – 28. Zentes, J.: Warenwirtschaftssysteme. Auf dem Weg zum Scientific Management im Handel. Marketing Zeitschrift für Forschung und Praxis, 3, 1988, 177 – 181.

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CHAPTER 3

Retailer strategies Mogens Bjerre

Retail Market Development The retailers positioning2 and the strategies pursued can provide a crucial understanding of what the possibilities are for aligning the suppliers and retailers in the FMCG-sector. Therefore a positioning model, developed specifically towards FMCG-retailing is presented as it has been developed and described by Ring and Tigert (1995). Their empirically based model – “The 8 Winning Strategies” – will be combined with a typology developed by Miles and Snow (1978) in chapter 7. This typology of strategies specifies 4 different types and was originally based on empirical studies of retailer strategies. The combination then leads to a specification of the strategy typology, containing the elements of the positioning model. The chapter thus focuses on the different retailer positioning elements and on the consequences of these in relation to suppliers’ sales and marketing organizations. Strategic planning and management in retailing has gradually developed over the past decades (Corstjens & Corstjens, 1995). The developments have mostly focused on either the operational side of retailing (Randall, 1994) or on the positioning side of retailing (Lawrence, 1983; Randall, 1994). The FMCG-retail sector is characterized by over-capacity, continued pressure on price and margins as new retailers operating as discounters enter the markets, and continuous search for more cost-effective ways to reach end-users.

2

The term positioning is used in accordance with Aaker (1995, p. 184).

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Bjerre Market saturation is a widely known phenomenon - this is also the case in the FMCG-sector. Moore (1994) developed the following overview of the situation in Europe, see figure 3:1.

Figure 3:1 Saturation of Supermarkets, Hypermarkets and Discounters in Europe. Source: Moore, 1994 The figure shows that a number of markets are saturated but, according to Moore (1994) this should generally be related to the type of retail operation and often to local conditions. In order to take a closer look at retailers, it is necessary to understand the strategies pursued by retailers and the foundation for these strategies.

Retailer Strategy Development Developing winning strategies in retailing does not come by it-self. It requires a lot of hard work, dedicated management, dedicated staff, an efficient operational system, a clear positioning in the market place and a bit of luck (Aaker, 1995). The days of the simplified statement: “What are the three most important factors in successful retailing? Location, Location, Location” have ceased.

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Retailer strategies However new models dealing specifically with retailer strategies are few and far apart. Although some attempts have been have made, few have a comprehensive scope, and most models are based on adapting existing product-oriented models to retailing. Until recently many retail strategies were based on one of two basic models (Corstjens & Corstjens, 1995): x The Wheel of Retailing (incl. the life cycle model) x The Adaptive Strategy Model The “Wheel of Retailing”, originally developed by McNair (1958), states that all retail formats go through three transition stages, see figure 3:2. An initial stage focusing on price - as low status, low margin and low price operators, a development stage focusing on better service - as prices and margins improve, and a maturity stage in which investments and sophistication increase, which in turn gives room for new concepts or stagnation. The wheel of retailing is thus based on the concept of introducing new retail formats based on a price strategy and a gradual “maturing” of the concept into one of more service and better assortments etc. This upscaling of the retail concept continues until there is “room” in the market for a new entrant, using price as the prime competitive advantage. A number of cases support this model such as the development of Netto (DK) that has changed the concept. The concept has changed from focusing only on price in rather small, untidy stores in secondary locations selling only prepackaged goods to a concept of bigger, tidy stores located on high streets selling prepackaged goods, meat, and fresh vegetables and fruits. However, as pointed out by Hollander (1960), not all types of retailing apply to the wheel of retailing and neither does all markets apply to the wheel of retailing. Wal-Mart is an example of avoiding the temptation to move through the steps in the wheel. It has for more than 20 years maintained its image as a low-price, low-cost retailer (Tinsley, Brooks Jr. & d’Amico, 1978). Another basic problem in applying the wheel of retailing to a specific retailer is that the wheel was developed to describe developments in the retailing sector, not individual retailers. Describing individual retailers is, however, possible in the “lifecycle” strategy models, typically based on the principles related to “product life-cycle” models (Davidson, Bates & Bass, 1976).

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Bjerre Initial stage – Characteristics: Low price, limited service, limited assortment. Low status Mature stage – Characteristics: Stagnation, no new developments, focus on maintenance Development stage – Characteristics: (Trading up) Improving concept and facilities, wider assortment, increased price, increased status Figure 3:2 The Wheel of Retailing. Source: Based on Corstjens & Corstjens, 1995, p. 22 This cycle can be partitioned into four distinct stages: x x x x

Innovation Accelerated Development Maturity Decline

The implications of Davidson, Bates & Bass’s model are, that retailers should remain flexible to adapt to external changes, analyze new endeavours carefully and that the maturity stage should be extended as long as possible. The life-cycle model is well suited to present the market conditions at the different steps in the life-cycle, but does not have any arguments leading to the development of different strategies or to the identification of key strategic elements for retailers. The adaptive strategy model is based on a thorough analysis of the environment and consequently an adaptation to the results of this analysis, focusing on fulfilling uncovered demands in the market. Thus this type represents the development of strategic thinking and models analyzing the interaction between the company and it’s

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Retailer strategies environment. Porter’s (1985) strategy model labeled “The Five Forces” is a representative of the adaptive strategy model in which external factors may indicate possible uncovered market opportunities in the market. Thus, strategic thinking resulted in the development of two basic strategies: x Cost leadership x Differentiation One, namely focusing on a niche and not the whole market - either in terms of cost leadership or differentiation strategy supplemented these two strategies. A basic problem in relation to the niche strategy is that if success is achieved within the niche continued growth could be pursued in two ways - either by gradually leaving the niche or to expand to other geographical markets. As quite a few FMCG-retailers have had success in their niches and gradually are leaving this niche, they are left with the problem of redefining their strategies. This leaves in essence the retailer with the two basic strategies - cost leadership and/or differentiation. Another attempt to describe retailer marketing strategies is based on a “retailer adaptation” of the 4-P-framework. Thus the 8 P’s of Albert Hein is an attempt to use the 4-P-framework in retailing (Lawrence, 1983, p. 10) are: x x x x x x x x

Products and assortment Pricing Promotional activities Place (i.e. location of the store(s) Personnel Physical distribution and handling Presentation of stores and products Productivity

In addition to the marketing strategies another important change is taking place within FMCG-retailing. On of the first to identify it was Lawrence (1983), that stated that retailers have ceased to be merely passive distributors of supplier’s products. Retailers are thus increasingly developing the base for their own positioning and focusing on specific end-user segments. This development involves optimizing internal operational and external positioning elements of the retailer’s concept.

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The 8 Positioning Elements Ring & Tigert have developed an interpretation of the two basic strategies - cost leadership and differentiation - specifically in relation to FMCG-retailing, in the 1990’es. Thus the two strategies have been supplemented by the concept of eight positioning elements. The eight positioning elements were identified in a study of more than 150 retailers that all had shown above average profitability, compared to other retailers in the same line of business. These retailers were then analyzed in detail to identify any common characteristics. Eight strategic elements were identified as headings, covering the strategic elements applied by the retailers. Not all elements were pursued simultaneously, typically there was management focus on two or three elements at any specific point in time. The eight elements are: x x x x x x x x

Systems Suppliers Logistics Location Product Value People Communication

At the same time this type of strategy model represents newer thinking in strategy development, namely that a competitive advantage cannot solely be developed based on external opportunities in the market (Peteraf, 1993; Penrose, 1959; Foss, 1993). The model states that internal resources that are hard to copy should support the external focus. The concept of the eight elements is thus based on two groups of positioning elements. One group supports the overall cost leadership strategy and the other group supports the overall differentiation strategy. However, retailer interpretation of cost leadership and of differentiation is quite different from a supplier’s interpretation. The differences between the retailer interpretation of cost leadership and the manufacturer interpretation are primarily:

x Retailers do not have “production facilities” x Cost of goods sold is high, i.e. low margins

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Retailer strategies Therefore the retailer must focus on bringing down “production costs” which primarily are operational costs e.g. wages, rent, cost of goods sold, and handling costs. The retailer’s “profit-formula” is quite different from that of the manufacturer, as FMCG-retailers generally have a very high stock turn and relatively low profits per SKU sold. The differences between the retailer interpretation of differentiation and the manufacturer interpretation are primarily: x The retailer can differentiate on assortment and/or services, not individual SKU’s x A retailer’s unique selling points are related to the assortment, the store, service facilities, end-users convenience and the staff Pursuing a cost leadership strategy will according to Ring & Tigert (1995) be based on different combinations of three elements, also labelled the “Triangle Elements”, see figure 3:3: x Systems x Suppliers x Logistics None of these three elements are directly visible to end-users, and are all used to pursue a cost leadership strategy. Cost leadership has become quite important in FMCG-retailing due to the emergence of discount retailers such as Aldi, Netto etc. At the point of their introduction these retailers often market themselves purely based on price and are capable of offering 25 to 30 % discounts compared to regular prices in typical supermarkets (Heede & Storm, 1997). Cost leadership has actually changed from being one of two generic strategies and has turned into a necessity in FMCG-retailing. If a retailer is not cost-effective, it will not be possible to fulfil one of the essential consumer criteria, namely a competitive price level. The level of cost-effectiveness have changed, as the need for competitive prices have increased - resulting in a situation, in which the retailer has to be able to meet a certain level of cost-effectiveness in order to stay in business. Thus all retailers have to pursue cost leadership as part of the strategy.

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Figure 3:3 Elements of the Cost Leadership Strategy Source: Ring & Tigert (1995), p. 6. The other group of elements supports the overall differentiation strategy (Ring & Tigert, 1995). However, retailer interpretation of differentiation is quite different from a manufacturer's interpretation. The retailer is not only dependent of the basic 4 P’s3, but is also quite dependent on human resources “people” as they are the key enabling factor securing the transformation of the 4 P’s. Thus the differentiation strategy identified as positioning strategy (in the terms of Ring & Tigert), supplements the concept of the 4 P’s with a fifth P - people, and is thus base on five elements, also labelled the “Pentagon Elements”, see figure 3:4: x x x x x

3

Place - location Product - assortment Price - value/quality ratio People - service and knowledge Promotion - communication - internal and external sales and marketing activities

As formulated by Kotler, Armstrong, Saunders, and Wong (2001).

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Retailer strategies

Place

Promotion

Product

People

Price

Figure 3:4 Elements of the Differentiation Strategy. Source: Ring & Tigert (1995), p. 1 All five elements are directly visible to consumers and are thus seen as parts of the differentiation strategy. Differentiating a retail format naturally requires a segment or segments to target, which means, that any descriptions of differentiating strategies that do not specify the target segments cannot provide foundation for building competitive advantages. The elements in the triangle and in the pentagon cannot be analyzed separately as several of them are interdependent. For example it is not possible (profitably) to pursue a strategy based on assortment dominance and thus carrying a very wide and deep assortment, if the logistic strategies are not engineered to support this. The combination of the two groups of elements, the triangle elements - the operational group and the pentagon elements - the differentiation group, is illustrated below in figure 3:5. The triangle is placed within the pentagon to illustrate (respectively) the internal and the external nature of the two groups of elements. To illustrate the descriptiveness of 8 elements they are applied to two different retailer concepts - one being Aldi and one being Tesco.

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Bjerre

Place

Systems

Promotion

Logistics

Product

Supplier

People

Price

Figure 3:5 The Retailer Positioning System. Source: Ring & Tigert,1995, p.7 Aldi, the German based discount retailer (Hartvig Larsen & Grych, 1997b; Nielsen 1993), can be described in terms of the triangle and pentagon in the following way: x Systems - scanning is used in most stores, EDI, internal monitoring of individual SKU’s x Suppliers - uses European bargaining power locally, do not accept any no sales representatives in the stores x Logistics - handles their own logistics based on own trucks x Place - typically secondary locations, 200-1000 sqm. Of which app. 60 % are over 600 sqm., standard and simple interior design, efficient floor planning x Product - limited assortment 5-600 SKU’s of which only 50 are non-food, few local adaptations of the standardized assortment, private labels account for 35-90 % of the turnover depending on the category. Does not fulfill “one-stop” shopping needs. x Price - low prices, using brands to communicate low price, low quality SKU’s, few high-end products x People - no service, no product know how, internal climate reflects high pressure on existing resources 57

Retailer strategies x Promotion - no signs in the stores, monthly leaflets locally, local adds in magazines Aldi has expanded into a number of different European markets and have experienced varying degrees of success. The use of the 8 elements is a concept that can be regarded as a traditional “hard” discounter (Randall, 1995). A leading English retailer, Tesco (Hartvig Larsen & Grych, 1997a), has developed a fundamentally different approach to the 8 strategic elements. Tesco can be described in terms of the triangle and pentagon in the following way: x Systems -scanning, EDI used extensively, introduced a “Sales Based Ordering system” in1993 x Suppliers - the chain has developed it’s own buying department with product and production specialists with insight into suppliers processes, suppliers sales reps. are allowed in the stores x Logistics - partly direct store delivery, partly own handling and partly third party distribution, accepts order to store delivery time span of 24 or 48 hours x Place - high street locations, varying in size from medium to large supermarkets, different types of interior design depending on location and product group x Product - wide and deep assortment, many new products, many special items, focusing on the above-average spending end-user, many exclusive product - and high share of high quality private labels, some high-end products - Healthy Eating, Green Choice and Nature’s Choice. Do fulfill the “one-stop” shopping concept x Price - average to high prices, good value for money x People - knowledgeable staff, stores often equipped with a butcher/delicatessen, wine-department, kiosk, and pharmacies x Promotion - local TV-advertising on this weeks offers, weekly leaflets, signs in the store, merchandising special events, demonstrations and tasting events

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Bjerre

The Cost Leadership Strategy and its Elements This strategy involves the achievement of the lowest possible cost position in the FMCG-sector. Many segments are served and great importance is placed on minimizing costs on all fronts. If prices achieved by a retailer is approximately the sector average, cost leadership should result in superior performance. Thus cost leaders often market standard products believed to be acceptable to end-users. Examples of cost leaders among retailers in the FMCG-sector are Netto (DK), Aldi (D), and Kwik Save (UK) (Jobber 1995). They market acceptable products at reasonable prices, which means that their low costs result in above-average profits. Some cost leaders need to cut prices in order to achieve high sales levels. Cost focus is equivalent to a niche strategy, based on the cost leadership strategy, focusing on a few target segments. Corstjens & Corstjens (1995) warn against the risk of “hypersegmentation - i.e. segmentation into too much detail” in the FMCG-market. They argue that although the principle of segmentation should be pursued, there are markets, especially rather small markets (in terms of the number of potential end-users), in which differentiation based on hypersegments is not possible, as the segments do not provide a sufficient turnover basis. This will typically lead to focus on cost leadership strategies and their elements.

Systems Systems provide the mechanisms for controlling flows and operations. They are carriers for operational decisions and business processes. The information they supply can provide competitive advantage if timely action can be taken. Increasingly retailers need systems that allow them to manage by SKU (Stock Keeping Unit), store by store. Systems also contain the management information and control systems. This implies that the different types of “retailer systems” will influence this strategic element - in terms of buying, marketing, merchandising, training, and operations. As retailer systems range from voluntary to wholly owned systems, the individual stores may vary significantly or not at all. The type of internal control or rather internal centralization is a key to provide the retailer’s management with ability to enter binding agreements with manufacturers and other external parties.

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Retailer strategies Often centrally controlled and centrally managed retailer systems are preferred by suppliers, as it is possible to be certain, that what may be agreed on with the buyer in the central organization is exactly what is executed in the stores and by other functions within the retailer’s organization.

Suppliers Suppliers and supplier relationships determine deals, terms, delivery quantities and dates etc. Ring and Tigert (1995) do not present this part of the model in detail, and simply notes, that relationships range from adversarial to cooperative. The reference to Kurzrock’s (1996) fivestage model of different types of relationships between a seller and a buyer can be of use here to exemplify the different possible relationships. It is of particular interest that some FMCG-retailers (Bjerre, 1993) do not wish to engage in close partnerships with suppliers, as the retailers fear loosing their bargaining potential, as they disregard the possibility of changing suppliers overnight. As the retail organizations grow in size and enter other countries, traditional geographic boundaries become obsolete. Thus some retailers look for international suppliers that are able to enter into international agreements and to supply the retailer in the relevant markets. National manufacturers may have competitive advantages in their respective national market, and yet be disregarded, as they are not able to provide supplies outside a national market. Another result of the retailer growth is, that international manufacturers may face situations in which retailers that are large in large markets - such as EDEKA in the German market - may use their position to copy trade terms to other markets where the retailer is of little importance. This could be illustrated by EDEKA's position in the German market and EDEKA's position in the Danish market. Size in one market is thus no longer an isolated phenomenon.

Logistics Logistics concerns the movement of goods from suppliers to stores and encompasses distribution and transportation. It is a major factor in operations and financial performance relates time and inventory (turns). In many retail supply chains there exist significant opportunities to reduce loss from theft, breakage, spoilage, intentional fraud and unintentional inaccuracies.

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The interplay between the Three Elements Triangle activities can also be characterized as quick response activities because they often result in the replacement of labour by technology, merchandising and space management activities. Quick response systems include a wide range of activities such as: x x x x x x x x

EDI - Electronic Data Interchange EAN/UPC - Bar-codes POS - Point Of Sale CL - Customer Loyalty PSS - Point of Scale Scanning Programmed Supply Relationships Information sharing ECR -Efficient Consumer Response

Replacement of labour by technology includes: x x x x x x x x x

Front End Scanning Labour Scheduling Systems Electronic Shelf Stickers Fully Automated Warehouse/Distribution Center Check Robot Automated Picking Lines Store Security Systems Environmental Controls Cross Docking systems

Merchandising and Space Management includes: x x x x x x

SKU Data Capture DPP - Direct Product Profitability SSM - Shelf Space Management Category Management Rapid identification and Delisting Modularization in Store Design

In general the idea is to build a productivity loop. That is to make an investment in lowering costs by having better logistics, or better supplier relationships, or just in time delivery, or systems for better inventory control, or better labour scheduling, or whatever.

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Retailer strategies Once costs have been lowered, the company can then reduce its margins. Lower margins results in lower prices, and lower prices results in an improvement of the company’s ROI and ROCE. An improved position in these means higher sales per square meter. A higher sale per square meter means lower costs - measured as a percentage of sales. And lower costs means that the retailer can reduce gross margins and thereby prices, again. The ultimate objective of working with the elements in the triangle is to develop sustainable cost leadership (and thereby price leadership or in some market above average profitability) - or Every Day Low Price (EDLP), and expect that this is perceived by end-users as EDFP – (Every Day Fair Price).

The Differentiation Strategy and its Elements This strategy involves the selection of one or more choice criteria that are used by many buyers among the end-user in the FMCG-sector. The firm uniquely positions it-self to meet these criteria. Differentiation strategies are usually associated with a premium price, and higher than average costs for the sector as extra value to end-users (e.g. higher performance) often raises costs. End-user criteria can be regarded in relation to two different situations, one is the end-user as consumer and the other is end-user as buyer. The two situations may reflect the same criteria, i.e. when the end-user is also the consumer, or it may reflect different criteria, i.e. when the end-user buys on behalf of other consumers. These different situations are often reflected in the way retailers position themselves, i.e. building a consumer franchise or to ensure end-user convenience. Examples of this strategy are retailers such as Tesco (UK), Sainsbury (UK), Albert Hein (NL), Grönna Konsum (SWE), and Irma (DK). The aim is to differentiate in a way that leads to a price premium in excess of the cost of differentiating. Differentiation gives end-users a reason to prefer one retailer to another and thus is central to strategic market thinking. Differentiation focus is equivalent to a niche strategy, based on the differentiation strategy, focusing on a few target segments. One major problem relating to establishing differentiation in a rather small market is the risk of being too specific and thus not being able to attract a sufficient number of end-users. The differentiation strategy, which according to Ring and Tigert is labelled positioning strategy, supplements the traditional concept of the 4 P’s with a fifth P, people. As noted before, they are; place location, product - assortment, price - value - price/quality ratio, 62

Bjerre people - service and knowledge, and promotion - communication – concerned with internal and external sales and marketing activities

Place Location is not just a question of locating the store (of the desired size) in accordance with the buying habits of key segments. Location is one of the most important end-user criteria, and in markets where differentiation among retailers is low, identified as the single most important criteria. One key element related to location is distance between stores belonging to the same multiple, and can be transformed into convenience for end-users. This influences the potential market a retailer can expect to cover and can expect to attract end-users from, as the stores will divide the market between them. Quite often retail concepts grow in size as they pass through the wheel of retailing and are often faced with limited sales per square meter. This is typically overcome by introducing new categories in the assortment, or by introducing “shop-in-shops” handling supplementary retail concepts, such as dry-cleaning, shoe-repair, film-processing, etc. A critical part of the considerations related to size is space needed to “win” in that particular department. This question is particularly important if the strategy is based on dominant assortment in that department. Thus internal use of space for different categories requires an analysis of the space needed for the category in order to differentiate the offer to end-users, and at the same time balancing the size that will provide a profitable turnover per square meter. The quality of the location itself is a key factor for all types of retailing, as the location has to match not only the habits of the target segments but also their taste, their demands regarding the “shopping neighbourhood” etc. Deciding on a specific location often involves the use of computer-based simulation models, used to estimate turnover, number of shoppers etc. given a specific size, a specific store layout etc. According to Ring & Tigert (1995) Wal-Mart is using a 1,000 variable decision support model to do the simulation. Layout and design of the store are an important part of the positioning strategy, because they are the key to develop “home-site” identification. Ring & Tigert states that this area is often ignored, and that it should be an integrated part of the place variable, and that it therefore, per se, will have impact towards size. The role of store environment is a critical determinant of store choice. Not only are

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Retailer strategies different end-user segments attracted by different store interior, but the different segments will also have varying physical shopping patterns. These differences require constant monitoring and constant testing of different solutions. Internet shopping will influence size in the future - however it is quite difficult to predict what the effect will be, but is seems certain that there will be one. The practicalities in relation to payment, delivery/pick-up of goods etc. will, when these issues are solved also influence store location, parking facilities, store layout, staffing etc.

Product Merchandise intensity is measured by how much money that has been invested per square meter at cost in inventory. In general, it has shown to be more or less true and consistent across retail sectors that higher merchandise intensity leads to higher sales per square meter. “Goods sell goods” as the old saying goes. Ring and Tigert (1995) refers to a situation in which the American department store Macy’s went into a Chapter 11 bankruptcy4 and reduced the inventory by 18 % in an effort to produce the needed cash flow. The result was that sales were reduced by 18 % that same year. Assortment is often described in terms of breadth and depth and is often measured in terms of SKU efficiency - sales per SKU per time unit. High merchandise intensity can be costly; therefore retailers are constantly analyzing whether to expand and/or fine tune all categories. Category management includes defining the role of different categories in building the overall attraction of the assortment. An assortment can be described in terms of style/fashion - this applies to food SKU’s as well as to non-food SKU’s.

Price Price is also labelled “Value” by Ring & Tigert (1995) and deals with the positioning of the value/quality combination offered to end-user. The following elements are important when discussing price - the price level itself, the quality match versus value, the margin in the category, and the use of exclusive SKU’s and/or Private Labels. Combining the product (assortment) and the price element may illustrate some of the managerial choices, which have to be made if the retailer should avoid being “stuck in the middle”. 4

This is a technical bankruptcy, in which the company is given a specific period of time to try to regain financial control.

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Bjerre

Figure 3:6 Retailer positioning in terms of assortment and price. Source: Bjerre, 1993, p. 147. As suggested in figure 3:6, the two elements can not be regarded without reference to the other strategic elements, but they are often seen as the two key elements in the traditional retailer positioning literature (Corstjens & Corstjens, 1995). The use of private labels or private brands or own brands etc.5 has increased during the past decade across Europe (Laaksonen, 1994). The use varies with the nature of the category and with the retailer’s positioning strategy and has been divided into four generation by Laaksonen (1994). Examples of the first generation was introduced in 1976 (Laaksonen, 1994) by the French retailer Carrefour and labelled “Produit Libres” and comprised 50 product lines. Packaging was geared to support the low price message to end-users, featuring white packaging with only the name of the products in black lettering. The price discount compared to national brands was significant - up to 35 %, depending on the product category (Laaksonen, 1994, p. 11). The concept was later copied and introduced in USA by Jewel Food Stores, in Germany and then spread to the rest of Europe. The British retailer Fine Fare introduced its “Yellow Packs” in 1980 and the range comprised 250 product lines by 1986. These lines have been highly successful and have been supported by advertising and a clear commitment in terms of continuous development, strong displays in the stores and easy to distinguish from other products. Retailers’ own brands or the birth of the second generation emerged in mid-1980. An important element in this development was the fact, that price alone was not enough to sustain competitive edge and 5

The terms private label, private brand, own brand, house brand will be used interchangeably the main focus is to show the development and the different types.

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Retailer strategies secondly those simple generic products were easy to copy. The first examples of own brands were therefore up-graded versions of the generic products. Often these products are up-graded to an extent, where end-users cannot tell retailers own brands and manufacturers’ brands apart. For example almost 90 % of Aldi’s turnover is derived from a range of 600 product lines, often using different brand names such as Alpenmark, Caribic, Olana, Albrecht etc. Another development for own brands is the use of the retailer’s name to support these and at the same time using them to communicate low price. In this way the retailer avoids the price competition on generic products and may support the overall strategy - if that is one of cost leadership. Development of international own brads has so far been few and far apart. Examples of these are “Euro-Brands” that have been a major ambition for several international buying groups, such as BIGS (Buying International Gedelfi Spar) and EMD (European Marketing Distribution). So far it seems very difficult to find common denominators, such as type of store, location, image, assortment width and depth, culture etc. to support the development of international own brands, that are an integrated part of the different retailer members’ concepts. The third generation of own brands has developed rapidly, as retailers have focused increasingly on differentiation rather than cost leadership. Own brands have narrowed the gab between manufacturers’ brands in terms of quality, price, packaging and promotion activities. Thus more sophisticated products have been introduced as own brands, however they are typically with a limited level of innovation. The “Pirkka”-range from Kesko in Finland is a very good example. Only few retailers have entered the fourth generation of own brands, which are value added own brands and are differentiated through product quality, innovation and/or design. There are developed to support the overall strategy of the retailer, and will typically be regarded as an integrated part of the strategy. According to Laaksonen (1994, p. 16): “Value-added ranges are likely to be in the core of future own brand development, because of the pressures towards cost-led strategies”. Examples of the fourth generation are “St. Michael” from the British retailer Marks & Spencer, and a range of products from the British retailers Sainsbury and Tesco, both focusing on frozen and chilled ready-to-eat meals.

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Bjerre French retailers such as Monoprix and Prisunic, the Dutch retailer Ahold, and the Swiss retailer Migros all have developed similar products and concepts.

People The service element is oriented towards the levels of service the retailer executes - which is closely linked to the type of retailing and the desired position. Service levels are often measured in terms of the number of customers that the management accepts queuing at the check out stands. According to Ring & Tigert (1995) Wal-Mart considers three customers to be a crowd - and thus too many. The knowledge element is oriented towards the level of knowledge the management wishes that their employees posses. There are only two ways for an employee to obtain certain knowledge level - one is to train the employee (executed by either retail management or by suppliers) or hire staff that possesses the knowledge are by working together to pass on the knowledge. The other dimension of the knowledge element is focused on knowledge as a basis for changing the organizational design and expand the use of team approach/responsibility, by keeping employees informed (including own management team about common goals). The climate element deals with two dimensions - one is the endusers perception of how it is to shop in the store and the other is the employees’ perception of how it is to work in the store. The critical question is - of course - how these two perceptions differ and where the overlap.

Promotion For many retailers promotion in the broad sense as it is used here is tough, because a store or retail chain may have difficulty to promote itself if it does not win on place/location, or on assortment, or on price etc. According to Ring & Tigert (1995, p. 4) if the store or retail chain “isn’t a winner on one or more of the other four corners of the pentagon about all there is left to do is run a sale. In other words, to promotional advertising to generate immediate response”. Positioning advertising is communication that tells the end-users that the store or retail chain wins on one or more corners of the pentagon. Ring & Tigert (1995) refers to Nordström talking about having 10,000 men’s suits or 100,000 pairs of shoes. Similarly, Wal-Mart is advertising every day low prices (EDLP) is thus positioning itself as

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Retailer strategies the low price leader in their market. The promotional element also deals with: x Information - internally to Store Management, staff, regional organization etc. x Positioning externally and towards competitors x Promotional, Special events x Advertising, in-store events x Merchandising The promotional strategy element can be seen as the one that “sums it all up” in terms of communication of the chosen positioning vis-àvis competitors, based on the other four elements - place, product, price, and people.

Retailers organization - Buying and Marketing Changes in retailers buying organizations and related functions have taken place during the past decade. Primarily the changes have occurred due to the increase pressure on margins that leads to an increased demand for selling what is bought at full price. Also retailers have changed from the functionally divided organization to a process oriented organization. Thus, retailing has changed from “you sell what you buy” to “you buy what you sell”. There are many implications in these two short statements, in terms of the tasks handled by the buying functions in retail organizations As organizations change from functional division to process orientation (George, Freeling & Court, 1994), the traditional focus of the individual function, i.e. buying changes into a more holistic orientation. This implies that buying not only takes “buying needs” into account, but also deals with the needs of other functions such as marketing etc. Therefore the retail buyer’s role is supplemented with the needs of other functions, which in some cases result in the formation of formal groups within the retailers organization, focusing on the functions related to a specific category rather than the functions in the retailer’s organization - typically applied to all categories. The retail buyer’s role has changed and although the “new” role has not left price as a focus area, many new areas have been added. Key points of change of the retailer buyer’s focus are: x From buying price and rebates to DPP

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Bjerre x Extending DPP to include sales and marketing activities and allowances x From single product to category perspective x From focus on own operation to focus on the supply chain x From no division of tasks with suppliers to some division of tasks with suppliers x From “hunch” to analytical approach x From product to end-user insight These changes have brought about changes in the organizational structure, leading to a number of characteristic elements of retailer buying organizations. Retailer buying organizations typically include functions such as: x x x x

Category responsible buyers Assistants buyers to handle analysis and simulations Buyers responsible for category profitability Buyers responsible for category’s position

Cooperation between the buying function and the marketing function of the retailer is often based on close cooperation and coordination: x Buyer sources product, logistics and marketing x Buyer decides on logistics x Marketing decides on product and marketing The variety of services that may be available from a supplier to a retailer is presented in the figure below. Often the buyer or buying responsible group will have to decide whether the service available is in the interest of the retailer and its customers. Therefore Cash, Wingate and Friedlander (1995, p. 291) list the following questions: x Will the service or services increase the sales of my/our store/department/chain, or simply transfer demand from one product stocked to another - category management considerations

69

Retailer strategies x Because the cost of the service is absorbed in the price paid for the product, is the saving in the store’s/chain’s expenses greater than the increase in the cost of the merchandise - DPP considerations x Is the supplier in a better position than the retailer to develop effective promotional tools - consumer marketing and ECR considerations x Are the suppliers and the retailers interest in certain promotional tools aligned - consumer marketing considerations George, Freeling, and Court (1994) suggest that teams will dominate the future organizations among retailer and suppliers in the FMCGsector, as the tasks handled by the buying and marketing functions are more closely coordinated, and their joint responsibility changes from a single products to categories. Kjeldsen (1997) introduces the concept of “buying marketing” as a development of the buying function towards a cross-functional process including sales and marketing. This process is not merely characterized as cross-functional but also by it’s strategic perspective. Thus retail buying has developed from an operational price focus to a strategic positioning process enhancing the retailer’s positioning towards end-users.

Status of Retailer Positioning Using Ring and Tigert’s (1995) retailer positioning model it is possible to describe the individual retailer’s positioning in great detail. Furthermore it is possible to identify the areas of cooperation with suppliers that will enhance the individual element of the positioning. However, the model does not in it-self help develop a better understanding of the different retailer concepts found in the FMCGsector. Thus, a description of different positioning strategies is expected to develop the understanding of the importance of the retailer positioning in relation to the four different key account management alignments. Therefore, a typology for analyzing different retailer strategies is needed – preferably empirically based, as it is expected to describe how the positioning strategy pursued by the retailer influences the supplier-customer alignment.

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Bjerre Thus, the type of key account management applied is expected to depend on the positioning strategy pursued by the retailer.

References Aaker, David; Building Strong Brands, The Free Press, 1995. Bjerre, Mogens; Mærkevaren, København, Schultz, 1993. Cash, P. R., Wingate, J. W. & Friedlander, J. S.; Management of Retail Buying, Wiley & Sons, 1995. Corstjens, J. & Corstjens, M.; Store Wars: The Battle for Mindspace and Shelfspace, Wiley, 1995. Davidson, W. R., Bates, A. D. & Bass, S. J.: The Retail Life Cycle, Harvard Business Review, November-December, 1976. Foss, N. J.; Theories of the Firm, Contractual and Competence Perspectives, Journal of Evolutionary Economics, 1993. George, M., Freeling, A. & Court, D.; Reinventing the Marketing Organization, THE McKINSEY QUARTERLY, Vol. 4, 1994. Hartvig Larsen, H. & Grych, S.; Fødevaredetailhandelen i Storbritannien, Project Paper, MAPP, Handelshøjskolen i København, 1997a. Hartvig Larsen, H. & Grych, S.; Fødevaredetailhandelen i Tyskland, Project Paper, MAPP, Handelshøjskolen i København, 1997b. Heede, S. & Storm, S.; Loyalitetsprogrammer i Norden og forbrugerbeskyttelse, TemaNord, 615, 1977. Hollander, S. C.; The Wheel of Retailing, Journal of Marketing, July, 1960. Jobber, D.; Principles and Practice of Marketing, McGraw-Hill, 1995. Kjeldsen, J.; Køberinitiativ, indkøbsmarketing og leverandørsamarbejde, Ledelse & Erhvervsøkonomi, vol. 2, pp. 145-157, 1997.

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Retailer strategies Kotler, P., Armstrong, G, Saunders, J. & Wong, V.; Principles of Marketing, Prentice-Hall, 2001. Kurzrock, W.; The Sales Strategist, Irwin, 1996. Laaksonen, H.; Own Brands in Food Retailing across Europe, Oxford Institute of Retail Management, 1994. Lawrence, A.; The Management of Trade Marketing, Gower, 1983. McNair, M. P.; Significant Trends and Developments in the Post-war Period, in Competitive Distribution in a Free High-Level Economy and Its Implications for the University, Ed. by Smith, A. B., University of Pittsburgh Press, 1958. Miles, R. E. & Snow, C. C.; Organizational Strategy, Structure, and Process, McGraw-Hill, 1978. Moore, B.; Key Account Management, Presentation at conference arranged by LOGISYS, Copenhagen, 1994. Nielsen, A. C.; EUROPA - Retail Trends, Volume II & III, A. C. Nielsen Company, 1993. Penrose, E. T.; The Theory of the Growth of the Firm, Oxford University Press, 1959. Peteraf, M. A.; The cornerstone of competitive advantage: a resourcebased view, Strategic Management Journal, vol. 14, pp. 179-191, 1993. Porter, M. E.; Competitive Advantage, The Free Press, 1985. Randall, G.; Trade Marketing Strategies: The partnership between manufacturers, brands and retailers, Butterworth-Heinemann, 1994. Ring, L. J. & Tigert, D. J.; Building Competitive advantage in Retailing, Babson College, 1995. Tinsley, D. B., Brooks Jr., J. R. & d’Amico, M.; Will the Wheel of Retailing Stop Turning?, Akron Business and Economic Review, Summer, pp. 26-29, 1978.

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CHAPTER 4

Retail logistics and Supply Chain Management Herbert Kotzab Introducing the concept of logistics and Supply Chain Management Since the upcoming of logistics at the start of the 20th century, the concept of business logistics has evolved (see Stock/Lambert 2001). Starting in the agricultural sector, logistics thoughts had been transferred to business from the military setting in the mid-50’s. Logistics in terms of physical distribution is also part of marketing’s distribution aspect. Drucker (1962) called it the “dark side of the continent” and, although being very important, logistical efforts are typically not recognized within marketing. While transportation and warehousing issues had been of major importance in the beginning, Bowersox (1969) already plead for an integrated logistics approach that should help to gain efficiency in the channel by reducing redundant expenditures. The Council of Supply Chain Management Professionals (CSCMP) (formerly Council of Logistics Management – CLM), the world’s largest association of supply chain management professionals and academics, defines logistics management as “that part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements.” (CLM 2004 or CSCMP 2005). This definition intends to cover all facets of logistics, like inbound, outbound, internal, as well as external movements, and return of materials for environmental purposes.

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Kotzab In that sense, logistics can be identified as the integrated management of specific flow activities relating to a flow of goods and a flow of information that occur between a point of origin and a point of destination. Table 4:1 gives an overview to logistics tasks that refer to the two typical flows that make out logistics – the flow of goods and the flow of related information. Information-flow related logistics flow activities Order processing

is the trigger system of any logistical activity as the customer order sets logistics in motion.

Flow of goods related logistics flow activities Transportation

refers to the movement of products and creates time and

Warehousing

refers to storing activities while connecting a point of origin

Inventory Management

includes all activities that influence inventory levels of the

Handling and Packaging

deals with those activities that generate logistical units

place utility and a point of destination products to be stored according to customer requirements.

Table 4:1 Characterization of typical logistics activities (according to Lambert/Stock 2001; Bowersox et al. 2002 or Pfohl 2003)

General aspects of retail logistics Logistics has been a topic for industrial companies rather than for retailing companies. Since the presentation of the Wal-Mart distribution system in a Harvard Business Review article by Stalk et al. (1992), logistics and supply chain management, besides location and personnel, is re-recognized as a core competence of retailing (Gudehus and Brandes 1997 or Cuthbertson 2003). Market dynamics (more buyer markets than seller markets, shortened product life cycles, concentration processes, excessive competition and globalization of markets) have put new emphasis on retail logistics, as having a good assortment alone is not enough. This is accompanied with price battles that put pressure on the retailers’ cost structures. Many retailers operate with a loss (see Müller-Hagedorn 1997, Shet/Randall 2000) as costs are above sales and, compared with industrial companies, retail logistics costs take a higher share on total costs (between 10 to 30 % of total costs; Baumgarten 1997). However, successful retailing companies are able to operate logistics below 10 % of total costs, whilst increasing logistics service, as Wal-Mart has demonstrated. 75

Retail logistics and Supply Chain Management Focusing on logistics can help retailing companies to operate profitably and avoid harmful price battles. Passing the advantages to the consumers, it is another possibility for retailers to gain additional market shares (Kotzab 1997).

A model of retail logistics Logistics in a retailing context typically refers to multi-echelon logistics systems, meaning that there are many nodes from the original supplier to the final store destination (Toporowski, 1996, Kotzab, 2004 or Schnedlitz, Teller 1999). As a consequence, retail logistics presents itself as a very complex logistics system whose flows of goods and related information depend strongly on external as well as internal factors (see Figure 4:1). Looking at the external factors we can distinguish between the structure of the suppliers, like number and size, the competitive situation of the different retail formats, as well as the IT-, legal or other environmental contingency factors. Empirical studies indicate that the interaction between retailers and their suppliers is crucial for the success of the retailers' logistics systems (Kotzab, 2004). A successful retail logistics system not only depends on the quality of the vendor's input, (Kotzab/Reutterer 2000) but also on inputs from the IT environment. Fernie et al. (2000) calls this the transformation of retail grocery logistics from transaction-based to relationship-based. A growing number of retailers are increasingly evaluating their suppliers on their ability to electronically communicate and cooperate with them in a standardized manner, as the example of the Danish food wholesaler Supersgros shows where Supergros’ suppliers are informed about Supergros’ logistical requirements. They can therefore adapt their delivery processes according to Supergros’ distribution center specifications (see Logistikguide 2002). The internal factors of a retail logistics system can also be interpreted as procurement and distribution instruments, which influence the quantity and quality of the output of the retailing logistics system. The location of the stores determine the number of delivery points within the system, while the 'range of products', as well as the size of the store, determine the 'quantity scaffold' of the flow of goods. Depending on the retail format, logistics handle between 5,000 (grocery supermarket) and 400,000 SKU’s (furniture category killer).

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Kotzab

Figure 4-1 Retail logistics as a function of internal and external factors (following Toporowski 1996 and Kotzab 2004) Here Fernie et al. (2000) refer to the increasing use of centralized distribution centers that allow just-in-time operations.

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Retail logistics and Supply Chain Management

Retail logistics decision parameters The specific retail logistics decision parameters are characterized in Table 4:2. Like any other logistical subsystem, these parameters are also inter-related and differ from retail format to retail format as Schnedlitz/Teller (1999) claim. The strategic goal of retail logistics is to design an efficient flow of goods and related information. Efficient means that the connection of all relevant points of consumption and points of production are either connected at the lowest costs possible but aiming for demanded logistics service or connected at the highest logistics service but aiming for optimal cost structures. Retail logistics

Characterization

decision parameter Order management

….. deals with the informational control of the total flow of goods. A central role is given to the computerized merchandise information system. Today, the main tasks of order

management

are

seen

in

the

computerized

transmission of the order from POS-level to the suppliers. Inventory Carrying

..... overcomes timely differences between two processes that follow in a sequential manner. The main responsibilities for retailing can be seen in inventory management (= what to carry and how much of it?; when to order and how much to order?) and the vertical/horizontal distribution structure (where to hold inventory?). Inventory is necessary as demand can shift immediately and synchronization with suppliers’ production facilities might be not possible. The ongoing pressure on prices and cost structures, however, makes retailers reorganize their inventory carrying strategies, which results in redesigning the geographic configuration of a given inventory carrying system and its number of inventory carrying points. While the vertical structure refers to the number of inventory carrying locations in the total chain, the horizontal structure includes all inventory carrying locations on one chain level. While planning the horizontal and vertical structure, Make-Or-buy-decisions will be made and the issue of whether to hold inventory in a centralized or decentralized location has to be answered.

Table to be continued

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Kotzab Continued Table 4:2 Warehousing

..... refers to all processes completed within a retailer distribution center, which can either be organized as a warehouse with intensive inventory levels or as a distribution center with lower inventory levels and high inventory turns. Recently, we observed the upcoming of transit

terminals

with

no

inventory

but

intensive

sorting,

picking/packing, transportation processes. Depending on the sort of warehouse, different activities are performed. However, receiving, sorting for inventory or shipping and shipping are the main tasks that are performed at this stage of a channel (especially the coordination of flows of goods and their transformation from vendor specifications to shop-floor affinity). Specific break bulk activities can help to reduce inventory levels. The total assortment of the retailer, which influences the layout of the distribution center (e.g. for SKU location allocation) is another important factor that plays a role. All activities can be performed in a range from fully manual to fully automated. In case of full automation, decisions regarding the technical equipment used in every location have to be made. Picking/Packing

.....includes all activities that have to be performed while putting subsets of an order into a complete set of an order that are based on the order information. Picking and Packing is placed between the stage of inventory and the stage of consumption and, in a retail setting, can be situated on two levels: a) the POS-level, where these activities are completed by the shoppers and b) on the distribution center level, where store orders are completed. At the distribution center level we can differentiate between static and dynamic picking and packing activities, depending whether personnel moves to the items or vice versa. - continued

Picking/Packing

On this level it might be interesting to check whether the picking process considers the store layout. Otherwise time intensive repicking activities are performed at store level. Packaging not only includes logistical, but also marketing specific issues. For logistics, packaging has to ensure that products arrive in the desired condition and it has to assist all inventory and transportation efforts made in the channel by using the given capacities advantageously. Packaging also has to market and promote the packed item. Good packaging

can

increase

services

and

decrease

costs

simultaneously. Inter-organizational packaging standards can help to speed up delivery time and decrease loading costs.

Table to be continued

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Retail logistics and Supply Chain Management continued Table 4:2 Transportation

.... overcomes spatial distances by using different transportation means.

Transportation

includes

all

internal

and

external

transportation processes. In the case of retail logistics, internal transportation occurs at distribution center level but also at store level,

while

bringing

the

goods

to

the

shelves.

External

transportation refers to all transport decisions made on the way from a supplier to the warehouse and from the warehouse to the store. The use of a specific transport mode is dependent on the structure of the transport problem, legal factors, given budgets and infrastructure. However, increased JIT-orientation can be observed in the field of retail logistics that influences transportation. As inventory-carrying costs seem to be higher than transportation costs, transport is replacing inventory.

Table 4:2 Retail specific logistics decision parameters (Toporowski 1996, Kotzab 2004). On an operative level, retail logistics is determined by shelf presence, which is the result of the interaction between the loss of sales due to out-of-stock situations (OOS) and high inventory at POS-level (see Teller/Kotzab 2004). Gruen et al. (2002) found out, that the average OOS-rate worldwide is between 5 to 10 percent (approx. 8 percent on average). The reasons for this shopping inconvenience can be found in poor retail logistics. The study confirms the results of Raman et al. (2001), who came to a similar conclusion, although retailers have made huge investments in IT-driven logistics applications. The authors have shown, that to have IT-systems is not good enough – what retailers also need, is the capabilities to use these systems, which is recognized as being the missing link in retail execution (Raman et al. 2001, p. 136).

The concept of retail oriented supply chain management The influence of marketing on logistics is immanent and a permanent development within the field can be observed. As Bowersox and Closs (1996, p. 3) said „Logistics is unique: it never stops!”.

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Kotzab Especially in the German area, a specific logistics understanding has been developed that defines logistics management as being an integrated process and having the potential to manage and control the flow of goods and related information (Weber 2002). In that sense, logistics is understood as an optimization strategy that observes economic facts as flow systems, and connects them in order to decrease costs and simultaneously increase value due to permanent adaptations to demand changes (Klaus 1999). This holistic understanding, especially in the US, is seen as the existence of Supply Chain Management (SCM). Recently the CSCMP defined SCM as follows: “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the Logistics Management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology.” (CSCMP 2005).The relevant object of SCM is the supply chain, and can be defined from a logistics and from a marketing point of view, respectively, as follows: Logisticians would typically recognize the supply chain as “the entire set of activities involving the organization and the flow of material and other resources to produce and deliver the product to the final customer” (Schary and Skjoett-Larsen 2001, p. 23). In that sense the management of a supply chain can be understood as a special form of a logistical inter-firm strategic partnership, e.g. between retailers and suppliers, with positive effects on overall channel performance (e.g. Cavinato 1991). x Marketers would pursue Coughlan et al.’s (2001) proposition of a supply chain being a marketing channel that includes “a set of independent organizations involved in the process of making a product or service available for use or consumption” (p. 3). x

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Retail logistics and Supply Chain Management SCM is understood as a strategic, cooperation-oriented, interorganizational management philosophy, which leads to improved channel-performance. The request towards cooperation is beyond the logistics dimension and all activities are controlled by demand (= enduser-orientation) (see Kotzab 2000). SCM, as well as the management of marketing channels, deal with a basic connection problem that usually occurs while connecting a point of consumption with a point of production through several organizations. The supply chain, like a marketing channel, can be seen as the total sum of all activities and related institutions that are necessary to guarantee a successful connection between those two points. In case of industrial partners, one can define SCM as a specific relationship management approach amongst business partners and as a consequence of industrial relationships (Stölzle 1999). In that sense, SCM can be seen as a consequence of marketing channels, whenever marketing channels are organized by having several independent channel members involved as shown in Figure 4:2 (see also Cooper et al. 1997 or Mentzer et al. 2001). In order to be implemented, SCM needs certain prerequisites that refer mainly to constructs of relationship orientation, such as independent organizations, willingness to cooperate, trust, etc. The outcome of SCM helps to increase the efficiency of a channel, as costs are minimized but services are increased. This efficiency is realized by organizing a channel according to the notions of Cooper et al. (1997) or Frazier (1999): Outlining a supraorganizational structure that ensures a successful configuration of responsibilities of several independent players. x Identifying and setting up certain business processes, where the outcomes meet the customers’ requirements (= customer oriented interorganizational transformation capacities) x Presenting goal oriented directives (= management components) that give directions on how the processes should be performed. x

In that sense, one can also understand the supply chain as a specific network as Otto (2002) demonstrated by distinguishing the supply chain as the reproduction network, besides four other network types (the innovation network, the connection network, the multiplication network and the transportation network).

82

Kotzab

Figure 4:2 A model of Supply Chain Management – prerequisites, means and outcome 83

Retail logistics and Supply Chain Management

Retailing as a result of value constellation in supply chains An increasing number of retail executives regard SCM, logistics and IT as the most important factors that change contemporary retailing (e.g. Zentes 1994a, 1994b or Liebmann/Zentes 2001). Especially SCM is understood as having a competitive advantage as many successful applications of SCM in retailing show that consumer satisfaction can be enormously increased (see Liebmann/Zentes 2001 or Foscht et al. 2000). General SCM models, such as the model of Cooper et al. (1997; see also chapter 2) place no explicit emphasis on integrating intermediaries in their approaches. Kotzab/Schnedlitz (1999) broadened Cooper et al.’s (1997) approach by incorporating retailing into the general framework (see Figure 4:3). The supra-organizational structure of a retail incorporated supply chain refers to the configuration of the chain, while explicitly integrating the three critical retail areas of retail procurement, retail marketing and retail logistics. These customer oriented transformation capacities are of bi-directional orientation, which help to increase exchange relations, ensuring increased supply chain performance in terms of distribution value constellation that thrives by connecting suppliers with end users. Table 4:3 presents those SCM business processes that specifically occur in such a setting. Kotzab (1997) discusses an interesting example of Supplier Relationship Management as executed by the US retailer Sears, Roebuck (Sears) who has installed a vendor relations department that systematically manages the relationships between Sears and the 3,800 Sears vendors. The main responsibility of this department is the realization of vendor-specific partnership-programs, which are placed between pure EDI-information exchange and sophisticated continuous replenishment programs. Vendor Relations has constituted two committees to match the activities between Sears and the Sears vendors: Vendor Advisory Committees, which consists of the most important vendors and all Sears representatives and could be seen as a kind of feed-back-round of the parties. 6 % of the 3,800 vendors make up 80% of the buying volume of Sears. x Vendor-Relations-Steering-Committee-Meeting is the body consisting of all vendor representatives, where all supply chain related decisions that affect cross channel performance have to be discussed. x

84

Kotzab Information flow T2S

T1S PU

Purchasing

PR

Production

M LO

CU

Logistics

PF FLOW PRODUCTIION PRODUCT FLOWS

RD

R&D

EU

MS

Marketing, sales

FI

Finance

1

CUSTOMER RELATIONSHIP MANAGEMENT

2 31 4 5 6 7

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

8

PURCHASING

MARKETING

PHYSICAL DISTRIBUTION

ORDER SERVICE MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT COSTUMER RELATIONSHIP MANAGEMENT

DEMAND MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

Figure 4:3 A general model of retail incorporated Supply Chain Management. Legend: T2S – Tier 2 Supplier; T1S – Tier 1 Supplier; M – Manufacturer, CU – Customer, EU – Enduser, PU – Purchasing, LO – Logistics; MS – Marketing & Sales, FI – Finance, PR – Production, RD – Research and Development; PF – Product Flow; 1- Customer Relationship Management, 2 – Customer Service Management, 3 – Demand Management, 4 – Order fulfillment, 5 – Manufacturing Flow Management, 6 – Procurement, 7 – Product Development and Commercialization, 8 – Returns.

85

Retail logistics and Supply Chain Management Generic SCM business

Retail specific SCM-business processes

processes according to Cooper et al. (1997) Order fulfillment

Order service management .... refers to the amount of data-exchange on an EDI-

Customer Service

basis...

Management Procurement

Supplier Relationship

.... refers to the extent of

Manufacturing flow

Management

the initiation of streamlined partnership programs (see

Management

Buzzell/Ortmeyer and

1995)

contains

connection

of

the EPOS-

systems at store level and MRP-systems

at

vendor

level to manage vendor's operations... Customer Relationship

.... refers to the degree of interaction with the end users,

Management

e.g. initiation of membership programs

Demand Management

.... refers to the degree of exchanging accurate sales data to predict future demand...

Product development and

.... refer to how quickly new products are available in the

commercialization

store, and which shelf-location will be offered to these new products..

Table 4:3 Critical overview of the supply chain business processes (adapted from Kotzab/Schnedlitz 1999) The retail specific SCM goal oriented directives or management components are also adapted to the interplay between manufacturers and retailers. These components have to be understood as managerial guidelines that help to realize the outlined transformation capacities (see Table 4:4).

86

Kotzab Retail

Supply

Chain characterization

Management Components Planning and control .....

..... operations are considered to be the key of SCM. While the planning aspect refers to the extent of joint planning activities,

the

control

operations

refer

to

the

operationalization of performance metrics. Product

flow

facility ....

structure ...

directs

the

network

structure

for

sourcing,

manufacturing and distribution across the supply chain.

Product structure ...

... means how new product development processes installed across the supply chain are coordinated.

Risk and reward structure .... determines the degree of sharing risks across the chain .....

affecting long-term commitment.

Work structure ....

.... refers to the degree of the integration of processes within a firm.

Information

flow

facility ..... focuses on the quality of information passed along the

structure ..... Power

and

supply chain. leadership ..... deals with the problem of defining a channel leader

structure ........

within the supply chain structure.

Culture and attitude......

.... determine the way members behave towards a common corporate culture across the supply chain.

Management

... include the corporate philosophy and management

methods ...

techniques needed to find a balance between a top down organization structure with a bottom up structure

Table 4:4 Critical overview of general supply chain management components according to Cooper et al. (1997) Out of these, product flow and information flow facility structure, power and leadership structure, management methods, planning and control and the aspect of work structure can be assumed as being the most critical components for effective retailing SCM-considerations as Kotzab/Schnedlitz (1999, pp. 148) point out: x

Retailing product flow and information flow facility structure: The supplier-network of leading retailers consists of business relationships with several thousand vendors each contributing between 20,000 to 400,000 products. The store-network usually consists of many hundreds of stores scattered across the country, and due to the ‚Europeization‘ of the market, the store-network will not remain on a regional level.

87

Retail logistics and Supply Chain Management Retailing information flow facility structure: Information is one key to successful SCM, especially in the grocery industry, where industry-wide barcode- (like EAN.UCC-codes) and EDIsystems (like ANSI.X12 or EDIFACT) are widely used. The reduction in costs from speeding up cycle time can be enormous. However, not all retailers are able to transfer the scanner-data captured at the POS-level into marketing-relevant information yet (e.g. Lingenfelder 1996 or Raman et al. 2001). This might explain why many retailers have not been able to transform power into profit yet (e.g. Farris/Ailawadi (1992). x Power and Leadership structure: There has been a remarkable power shift between trade and manufacturers in the last thirty years (Mulhern 1997). Global business practices in retailing clearly show that it depends on single retailing companies to drive the success in retailing. Retailing increasingly appears as a bizarre conglomerate of „completely tailorized selling machines“ and a steadily shrinking number of small retailing units (e.g. neighborhood shops) (Schnedlitz 1994). Given the notion of Cooper et al. (1997) of a strong channel leader who will drive the direction of the supply chain, a retailer will be the channel-leader setting the supply chain standards. Smith (2003) has therefore developed the concept of channel captaincy. x Retailing management methods: There are different methods in a chain that are used to manage the channel. It is a fact, that in European Retailing, the majority of retailing companies are facing increasing costs with decreasing sales. This might be due to ‚poor’ reporting systems, which can be identified in a certain number of retailing companies (Schröder 2000). While the assumption of process-orientation within a supply chain should force activity-based cost systems, it is very common practice to rely on traditional single-cost-block-thinking with an overall valid profit margin. The splitting of overhead costs into specific SCM-cost-drivers is in the early stage of leading retailers, encouraged mainly by industry specific initiatives such as Efficient Consumer Response (ECR; see chapter 8). x Retailing planning and control and work structure: Joint planning procedures and cross-functional teams within the retailing company and between the different members of the supply chain are considered to be important for successful SCM (see the ECR-discussion in chapter 8). Such an attempt can also be seen in retailing category-management (CM) (see Chapter 9). x

88

Kotzab

The adaptation of the generic SCM-model to a value constellation oriented retail setting offers more insight into the dynamics of the interplay within the marketing channel. Similarly to the internal and external factors of a retail logistics system, channel managers have to apply service output oriented supply chain management strategies, as it makes a difference to serve end users through supermarket, discount or electronic channels (see Coughlan et al. 2001). References Baumgarten, H. & M. Benz: Logistik des Handels - Ergebnisse der Untersuchung Trends und Strategien in der Logistik 2000. Technische Universität Berlin, Berlin, 1997. Bowersox, D. & D. Closs: Logistical Management: The Integrated Supply Chain, McGraw-Hill, New York, 1996. Bowersox, D., D. Closs & B. Cooper: Supply chain logistics management, McGraw-Hill Education - Europe, London 2002 Bowersox, D.: Physical Distribution Development, Current Status, and Potential. Journal of Marketing, 33, 1969, 63 - 70 Cavinato, J.: Identifying interfirm total cost advantages for supply chain competitiveness. International Journal of Purchasing and Materials Management, 27, 4, 1991, 10-15 Council of Logistics Management (CLM): Supply chain visions logistics terms and glossary, Council of Logistics Management, 2004 Council of Supply Chain Management Professional (CSCMP): http://cscmp.org/Website/AboutCSCMP/Definitions/Definitions.asp, accessed, 01-27-2005. Cooper, M., D. Lambert & J. Pagh: Supply Chain Management: More than a new name for logistics, International Journal of Logistics Management, 8, 1, 1997, 1- 14. Coughlan, A., E. Anderson, L. Stern & A. El-Ansary: Marketing Channels, 6th edition, Upper Saddle River NJ, Prentice-Hall, 2001.

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Retail logistics and Supply Chain Management Cuthbertson, R.: Conference Review. The 2003 Official ECR Europe Conference and Marketplace, Berlin, May 2003, European Retail Digest, 38, 2003, 1-2. Drucker, P.: The Economy’s Dark Continent. In: Fortune, 4, 1962, 103; 265 - 270 Farris, P. & K. Ailawadi: Retail Power: Monster our Mouse? Marketing Science Institute, Report No. 92-129, Cambridge, 1992 Fernie, J., F. Pfab & C. Marchant : Retail grocery logistics in the UK. International Journal Of Logistics Management, 11, 2, 2000, 83-90. Foscht, T., G. Jungwirth & P. Schnedlitz: Konturen eines künftigen Handelsmanagement. In: Foscht, T., G. Jungwirth & P. Schnedlitz (ed.): Zukunftsperspektiven für das Handelsmanagement. Konzepte – Instrumente – Trends, Deutscher Fachverlag, Frankfurt/Main, 2000, 22 – 38. Frazier, G.: Organizing and Managing Channels of Distribution. Journal of the Academy of Marketing Science, 27, 2, 1999, 226 – 240. Gruen, T., D. Corsten & S. Bharadwaj: Retail out of stocks: A worldwide examination of extent, causes, and consumer responses, Grocery Manufacturers of America, Washington D.C., 2002. Gudehus, T. & T. Brandes: Logistik: Kernkompetenz des Handels, Dynamik im Handel, 1, 1997, 71-72 Klaus, P. : Logistik als „Weltsicht“. In: Weber, J. & H. Baumgarten (ed.): Handbuch Logistik. Management von Waren- und Materialflussprozessen, Schäffer-Poeschel, Stuttgart, 1999, 15-32. Kotzab, H.: Zum Wesen von Supply Chain Management vor dem Hintergrund der betriebswirtschaftlichen Logistikkonzeption – erweiterte Überlegungen. In: Wildemann, H. (ed.): Supply Chain Management, TCM, München, 2000, 21-48. Kotzab, H.: Handelslogistik. In: Klaus, P. & W. Krieger (ed.): Gabler Logistik-Lexikon. Management logistischer Netzwerke und Flüsse, 3rd edition, Gabler, Wiesbaden, 2004, 180 – 185.

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Kotzab Kotzab, H., Schnedlitz, P. (1999): The Integration of Retailing to the General Concept of Supply Chain Management Concept, Journal für Betriebswirtschaft, 49 , S. 140-153. Kotzab, H.: Neue Konzepte der Distributionslogistik Handelsunternehmen. Dr. Th. Gabler, Wiesbaden, 1997.

von

Reutterer, T. & H. Kotzab: The Use of Conjoint-Analysis for Measuring Preferences in Supply Chain Design. Industrial Marketing Management Special on Issues in Supply Chain Management, 29, 1, 2000, 27-35. Liebmann, H.-P. & J. Zentes: Handelsmanagement, Vahlen, München, 2001. Lingenfelder, M. : Die Internationalisierung Einzelhandel, Duncker & Humblot, Berlin, 1996.

im

europäischen

Supergros Logistikguide (Logisticsguide): Rules and procedures in concerning trade between SuperGros a/s and suppliers, 2002 Mentzer, T., W. deWitt, J. Keebler, M. Soonhoong, C. Smith & Z. Zacharia: Defining Supply Chain Management, Journal of Business Logistics, 22, 1, 2001, 1 – 25. Müller-Hagedorn, L.: Erfolgsbedingungen für den Fachhandel, Mitteilungen des Instituts für Handelsforschung an der Universität zu Köln, 7, 1998, 137-147 Otto, A.: Management und Controlling von Supply Chains. Ein Modell auf Basis der Netzwerktheorie. Wiesbaden, DUV-Gabler, 2002 Pfohl, H.-C.: Logistiksysteme. Betriebwirtschaftliche Grundlagen, 6th edition, Springer, Berlin et al., 2003. Raman, A., N. DeHoratius, Z. Ton: Execution: The Missing Link in Retail Operations. California Management Review, 43, 2001, 136-152. Schary, P. & T. Skjoett-Larsen: Managing the global supply chain, 2nd edition, Copenhagen Business School Press, Copenhagen, 2001 Schnedlitz, P.: „Verkaufsmaschinen“ als Danaergeschenk?, Cash, 10, 1994, 122 – 128. 91

Retail logistics and Supply Chain Management Schnedlitz, P. & C. Teller: Aktuelle Perspektiven der Handelslogistik. In: Pfohl, H.-C. (Ed.): Logistikforschung. Entwicklungszüge und Gestaltungsansätze, Berlin, Erich-Schmidt-Verlag, 1999, 233-252. Schröder, H.: Handelscontrolling – Anforderungen, konzeptionelle Grundlagen und Status Quo. In S. Reinecke, S., T. Tomczak & G. Geis (ed.): Handbuch Marketingcontrolling, Ueberreuter, St. Gallen, 2001, 774-794 Seth, A. & G. Randall: The grocers. The rise and rise of the supermarket chains, 2nd edition, Kogan Page, London & Dover, 2001. Smith, D.: Channel captaincy driving change. In: Kotzab, H. (ed.): Proceedings of the 8th ELA Doctorate Workshop, 25th-27th June, 2003 Monchy-St. Eloi, France. Stalk, G., P. Evans & L. Shulman: Competing on Capabilities. The new Rules of Corporate Strategy. Harvard Business Review, 2, 1992, 57 – 69. Stock, J. & D. Lambert: Strategic Logistics Management, 4th edition, Boston et al., McGraw-Hill Irwin International Edition, 2001. Stölzle, W.: Industrial Relations, München, Wien, Oldenbourg, 1999. Kotzab, H. & C. Teller: Instore Logistics - The Missing Link in Retail Operations? In: Van Wasserhove, L., A. De Mayer, E. Yücesan, D. Günes & L. Muyldermans (ed.): Operations Management as a Change Agent, Proceedings of the 11th International Annual EurOMA Conference, Volume 1, Insead: Fontainebleau, 2004, 353-362. Toporowski, W.: Logistik im Handel. Optimale Lagerstruktur und Bestellpolitik einer Filialunternehmung, Heidelberg, Physica, 1996 Weber, J.: Logistikkostenrechnung. Kosten- Leistungs- und Erlösinformationen zur erfolgsorientierten Steuerung der Logistik, 2nd edition, Berlin et al., Springer, 2002. Zentes, J.: Effizienzsteigerungspotentiale kooperativer Logistikketten in der Konsumgüterwirtschaft. In: Pfohl, H.-C. (ed.): Management der Logistikkette. Kostensenkung - Leistungssteigerung - Erfolgspotential. 9. Fachtagung der Deutschen Gesellschaft für Logistik e.V. 3. Mai 1994, Darmstadt. Berlin, Erich Schmitdt Verlag, 1994, 105 – 126.

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CHAPTER 5

IT-Applications for retail store management Herbert Kotzab

Essential elements of IT-driven retail management IT-based retail management – as outlined in Figure 5:1 - is built upon the latest developments in IT and creates a channel mandate for retail management (CCRRGE) (1996, p. 52). IT is used for retail management not only for increasing efficiency and productivity of the utilized resources, but also to build up better consumer relationships (Anonymous 2004). This model characterizes a seamless connection between the retailers’ outlets with retailers’ and suppliers’ ERPsystems with the goal of applying valuable customer relationship management tools (Anonymous 2004). However, a general similarity to marketing channel management in terms of managing flows of goods and related information as outlined in Chapter 2 seems evident. “The interface” describes the information exchange process between the customer and retailer, characterizing the need of every retailer to understand consumers' needs and wants in the right manner. The interface manages the physical fulfillment process of getting the right assortment of goods (“The Range”) to where the customers are looking for them. The major IT-tools can be seen in channel-wide EPOSsystems, channel-wide bar code and EDI-systems that control an interorganizational flow of information and goods.

94

Kotzab The IT-related interplay between the variables point of order, product and service range, pricing, fulfillment, service providers and the interface between customers and service providers, consequently leads to new ways of performing retailing in terms of customized POSdata-driven marketing strategies and sophisticated supply chain processes (CCRRGE, 1996; Fisher 1997, Zentes 1991; Stalk et al. 1992, Salmon 1993, Mulhern 1997).

Information The shopper

Information The interface

The range

Physical fulfillment

Figure 5:1 Essential Elements of IT-driven Retail management According to a recent study of the EHI, the German-based European Retail Institute, German retailers invest 1 % of their sales volume in IT. The application of IT should improve the retailers’ core competencies, such as logistics and customer relationship management (Anonymous 2004). IT-based retail management leads to holistic demand-synchronized delivery systems (Zentes 1991; e.g. quick response, continuous replenishment, Efficient Consumer Response). Such systems demand information flow integration of all nodes in a channel – from the store-level up to the raw materials supplier. The textile industry relates to such systems as “from sheep to shop”systems (Linke/Hildebrandt 1999). The major effect of such a management style is a compressed channel structure, which is the result of reducing the timely and/or spatial distances between the first and the last echelon of the supply chain. Leading retailers are aware of these issues and use IT in their activities to gain major competitive advantages simultaneously (e.g. Keen, 1991 or Lewig, 1993 or Porter 2001; see also Chapter 2): Decreasing costs: IT-solutions help to reduce costs, e.g. administrative or inventory costs. x Speeding up time: IT can help to reduce the lead times of all flows within a channel. Companies can strategically use x

95

IT-Applications for retail store management postponement and customization strategies to shift the risk of not producing according to demand down the channel. x Increasing service: IT can help to improve the dialogue between companies and their customers and consumers. Such systems allow one-to-one-marketing and ensure mass customization application by offering individual solutions at lower price levels. Such systems lead to a re-formulation of the logistical efficiency principle because IT-based retail management can help decrease costs and increase services at the retail level, which has enormous savings effects for the total distribution pipeline (Mulhern, 1997). We can also observe similarities to Srivastava et al.’s (1999) suggestions of shareholder value generating marketing business processes: new product development management processes (= the range?); supply chain management business processes (= physical fulfillment?) and customer relationship management business processes (= the shopper?). However, the downturn in consumption and the increasingly international focus of relationships with suppliers have forced large retailers to adopt new strategies, taking the form of acquisitions, diversification or globalization. Successful retailers have to be flexible and simultaneously have to look for economies of scale and scope. IT-based retail management helps retailers to gain these sustainable competitive advantages that prefer customer retention strategies rather than customer attraction strategies, which Quinn (2003) calls the boomerang principle – bringing the customer back.

IT-based retail marketing processes General overview Retail marketing refers to the market-driven, customer-oriented management of retailing companies. Like any other marketing approach, retail marketing also means coordinated efforts, valuedriven activities and goal orientation (Berman/Evans 2000). Retail marketing includes the final activities that are needed to place products in the hands of consumers. The integration of IT in retail management can thereby help retailers control their activities better and to provide a better service in a more efficient manner, meaning doing more with less. Incorporating IT into retail marketing processes leads to IT-based

96

Kotzab retailing strategies as presented by Kotzab et al. (2003) (see also Table 5:1). Retailer

Example

Description

Wal-Mart

Merchandise

Wal-Mart Stores will use on-line analytical processing

Stores Inc.

Planning

(OLAP)

technology

from

Sunnyvale,

Calif.-based

Hyperion, under a deal unveiled today. The chain intends to build an advanced merchandise planning and reporting system with the Hyperion Essbase OLAP technology. Circuit City

Wired

Circuit City Stores will roll out in-store kiosks offering a

Customers

digital subscriber line (DSL) service from DirecTV Broadband. 435 stores will offer DirecTV DSL at kiosks that allow the entry of a phone number to determine if the customer has access to service. The ordering process can then be completed in the store.

Sports

Kiosk

Authority,

Catalogue

and In a move that augments its recent pairing with Global Sports, The Sports Authority Inc. says it will install

Global

interactive kiosks in five of its 198 stores. The specialty

Sports

chain will also debut a catalogue during the fourth quarter of 2001. Global Sports, based in King of Prussia, Pa., will process and fulfill catalogue orders and provide customer service. It will also provide operational support for the kiosks. The Sports Authority does not plan to open any stores this year and instead is aiming to improve merchandising and control costs better.

Kmart

Check-out-

Kmart announced a similar program titled Blue Lightning.

systems

During peak periods at checkouts, workers at Kmart stores will ring up customers’ purchases while they wait in line and give them a card that the cashier can scan and process for payment.

Shoppers

ERP

Drug Mart

extranet

and Shoppers Drug Mart signed a multi-year deal to license the SilverStream Application Server from SilverStream Software, Billerica, Mass. The 820-store Shoppers Drug Mart will use the product for core business functions, including a vendor extranet and store intranet to improve online information access and interactions for company, employees and vendors.

Table to be continued

97

IT-Applications for retail store management Continued Table 5:1 Shaw’s

Self Check Shaw’s Supermarkets will allow customers to scan, bag

Supermarket

out

and pay for their groceries by themselves at 30 more stores. Installations of the NCR Corp. Self-Checkout systems were completed by February 2002. The Shaw’s and Star Market stores will use the latest system from Atlanta-based NCR—the A-Series, which includes a conveyor belt to help shoppers unload groceries.

Target Corp.

Smart

Target Corp. is jumping on the smart-card bandwagon.

Cards

The chain says it will issue Target smart Visa cards as part of its decision to roll out Target Visa cards on a national basis. It will also install point-of-sale terminals that accept smart-card payment in all stores next year. Like other smart Visas introduced last fall by major banks, the Target smart Visa will contain a computer chip—in addition to a magnetic stripe. The memory capabilities of the chips add to the potential for more elaborate security and loyalty programs.

Home Depot

Check-out- The Home Depot has installed Unleashed, a handheld systems

wireless scanner that reduces check-out time, in about 700 of its stores. Unleashed enables associates to scan and record customers’ purchases while they are in line. Home Depot said the application should be in all of its stores by the end of the year.

Kroger

Theft

The Kroger Co. signed a three-year agreement to install

prevention

Sensormatic’s UltraMax anti-theft systems. The UltraMax system, already in place at the chain’s Fred Meyer Stores division, is part of a chain wide source-tagging program, under which consumer-goods manufacturers apply antitheft tags to their products at the point of origin or packaging.

Table 5:1 Examples of IT-based retail strategies (Kotzab et al. 2003, p. 181) But it is not IT alone that helps to gain competitive advantages, as Accenture (2004) points out. The concept of the “Store of the future” shows how IT, in combination with innovative organization and integration of consumer behavior, can successfully be applied in a retail setting.

98

Kotzab As Carter/Lomas (2003, p. 5) state: “It’s not just technology”, this task is a way to allow innovative consumer shopping experience in a collaborative manner. Sainsbury’s store in Hazelgrove can be seen as one prominent example of smart shopping (Carter/Lomas 2003). Further examples, which follow the basic notions of IT-based retail marketing are the Metro Future Store in Rheinberg and Rewe Austria’s most modern supermarket in Purkersdorf (both presented later in this chapter). Experience shows, that retailers can derive IT-based retail marketing strategies from sophisticated information management on consumer behavior and it affects all retail areas from the sales floor to the back offices. The outcomes can be found in re-engineered IT-driven retail formats that allow customized shopping experience; the development of new retail channels, e.g. Internet-based retail formats to address new customer segments; and Category management resulting from a jointplanning process with manufacturers based on real-time accessed client data in order to offer client-oriented sets of products/services.

Re-engineered IT-driven retail format layout The most valuable asset for store-based retailers is the store, which is determined by location, size and layout. The application of IT yields to a reorganization of the store layout, which is the result of an optimal link between sales productivity and consumers’ excitement (Berekoven, 1995, p. 276 or Hansen 1990, pp. 296). As Levy/Weitz (2004, pp. 591) point out, good store layout means balancing conflicting objectives as for example attracting consumers to the stores (= offering excitement) and increasing profitability (see Figure 5:2). A good store offers an attractive atmosphere/layout considering that consumers postpone their purchase decision to the point-of-sale and seek orientation, friendly and helpful personnel and short lines at the checkout (see also Levy/Weitz 2004, pp. 591). IT in the form of in-store media helps to achieve this prerequisite (Nymphenburg, 2001). Carter/Lomas (2003) also provide some empirical evidence showing that improved store layout helped to increase the average time spent in the store and the number of aisles visited.

99

IT-Applications for retail store management

Figure 5:2 Store design as the result of excitement and profitability. Source: adapted from Berekoven 1995.

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Kotzab

Audiovisual systems – the example of in-store radio Karabateas et al. (1999) or Silberer (1999) differentiate between audiovisual systems (e.g. in-store radio, in-store television and video animation), electronic price and information systems (e.g. displays, electronic price tags or electronic shopping carts or self check out systems), multi-media systems (e.g. control systems, product information systems, customer service systems) and olfactive systems (e.g. air circulation systems). The example of in-store radio shows that it can be used for several target groups/reasons, as in-store radiobroadcasts for customers and employees of a certain store or a chain of stores during opening hours (e.g. Schnellhardt 1998). Contrary to the traditional public-address announcements, an in-store radio program is similar to any familiar radio program, including headline news, weather forecasts, horoscopes, and also customized, store-specific promotion and advertising elements. The radio programs are transmitted over satellites to the single stores. The retailers’ investments in this media could be “refunded” by offering special advertising opportunities to manufacturers. In-store radio is not limited to a special field of retailing, it can be used in any store format, however, grocery retailing might be, due to its importance, the main field of application. As 60 % of all consumers’ purchase decisions are made in front of the shelf (see e.g. Dussart 1998), in-store radio is a major tool for store specific promotional activities. Empirical tests have shown that average sales can be increased in a range from 9 to 26 % (Karabateas et al., 1999, pp. 12).

Electronic price and information systems Electronic price and information systems refer to the electronic integration of shelves and checkout systems within a retail store (see Stern et al. 1996, p. 404). Such instruments help to increase shopping excitement and experience as certain errors, such as differences in prices at the checkout and on the shelves, are diminished and negatively perceived waiting times at the checkout – due to queues at the checkout – can be reduced (e.g. Webb 2002). Electronic price tags and shelf labels As self-service plays a major role in today’s retailing, consumers have to be informed about prices at the point of purchase, i.e. the shelves of the stores. Most of the price tags are in paper form and then have to be

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IT-Applications for retail store management replaced whenever prices for articles are changed. In a typical grocery store this activity refers to an assortment of up to 10,000 items, whereupon prices can be changed several times a week. This replacement can take several hours and is not an error-free activity (Leigh 2001). By using electronic shelf labels, retailers can compensate these disadvantages, because price changes can be executed from a back office and transferred via radio frequency to the shelves. Electronic shelf labels should be of such a size, that enables the consumer to read the price information, but it should also allow flexible price management, smarter shelves management and improved promotion possibilities (Karabateas et al. 1999, pp. 33). The technology is based on radio-frequency and infrared systems, which link the master-checkout with the shelves (NCR, 2001a and NCR 2001b, Webb 2003). The relevant tags then show the actual price, even on a chain-wide basis (Garry 2003). This not only leads to an efficient use of manpower in the store but also to increased customer satisfaction as the prices as documented on the shelves are the same prices as shown at the cash desk (e.g. Mulholland 2002). The implementation of electronic shelf labels has certain logistical advantages that relate to the reduction of administrative costs, as paper labels do not have to be removed manually anymore. Furthermore, customer service increases as shoppers do not have to expect “price surprises” at the end of their shopping. Self-checkout systems Speeding up time by reducing the waiting lines at the checkout has always been an issue for store managers. Gugelman (1988, p. 50) reports of the early attempts of reduction of waiting time of the Swiss Migros, by letting consumers punch their data into a cash desk. Of course, the introduction of bar codes, and nowadays the use of RFID, replaced these early attempts and offered new possibilities for ‘outsourcing’ checkout activities to the consumers. Some possibilities are presented by NCR (2004) and used by Metro (see Metro 2003). Like in a traditional setting, the scanning process is postponed until the end of the shopping activity, but it is processed by the consumer. Another way of integrating the consumer in the retailing activities that speeds up the time at the cash desk, is letting consumers self scan their items during shopping by using hand held scanners. Consumers can thereby read the products’ barcode information while walking around the aisles and check out, without waiting at the cash desk, by putting the client card into the scanning device (Scanboy, 2001 or 102

Kotzab Donelly 2003). This special connection between a client card and the scanning device can generate customized marketing approaches and allow one-to-one marketing and promotion activities. This approach is different to the self-check out systems, as for example developed by NCR, where the client scans the articles at the end of the shopping tour at the automated cash-desk (NCR, 2001b). Intelligent Scales Especially in self-service food retailing, the use of self-service scales is a consumer friendly tool for buying fresh fruits and vegetables. However, the downside of the use of self-service scales can be seen in errors made by consumers indicating other items than the scaled ones (MT 2004). In order to avoid mistakes that occur in a traditional selfservice scaling process, optical recognition technology can help to ease this process. The SmartVision scale, developed by Mettler-Toledo can be seen as an attempt in that direction. The SmartVision scale automatically recognizes different types of fruit and vegetables by using a camera (incl. picture recognition software, IBM Veggie Version) and automatically prints the correct price tag. Consumers do not have to remember any numbers, which they have to punch in (Retail News 2004, p. 1; Lambertz 2003). Such scales are now in use e.g. in an Austrian Spar-Supermarket (Spar 2004). The communicating shopping cart and personal shopping assistant Even the shopping cart could be used as an IT-based retail marketing tool or promotional means (Karabateas et al., 1999, pp. 37) and so be turned into a smart cart. The trolley can be equipped with electronic displays, showing specific product information and/or guide consumers through a store and provide customized promotional activities. The German Atlas New Media Group holds the worldwide patent for the “talking” or “communicating” shopping cart, WATSON. The communication devices are integrated at the grip of the cart and, based on radio frequency, the cart is “linked” with the shelves. Whenever passing a “labeled” shelf, the cart “announces” a message to the shopper (Röbke 2000). Some pilot studies showed the enormous impact of WATSON on sales volume; sales increases of up to 250 % for selected products have been realized (Atlas New Media, 2001). Another possibility to use the shopping cart as a customized information tool is the integration of the cart with a mobile electronic shopping decision making tool, called Personal Shopping Assistant (PSA). 103

IT-Applications for retail store management The PSA offers for example store maps, shopping lists and even – if linked with a customer card – personal shopping history (Anonymous 2003, PSA 2004; see Metro Future Store). Multi-media kiosks and advertising displays Another possibility of making shopping more convenient and easier for shoppers, but also offering personalized information, is the use of information and/or presentation terminals or other forms of information terminals. Silberer (2000) outlines the possibilities of using information and presentation terminals (also NCR, 2001b; NCR 2004). Multimedia kiosks decrease burdens on personnel, increase sales possibilities and inform consumers better. Silberer (2000, p. 278) also points out the transformation of such systems from pure transaction-oriented kiosks to multi-media sales stations, combining ordering, payment and sales processes. Another form of promotional activity can be found in electronic advertising displays, which can promote specific offers in a personalized way, when the display is linked with the PSA via WLAN (Metro 2003). Moreover, the display can be used for complementing classical advertising, by using dynamic presentation forms such as videos instead of printed billboards.

Modern supermarkets in European business practice Rewe Austria’s most modern European supermarket in Purkersdorf, Austria6 A new era of retailing started in Austria in the year 2000, when Rewe Austria launched its sophisticated ‘Billa’ store format in Purkersdorf near Vienna. Rewe Austria used up to date technology, as described in the sections above, in order to provide a special shopping experience on a size of only 800 square meters. The offer concentrates on convenience and freshness, by focusing on the categories vegetables and fruit, delicatessen, snack- and salad bar and an in-store coffee shop. In addition to these areas, the customer has the possibility to use free phones, has free access to the Internet, can book a holiday by using online travel services and seek health care information. 6

Adapted from Kotzab et. al. (2003); The author gratefully thanks Mag. Kerstin Neumayer (REWE Austria) for her continuous support.

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Kotzab In order to generate future customers, the supermarket also offers special child services like a cinema and play station area, where children can play while their parents do their shopping. Children can be looked after by a special video system. Rewe Austria has been one of the first grocery chains to use the WATSON-technology and will expand its use to other stores (starting in October 2001 in Graz). All articles on the shelves are price-tagged electronically. The tags are directly linked with the EPOS-system, which ensures a “right-price” guarantee. Price changes can be managed immediately without having problems with the central systems. Waiting times at the EPOS can be reduced and the use of electronic payments can be increased as all shopping carts are equipped with selfscanning devices. While shopping, the customer scans articles immediately and knows at once not only the products’ prices but also the value of his/her shopping basket. While checking out at the EPOS, the purchase is invoiced over the customer’s payment card. Business practice showed, that eighty per cent of the shoppers have chosen the self-scanning possibility and Rewe Austria was not experiencing higher inventory differences. In fact, sales went up 30 % since the introduction of this technology. Another atmospheric effect is given by installing a fountain spring inside the store, where clients can have a glass of fresh water. A critical issue is the cleanliness of the store. In this store, cleaning activities are performed by a robot, which continuously cleans the floor and recognizes customers and other items. The shop also offers around the clock shopping, i.e. 24 hours per day. Shoppers can shop outside the usual 66 weekly shopping hours as a special vending machine, which carries around 200 products has been installed outside of the store. The prices for the products however are the same as in the store.

Case 2: Metro Group Future Store Initiative7 The German Metro Group (Metro) is one of the world’s largest retailers. Metro can be found in 28 countries at some 2,300 locations and employs more than 240,000 people. Having six different sales divisions (wholesale: Metro/Makro Cash & Carry; hypermarket Real; supermarket Extra; consumer electronics center Media Markt/Saturn; 7

This chapter refers to following literature: www.future-store.org; Anonymous (2003) ; Metro (2003) ; Weber (2004). The author gratefully thanks Albrecht von Truchseß (Metro AG) for his valuable support.

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IT-Applications for retail store management home improvement and DIY center Praktiker and department store Galeria Kaufhauf), Metro is following a typical multi-channel strategy. The wholesale channel Metro/Makro Cash & Carry is the world’s leading self-service wholesale centre. Together with 45 leading companies from the consumer goods, IT and other industries, Metro started the Metro Group Future Store Initiative, which is a future lab for technologies that will certainly shape the retail industry. The aim of the initiative is to drive an innovation process in retailing on a national, as well as on a global scale. The Future Store in Rheinberg, Germany was the first project of the initiative. It shows how technologies and technical systems could help to ease grocery shopping. The Future Store in Rheinberg is a technology driven Extrasupermarket with a sales area of 3,855 square meters, 124 employees (52 in the service area), offering approx. 2,500 consumers/day about 30,000 items, out of which 20,000 items belong to the food category. The merchandising concept of the store focuses on freshness and convenience. The technology applied in the Future Store refers to the following types presented in Table 5-2). The central components at the technical level are the application of RFID transponder technology and wireless local area network (WLAN). The Future Store combines old technology with new and “looks disappointingly normal” (Weber 2004). On the sales floor, mobile selfscanning and self check-out systems are applied in order to make the payment process more efficient. Thus, waiting times at the check-out counter can be diminished. The use of the intelligent scale reduces the times for scaling and also reduces errors that might occur due to pressing a wrong button on the scale. Area

Technology applied

Inventory

RFID for Goods handling, delivery to store, Warehousing in the

Management

back store, Smart Shelves, Transportation of goods into the sales room

In-Store

Employee portal “mymetro”, Personal Digital Assistant, Tablet

information

PC’s, In-Store Communication

Comfort

Personal shopping Assistant, Loyalty Card/Extra Future Card, Info

Shopping

Terminals, Intelligent Scale, Electronic Shelf labeling, Electronic Advertising Displays

Cashing/

Self Checkout, Comfort Payment

Checking out

Table 5:2 IT-applications in the Extra Future Store Rheinberg, Germany

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Kotzab The restructuring of the communication with the shoppers while shopping is also a key element of the Future Store. The combined use of PSA and Information terminals can immediately help consumers in their search for products and service information. The PSA are small tablet PC’s that are clipped to shopping trolleys and can be activated with the Extra Future Card. This card is, so to say, the personal key to the use of selected technical innovations in the store, like the comfort payment and the navigation to the products. The checkout area is organized in three ways: “Traditional checkout” – organized like in a normal supermarket, but with the use of touch screen cash desks; x Comfort payment – when using a PSA, consumers just press the button “Pay and Go” and the checkout process is completed. The checkout point just controls the physical identification of the shopped items. These operations are more convenient for consumers as well as for the employees, as certain activities do not have to be repeated (putting articles on a conveyor belt, punching in numbers, passing barcoded articles over a scanner and putting them into the trolley again); x Self-Checkout – where the whole process is “outsourced” to the consumer. Payment can be done cash or cashless. x

METRO Group is also testing RFID in the Future Store, first of all in the logistics area. RFID technology is used in the back offices mainly for inventory management processes. As many incoming goods are equipped with RFID-chips (pallets and cases), the individual tracking and tracing of the products is dramatically improved. In that sense, the total supply chain can be mapped. Instead of manually controlling all the incoming goods, the employees can now control the delivery via PC or with the PDAequipment in a much better manner. In the Future Store RFID is also tested on selected items. The application used here is called “Smart shelves”. These shelves will not only automatically recognize incoming and outgoing products, but also if consumers put products/articles back incorrectly. Thus real-time-merchandising is possible, as the logistics can already start before the last item is sold and a stock out situation might occur. In the long term, the applied technology should lead to international standards for retail industries, which can be implemented consistently throughout the world.

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IT-Applications for retail store management Furthermore, the shelves in the Future Store are equipped with 37,000 electronic price labels that allow easy price updates via the Metro Group’s merchandize management system. This means, that the price shown at the shelf is always identical with the price to be paid at the checkout. The specific information flow for employees is managed via a particular portal – “mymetro”, where employees can get current information on sales volumes, important customer information and also have access to discussion rooms. Personal Digital Assistants (PDA) can be used for tracking/tracing, real time reordering (instead of using a mobile data capturing system). The telephone communication is organized via IP-connections. One question (still) remains: Will the consumer accept these applications? Recent studies have shown, that the question can be answered positively. 77 % of the consumers visiting the store have tried at least one technology, of which the intelligent scale is the most used, followed by information terminals. Technologies such as PSA and Self Check Out are mainly used by regular users. The majority of the consumers evaluate the value of the Future Store devices positively, but some disadvantages are mentioned. These disadvantages refer to an impersonal atmosphere generated by some technology, such as an information terminal or the Self Check Out. Consumer studies furthermore have shown that the use of the technology is not a matter of age, as senior customers also regularly use it. First analyses have also shown that not only the number of consumers is growing, but also that store loyalty and sales were up.

References Accenture: Store of the future, http://www.accenture.com/ xd/xd.asp?it=enweb&xd=industries%5Cproducts%5Ccgs%5Ccapabilit ies%5Cstore_future.xml, accessed 05-25-2004. Atlas New Media: Watson, der sprechende Einkaufswagen. Hamburg, 2001. Bedington, E.: It's getting personal: smart ways with trolleys could bring bhuge benefits for supplier, retailer and consumer alike, The Grocer, June, 2002, 40 Berekoven, L.: Erfolgreiches Einzelhandelsmarketing. Grundlagen und Entscheidungshilfen. 2nd edition, Beck, Munich, 1995.

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Kotzab Berman, B. & J. Evans: Retail management. A strategic approach. 7th edition, Prentice Hall. Upper Saddle River, 1998 Carter, D. & I. Lomas: Store of the future, Presentation at the ECR Europe Conference, 13-15 May, Berlin, 2003. Coca-Cola Retail Research Group Europe (CCRRGE): The Future for the Food Store - Challenges And Alternatives. London, 1996. Dussart, C.: Category Management: Strengths, Limits and Developments, European Management Journal, 16, 1, 1998, 50-62. Fisher, M. : What is the Right Supply Chain for Your Product. Harvard Business Review, 2, 1997, 105-116. Future Store: www.future-store.org, accessed 12-02, 2004 Garry, M.: Is this the year for ESLs?, Supermarket News, 5, 1, 2003, 35-37. Gugelmann, E. : Marktbearbeitung mit gesellschaftlichem Anspruch. Dynamik im Handel, Sonderausgabe, 10, 1988, 48 - 58 Hansen, U. : Absatz und Beschaffungsmarketing des Einzelhandels. Eine Aktionsanalyse, 2. Auflage. Göttingen, 1990. Karabateas, K., S. Barth & N. Wittmann: Instore Medien & Multimedien am POS. EHI, Köln, 1999. Keen, P.: Redesigning the Organization through Information Technology. Planning Review, 19, 3, 1991, 4 – 9. KHI Metrics: Retail Revenue Management, a case for category optimization, KHI Metrics, Scottdale, 2002. Kotzab, H., P. Schnedlitz & K. Neumeyer: Contemporary IT-assisted Retail Management. In. Joia, L. (ed.): IT-Based Management. Challenges and Solutions, Idea Group Publishing, Hershey et al., 2003, 175-203. Lambertz, W.: High-Tech im Extra Markt, Retail Technology, 2, 2003, 32 – 36.

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IT-Applications for retail store management Leigh, C.: NCR Takes Electronic Shelf Labels from Novelty to Necessity, NCR Press Release, 06-25-2001, http://www.ncr.com/ media_information/2001/jun/pr062501.htm, accessed 07-10-2004. Levy, M. & B. Weitz: Retailing Management, McGraw Hill-Irwin, Boston et al., 2004. Lewig, D.: Beziehung zwischen strategischer Planung und Informationsmanagement. In: Scheer, A.-W. (ed.): Handbuch Informationsmanagement: Aufgaben - Konzepte - Praxislösungen. Wiesbaden, 1993, 69 - 77 Link, J. & V. Hildebrand: EDV-gestütztes Marketing im Mittelstand: Wettbe-werbsvorteile durch kundenorientierte Informationssysteme. In: Link, J. & V. Hildebrand (ed.): EDV-gestütztes Marketing im Mittelstand. München, Vahlen, 1995, 1-21. Metro AG: Customer Acceptance of FSI Applications, Market Research Results October 2003, Metro, 2003. Metro Future Store Initiative (Metro): Extra Future Store Rheinberg, Technical Components in Detail, Metro Group, Düsseldorf 2003a. Metro Future Store Initiative (Metro): Welcome to the new reality in retailing, Metro Group, Düsseldorf, 2003b. Mulhern, F.: Retail Marketing: From distribution to integration. International Journal of Research in Marketing, 17, 2, 1997, 103 – 124 Mulholland, S.: Safeway UK links ESLs to pricing optimizer, Supermarket News, 50, 45, 2002. NCR 2004 http://www.ncr.com/media_information/photos_sa.htm, accessed June 23, 2004. NCR Corporation (NCR): http://www.ncr.com/media_information/ photos_sa.htm, 2001, accessed September 27,2001. Nymphenburg: Elektronische Medien erobern den www.nymphenburg.de, 2001, accessed August 14, 2001.

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Kotzab Personal Shopping Assistant (PSA): Welcome to Better Shopping with PSA, http://www.cs.odu.edu/~cpi/cpi-s2003/psa/, accessed 07-032004. Porter, M.: Strategy and the Internet, Harvard Business Review, 3, 2001, 63 – 78. Quinn, F.: Superquinn, the specialist in fresh food. Presentation at the ECR Europe Conference, 13-15 May, Berlin, 2003. Retail News: Smart Vision – The future of fresh, Retail News – Perspectives in Food Retailing Technology, 1, 2004, 1 Röbke, T.: Sprechende Karre. Wie ein Kieler Feinmechanikstudent mit seiner Erfindung das Einkaufen im Supermarkt revolutionieren will, http://zeus.zeit.de/text/archiv/2000/2/200002.c-einkaufswagen_.xml, accessed 10-09-2004. Salmon, K.A.: Efficent Consumer Response. Enhancing Consumer Value in the Grocery Industry. FMI, Washington, 1993. Scanboy: Handscanner im Vormarsch. http://www.scanboy.de/news/fachpresse/meldung116133852.htm, 2001, accessed September 9, 2001. Schnellhardt, M.: Neues Medium: "lnstore-Hörfunk", untersucht am Beispiel von Radio P.O.S., Kiel. Diplomarbeit Eichstätt, 1998 Silberer, G. : Handelsmarketing mit neuen Medien. Herausforderungen für den klassischen und den elektronischen Handel. In Beisheim, O. (ed.) : Distribution im Aufbruch. Bestandsaufnahme und Perspektiven, Vahlen, München, 1999, 1035 – 1048. Silberer, G. : Neue Medien im Handel. In : Foscht, T., G. Jungwirth & P. Schnedlitz (ed.) : Zukunftsperspektiven für das Handelsmanagement. Konzepte – Instrumente – Trends,: Deutscher Fachverlag, Studien für die Praxis Band XIV, Frankfurt/Main, 273288. Spar: Premiere im österreichischen Lebensmittelhandel in Mattighofen: SPAR setzt auf Self-Check-Out, Cash-Back und ‘Intelligente Obst- und Gemüse-Waagen’, Press release, Oct. 21, 2004.

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IT-Applications for retail store management Srivastava, R., T. Shervani & L. Fahey: Marketing, business processes, and shareholder value: An organizationally embedded view of marketing activities and the discipline of marketing, Journal of Marketing, 1, 1999, 168-179 Stalk, G., P. Evans & L. Shulman: Competing on Capabilities. The new Rules of Corporate Strategy. Harvard Business Review, 2, 1992, 57 – 69. Stern, L,., A. El-Ansary & A. Coughlan: Marketing Channels. 5th edition. Upper Saddle River, New Jersey, 1996 Webb, W.: On-the-shelf electronic price labels, EDN, 47, 25, 2002, 36-38 Weber, B.: Metro verpflichtet Hersteller auf RFID. Die ersten 20 Lieferanten müssen ab November logistische Einheiten mit Funkchips kennzeichnen - Briefing mit Show-Charakter, Lebensmittelzeitung, 21, 05-21-2004, 25. Zentes, J.: Computer Integrated Merchandising - Neuorientierung der Distributionskonzepte im Handel und in der Konsumgüterindustrie. In: Zentes, J. (ed..): Moderne Distributionskonzepte in der Konsumgüterwirtschaft. Stuttgart, 1991, 1 – 15

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CHAPTER 6

The automation of retail logistics

Herbert Kotzab

Combining IT with just-in-time oriented retail logistics systems - Information or inventory? The management of the information flows plays an increasingly important role in today’s retail environment. The overall flow of information is usually managed by integrated retail logistics information systems, which are defined, at least in the German area, as integrated merchandise information systems (Zentes, 1991, or Ahlert 1999). These systems range from non-computerized open systems over standardized computerized systems to applications of data mining and warehousing in order to extract individual consumer specific purchase patterns based on real time POS data. Retail merchandise information systems allow an inter-organizational, SKU-specific, fully automated order management, that can be transformed to demand driven flexible manufacturing and order delivery systems as well as synchronized replenishment systems (see Zentes 1991 or Srivastava et al. 1999). Whenever a consumer buys an item, this information is immediately scanned and sent through the system, so that production planning can be set up in a real-time manner. Retailers can also minimize inventory levels, as the integration helps to reduce the uncertainty of delivery problems. A circumstance, that inventory equalized in the past. “Information replaces inventory” is today’s message that makes retail executives invest in informationdriven logistics systems that allow just-in-time applications as well as end-user oriented customization (see e.g. Ahlert 1999). IT can help to automate the activities performed at the distribution center level.

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Kotzab Traditional warehouses can be converted into zero-inventory transit terminals, where inventory processes are totally replaced by transportation and sorting activities. But what IT is the right IT for retail logistics? A question that is difficult to answer, considering the fast enhancements in the development of IT. Certainly such IT is best suited for retail logistics that supports flow through applications in the total channel. Kotzab (1997) introduced electronic data interchange (EDI), barcodes and scanning technology as the main supporters for flow through retail logistics systems. Although the character of these forms of IT might have changed, from being key to being basic technology, all three of them still play an important role in many industries worldwide (see EAN 2003).

Electronic data Interchange (EDI) Since the upcoming of computer technology, logisticians wanted to link computers in order to allow an automated information exchange. In the early 1970’s, Stern/Craig (1971) suggested a system called Interorganizational Data Systems that should ensure interfirm specific transfer of information. Other early forms of information exchange refer to the exchange of data carriers (e.g. tapes or disks) and remote data transmission (e.g. Nagler 1991, p. 217 or Gallasch 1993, p. 470). Emmelhainz (1990, p. 4) defines EDI as “the organization-toorganization, computer-to-computer exchange of business data in a structured, machine-processable format”. In that sense, EDI allows paperless communication between organizations in a supply chain to take place. EDI is not a standard itself, it should be seen as a meta-term for a multitude of different electronic standards allowing computerized and highly structured lowerror communication (Kotzab, 1997 or Hsieh/Lin 2004; see Figure 6:1). There are three components necessary to run EDI. These are: EDI-enabling software, in order to translate incoming/outgoing messages to a specific format; communications and networks and standard messages that ensure the electronic communication between the partners, so that the involved computers can exchange information in the highly demanding structure. Within the European FMCG industry, EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) and its specific application EANCOM are the most important EDI-standards, allowing such standardized electronic communication between the supply chain partners (e.g. Hsieh, Lin 2004 or Hildebrandt/Kamlage, 1995; see Figure 6:2).

115

The automation of retail logistics Cross industry

ODETTE RINET SWIFT

EDIFACT

national

international

Within an industry

VDA SEDAS COMPASS UCS WINS EIDX

INTAKT LOG CIDX DAKOSY AMADEUS START

ANSI ASCX.12

Figure 6:1 Overview of different EDI-standards seen from industry/geographic angle (see also Kotzab 1997).

Bank

Supplier

Master data

Customer

Commercial transactions Report and planning General message

Transporter

Figure 6:2 Information exchange between supply chain partners based on EANCOM (adapted from EAN 1999).

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Kotzab EANCOM considers four categories of so-called standard messages - master data, commercial transactions, report and planning, general message – that should primarily be used for electronic information exchange between two supply chain partners (EAN 1999 or 2001): master data which does not change very often (e.g. names, addresses, product measures, etc.) ; x commercial transactions include all data sets that are used in a general trading cycle such as purchase orders, terms of delivery, payment, dispatching, etc.; x report and planning messages that include general information that may be used for planning purposes such as delivery forecasting, promotion forecasting, inventory holding, etc.; x general messages for all other information. x

Since the launch of EANCOM in 1990, the number of standard messages has grown from 9 to 47. The interplay of these three types of messages allows optimization of all logistical processes that are linked with a closed electronic processing of all product and supply chain relevant information between all supply chain partners (e.g. suppliers, logistics service providers, wholesalers and retailers) (see Glavanovits/Kotzab, 2002). EDI software (converter programs) is needed to translate EDI-messages for internal company issues, as internal computer systems may not communicate on an EDI-basis. In the case of EANCOM, many ERP software developers therefore offer standardized converters with their systems to make them EANcompatible (see Glavanovits/Kotzab 2002). The communications and network component ensures that the transmission of the data between the EDI-partners can be organized over a clearinghouse or in a multi-lateral manner. The possibility to use a clearinghouse for these purposes seems to be the most attractive solution, as many retailers and vendors in the various markets use socalled value-added networks (VANS) to allow multi-lateral communication within the supply chain (see Weid 1995 or Hill/Furgeson 1995). VANS provide the participants with the necessary connection software, which enables the transmission of electronic information between numerous supply chain partners (Weid 1995). In Europe, several clearing houses offer their services to the consumer goods industry, such as the German SEDAS Daten Service, the British TRADACOM (Trading Data Communication) or TRADANET (Trading Data Network) or the Austrian ECODEX (e.g. Nagler, 1991, p. 220 or Colberg et. al. 1995, p. 176).

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The automation of retail logistics However, in case VAN-services are not used, EDI allows only bilateral information exchange. Taking the upcoming importance of ecommerce into account, that relies mainly on the use of the Internet technology, an increasing demand for web based information exchange, that is open for many participants, can be observed. But the exchange of information has to follow standardization rules in order to be managed in an efficient manner (e.g. Laudon/Traver 2001, pp. 150 or King et al. 2002, pp. 316). Especially for medium sized companies the investment in EDI can be rather expensive, while the use of Internet technology is affordable (EAN-Austria 2001). One solution for solving this problem can be found in a combination of web technology and EDI (see Fu et al. 1999). LiteEDI (EAN 1998) combines the advantages of EDI with Internet technology and allows supply chain partners without EDI connections to communicate with EDI-using partners and vice versa (see also ECODEX-Austria 2004). Another advance in electronic information exchange can be seen in XML (= eXtensible Markup Language) that was introduced by the World-Wide Web Consortium in 1998. The XML-standard was recommended as the standard for exchanging information over the web and can be seen as a further development of HTML (= Hypertext Markup Language), that also allows computers to process the content of websites (Piller 2002, pp. 12 ; www.w3c.org/XML ). XML can therefore be characterized as an open and flexible standard to store, publish and exchange information (Daum and Horak 2001, p. 18). In order to harmonize given standards with future standards, EAN-UCC is working on the development of a global standard that is based on the logic of EANCOM but keeps interface problems as low as possible, as XML promises. This means, that in future there might be a co-existence of EANCOM and XML. A recent example of this development can be seen in the Austrian EAN e-business platform ‘eXite’ that is replacing the former data clearing model of ECODEX that allowed EANCOM message exchange in the Austrian consumer goods industry (BurianBraunstorfer 2004) eXite understands XML as well as 50 EANCOM standard messages and also allows a connection to several e-market places such as transora, WWRE and CPG Market (EAN-Austria 2004). Since January 2004, the standard is in use and over 3,800 ECODEX-mailboxes had been transferred to eXite. The annual data transfer volume is expected to be more than 80 million transactions (Humenberger 2004).

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Kotzab

Barcodes The use of barcodes either on labels or on sales units helps to mechanize many physical distribution processes. In combination with electronic data transfer, the whole logistics channel can gain profitability and can be organized in a more efficient manner (see Kotzab 1997). Barcodes are a further development of optical character recognition where information is encoded in printed bars of relative thickness and spacing (Colberg et al. 1995). Barcodes had first been introduced in 1949 and then used in the 1960’s for identifying railway wagons (Dawe 1993, p. 34). A lot of different barcode types exist, differing in the bar code specifications, like design and information capability, as well as in the fields of application that give guidelines of how to use a specific barcode in an industrial setting (see Figure 6:3; e.g. Wiesner 1990, p. 99 or Colberg et al. 1995, p. 212). In terms of logistics EAN.UCC barcodes play a specific role. EANUCC developed different application standards that help to minimize the logistical efforts in a supply chain In order to label all logistical units from primary packaging (= sales unit; e.g. EAN-13; EAN-8; UPC-A;UPC-E) to secondary packaging (= cases containing a number of sales units; e.g. ITF-14) and tertiary packaging (= pallets on which cases are loaded; e.g. EAN-128) (see Figure 6:4). The EAN-UCC codes, as most of the existing barcodes, belong to the group of twodimensional barcodes. Recently, three-dimensional barcodes (e.g. PDF 417) or transponder based bar codes like RFID were introduced, which allow a larger information storage and utilization capacity (Colberg et al. 1995, pp. 210; Höfler 2004). While UPC-7/EAN-8 and UPC12/EAN-13 refer to an end user oriented identification of products, while the ITF-14 though is for those trade items that do not pass through retail checkouts (EAN-International 2005). The UPC/EAN128 can be used as a special logistical identification and labeling system for retail units (Frazelle/Apple, 1994, p. 595; EANInternational 2005). Based on the EAN-128 typology, so-called Application Identifiers (AIs) were developed in order to allow global use of this standard. For example, the AI 00 is the serial shipping container code and helps to identify the various shipping units and assists the automated management of the material and product flow as well as the customization of customer-oriented package units (Glavavonits/Kotzab 2002 or EAN-Australia 2004).

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The automation of retail logistics

Figure 6:3 Presentation of selected barcode standards (see alsowww.activebarcode.de)

120

Kotzab

Figure 6:4 EAN/UPC and EAN/UCC barcodes (EAN-International 2005).

121

The automation of retail logistics

Scanners Barcodes need to be read and converted by scanners into a machinereadable form. The mechanisms that relay signals from barcodes are called bar code scanners. Table 6:1 shows different types of barcode scanners. Another way to classify bar code scanners can be to divide them into groups of contact scanners (need to touch the barcode) and non-contact scanners (do not need to touch the barcode). A particular application of scanning is also found in retailing at store level, where electronic point of sales systems (EPOS) scan purchased items. Symbol recognition Fixed

Beam

Field of application

scanning point-wise Moving

Beam

Handling

scanner Stationary scanner that is Manual scanner that needs fixed installed

specially trained people

Scanner Non-stationary scanner that Automatic scanner with no

scanning line-wise fan scanner – scanning

is moveable

need for specially trained people

area-wise

Table 6:1 Types of scanners (according to Jünemann 1989, Wiesner 1990, Dawe 1993, Gaul/Both 1990 and Colberg et al. 1995). In a typical retail setting, scanning means the automatic collection of consumer purchases. Combined with retail merchandising information systems, successful retailers implemented demand-synchronized delivery systems, which can also be called computer-integrated merchandising (Zentes 1994,p. 109 or Hallier 1995, p. 59) that leads according to Mulhern (1997) to real-time information retailers.

Combining EDI, barcodes and scanners to automated logistics Wiesner (1990, p. 11) characterized the logistical possibilities for using barcodes and scanners as follows: Everything that moves, that has to be calculated or counted is a barcode target. Barcodes and scanners control the information flow and help to initiate automated physical distribution (see Figure 6:5). The barcode labels of the incoming goods are read in order to identify the specific purchase order. The system simultaneously calculates, based on the product’s characteristics, the inventory location and compares delivery with purchase information. If these match, the receipt is sent electronically to the supplier.

122

Receiving dock

Barcode labels on individual items

Barcode labels on pallets

Invoice number

Barcode readers with keypad

Customer P.O. (number & date)

communications concentrator

Host microcomputer system

Kotzab

Figure 6:5 IT-integrated retail logistics operations (according to Speh et al. 1992, p. 17)

123

The automation of retail logistics The Swiss Association of Logistics published a catalogue of different fields of application, where barcodes and scanners can be used (see Table 6-2). Field of application

Labeling/

Checking

Sorting

identification

Physical throughput

Receiving area identification

of

the

X

product quantity check

X

X

X

quality check

X

X

X

prepare for inventory

X

X

X

X

X

X

Inventory checking inventory space checking SKU quantities

X

X

Handling paperless pick and pack replenishment

X

X X

X

Table 6:2 Selection of fields of logistical application for barcodes and scanners Georg/Gruber (1995) reported a 60 % reduction in order processing time because of the combined use of the presented IT. Costs are also dramatically reduced due to decreased inventory levels. A channelwide use of the described IT-standards also allows the integration of the involved manufacturers’ ERP-systems with the retailers’ merchandise information systems. Thereby, former push oriented logistics channels are converted into pull-oriented demand chains (Zentes, 1991). Masters/Lalonde (1994) characterized such logistics efforts as “blueprints for the future”. Recently, Netto, a major Danish grocery retailer, started a new 52,000 square meter distribution center, which is based on state-of-the-art technology. The costs for the distribution center were more than 500 million DKK (Denman 2003, p. 1) and represented the largest investment in logistics ever made in Denmark. The annual savings were stated as being 50 million DKK.

124

Kotzab

Future outlook - Radio Frequency Identification (RFID) Radio Frequency Identification (RFID) is a microelectronic circuit and can be used in the form of smart labels for an automated, radio frequency based identification of objects (Etikettenwelt 2004; Öztürk 2003; Finkenzeller 1998). RFID systems typically consist of an antenna, a transceiver for reading radio frequency, a processing device to transfer information and a transponder (see Figure 6:6). According to Finkenzeller (1998) and/or RFID-handbook.com, an RFID-reader contains a high frequency module that acts as transmitter and receiver, a control unit and a coupling element to the transponder, which stands for the data carrying device of the RFID system. A transponder’s status can either be active or passive, depending on where they take the energy for their use from (Jansen/Mannel 2003). While active transponders get the energy needed for information transmission and storage from a battery, passive transponders receive the needed energy from an electromagnetic field that is sent from the RFID-reader (see Etikettenwelt 2004). Due to space restrictions, smart labels only use passive transponders. Contrary to a chip card, an RFID does not need the physical touch of a reading device as it sends and receives signals on a contactless base (Finkenzeller 1998 or Pflaum 2001).Although the technology had already been introduced in the year 1949 by Bernard Silver and Joseph Woodland, it took another 30 years until RFID was used by the US army as a barcode application (a3volt 2004, p. 121). Jansen/Schmidt (2004) refer to the automotive industry where RFID on a 125 kHz-base has been used since the mid-1980’s, e.g. in immobilizers or in the production lines. In the form of smart labels, RFID today works on an operating frequency of 13.56 kHz with a reach from 1.2 m (passive) to 100 m (active) (Etikettenwelt 2004). RFID can be constructed differently, depending on the application area, such as coins, watches, key rings, tags, etc. and various application areas, like vending machines or ski passes (see Höfler 2004). RFID-technology seems to change retailing marketing and logistics dramatically (e.g. AIMGLOBAL, 2004 or Miller-Holodnicki 2004). The Exxon Speedpass program shows how RFID can be used for cashless payment processes, as immediate authorization is possible and waiting time is enormously reduced (Speedpass, 2003).

125

The automation of retail logistics

Figure 6:6 RFID-tag and RFID components (Sources: www.sensational.ch - Tag; components adapted from www.rfidhandbook.com 2004 and Finkenzeller 1998, p. 9).

126

Kotzab Wolfram (2003) showed how the use of RFID is also discussed on a global level, within the Global Commerce Initiative, in the form of intelligent tagging at distribution center and store level. On a store level, Metro’s future store concept is based on RFID and shows, for example, how self scanning processes can be replaced by RFID or how consumers can be approached on a one-to-one segmentation basis during shopping. However, the real savings are expected in logistics. In the grocery industry, Metro and Wal-Mart can be seen as pioneers in terms of RFID. Metro’s Zygmunt Mierdorf, board member and responsible for IT, logistics and HR, expects however another 15 years to come until the grocery industry has fully adapted to this standard as prices for the tags are still to high and the technology is still faultprone (Böhmer/Rück 2005, 46). Another issue that has to be considered while implementing this standard are consumerism issues, such as data security. However, industrial initiatives such as the EPCGlobal, a joint venture between EAN International and the UCC, have developed so-called Electronic Product Codes (EPCs), which can be seen as RFID-based advanced UPC-bar codes with the benefit of being able to identify articles at the item level uniquely (Verisign 2004). The power of such a code can be illustrated by following quote: “Using this EPC, members of the supply chain can thus identify and locate information about the manufacturer, product class, and instance of a particular product. Depending on the type of tag, EPCs can be used to uniquely identify up to 268 million unique manufacturers, each with 16 million types of products. Each unique product can include up to 68 billion individualitems, meaning the format can be used to identify hundreds of trillions of unique items” (Verisign 2004, 2). In 2003, Ashcroft (2003) presented Wal-Mart’s plans to implement RFID with about 100 vendors in order to improve Wal-Mart’s replenishment processes. Since May 1st 2004, Wal-Mart and eight manufacturers (Gillette, Hewlett-Packard, Johnson & Johnson, Kimberley Clark, Kraft Foods, Nestle Purina Pet Care Company, Procter & Gamble and Unilever) started a pilot project at selected super-centers and one regional distribution center in the Dallas Forth Worth metropolex (Wal-Mart 2004). By January 2005, Wal-Mart plans to expand its RFID usage to their 100 most important suppliers. It seems that RFID might have the same impact for Wal-Mart logistics as the UPC codes had for the company in the early 70’s. One major disadvantage of RFID so far has been the costs for the tags that were higher than the traditional EAN.UCC bar code labels.

127

The automation of retail logistics That might be one reason that explains the reluctance of managers to implement RFID in their logistical operations, as a recent study showed (Collins 2004). EAN.UCC therefore formed the EPCglobal initiative in order to create a global standard for the use of RFID (Hook 2003). Through Wal-Mart’s RFID engagement, experts foresee a major price decrease and an improvement with the standardization issues, as Wal-Mart is using EPC codes.

General introduction to specific applications of IT-based retail logistics systems IT-based retail logistics systems can be found at any level of a retail specific supply chain. For the purpose of this chapter two strategies are analyzed more thoroughly: cross docking as the prominent example of IT-driven flow through distribution center operations that manages both, the flow of goods and related information x continuous replenishment as an outstanding possibility of IT-driven customized order management that focuses on mastering the information flows in a supplier-retailer relationship. x

Both strategies show how specific retail distribution functions can now be performed in an integrated manner (see Mulhern 1997).

Cross docking – how IT translates distribution center functions into flow through processes Cross docking is a logistical process that can be regarded as a specific IT-driven application of break-bulk and consolidation activities within a distribution center. Napolitano (2000) called all activities along a supply chain that add value cross docking, which is probably too enthusiastic an approach. Cross docking’s origins, as we know it today, can certainly be found at Wal-Mart, whose founder Sam Walton refers to one of his managers, Ron Mayer, who– between 1968 and 1976 – was responsible for IT and inventory management.

128

Kotzab Mayer’s idea was to re-arrange the traditional order management, where stores ordered directly from the suppliers, to a centralized order that was delivered from one point to the stores afterwards. „He pushed us in some new directions, such as merchandise assembly, in which we would order centrally for every store and then assemble their orders at the distribution center, and also crossdocking, in which pre-assembled orders for individual stores would be received on one side of the warehouse and leave out the other“ (Walton 1992, pp. 90). The basic ideas of cross docking however, have been applied by the US postal Services since the late 1800’s and by Montgomery Ward and Sears Roebuck in 1872. As Napolitano (2000, p. 8) points out, such activities were called expediting rather than cross docking. Today, cross docking can be seen as the meta-term for all IT-related flow-through activities within a distribution center (see Table 6:3). Author

Crossdocking - definition

Andel

„Cross docking is the direct flow of merchandise/product from

(1994, p. 93)

receiving to shipping, thus eliminating additional handling and storage steps in the distribution cycle“

Andersen

„..the term refers to moving merchandise through a distribution facility

Consulting

from receiving to shipping without intermediate storage“

(1994, p. 17) Cooke (1994a, p. 35)

‘ „In a cross-dock operation, merchandise from an arriving truck is broken down into case- or pallet-loads upon arrival. Cases or pallets then are moved to the shipping dock, where they are placed onto trucks bound for individual stores. The speedy transfer of goods eliminates the need for warehouse storage“

Cooke

„Cross-docking... it’s a method of moving products from the supplier’s

(1994b, p. 52)

dock through the distributor’s distribution system without putting it into storage. .... the speedy transfer of goods eliminates the need for warehouse storage“

Garry

„The purpose of cross-docking is to hasten the flow of products from

(1994, p. 63).

the supplier to the store by removing storage and handling at the distribution center (DC) or warehouse“

Kroll (1999, p. “Crossdocking is the technique of moving merchandise into and 64)

directly out of a distribution center and onto outbound trucks, without placing the goods in storage or holding them for additional processing.”

Table to be continued

129

The automation of retail logistics Continued Table 6:3 Lalonde

& „In a crossdocking operation, shipments (normally of finished goods)

Masters

move through a warehouse or distribution center without being held in

(1994, p. 41)

storage“

Napolitano

“… a process where a product is received in a facility, occasionally

(2000, p. 6)

married with other products going to the same destination, then shipped at the earliest possibility, without going into long-term storage”

Richardson

“Cross docking allows shippers to flow goods through facilities non-

(1999, p. 51)

stop, increasing turns and undermining inventory carrying costs”

Schwind

„Physically, cross docking is the direct flow of material from the trucks

(1994, p. 57)

at the receiving dock to the shipping dock without buffering or storage in-between“

Schwind

„.. it is the expedited flow of goods from receiving to shipping... In

(1995, p. 47)

cross docking, incoming loads are taken directly to shipping as part of the outbound flow“

Schwind

“Cross docking is the movement of material directly from receiving to

(1996, p. 59)

shipping with minimum dwell time in between.”

Shanahan

“Cross docking saves time and money by immediately routing

(2004, p. 65)

inbound products to loading docks for outbound shipment, without the intermediate step of warehouse storage. For cross docking to work, the vendor must pack products in a form that’s usable by the ultimate receiver”

Stalk

et.

(1992, p. 58)

al. „In this system, goods are continuously delivered to Wal-Mart’s warehouses, where they are selected, repacked, and then dispatched to stores, often without ever sitting in inventory. Instead of spending valuable time in the warehouse, goods just cross from one loading dock to another in 48 hours or less.“

Wagar (1995a, „Cross-docking and flow-through have tended to be defined within the p. 29)

food-industry as the simple movement of full pallets of merchandise across a distributor’s dock to an outbound retail delivery truck“

Wagar (1995b, „This activity usually and is limited to the movement of full pallets of pp. 182)

product from an inbound truck, across a distribution center dock to an out-bound retail load“

Table 6:3 Defining the concept of cross docking (authors ranked alphabetically)

130

Kotzab

Figure 6:7 Basic model of cross docking operations

131

The automation of retail logistics Cross docking’s main principle is to avoid inventory at the distribution center level. Therefore inventory-building activities are replaced by sorting, transportation and handling activities, which are controlled by increased use of IT (e.g. barcodes, scanning devices and EDI-connections) (Kotzab, 1997; Swoboda 2000). Cross docking can therefore be defined as the sum of all IT-applied activities within a certain point in a supply chain, in order to generate customer-ready orders, which are shipped immediately after receiving the order. Consequently cross docking’s main task is to provide tailor-made deliveries on a just-in-time basis (see Figure 6:7). Different vendors deliver full truckloads of their goods to a transit terminal (also called transshipment point) that can be operated either by a retailer or by a logistics service provider. There the goods are consolidated and/or split into vendor-integrated POS-required smaller delivery units within 24 to 48 hours. Inventory levels are thereby kept at a minimum. From a logistical point of view, cross docking can be seen as IT-driven break bulk and consolidation activities, where moving activities replace inventory holding activities. Table 6:4 though presents several types of cross docking concepts that are discussed within literature and business practice. The differences in these cross docking approaches refer to the responsibility level of the operation, the cooperation level of the involved organizations, the electronic integration with the distribution channel and the cross docking requirements for products and distribution centers. Types of cross docking operations Differentiation by CCRRC (1992) Complex cross docking The (CCD)

vendor

delivers

pre-labeled

(according

to

store

requirements) units to the retail DC. Pre-labeling is possible due to the exchange of P.O.S. data.

Intermediate

cross The vendor delivers units, which are labeled and mixed for

docking (ICD)

store-destination at the retail DC. Store-specific ordering is

Simple cross docking

Special cross docking operation for fast moving items, which

not necessary. should be delivered to the stores within 24 to 48 hours. Differentiation by JIPOECR (1994b) Pallet-level docking (PL-CD) Case-level docking (CL-CD)

cross Full pallet-deliveries are directly loaded from the vendors’ to the retailers’ trucks. cross Break-bulk operations, where full pallets are transformed to smaller retail units.

Table to be continued 132

Kotzab Continued Table 6:3 Differentiation by Andersen Consulting (1994) Flow-through

Vendors deliver the right retail store mix to the retail DC,

(continuous movement) where it is directly loaded into the retailers’ trucks. This cross docking (FT-CD)

process requires full electronic linkage of the supply chain.

Consolidated movement The mixing of the products is based on „traditional“ methods cross docking (CM-CD) Distributed

of ordering, holding inventory and picking and packing.

movement Vendors deliver less-than-truck-load units, which are mixed

cross docking (CM-CD)

to retail-customized full truck loads in the retailers’ DCs.

Differentiation by Efficient Consumer Response Austria (1997, 1999) Single-stage

cross As suppliers have already mixed the deliveries due to store

docking

requirements, the ready-mixed units are transferred along the supply chain. The cross docking operations here, refer to consolidating several supplier units to one store unit.

Double-stage

cross Suppliers deliver products that were ordered in a collective

docking

manner (not store specific). The units are then mixed and consolidated to store specific units at the cross docking point. Differentiation by Napolitano (2000)

Manufacturing

cross Cross docking is used for raw material mixing done by either

docking

a manufacturer or a third party logistics provider.

Distributor

cross The merchandise of various manufacturers is mixed to a

docking

multi-SKU-pallet before delivery to the next level of the channel.

Transportation

cross This type of cross docking refers to all operations of

docking

transportation providers such as UPS or FedEx, who consolidate and mix parcels and pallet loads based on geographic destination.

Retail cross docking

Cross docking that is operated at retail distribution center level in order to replenish retail stores. Differentiation by EAN Denmark (2001)

Store

specific

docking

cross Suppliers deliver products already in a store-specific mix. Cross docking here, is used to create multi-supplier store mixed units.

Cross

docking

repacking

with Suppliers deliver products in an unspecified mode that is mixed into store-specific deliveries in the distribution center.

Table 6:3 Types of cross docking operations

133

The automation of retail logistics However, only complex cross docking and continuous movement cross docking are the most sophisticated forms of this operation, and are operated only by a select number of companies, e.g. Wal-Mart (Shulman, Stalk & Evans, 1992; Kotzab, 1997), who can mainly be found in the grocery industry (e.g. Paché 1998). This could be explained by Fisher’s (1997) notion of setting up an efficient supply chain, when functional products have to be moved to consumers. Such products have a predictable demand and consumers expect to find this product in many channels (see Cespedes’ (1980) notion of intensive distribution for convenience products). Efficient supply chains foresee rapid distribution that avoids inventory on all stages except in the store. Cross docking’s specific challenges and threats are summarized in Table 6:4. The positive effects of cross docking can be seen in a flattened distribution structure, and consequently in speeding up the delivery times within the channel. Reduced costs also positively affect the total cost situation. Cross docking challenges x x x

Cross docking speeds up the

Cross

docking

requires

re-

order cycle time

engineered

Cross docking avoids duplication

warehouse

of activities and costs

investments in special sorting and

Cross

docking

minimizes

inventory levels x

Cross docking threats x

inventory systems

and due

to

handling facilities x

Cross docking increases sales

Cross docking requires electronic integration of all stages within the distribution channel

x

Cross

docking

requires

major

changes in the organization within the company, especially when it comes to order management and inventory management x

Cross docking requires special trained

human

resources

as

traditional warehouse operations are replaced x

Cross

docking

transportation frequency

Table 6:4 Challenges and threats of cross docking

134

increases costs

and

Kotzab As Lalonde/Master (1994) already pointed out, cross docking is a blueprint of a successful logistics strategy, as service improvements are fulfilled although costs are lowered (which goes against traditional thinking of logistics). Since this remark, cross docking has become a recognized strategy in many Efficient Consumer Response approaches all over the world (see e.g. ECRE, ECRA 1997 and 1999, EANDenmark). However, in order to run cross docking facilities, retail managers have to consider rather huge set up costs (e.g. highly automated distribution centers) and a vast number of items to be distributed. Both requirements are significantly related to the size of a company (Master & Lalonde, 1994).

Continuous Replenishment Programs (CRP) – how IT translates retail ordering functions into integratedcustomized order management processes Especially the use of EDI for replenishment purposes changed the whole replenishment process (Raghunathan & Yeh 2001) as vendors and retailers have begun to forge cooperative agreements to manage inventory, which requires sharing demand information and setting mutually agreed upon performance targets for the supply chain (Achabal et al. 2000). Vendor Managed Inventory (VMI) or Continuous Replenishment (CRP) is a special cooperative form of an automated, inter-firm replenishment program where the common goal is the automatic reinforcement of the supply of goods and the transfer of the burden of responsibility for storage from a retailer to a vendor (see Table 6:5; see also Vergin & Barr 1999). Author

CRP-definition

Ackerman

„Transferring responsibility for retail store replenishment from the

(1995, p. 21)

retailer to the wholesaler or manufacturer.“

Andraski

„.... a partnership which will transcend the basic interchange of

(1994, p. 1)

electronic data interchange (EDI) to generate orders and manage inventory.“

CCRRC

„... automated systems that enable distributors to stock and to

(1992, p. 7)

reorder goods based on actual consumer sales (i.e. point-of-sale transactions).“

Crasper

„..a mutual partnership, linking the distributor’s business plans with

(1994, p. 76)

the manufacturer’s inventory replenishment and operations.“

Table to be continued

135

The automation of retail logistics Continued Table 6:5 JIPOECR

„The practice of partnering between distribution channel members

(1994, p. 111)

that changes the traditional replenishment process from distributorgenerated purchase orders, based on economic order quantities, to the replenishment of products based on actual and forecasted product demand“

Ricker

& „..a mutual partnership, linking the distributor’s business plans with

Sturtevant

the

(1993, p. 527)

operations.... CRP is a vendor managed inventory control system...“

Salmon

„Continuous Replenishment Programs typically refer to the process by

(1993, p. 64)

which warehouse inventory and movement is transmitted from

manufacturer’s

inventory

replenishment

and

integrated

distributor to supplier and the supplier generates the purchase order.“ Keough (1997, “… a manufacturer takes over the management of his product line in p. 13)

the distributor’s warehouse. This means the vendor is responsible for the replenishment process based on estimated usage of their products”

Holmström

“VMI is an example of how it is possible to improve the efficiency of

(1998, p. 1)

material flows in a vendor/buyer partnership. The supplier is given the task of keeping the warehouse of the wholesaler stocked with the supplier’s products. Now the supplier can align his operations with the needs of the retail trade.”

Waller

et

al. “… is one of the most widely discussed partnering initiatives for

(1999, p. 183

improving multi-firm supply chain efficiency… In a VMI partnership, the supplier, usually the manufacturer but sometimes the reseller or distributor, makes the main inventory replenishment decisions for the consuming organization.”

Williams

“… is a planning and management system that is not tied directly to

(2000, p. 60)

inventory ownership. Under VMI, instead of the customer monitoring its sales and inventory for the purpose of triggering replenishment orders, the vendor assumes responsibility for these activities.”

Table 6:5 Defining the concept of VMI/CRP VMI/CRP can be defined as a joint program between a supplier and a retailer with the objective to automate the replenishment process by harmonizing the involved partners’ activities by a continuous exchange of actual sales data (= POS-data) which results in reductions and avoidance of security inventory at retail level (see Figure 6:8).

136

Kotzab VMI/CRP can certainly be seen as a specific application of Buzzell/Ortmeyer’s (1995) presentation of a streamlined distribution partnership. Based on the transmitted information (e.g. via EANCOM standard messages), suppliers can coordinate their production processes with the sales processes of the involved retailers faster and more advantageously. CRP helps to minimize the timely distance between sales, order and replenishment processes. Disney & Towill (2003) recognize the power of CRP to minimize bullwhip effects in the relevant channels as the responsibility of the reengineered replenishment process is given back to the manufacturer’s side, who tries to adapt to the rhythms of demand and supply on a permanent basis. Retailers and suppliers also agree on certain average inventory levels on the distribution center level, service levels and/or other arrangements, like the reduction or avoidance of out-of-stocksituations (see e.g. Buzzell/Ortmeyer 1995). VMI/CRP also helps to minimize the timely distance between the first and the following orders, and consequently bullwhip effects in the channel can be avoided (Lee et al. 1997). To facilitate VMI/CRP, all parties have to be ready to exchange the necessary information at the time when it is needed. As a consequence, VMI/CRP dramatically changes the ordering process between retailers and vendors. While in the past, a seller and a buyer, who individually represented the goals of their companies, drove the interaction, within VMI/CRP this one-to-one relationship is replaced by interdepartmental, inter-organizational teams being responsible for the ordering process (Matthews, 1994, p. 44). According to Sako (1992) such an arrangement can be regarded as a voice-relationship. The specific VMI/CRP- teams consist of representatives of many departments, mainly from marketing, logistics, sales, operations, finance and IT (see Figure 6:9). These teams cooperate closely and jointly develop VMI/CRP plans and actions (Golub 1994, S. 13).According to JIPOECR (1994) these plans and operations refer to the determination of responsibilities (e.g. set up of teams, status quo reporting); promotion strategies (time plan, price setting); x EDI-strategies (e.g. EDI-transaction sets); operative questions (e.g. routing plans); simulation processes (e.g. barcoding and ordering or EDI-ordering processes); x determination of common goals like fill-rates; order cycles; reporting structures; future strategies; time plans and follow up. x

137

The automation of retail logistics

Figure 6:8 Ideal Continuous Replenishment Process 138

Kotzab

Figure 6:9 Comparing a traditional organization with an VMI/CRP based organization

139

The automation of retail logistics Table 6:6 summarizes the challenges and threats of VMI/CRP programs. The permanent harmonizing of the order management activities of both partners is based on a steady information exchange and follows the goal of reducing the bullwhip effect between two levels of the supply chain. In order to reach this goal, VMI/CRP requires high integration on organizational and technological levels from both vendor and retailer. CRP-Challenges x x x

CRP-Threats

VMI/CRP increases sales

x

the

VMI/CRP reduces the number of

organization

chain and needs top-management

VMI/CRP

assists

just-in-time

VMI/CRP

within

the

supply

support x

P.O.S.

VMI/CRP

needs

different

motivation and reward systems reduces

inventory

x

holding and other administrative VMI/CRP increases the quality of

VMI/CRP is not applicable to all products

costs x

changes

slow moving items oriented inventory systems at the x

VMI/CRP

(e.g.

innovative

products) x

cooperation between retailer and

VMI/CRP needs a high level of coordination between logistics and

manufacturer

all other business units x

VMI/CRP’s performance is difficult to measure and it is difficult to split its profits among the partners

x

VMI/CRP needs specially trained people.

Table 6:6 Challenges and threats of VMI/CRP (see Kotzab et al. 2003) The setting up of inter-organizational working groups, to overcome functional silos within the involved organizations and inter-firm barriers, is required in order to re-engineer the total order process within the supply chain. Another important issue for having success with VMI/CRP is product suitability. Some categories might not be appropriate to be managed on a VMI/CRP basis. It might also be a question of the critical mass. The VMI/CRP volume in certain retail sectors was estimated to be one to two per cent of total products (Kotzab, 1997).

140

Kotzab

Applications of IT-driven retail logistics systems – the case of Swiss Migros, US-based Wal-Mart and Rewe Austria The Migros logistics system and it’s EAN-128 SSCC application8 With nearly 600 stores representing a total sales area of over 1 million square meters and a sales volume of approx. 13 billion Swiss Franks, Migros is Switzerland’s largest retailer. Migros was founded by Gottlieb Duttweiler on his 37th birthday on August 15th 1925 as a cooperative. Duttweiler started with 5 sales trucks (= semi-stationary retailing) that brought six basic products to Swiss people. The prices were 40 % lower than the prices of competitors. Today Migros operates on a multi-channel basis offering different store formats, starting from supermarkets to category killers, hotels, recreation facilities, restaurants and banks. Migros integrated vertically in a backwards direction and so also acts as manufacturer. Therefore the share of private labels is quite high compared to other European countries. Focusing on the food retailing channel Migros has three main supply chains that are non-food, dry products and fresh products. The fresh goods assortment and fast moving dry goods consists of 7,000 SKU’s and through this chain, 20,000 pallets are moved through 10 distribution centers daily. The supply chain of non-food products deals with 250,000 SKU’s and around 6,000 pallets every day. The 4,000 SKU’s that represent slow moving dry goods (food and beverages) are bundled every day on about 5,500 pallets. The average lead time for these categories is about 24 hours. The information flow is supported by SAP including stores and suppliers. At Migros, logistics and Supply Chain Management are recognized as core competencies that should allow Migros to act responsive and flexible according to market demand. The logistics operations are valued within the organization as important services that allow offering the needed products in the best quality to the best price.

8 This chapter refers to Migros (2002a) ; Migros (2002b) ; Migros (2002c) ; Cuthbertson, R. (2003) ; Migros (2004) ; LP-International (2003a) ; LP-International (2003b) and Wespi (2002). The author gratefully thanks René Meyer (Graduate in Mechanical Engineering, Swiss Federal Institute of Technology, Zurich), Director Logistics, Migros Genossenschaftsbund for his support.

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The automation of retail logistics The costs for logistics at Migros are considered to be around a third of total costs for the whole operation – from the supplier into the shelf of the store – which shows the importance of mastering logistics on a superior level, otherwise Migros could not guarantee their price advantage against competitors. Therefore Migros opened a new distribution center in Suhr for nationwide distribution of medium and slow moving dry food and beverages in 2003. Already in 1998 Migros made a major step to standardize the logistical information flow by implementing SAP Retail. In 2001, this standardization effort was transferred to the fresh product chain and up to now, all Migros units work with SAP Retail allowing centralized and standardized operations. The new distribution center is one of Europe’s most modern distribution centers that allows IT-based logistics operations. The high rack store area offers space for a total of more than 50,000 pallets. The daily picking/packing capacity is planned with 250,000 to 500,000 cases on over 9,000 pallet places. 350 employees should manage 40 to 50 inbound truck deliveries and 90 to 130 inbound train deliveries (= total of 5,500 pallets) from over 100 suppliers and 150 to 250 outbound truck or 50 to 60 outbound train deliveries (= total of 6000 pallets) to around 600 stores. Automation is guaranteed by using the EAN 128 SSCC application in combination with the EANCOM standard message DESADV, the electronic dispatch note. Each pallet is labeled with the EAN load unit label and each delivery is handled via one DESADV. This combination is used in the inbound area as well as in the outbound area. That guarantees complete electronic handling of the relevant information and links suppliers with stores’ demand. In order to make the whole system run in an efficient manner, highly standardized procedures have to be fulfilled. Orders have to be transmitted in good time. Other interface areas of importance are the correct linkage of the documentation between the partners, correct identification of articles and the split of order positions. First experiences showed that general problems were faced mainly in operative areas, such as badly printed barcodes, wrong usage of barcodes, wrong placing of the labels.

Rewe Austria Logistics and IT services9 The managers of Rewe Austria recognized quite early that logistics and IT management can guarantee sustainable competitive advantages.

9

Adapted from Kotzab et al. (2003). The author gratefully thanks Mag. Kerstin Neumayer for her continuous support.

142

Kotzab Rewe Austria centralized IT and administrative activities to the Billa Management Support Systems business unit (finance, IT and software development, engineering and advertising). Logistics and supply chain activities of all store formats are managed by the Warehouse and Transport profit center. This division operates a fleet of over 300 trucks, which deliver dry and packaged goods six times a week within 24 hours from one central distribution center in Wr. Neudorf (south of Austria’s capital city Vienna). Fresh products (e.g. fruit, vegetables) and other perishable goods are delivered daily from five local fresh goods distribution centers (Wr. Neudorf, Ansfelden, Maria Saal, Kalsdorf and Hallein). Beverages are logistically managed by the Billa Beverage Distribution Department. All beverages come in returnable glass bottles. They are picked up by BML-trucks at the manufacturers’ sites and then delivered directly to the stores. The empty bottles are returned to the central BML empty bottle sorting plant. To facilitate these operations, Rewe Austria opened one of the world’s most modern central grocery distribution centers in 1995. All dry and packaged goods sold in the total store network (including the supermarket format Billa, the discount format Mondo, the neighborhood format Emma, the hypermarket format Merkur and the cosmetic chain Bipa) are delivered from the CDC. The CDC has a storage capacity for 38,000 pallets and operates 16 hours/day with an average daily outbound throughput of 250,000 cartons (7,000 roll cages) and inbound throughput of 4,000 pallets/day (3,000 from trucks and 1,000 from railways). Nearly all operations within the CDC are fully automated and based on EAN-128 and RTF-technology. All vendors have to equip their pallets with EAN-128 transport labels and have to follow strict loading rules for their pallets and time windows for their delivery. The storage area is divided into sections for fast movers (2,000 articles, which are already prepared for store destination from the vendors), slow movers (2,500 low volume articles, which are prepared for traditional pick to belt operations) and storage goods (automatic storage and retrieval system for a daily picking volume of 9,000 full pallets). The robots in the storage goods area operate 24 hours a day by a first-in-first-out principle and follow chaotic rules for locating the inventory location. The RTF-controlled picking area allows paperless picking and packing of 3,500 articles. Conveyor belts move the picked items to the sorter-area. High-speed scanners can read the information from the barcode labels and direct the items to one of the 192 chutes by using flip-shells. This allows immediate order fulfillment for 96 store deliveries. The logistical parameters of Rewe Austria have been summarized in Table 6:7.

143

The automation of retail logistics Technical key numbers of the Billa-Distribution Center Wr. Neudorf Number of articles managed: Technical

equipment;

throughput performance:

storage

6000 items and 10 ASRS-robots inbound 3,000 pallets/day by truck inbound 1,000 pallets/day by train storage of 30,000 pallets outbound 250,000 cases/day

Additional information:

set up costs of over 70 million Euro total area of 50,000 sqm operated 16 hours/day

Table 6:7 Technical key numbers of Billa’s distribution center

The retail logistics pioneer – Wal-Mart Stores10 Sam Walton started in the 1950’s with a „Five-and-Dime-Shop“ in Bentonville, Arkansas. In 1962, he opened the first Wal-Mart store. More than twenty years later, Wal-Mart Stores is the world’s largest retailer, with approx. USD 256 billion sales and 1.5 million associates in more than 3,600 stores in the US and more than 1,570 stores in the Americas (Mexico, Puerto Rico, Argentina, Brazil, Canada), Asia (China, Korea) and Europe (Germany and the UK). About 138 million customers visit a Wal-Mart store every week. The company follows a multi-channel strategy operating following store formats: store based retail formats : Wal-Mart Store, Supercenters, Sam’s Clubs, Neighborhood markets x non store based retail formats : walmart.com x

In 1978, Wal-Mart started tests with barcoding and EPOS-systems at store-level. By 1983, all existing Wal-Mart stores had been fully equipped and all sales were being captured and transmitted in real-time to the store-relevant distribution center. By 1990, the total installation costs for these sophisticated systems have been estimated at about USD 700 million. On the occasion of the 3rd European ECR-conference in Hamburg 1998, a Wal-Mart-representative presented the power of their ITsystems by presenting following impressive numbers: Wal-Mart 10

Updapted from Kotzab (1997) by using following sources : Wal-Mart (2005), Kuiper (2005), Koch (2002), Useem (2003), Johnson (2000), Arnold/Fernie (2000) and Fernie/Arnold (2002). The author also gratefully thanks Mr. H. Lee Scott Jr., who has given the author a lot of insight into successful retail business.

144

Kotzab recorded a US$2.6 billion reduction in net working capital via customer-driven collaboration with suppliers, cutting lead times by 70 per cent and reducing inventory levels by over 50 per cent” (Kuipers, 2005). All US-based Wal-Mart-stores are replenished by several transit terminals that operate on a cross docking basis. Two thirds of the terminal area is operated by pure cross docking, the remaining third is operated by continuous replenishment. This area is organized as a high-shelf storage system. The size of a typical Wal-Mart DC is about 74.000 square meters and on average turns 500,000 cases per day. The transit terminals operate on a permanent basis, so that incoming goods never remain in the distribution center for longer than 48 hours. The goods are transported within the center with conveyer belt systems. Table 6:8 shows how and where barcodes and scanners are used in a typical Wal-Mart-transit terminal. As suppliers send electronic ASN before arrival of the goods, the distribution center staff is well prepared upon arrival. field of

identification

control

sorting

transshipment

application receiving, inbound

x

x

logistics temporary stock & stock allocation

x

x

Picking/ Packing paperless Picking/

x

x

Packing SKU search

x

x

x

Outbound logistics ramp allocation

x

Table 6:8 Use of barcodes and scanners in a Wal-Mart distribution center, adapted from Kotzab (1997)

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The automation of retail logistics All incoming goods are already barcode labeled. Product identification and order update is completed by manual scanners in the receiving area. Based on this information, the incoming SKU’s are then prepared for either, cross docking or continuous replenishment operations. Within the next 24 hours, store specific break/bulk and consolidation (= cross docking) is done. Typical cross docking units are one secondary packaging level, meaning a case contains many end-user specific units. Smaller units are paperless picked and consolidated to store-based units. All goods are transported via conveyer belt systems to the shipping dock, where scanners sort and mix all products to storespecific loads. The average scanner performance is 6000 cases/hour. Besides Wal-Mart’s innovation leadership in terms of cross docking, the company can also be considered as being the pioneer in terms of CRP. However, the first CRP partnership was launched between Procter & Gamble and St. Louis grocer Schnucks. It was Wal-Mart and Procter & Gamble, who began this partnership in the late 1980’s that made CRP leading edge. In 1987, inter-organizational project teams were put in place, in order to design business processes that should harmonize and synchronize the partners’ activities. This partnership is so advanced, that even company borders were exceeded, as P&G opened an office in the Wal-Mart headquarters, where the project teams worked on one common goal. This specific partnership is the most prominent CRP-example worldwide and is the basis of many benchmarking projects. Key performance indicators were presented as follows: x x x x x

inventory and delivery times were reduced by more than 50% reduction of incorrect invoices from 26 % to 10 % 60 % less returns and refusals 20 % less handling costs for damaged goods increased inventory turns from 12 to 24 turns/year

Cross docking and CRP helped Wal-Mart to gain sustainable competitive advantages, which are presented in Table 6:9 and in Figure 6:10.Wal-Mart definitely fulfils those requirements that a company has to perform, when operating in a market that continuously demands high logistics service (see Christopher 1992, p. 167). WalMart’s capability can be seen in how the company’s executives have been implementing IT in their operations on all levels.

146

Kotzab

Figure 6:10 Retail automation and its effect for Wal-Mart’s competitive strategy

147

The automation of retail logistics

Sustainable

Wal-Mart’s capabilities

competitive advantage Economies of scale

Before new stores are opened, a distribution center has been opened. All distribution processes are streamlined, separated, re-integrated and coordinated over the transit terminal structure.

A

central

distribution

center

structure

that

replenishes a given number of stores with a specific assortment makes logistics costs go below industry average. The Efficient Consumer Response Initiative benchmarked this structure later. Economies of scope

By cooperating with suppliers in a CRP-manner, Wal-Mart reduces cost duplications within the channel. The cooperation is assisted by a huge database - all Wal-Mart suppliers have access to it via company owned satellite systems. The database contains sales information of 80,000 articles (per store, per day, per article) over the last 65 weeks as well as aggregated values for the last 104 weeks. In 1996, the database had a size of 3 terabyte (= 3,000 gigabyte)

Economies of speed

Wal-Mart responds to market changes faster than competitors. The

demand-synchronized

delivery

system

allows

a

replenishment of the stores twice a week, which no other competitor has achieved. This is due to the centralized distribution system where 80 % of the merchandise is handled through.

Table 6:9 Sustainable competitive advantages for Wal-Mart through logistics capabilities, adapted from Kotzab (1997). A comparison with the leading discount merchandiser in the 1970’s, K-Mart, shows the superiority of the Wal-Mart system. As Ortega (2000) impressively describes, in 1973, while Wal-Mart already operated with computerized systems, K-Mart still used manual order systems, that handled e.g. approximately 40,000 invoices a day. These had to be sorted manually and then sent to the different vendors. Store orders were still filled out by hand and sent via postal services. Only in the late 1970’s did executives agree to install computers on a store level for transmission of orders and other data.

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Kotzab

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Waller, M., E. Johnson & T. Davis: Vendor-Managed Inventory in the Retail supply Chain, Journal of Business Logistics, 20, 1, 183-203. Wal-Mart (2005): www.walmart.com, accessed 02-08-2005. Walton, S.: Made in America. My Story. New York, 1992. Weid, H.: Wettbewerbsvorteile durch Electronic Data Interchange (EDI). Analyse betrieblicher Effekte des Einsatzes zur zwischenbetrieblichen Kommunikation zwischen Lieferant und Abnehmer. München, 1995 Wespi, A. (2002): SSCC im Wareneingang der Migros, EANErfahrungsgruppe, Presentation, 24-10-2002, Zug. Wiesner, W.: Der Landsberg/Lech, 1990.

Strichcode

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seine

Anwendungen.

Williams, M.: Making consignment- and vendor-managed inventory work for you. Hospital Materiel Management Quarterly, 21, 4, 2000, 59-63. Wolfram, G.: Global Commerce Initiative, Working Group Intelligent Tagging, Presentation at the ECR-Europe Conference, Berlin, May 15, 2003. www.activebarcode.de, accessed 11-06-2004.

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Kotzab www.rfid-handbook.com, http://www.rfid-handbook.com/english/ index.html, accessed 21-03-2004. www.sensational.ch: http://www.sensational.ch/web_de/lab/rfid.htmlaccessed, 21-03-2004. Zentes, J.: Computer Integrated Merchandising - Neuorientierung der Distributionskonzepte im Handel und in der Konsumgüterindustrie. In: Zentes, J. (ed..): Moderne Distributionskonzepte in der Konsumgüterwirtschaft. Stuttgart, 1991, 1 - 15 Zentes, J.: Effizienzsteigerungspotentiale kooperativer Logistikketten in der Konsumgüterwirtschaft. In: Pfohl, H.-C. (ed..): Management der Logistikkette. Kostensenkung - Leistungssteigerung - Erfolgspotential. 9. Fachtagung der Deutschen Gesellschaft für Logistik e.V. 3. Mai 1994, Darmstadt. Berlin, Erich Schmidt Verlag, 1994, 105 – 126.

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CHAPTER 7

Retail Marketing Processes Mogens Bjerre

Various retailer strategies Within strategic planning literature a number of typologies are presented, focusing on a firm’s reaction to the outer environment (see chapter on the political economy paradigm for reference). Among these are the “Three Modes of Strategy Making”, presented by Mintzberg & Waters (1983), that are the Entrepreneurial Mode, the Adaptive Mode and the Planning Mode. A second one is Daft and Weick’s (1984) “Four Interpretation Modes”. Miles & Snow (1978) introduced a third model (empirically based) and their typology presents four different strategic patterns. Using typologies for analysis should always be carried out with caution, as a typology can not describe all characteristics of an organization. But the central point of a typology such as the one developed by Miles and Snow (1978) is that it (Hambrick, 1984,p. 28): “...helps bring order in an incredibly cluttered conceptual landscape.” This advantage will be used in relation to describing different retailers in the markets where the case firms are engaged.

The Miles & Snow Framework Originally Miles & Snow (1978) developed the typology of strategies pursued by firms, based on three empirical studies (Tollin, 1990). These studies covered different types of organizations, and the aim was to develop a “generic typology” that would be applicable in different areas of economic life. The result was a typology with four “archetypes”, namely “Defenders”, “Prospectors”, “Analyzers”, and “Reactors”.

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Bjerre Organizations in the first three categories fulfill the “minimal fit” criteria. “Fit” is used by Miles and Snow (1978) to describe a situation in which there is alignment between the strategy pursued by an organization, the organizational structure and it’s management processes. Successful firms have a high degree of “fit” between the three components, whereas less successful firms have a low degree of “fit”. The concept of “fit” is partly a process and partly a condition (Miles and Snow, 1984, p. 11): “... a dynamic search that seeks to align the organization with its environment and to arrange resources internally in support of that alignment. In practical terms, the basic alignment mechanism is strategy, and the internal arrangement are organization structure and management processes. Because in a changing environment it is very difficult to keep these major organizational components tightly integrated, perfect fit is most often a condition to be striven for rather than accomplished.” Within each archetype an adaptive circle exists. An adaptive circle is the organization’s ability to change in terms of product, and market domain and technology. The basic principle of the typology is that it is possible to identify a pattern in the way organizations move through the adaptive circle and at the same time solving the problems and making the necessary decisions. The adaptive circle is illustrated below in figure 7:1.

Figure 7:1 The Adaptive Circle. Source: Based on Miles & Snow, 1978, p. 24.

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Retail Marketing Processes The entrepreneurial problem deals with the choice of product and market domain e.g. the choice of “a specific product or service, and a target market or market segment”. According to Miles & Snow (1978) this is not only a problem that is dealt with once, but it continues to play an important part of the firm’s continuous passing of the adaptation cycle process. The adaptation cycle process is described as an organizational capability that influences the degree and type of change; the organization can handle, related to choices of products, markets, and technology. The engineering problem deals with the creation of a system that supports the choice of product and market. Thus this area is related to the choice of technology for production and distribution. Development of suitable control and information systems is a key part of the engineering problem. The administrative problem deals with reduction of internal insecurity and the creation of stabilizing elements that will support future development of the firm. Thus internal processes are a key area. According to Miles & Snow (1978) important features of the adaptive cycle are the following: x The adaptive cycle is a general physiology of organizational behavior x The three adaptive problems - entrepreneurial, engineering, administrative - are intricately interwoven x Adaptation frequently occurs by moving sequentially through the entrepreneurial, engineering and administrative phases x Adaptive decisions made today tend to harden and become aspects of tomorrow’s structure Miles & Snow (1978, p. 29) proposed an important observation, that they generalized namely that: “When competing organizations within a single industry are observed, however, patterns of behavior begin to emerge which suggest that these various organizational forms can be reduced to several archetypes. So far our research and our interpretation of the literature, we have identified four such organization types.” Thus the firm can pass through the adaptive cycle in four different ways, resulting in four different strategies. Miles & Snow (1978) identify defenders and prospectors as the two most clearcut opposing strategies. Defenders are characterized by their consistency and by isolating themselves from the outer environment, as opposed to prospectors, that are characterized by a continuous change of procedures and structures.

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Bjerre Analyzers are described as a “compromise” between defenders and prospectors. Consistency and renewal thus characterize analyzers. Miles & Snow (1978) do not deal with the fourth strategy - reactors in detail. They state that (Miles et al., 1988, p. 529): “... the Reactor, exhibits a pattern of adjustment to its environment that is both inconsistent and unstable; this type lacks a set or response mechanism which it can consistently put into effect when faced with a changing environment. As a consequence, Reactors exist in a state of almost perceptual instability.... Thus, the Reactor is a residual strategy, arising when one of the other three strategies is improperly pursued”. The level of description is the firm i.e. the retailer and not the individual internal function or individual stores. As indicated earlier it must be taken into account when analyzing voluntary organizations, where individual stores operate almost independently. Furthermore, although most retailers have developed overall buying policies or even buying strategies, there may be individual buyers that have complied with these. This implies that it may not be sufficient to identify the overall type for a specific retailer, it may in some cases also be necessary to identify the individual buyer’s type. Few winners in FMCG-retail sector suggest that the group of retailers identified as reactors is large. This group will gradually disappear, as other retailers refine their positioning. The reactor group will typically be the individual retailer; members of loosely coupled voluntary chains, and the middle-sized stores trying to handle all positioning elements as equally important.

Defenders Typical for firms of this type is a relatively narrow product and/or market domain. Furthermore, the decision makers in these firms consider the environment as simple and stable. This leads to a managerial focus on few indicators in the environment and no focus on indicators, that do not directly have any impact on internal operations or the domain in which the firm as active. Miles & Snow (1978, pp. 37-38) supports the description given by Thompson (1973): “Managers in Defenders usually restrict their perceptions to a narrow range of external stimuli, which are expected to influence the organization (mostly related to technological developments). Typically they allocate a small amount of administrative and personnel to monitoring other organizations, events, and trends. In addition environmental scanning is performed only by a few top executives of their staffs.”

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Retail Marketing Processes As defenders view their environment as relatively stable and simple, they focus on “doing things right”, once they have identified the right things. In other words they will stick to their strategy and their positioning as long as possible, and will only change when they acknowledge that the environment is markedly different from their internal dominant perception. The main focus is on cost efficiency in internal distribution and production systems. For defenders low price is a central issue in their marketing strategy and their positioning. Defenders are well known in FMCG-retailing. Examples of defenders are Aldi (Europe), Asda (UK), Prix (N), Carrefour (F), Fakta (DK) etc.

Prospectors Prospectors are opposed to defenders as they constantly seek new opportunities and “attack the existing and dominant perspective in a business sector”. Thus prospectors look for new positioning opportunities, focusing on the outer environment. Miles & Snow (1978, p. 56) presents prospectors in the following way: “In order to locate new areas of opportunity, the Prospector must develop and maintain the capacity to monitor a wide range of environmental conditions, trends, and events. The Prospector, therefore, invests heavily in individuals and groups who can scan the environment for potential opportunities. One means of spotting and exploiting opportunities is to develop and elaborate surveillance capacity by decentralizing and scanning activities to appropriate subunits within the organization.”. Daft & Weick (1984, pp. 287-292) supports this by writing: “The prospector strategy reflects a high level of initiative with regard to the environment. The environment is seen as changing and as containing opportunities. The organization develops new products and undertakes new initiatives.”. The outer environment is considered as complex and characterized by constant change, and therefore new initiatives must constantly be tested. These new initiatives will typically have relation to the positioning, regarding internal distribution and production systems as instruments supporting the initiatives. Internal flexibility and dynamics are key capabilities. Prospectors are no strangers to FMCG-retailing. They are often found in rather large markets, such as USA, UK, France, Japan etc. Other retailers, thus implying that retailers will be able to identify the winners often admire prospectors. Examples of prospectors are: Wal-Mart (USA), Tesco, Sainsbury and Marks &

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Bjerre Spencer (UK), Albert Hein (NL), Quinn (IRE), Irma (DK), and ItoYokado (Japan).

Analyzers Analyzers play it safe, and they can be characterized as a combination of cost- and risk- minimizers, and opportunity seekers. This is possible due to the division of the firm in two, the base part providing the majority of income and the development part used for “trial and error” activities. External stimuli are transferred to the base part, after proof of the significance in the development part of the firm. To do this successfully, analyzers rely on other organizations to “lead the way”; they thus follow in the footsteps of prospectors, if these developments are applicable within the base part of the analyzer's organization. In an analyzer’s outer environment there will be a number of prospectors, from which analyzers can “detect” new business opportunities. The analyzer's norm for cost efficiency is that of the defender. This will apply due to the “innovative delay” of the analyzer compared with the prospector, which gives the analyzer the opportunity to analyze how the strategy should be pursued, related to all three problems of the adaptive cycle. Analyzers thus typically copies and follows the prospectors, but making sure that good result are not jeopardized by new initiatives. This is often seen in FMCGretailing when retailers travel to other markets to investigate new concepts, new technologies and new combinations. Examples of analyzers would be ISO Supermarked (DK), Dansk Supermarked – Føtex, Bilka, and Netto (DK), ICA (SWE), Hakon-Gruppen (N), and Kesko (SF).

Reactors Reactors are “followers” in the sense that they react to new trends from competitors, attempt to copy these, but do not have the managerial systems or capabilities to analyze or investigate why and how competitors do what they do. The result is that they do not pursue any consistent strategy or development path and will apply any part of the triangle or pentagon for the time being. As they apply all 8 positioning elements over time, there is no focus - which according to the empirical results of the model of the 8 positioning elements will lead to failure.

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Retail Marketing Processes Reactors are retailers that stick to earlier successful business formats, and they will typically end up in a situation where they neither choose a positioning in relation to price nor in relation to assortment. Thus, they do not focus on specific segments among endusers. Examples of reactors would be Spar (DK), EDEKA (DK), NKL (N), Dagab (SWE), and Inex (SF).

Implications of various retailer strategies on marketing processes and SCM The typology developed by Miles & Snow (1978) is generic in the sense, that it can be applied to a number of different sector and industries. Our aim with this part of the book is to specify the Miles & Snow typology by using the characteristics of retailers in the FMCGsector, applying the 8 positioning elements of Ring & Tigert. Linking the typology of Miles & Snow (1978) with the strategic elements of Ring & Tigert produces a picture of three quite distinct retailer types and one which is a “residual”. As suggested in relation to the four different retailer types, it is possible to identify specific retailers pursuing each of these strategies. Furthermore many of these specific retailers operate in the Nordic area, however it has been difficult to identify a “prospector” in the Nordic area and it is expected that these do exist in the English and Dutch market. This implies that there is a need for using one or two retailers from one or these markets in order to be able to analyze relations between suppliers and retailer covering all four retailer types.The combination suggest that suppliers will have to develop specific solutions to specific retailer types and will have to manage these differences, within the frame of a systems, that would prefer providing identical solution to different retailers. The different retailer types and their focus areas11 are summarized in Figure 7:2 below. As can be read from figure 7-2, the supplier’s sales and marketing organization must be able to handle more than “just” the five positioning elements in the pentagon. This is because the three operational elements in the triangle are as important or even more important than the positioning elements - depending on the strategy pursued by the retailer.

11

Illustrated by “+”, +++ equals high focus, ++ equals some focus, and + equals no focus.

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Strategy/ Positioning Elements Defender Prospector Analyzer Reactor

Triangle Elements

Pentagon Elements

ON +++ FOCUS + COSTS FOCUS ON + OPPORTUNITIES +++ COST, ++ LOW ++ NO RISK NO FOCUS, + NO STRATEGY +

Figure 7:2 Combining Miles & Snow typology with Ring & Tigert’s 8 strategic elements.

Defenders Using the concept of the eight strategic elements of Ring & Tigert (1995) will result in a description of Defenders as retailers focusing on the triangle elements as base for their positioning. This implies that main focus will be: x Systems x Logistics x Suppliers Furthermore low price is a central issue in their marketing strategy and their positioning. Any attempt from the supplier’s side to develop relations that may exclude other suppliers will be rejected by the defending retailer, as flexibility and price are in focus. Defenders have in the FMCG-sector moved from focusing on price and gross profit to focusing on DPP and net profit. Defender’s interest in cooperating with suppliers is limited due to the possible loss of freedom to do business with any supplier at any point of time. It is important to recognize, that mutual relations and development of mutual trust is not of importance - cost efficiency is. This indicates, that supplier-retailer alignments will be limited (Kurzrock, 1996)12: x Spectator x Vendor x Preferred Provider 12

See chapter 9: B2B Relationships in Retailing

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Retail Marketing Processes The supplier retailer alignment may develop over time from spectator to preferred provider. However it is important to recognize the retailer’s strategy, which limits this development and which may result in sudden changes from preferred provider to spectator - earlier alignments do not ensure future alignment. Thus, the Defender’s relation to the 8 positioning elements can be described as: Systems

- Relies heavily on advanced systems for scanning, control and follow-up on the defined key measurement factors, such as SKU, turnover per hour, turnover per employee, etc., DPP and Space Management is used and managed internally, systems creating base for “simple operations and the use of low qualified staff” - Information is only shared with suppliers, if it suits the retailer Suppliers - Are used to minimize retailer net costs in terms of handling, transportation storage, shelving, interest, etc., suppliers will have to adapt to the retailer systems and processes - Do not want suppliers to get too close, as a Defender want to secure the maneuverability and power to change suppliers Logistics - Is often seen as a key factor of control and information, and a way to make suppliers unaware of actual performance of individual stores. Thus the willingness to share information will be low Place - Low cost, secondary location, standard inventory, efficient in terms of refilling shelves, pallets can be driven directly into parts of the sales area, stores are almost 100 % identical, if possible the retailer will prefer to design the location as opposed to accepting an existing one Product - Assortment is neither deep nor wide, private labels serves the purpose of increasing profitability, SKU are measured on stock turnover and DPP, rarely high-end products in the assortment, often limited offers (either in total number, time period), only carries products that are established in end-users minds

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Bjerre Price

- Low prices, focus on value-for-money, suppliers brands used as “price-indicators”, carries 1st and/or 2nd13 generation private labels People - No service apart from the necessary such as cash clerks and operational clerks, multifunctional staff, no productoriented training, low pay and short employment Promotion - No merchandising, no signs from suppliers - or very few Thus defenders are characterized by focusing on strategic elements such as: systems, suppliers, logistics, and price - as indicated in figure 7:3. The focus elements are represented in bold. Using the concept of the eight strategic elements of Ring & Tigert (1995) will result in a description of Prospectors as retailers focusing on the pentagon as base for their positioning.

Place Systems

Promotion

Product

Logistics

People

Suppliers

Price

Figure 7:3 The Defender’s use of the 8 Positioning Elements. Based on Ring & Tigert, 1995, p. 7

13

See Laaksonen, 1994, p. 10.

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Prospectors Prospectors do not take anything for granted, and while they primarily work with the elements in the pentagon, they regard the triangle as a tool to enhance performance of the pentagon elements. This implies that they will work primarily with x x x x x

Place Product Price People Promotion

Furthermore new products and the undertaking of new initiatives is a central issue in their marketing strategy, and the positioning. Attempts from the supplier’s side to develop relations that may exclude other suppliers may be accepted by the prospector retailer, as development and dynamics are in focus. Prospectors have in the FMCG-sector moved from focusing on products and “ingredients” to focus on concepts, people and “meal solutions”. Prospector’s interest in cooperating with suppliers goes beyond that of defender’s due to the possible development of new products, services or marketing insights. It is important to recognize that mutual relation and development of mutual trust is of some importance - but what is more important is the freedom to pursue new dimensions without being breaking obligations to existing suppliers. This indicates, that supplier retailer alignments will be limited (Kurzrock, 1996), and only the following are likely: x x x x

Spectator Vendor Preferred Provider Business Consultant

The supplier-retailer alignment will probably develop over time from spectator to business consultant. However it is important to recognize the retailer’s strategy, which will limit the alignment to business consultant because the retailer cannot pursue new strategies if tight partnerships are developed. Earlier alignments will typically ensure future alignment. Prospector’s relation to the 8 positioning elements can be described as:

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Bjerre Systems

- Often internally developed systems - or pretesting new systems, category management is introduced

Suppliers - Suppliers sales reps are allowed to come to increase attraction on their category, cooperation with suppliers aims at increasing end-user attraction, different system and processes may be accepted due to differentiation interests Logistics - Focus on flexibility and ability to handle small and/or special orders Place - High street, individually developed shelving and display systems - i.e. sprinkling systems in the fruit and vegetable department, ventilators in the baking department etc., existing locations will often be accepted Product - Assortment is wide and deep in accordance with demands from target segments, private labels used to support retailer’s image, some categories are supported by “shopin-shops” Price - Do run offers but focus is on value and the price-quality match, carries 3rd and/or 4th14 generation private labels People - Well-trained, often internal education and promotion program, used to create an atmosphere in the stores, long term employment and average pay Promotion - Promotions serving a number of different purposes introducing new products or line extensions, often in cooperation with suppliers Thus prospectors are characterized by focusing on strategic elements such as: place, product, people, and promotion - as indicated by the bold elements in figure 7:4.

Analyzers Analyzers try to combine the winning strategic elements of defenders and prospectors, thus balancing the triangle and pentagon elements as a base for their positioning. Their positioning will often be based on the triangle elements: x Systems x Logistics x Suppliers 14

See Laaksonen, 1994, p. 10.

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Place Systems

Promotion

Product

Logistics

People

Suppliers

Price

Figure 7:4 The Prospector’s use of the 8 Positioning Elements Based on Ring & Tigert, 1995, p. 7 The use of the pentagon elements will primarily focus on adaptation of the successful formula developed by prospectors. The main difference between the Analyzer and the Prospector is the detail and depth to which the pentagon elements are examined before implementation. Analyzer’s interest in cooperating with suppliers goes beyond that of prospector’s due to the possible development of unrealized cost-savings arising from better supplier retailer alignment, development of new products, services or marketing insights. It is important to recognize, that mutual relations and development of mutual trust is of great importance - as closer alignment is regarded as the leverage of increased cost efficiency and possible differentiation. This indicates, that supplier-retailer alignments can be developed quite far (Kurzrock, 1996), and the following are likely: x x x x x

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Spectator Vendor Preferred Provider Business Consultant Partner

Bjerre The supplier retailer alignment will probably develop over time from spectator to partner. It is important to recognize the retailer’s strategy will allow the development of partnerships and to use these to pursue new strategies. Earlier alignments will typically ensure future alignment. Analyzer’s relation to the 8 positioning elements can be described as: Systems

- Rely heavily on scanning data, uses DPP, Space Management and some of the principles in Category Management Suppliers - Can be used to ease operations or to lower costs, relations with suppliers are based on transparent structures (costs, profits, functions), suppliers will have to adapt to the retailer systems and processes Logistics - Handles logistics themselves either by terminals or by third party distribution, logistics is viewed as a basis for fulfilling demands related to products Place - Every location is monitored based on it’s potential and cost, often high street location - if numbers of end-users is sufficient, interior is monitored continuously developed to reduce costs or increase durability, locations are designed by the retailer - if possible Product - Every SKU is monitored, private labels are used to increase profitability and only to a limited extent support the image, new products are monitored closely to ensure they fulfil expectations - “this type of retailer is not in love with the products - they sell them” Price - Value-for-money, often combining high end prices and discount prices/programs, range of prices in the category is often used to give end-users a choice, carries 2nd and/or 3rd15 generation private labels - in rare case also 4th generation People - Well trained to perform “standardized roles”, every one can be duplicated, buyers also responsible for sales Promotion - Low to medium pay, some long term and some short term employment’s are typical, key players are paid well, promotional efficiency is a key measuring area.

15

See Laaksonen, 1994, p. 10.

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Retail Marketing Processes Thus analyzer’s are characterized by focusing on strategic elements such as: product, price, promotion, and using the triangle elements: systems, suppliers, and logistics to support this - as indicated in figure 7:5.

Place Systems

Promotion

Product

Logistics

People

Suppliers

Price

Figure 7:5 The Analyzer’s use of the 8 Positioning Elements Based on Ring & Tigert, 1995, p. 7

Reactors Reactors often try to combine the winning strategic elements of Defenders, Prospectors, and Analyzers, thus balancing the triangle and pentagon elements as a base for the positioning. The positioning will therefore often be diffuse, as it will be based on “a little bit of everything”. x Systems x Logistics x Suppliers The use of the pentagon elements will primarily focus on adaptation of the successful formula developed by Prospectors and Analyzers.

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Bjerre The result is, that they continuously will adapt new strategic elements as one of the last retailers in the market, handling future development by looking in the rear mirror. Reactor’s interest in cooperating with suppliers will vary depending on the personal relationship between the supplier and the retailer. However the traditional mistrust will prevail and the retailer will not be interested in entering a mutually binding alignment - flexibility and the possibility to pursue any potential “wheeling and dealing” is regarded as a important. This indicates, that supplier-retailer alignments will be limited (Kurzrock, 1996), and the following are likely: x x x x x

Spectator Vendor Preferred Provider (Business Consultant) (Partner)

The supplier retailer alignment will probably develop over time from spectator to preferred provider - or in principle further as indicated by the brackets above. However the development of alignments does neither reflect an overall strategy or a strategy towards suppliers. Changes in alignment may therefore happen suddenly and without any apparent reason. Earlier alignments will not ensure future alignment. Reactor’s relation to the 8 positioning elements can be described in detail as: Systems

- Space Management systems may be applied in certain categories by suppliers on behalf of the retailer, if scanning is implemented data are not used for analysis Suppliers - Suppliers can often pursue a traditional sales strategy, mistrust is often a base - However, it is important to note that projects are quite possible with Reactors, provided that the supplier will manage them and pay the costs. Logistics - May have focus on this, but has a hard time managing it. Place - Often located where it used to be attractive to be, interior typically not renewed recently, locations are accepted as they are

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Retail Marketing Processes Product

- Carries suppliers brands, private labels are often in the assortment because without any relation to either a costleadership or a differentiation strategy, assortment rarely analyzed, will often carry a mix of temporary and old brands Price - Often close to prospectors, but without the “appeal”, main problem is that they do not set the level themselves, often carries 1st or 2nd16 generation private labels People - Often the service provided will be traditional good service in terms of good product and end-user knowledge Promotion - Leaflets, signs, local adds - they accept proposals but they do not have a clear strategy themselves. Thus reactors are characterized by the lack of focus - as indicated in figure 7:6.

Place Systems

Promotion

Product

Logistics

People

Suppliers

Price

Figure 7:6 The Reactor’s use of the 8 Positioning Elements. Based on Ring & Tigert, 1995, p. 7.

16

See Laaksonen, 1994, p. 10.

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Implications for SCM Combining the typology of Miles and Snow (1978) with the positioning model developed by Ring and Tigert (1995) provides a more detailed description of Defenders, Prospectors, Analyzers, and Reactors. As indicated in the descriptions the areas of cooperation, if defined by the four types, the total picture will appear as illustrated in figure 7:7.

Figure 7:7 Retailer Strategy, Positioning Focus and the Four Types of Key Account Management The detailed description of the four retailer types can be used to describe the retailer part of the supplier-retailer dyad. As there are only four types it may be difficult to make a complete match between the existing retailers and the typology.

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Retail Marketing Processes However, using this typology to identify basic types of retailer strategies and thus identify basic strategic elements pursued by retailers will provide suppliers with an overview of different approaches to the various retailers. It is also important to note that the typology does not deal with the change of strategies over time. Some of the difficulties in matching a specific retailer with the typology may arise from a situation, in which the retailer is changing strategic focus. This will then imply that the retailer will change focus in regard to the 8 strategic elements and in relation to alignment modes that are possible to enter. As can be seen from figure 7, the alignment levels possible vary considerably between the different types of retailer strategies. It is important to note that it is the strategy of the retailer that will limit the alignments possible, no matter what level the supplier may prefer. The important element in this new understanding supplier’s choice of the relationship level that governs the suppliercustomer alignment level and content, it is also the retailer’s strategy.

Efficient Consumer Response – Demand Side One of the industry initiatives in the FMCG-industry during the last decade has been the development of Efficient Customer Response – ECR. Especially the functionally divided organizations have displayed the lack of ability to cope with closer collaboration between suppliers and their retail customers. Thus, to cope with new demands for managing collaboration, it is not just a question of being able to cope with new control mechanisms, but also a question of being able to cope with new organizational structures. These new structures will often be able to handle several areas of responsibility that used to be handled by separate functions. However, as in most new initiatives the underlying concepts and methods may not be clearly defined – neither in practice nor in theory. This part of chapter 7 therefore sets out to define central concepts and methods of category management, as one of the central part of ECR. More about ECR is shown in Chapter 8.

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One of the reasons for the differences found in practice and in theory is the variation between various countries regarding collaboration culture, the distribution of power amongst suppliers and retailers, and finally the experience with ECR in the specific country, and sometimes even the experience in the individual organization. ECR is based on to pillars – the demand side and the supply side (see Figure 7:8).

Figure 7:8 ECR – Demand side and Supply side

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Retail Marketing Processes

Figure 7:10 Barriers between Supplier and Retailer, and between functions

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Bjerre Since the FMCG-industry is dominated by few North America and European retailers, such as Wal*Mart, Carrefour, Tesco, etc. – partly due to sheer size and partly due to their ability to lead change in the industry, these markets and these retailers are often used as reference points to where the industry is heading. This is also reflected in the proportion of books written about retailing as the majority is written with an American or UK-based setting. It might be important to note that the collaboration climate in the Nordic region is somewhat different from the American and UK-based settings, as the Nordic collaboration climate is inclined to find joint solutions based on mutual recognition of dependency, and the lack of strong retail concepts – although more are under development and refinement. The barriers between the supplier and the retailer are some the major challenges when working with cross-organizational projects like ECR – but internal barriers will exist as well (see Figure 7-9). The traditional English ”buyer” is, when it comes to location in the organizational structure and formal responsibility and decision-making power very much like the Nordic buyer in the early 1990’s. However during the past years we have seen a transition towards the role as “category manager”, all over Europe and North America. However, there are still considerable differences from retailer to retailer.

Category Management Demand Management is principally (and foremost) focused on the functions handled by the retailer and is therefore typically converted to Category Management as the central framework for describing the elements of demand management. In retail organizations focusing on clear and distinct divisions of responsibilities and decision-making power, profitability and consumer orientation, we often see the classical buying function transformed into a category manager position. Several of these retailers have assigned the following tasks to the category manager: 1. Development of the category 2. Product development and innovation within the category 3. Negotiations and collaboration with suppliers – thereby ensuring profitability, consumer satisfaction and that the category lives up to it’s role within the retail store concept

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Retail Marketing Processes 4. Sales and marketing of the category (within the retail store concept) – including the optimal resource allocation aimed at in-store activities and externally oriented marketing activities

Different approaches to Category Management Category Management has been defined in several ways – and some of the more influential definitions are quoted below:: 1.

“Category Management is the management of related products in order to maximise sales- and marketing potential by enhancing joint goals for the suppliers and the retailer” “Category Management consist of three elements: analysis, implementation and forecasting: - analysis of the accumulated information concerning consumers, development of the category, and the retailer’s performance in the category - implementation of the analysis results to improve consumer satisfaction, increase sales and reduce costs - forecasting how the category will develop and how future consumer needs may be addressed” ”Category Management is a business philosophy recognising the category as an asset that must be developed strategically to satisfy changes in consumer needs and simultaneously assure the retailer’s sales and profit targets”

2.

3.

Across these definitions we identify three overriding elements of Category Management that also seems to be recognized when Category Management is applied in practice:

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x

The Category Management philosophy regards categories as strategic business units

x

The Category Management process in which the supplier(s) and the retailer develops common plans for the individual categories

x

The Category Management organization in which the buying and merchandising functions merge

Bjerre

The Category Management philosophy The philosophy addresses each category as a strategic business unit, and will as such, be treated strategically, tactically and operationally as an integrated part of the retail store concept, and at the same time as an independent unit responsible for it’s own analysis, implementation and forecasting. A central management question is how to balance managing single products versus managing the category and finally versus managing the store as a whole. Risks are that the first one is too detailed and the last will lack the necessary attention to detail. Therefore several important questions need to be answered: x

How is the category and limits of the category versus other categories defined?

x

How may several categories be linked to logical unit – seen from a procurement point of view?

x

How may the strategy of the overall retail concept be linked to the strategy of the individual category?

Although there may be internally logically to group specific categories seen from a procurement point of view, it is typically seen that retailers organise categories according to the consumers’ point of view – i.e. the consumers’ perception of logic links between categories. An example is shown below, based on the category breakfast: x x x x x

Main areas - foodstuffs, dry goods Overriding category – breakfast Category – cornflakes Sub categories – adults, children and family products Niche – specific taste (chocolate)

As a business unit the category thus moves from being defined based on the buyer’s area of expertise (in product terms) to be based on the consumer perception including products (could also be services) that the consumers’ logically link to the product groups – could be cornflakes and milk, eggs and bacon etc.

183

Retail Marketing Processes

The Category Management process Category Management is a process in which the supplier and retailer jointly develop strategic category plans. These plans should be able to answer the strategic ambitions of the category, the preconditions for reaching these ambitions, performance criteria and when and how to intervene if corrective actions are needed: x

Categories must be prioritized vis-à-vis each other – please see section on category roles later – to ensure the optimal allocation of resources

x

Relationships between supplier and retailer must be founded on mutual expectations to the joint outcome – as the parties can realize more together than they can alone

x

The process is based on sharing information and data, implying that the parties involved need a clear an concise agreement on how to provide data, how to use them and how to store them

The A C Nielsen category management process is based on the”10 Phases Plus model”, which is illustrated in Figure 7:10. The 10 phases may be described briefly as follows: o Phase 1 – Overriding strategy : Insights and know how of the category management partner’s overall strategy and interest in category management o Phase 2 – Category definition and segmentation : Defining the category as the consumers perceive it and development of the consumer decision tree – i.e. a graphic picture of how the consumers create an overview of the category, when they are standing in front of it – and the way in which they subdivide the category o Phase 3 – Category importance : An analysis of the importance of the category within the retailer store concept and it’s weight in the total assortment. o Phase 4 – Category role : Defining the role and the function of the category related to the retail store concept and the consumers – please also refer to subsection 7.4.6

184

Bjerre

Overriding definition Category definition and segmentation Review and

Category importance Category role

Adjustments

Analysis of the category Category targets Category strategy Category tactics Implementation

Figure 7:10 10 Phases Plus Model o Phase 5 – Analysis of the category : Evaluating the category’s current performance and identifying opportunities for improvements. o Phase 6 – Category targets : Setting targets for the category’s performance and future development o Phase 7 – Category strategy : Identifying the strategies related to marketing activities, in-store activities and the depth and width of the assortment in the category o Phase 8 – Category tactics : Planning the activities and allocating the necessary resources in order to to do so o Phase 9 – Implementation : Ensure that all plans are executed and theat performance measurements are carried out regularly

185

Retail Marketing Processes o Phase 10 – Review and adjustment : Review and adjustments according to performance review and registered changes in the competitive landscape Working with category management requires considerable changes of the organizational structures (job descriptions, internal communication routines, distribution of responsibility and decisionmaking power, and process descriptions – otherwise category management may risk ending up as a buzz-word. The needed changes have been described by George, Freeling, og Court (1994), as they present the changes in a brand and product oriented organization towards the customer (retailer) oriented and team-based organization. The retailer’s purpose of using the principles of category management may be divided into three central arguments: 1. Establish an improved overview of the importance of the individual categories and their impact on consumer satisfaction, profits and retail store concept attractiveness 2. Systematically to identify opportunities for developing private labels and/or private brands 3. To organize the internal management of buying, product development, logistics in accordance with an increased consumer oriented development of assortment depth and width

Various roles for the categories As indicated above not all categories are equally important. But the way to handle the various roles of categories may vary from one retail store concept to another – therefore it is important to decide which categories are going to play which roles. As can be seen from Figure 7:12, the roles may vary from “destination” meaning that the category is a central part of the retail store concept, and that consumers are expected to regard the category as one of the major reasons for choosing the specific store. At the other end of spectrum is “routine” and “convenience” meaning that the consumer may, or may not, buy items in these categories, they are merely part of the retail store concept as a service to consumers providing them with the opportunity for “one stop shopping”.

186

Bjerre Combining the various category roles may differ depending on the retail store concept – i.e. a defender retailer may have focus on some basic foodstuff categories and will be a price leader in these, whereas a prospector may have a few and specific categories as destination categories such as wine, vegetables or imported specialties.

Figure 7:11 Various Category Roles

Category captains Category management may be viewed as a collaboration between the supplier(s) in a category and the retailer. But, as mentioned earlier not all categories have the interest of the retailer, or the retailer may not possess sufficient resources to handle the category management process. In such instances a supplier may be asked to take on the responsibility as “category captain” meaning that the supplier will act on behalf of all interested parties in relation to the specific category. The role as category captain implies giving the supplier the full responsibility for the category management process and all it’s steps. The retailer will typically step in when targets are set for the category, and in the review and adjustment step – as these are the important steps management-wise.

187

Retail Marketing Processes

References Bjerre, M.; Trade Marketing Management. Børsens Forlag, 1995. Christopher, M.; Logistics and supply chain management. Pitman Publishing, 1992. The Coca Cola Retailing Research Group - Europe & GEA; Supplier retailer collaborating in supply chain management . A study conducted for: (The Coca Cola Retailing Research Group - Europe by GEA Consuleti Associati di gestione aziendale). Project V, 1994. Daft, R. L. and Weick, K. E. (1984), Toward a Model of Organizations as Interpretation Systems, Academy of Management Review, Vol. 9, No. 2, pp. 284-295. ECR Danmark, ECR Guidelines, ECR Danmark, 1998 ECR Europe; An introduction to ECR, ECR Europe, 1996. George, M., Freeling, A. & Court, D.; Reinventing the Marketing Organization, THE McKINSEY QUARTERLY, Vol. 4, 1994. Hambrick, D. C.; Taxonomic Approaches to Studying Strategy: Some Conceptual and Methodological Issues, Journal of Management, Vol. 10, No. 1, pp. 193-206, 1984. Kurzrock, W.; The Sales Strategist, Irwin, 1996. Laaksonen, H.; Own Brands in Food Retailing across Europe, Oxford Institute of Retail Management, 1994. Miles, R. E. et al.; Organizational Strategy, Structure, and Process, in The Strategy Process: Concepts, Context and Cases, Ed. By Quinn, Brian, et al. Prentice Hall, pp. 524-530, 1988. Miles, R. E. & Snow, C. C.; Organizational Strategy, Structure, and Process, McGraw-Hill, 1978. Mintzberg, H. & Waters, J. A.; Of Strategies, Deliberate and Emergent, Strategic Management Journal, pp. 257-272, 1985.

188

Bjerre Ring, L. J. & Tigert, D. J.; Building Competitive advantage in Retailing, Babson College, 1995. Thompson, J. D.; Hur organisationer fungerar, Bokförlaget Prisma, 1973. Tollin, K.; Konsumentbilder i Marknadsföringen av Livsmedel, Stockholms Universitet, Akademitryck, 1990.

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CHAPTER 8

Special IT-based retail trends Herbert Kotzab IT-based retail trend # 1 – Efficient Consumer Response The competitive situation in the grocery industry The grocery industry is embedded in a dynamic environment. Brand and product managers are facing markets affected by the information age, more demanding consumers, and new retail formats (PWC 2000, Clarke 2000). In addition to these market effects, the interface between manufacturers and retailers in the grocery industry has dramatically changed (Fernie 1999) as power shifted towards retailers during the past twenty years mainly through concentration and consolidation tendencies in most markets. Retail managers are increasingly relying on POS data, that they access over their EPOS systems and transform the data into valuable information. We can also observe a significant replacement of manufacturer brands by store brands and the use of sophisticated retail logistics systems (Kotzab & Schnedlitz 1999). This development affects the exchange relations between the channel partners, which, for many years, have been purely market exchange oriented, meaning that the competencies amongst both parties had been clearly disseminated: Manufacturers produce and retailers distribute. The market exchange-driven interaction, however, is causing more and more problems in the marketing mix as indicated in Ahlert (1999) or Meffert (1999). Taking price as an example, it could be observed that pure market exchange does not lead to satisfying results. Although being the major mechanism in the relationship between manufacturer and retailer, the various ‘pricesetting and discount games’ are leading to a zero-sum-result for all the actors (Meffert 1999, p. 413). 190

Kotzab

Distribution

The end-user price is placed between location and promotionoriented retail strategies and manufacturers’ brand image-building policies (see also Figure 8:1). Kahn and McAllister (1997) describe how wrong price differentiation has caused pain in Procter & Gamble’s (P&G) supply chains in the US.

Channel conflicts: Power/Goals/ information asymmetry/ roles

new products product replacement

Price

End user price discounts

Logistics merchandising

Product

Communication

B2B-promotion B2C-promotion

Figure 8:1 Marketing mix conflict areas/causes within channels of distribution (Meffert 1999, p. 413). The communication/promotion policy is diverging from a retailer’s effort of profiling outlets and the whole assortment, and a vendor’s plan to position his own products within the competitive environment in the best way possible. The optimization of distribution issues followed isolated ‘rules’ rather than joint harmonization activities. While manufacturers expected large order sizes, retailers demanded smaller order sizes combined with high frequency order-management. Empirical studies show, that the life cycle of products in the retail outlets is not longer than five years (Schnedlitz 1994). However, a

191

Special IT-based retail trends high percentage of products are at the point-of-sale (P.O.S) for less than one year. On the other hand, thousands of products are introduced yearly and manufacturers thus look for any available space on the retail shelves and even in the stocks (Pine II, Peppers and Rogers 1995). One way out of this dilemma, as pure market exchange has failed, can be seen in the harmonization of distribution activities as Gill and Allerheiligen (1981) call consensus systems. This is a specific form of a vertical marketing system, where channel members continuously cooperate. This could be realized by establishing strategic trust-based alliances, which control the dependency of the involved partners (see Figure 8:2). Hybrid integrative approaches also refer to the power structure of the market but differ between value adding partnerships (see e.g. Johnston and Lawrence 1988) or co-opetition models (= “a revolutionary mindset that combines competition and cooperation“ – Brandenburger and Nalebuff 1996), where the optimization of a single system is only possible by optimizing the complete system (see Bengtsson/Kock 2001 or Zineldin 2004). In both cases, organizations have chosen to harmonize their strategies in order to gain a useful economic compromise between specializing in and sharing of distribution tasks (Ahlert 1999, p. 337). Consensus based cooperation is characterized as being hybrid (e.g. Schmitz-Whipple et al. 1999) or hybrid-integrative (Heide 1994), as independent channel participants recognize that they gain certain rewards while setting up certain norms and standards that commits organizations to closer channel relationships. This alliance then transforms channel relationships from win-lose into win-win (Heide 1994). These channel coalitions can be distinguished as variations of Williamson’s (1987, p. 167) “credible commitments”, as for certain economic reasons it might be too expensive for a manufacturer to set up a nationwide distribution structure, or for a retailer to invest in production facilities (e.g. Schmitz Whipple et al. 1999). Efficient Consumer Response (ECR) can be seen as a form of hybrid-integrative governance distribution model, which is based on common norms and standards that are converted into specific business processes. Beyond this background, the following working hypothesis can be set up: The cooperative (= hierarchical) management of the grocery supply chain results in improved performance rather than managing the chain in an isolated (= pure market exchange) manner. This attempt could be interpreted as an effort of channeling information, organization and management to a seamless or borderless supply chain (Picot et al. 2001).

192

Kotzab

.

Figure 8:2 Design possibilities of relationships in the grocery supply chain between market exchange and hybrid integrative governance (Meffert 1999, p. 413).

193

Special IT-based retail trends The distribution channel partnership between Wal-Mart and Procter & Gamble (P&G) can be seen as such an arrangement and it set the benchmark for a borderless organization, where internal (= functional) and external (= organizational) boundaries were ‘defeated’ (Kotzab 1997, p. 200, Walton 1992). Former Procter & Gamble (P&G) vice president of customer service, Ralph Drayer, explained the fascinating partnership with Wal-Mart as follows: "I remember Sam Walton saying, 'The way we do things is way too complicated. You should automatically send me Pampers, and I should send you a check once a month. We ought to get rid of all this negotiation and invoicing.'" (Koch 2002). This was the starting point of ECR.

The development of ECR A growing number of US based grocery retailers and manufacturers have been confronted with losses in market shares and declining productivity (JIPOECR 1995, p. 2) in the late 1980’s and (beginning) early 1990’s, while one discount merchandiser – Wal-Mart - succeeded (e.g. Ortega 2000). In 1992, representatives of the US grocery industry founded the Efficient Consumer Response Working Group with the goal of analyzing the grocery supply chain. The analysis should focus on the mass merchant channel with its main competitors Wal-Mart, Target and K-Mart (acc. Browning 1997). The working group consisted of the following companies (Salmon 1993, p. vi): Borden, Inc; Campbell Sales Company; The Coca-Cola Company; Crown/BBK Incorporated; Kraft General Foods; The Kroger Co.; Nabisco Food Corp.; The Procter & Gamble Co.; Ralston Purina Company; Safeway Inc.; Sales Force Companies, Inc.; Scrivner, Inc.; Shaw’s Supermarkets, Inc.; SUPERVALU INC.; The Vons Companies, Inc.. The US-based consulting company Kurt Salmon Associates (KSA) was asked to „examine the grocery supplier/distributor/consumer value-chain, in order to determine the cost and service improvements the industry could achieve through technological and business practice changes“ (Salmon 1993, p. iv). KSA had already made a similar analysis in the textile industry of Quick Response (QR) – that is a logistics strategy, which harmonizes the replenishment of merchandise within the textile channel. KSA specifically developed a distribution model for the grocery industry, Efficient Consumer Response (ECR) that was presented as a powerful tool for optimizing the supply chain performance within the US-grocery industry (see Figure 8:3).

194

Kotzab

Figure 8:3 Basic ECR-model (adapted from Salmon 1993) ECR is suggested to be a strategy of “how partners in the supply chain can best synchronize the flow of product through the distribution pipeline from point of manufacture to point to final sale“ (Martin 1994, p. 377). Various attempts to define ECR show that the concept is primarily related to strategic partnerships in the distribution channels of the grocery industry in order to increase the performance of the consumers (Salmon 1993, JIPOECR 1996a, ECRE 1996, ECRE 1997). Svensson (2002) recognizes ECR therefore as a business philosophy that centers explicitly on a vertical marketing channel perspective.

195

Special IT-based retail trends The basic message is the following: by facing stable and decreasing sales volumes, the implementation of ECR standards within the industry will lead to enormous savings potentials. The vision of ECR is to set up a consumer-driven distribution system in which production is permanently managed by the consumers’ POS-activities (according to Salmon 1993). The realization of this strategy is originally based on four pillars, which application leads to increased productivity (Kotzab 1999; see Table 8:1). Efficient Consumer Response modules Efficient

Store Providing a complete, easy-to-shop assortment of products

Assortment

wanted by the consumers

Efficient Promotion

Harmonizing the promotion activities between manufacturer and retailer by communicating benefits and value

Efficient

New Developing and introducing new products the consumers really

Product Introduction want by meeting their ultimate needs. Efficient

Maintaining high in-stock levels of the required assortment

Replenishment

Table 8:1 Comparison of ECR-modules (based on Salmon 1993, ECRE 1996) The optimal combination of these areas leads to a benefit for the members of the supply chain of US-$ 30 billion in the US (according to Salmon 1993, p. 4). The savings result mostly from total-chain reduction of inventory by speeding up cycle-time (see Figure 8:4). In 1994, leading representatives of the European grocery industry formed the European Efficient Consumer Response (ECR)-Initiative. The goal of this group was to reengineer the way business is done in the European grocery industry, by implementing cooperative strategies between retailer and manufacturer to fulfill consumer wishes better, faster and at less cost (ECRE 1996, p. 1, see Figure 8:5). The promised savings through ECR in Europe were estimated with DM 50 billion (ECRE, 1996). The application of these rules should help those companies escape the ‘dilemma’ of the industry, meaning that higher sales volumes might have a negative impact on the profits. These results have been documented in a variety of series published by the various ECR-working groups and other organizations. The studies include rules and case studies, which can be used as benchmarks (e.g. FMI 2000, ECRE 1996, ECRE 1997, ECRE 2000, ECRA 1997 and 1999, ECR-Italy 1997, ECR-Espana 1997).

196

Kotzab

Comparison of Average Throughput Time of Dry Grocery Chain Before and After ECR Implementation Current Dry Grocery Chain Packing Line

Distributor Warehouse

Supplier Warehouse

Retail Store

(Forward buy 9 days Turn inventory 31 days) 40 days

38 days

Consumer Purchase

26 days

104 days

ECR Dry Grocery Chain Packing Line

Supplier Warehouse

Distributor Warehouse

Retail Store

27 days

12 days

22 days

Consumer Purchase

61 days

Figure 8:4 Increasing supply chain efficiency through Efficient Consumer Response (Source: Salmon 1993).

DEMAND MANAGEMENT

ENABLERS

Demand Strategy & Capabilities

Common Data & Communication Standards

Optimize Assortments

Optimize Promotions

Optimize New Product Introductions

Consumer Value Creation

SUPPLY MANAGEMENT Supply Strategy & Capabilities

Responsive Replenishment

Operational Excellence

Integrated Demand Driven Supply

Cost/Profit and Value Measurement

INTEGRATORS Collaborative Planning Forecasting and Replenishment E-Business Business to Business

Figure 8:5 A European Approach to Efficient Consumer Response (adapted from ECR Europe 2002).

197

Special IT-based retail trends

ECR’s supply chain particularities ECR’s originality should be seen in the quest towards common endeavors in order to harmonize the relationships of the distribution channel members. The basic notions of ECR refer to harmonization and cooperative adaptation of commonly agreed upon norms and standards that are formed to fit logistics (= supply side) and marketing (= demand side) business processes that avoid the duplication of costs. Supply and demand side includes the ‘involved’ departments (e.g. procurement, logistics, marketing and sales) at both retailer and manufacturer levels. Processes and standards represent the way business should be done in this channel. These areas and categories are intended to reach the end result of ECR: a better understanding between retailers and vendors in order to offer end-user required product solutions. Suggested standards are values that members agree to adopt and primarily concern various logistics and marketing activities among supply chain partners (see Grant et al. 2002 and Figure 8:6). From a logistical point of view, ECR refers to three well known common practices ; 1. Centralization and Standardization: Centralizing the flow of goods eliminates unnecessary inventory levels thus leading to increased profits. Implementing supply chain wide IT and organizational standards reduces insecurity in the market place, reduces inventory and leads to a steady flow of goods and related information. 2. Cooperation/Integration and systems thinking: The realization of ECR depends on common approaches. Sub-optimization does not lead to improvements, the total system has to be optimized. 3. End user orientation by postponement: The design and the optimization by ECR is controlled by the end user (meaning the POS-data). Bullwhip effects can be reduced and out of stock situations at the POS can be avoided, if an integrated access to this data is guaranteed. The assortment of end user oriented categories has to be done in close conjunction between retailers and manufacturers.

198

DEMAND SIDE SUPPLY SIDE

PACKAGING UNITS = definition of primary, secondary and tertiary packing standards LABELING = definition of uniform article numbering, e.g. Global Trade Item Number (GTIN) or EAN.UCC 128

Efficient Unit Load (EUL) = development of uniform design of transport packaging and loading capacities

STANDARDS

EDI-STANDARDS = definition of electronic standard data messages, e.g. EANCOM, EDI-Lite or SINFOS depending whether variable data or account master data is exchanged

Electronic Data Interchange (EDI) = development of cooperative electronic data exchange norms and standards

Efficient Replenishment= development of cooperative logistics strategies

Category Management = development of cooperative marketing strategies CROSS DOCKING = providing of tailor-made deliveries on a just-in-time basis CONTINUOUS REPLENISHMENT = vendor managed inventory through retailer driven information allocation FORECASTING UPDATES = providing of order data by retailers without giving competence of order management to vendors ROLL CAGE SEQUENCING = generation of store specific loading units that speed up replenishment of shelves

EFFICIENT STORE ASSORTMENT = joint optimization of merchandise presentation at the POS EFFICIENT PROMOTION = harmonization of promotion efforts EFFICIENT PRODUCT INTRODUCTION = joint development of innovations and optimized introduction of new products

Kotzab

PROCESSES

Figure 8:6 A generic ECR business process model (ECR-A 2000).

ECR can therefore be seen as a the SCM-application for the grocery industry (see Kotzab 1999 or Figure 8:7). Amongst the participating independent organizations, the willingness to cooperate and to initiate hybrid-integrative relationships, by setting up common technical and organizational norms, can be identified. The supra-organizational dimension refers to the differentiation between demand and supply side that governs the involved departments in a cross-border manner.

199

Special IT-based retail trends

Figure 8:7 Efficient Consumer Response as the SCM application for the grocery industry

200

Kotzab The specific ECR-business processes are also set up across the involved organizations, in order “to fulfill consumer wishes better, faster and at less cost” (ECRE 1996, p.1). The explicit rules are then specified in various ECR-manuals that indicate how to use specific technologies such as EAN.UCC bar codes or transportation labels. It seems that with ECR, the realization of Gill and Allerheiligen’s (1981) suggestion of a consensus based coordination of supply chain activities, can be seen, as ECR also follows their suggested cooperation principles (see Table 8:2). Cooperation principle

… as suggested by Gill and

…

Allerheiligen (1981)

Selective

stock

principle

ECR-specification

Total inventory levels in the

Centralized

channel can be minimized by

finished

holding

warehouse – either distributor

inventory

of

slow

moving items at few points in

distribution

products

in

of one

or retailer

the channel Postponement

The differentiation of goods

POS-data driven information

principle

should be postponed until the

flow

latest possible point in the

demand of the channel

determines

the

real

marketing flow Separation principle

The physical flow of products

The information flow manages

is separated from the flow of

the product flow as it is

title. It is cheaper to move

cheaper to move information

paper than to move products

via EDI than hold inventory of finished products.

Uncertainty

A

central

organization

Retailers’ EPOS systems can

absorption principle

gathers data concerning a

be linked with suppliers’ order

product that moves through a

management and production

channel instead of analyzing

systems.

data

by

several

channel

members Data

compatibility

principle

Development of compatible

Information

data systems in channels

based on agreed IT-standards

avoids

such as EAN.UCC, EANCOM

duplications

and

reduces total data processing

is

exchanged

or ANSI.ASX 12

requirements Coordination

A physical distribution system

The philosophy of ECR is that

principle

operates on the basis of

the flow of information is

information.

managing the product flow.

Table to be continued

201

Special IT-based retail trends Continued Table 8:2 Cooperation principle

… as suggested by Gill and

…

Allerheiligen (1981)

Transportation

cost

principle

ECR-specification

It is less expensive per unit of

The Efficient Unit Loads (EUL)

weight:

show

to

move

a

large

how

the

loading

shipment, than it is to move a

capacities in the total channel

small shipment. It is less

can be optimized.

expensive

per

unit

of

distance: to move a shipment a long distance, than a short distance

Table 8:2 Consensus based principles for ECR cooperation in supply chains (adapted from Gill and Allerheiligen 1981).

The diffusion of ECR The ECR-era started in the US in 1992. In 1998, the Joint Industry Project on Efficient Consumer Response presented its 1997 ECR Industry Benchmarking survey that was based on an ECR-score-card approach (JIPOECR, 1998 and JIPOECR, 1996b). Table 8:3 shows the results of the Maturity-Index calculation among the respondents in 1997 and 1999 as well as the plans for the coming three years (Biggs, 1999). ECR-Field

1997 1999 Change 97/99 in % Goal in 3 years time

Efficient Replenishment

38

38

-

90

Category Management

33

46

39.4

95 93

Efficient Promotion

31

21

-32.3

Efficient Assortment

30

37

23.3

93

Efficient Product Introduction 25

25

-

92

Table 8:3 ECR-Maturity Index in the US. Source (Biggs 1999). The scorecard considers five levels of implementation, where 0 represents little or no implementation and 4 represents advanced implementation. The calculation of a special ECR-maturity index (where all level 3 and 4 results are combined) then specifies the degree of ECR implementation. The maturity indices in 1999 show a slow growth in the various areas (except category management, where most efforts have been made).

202

Kotzab Efficient promotion seems to be less important than in 1997. None of the numbers show an achieved ECR competence of over 50 %, meaning that none of the firms in the sample actually implemented half of the ECR practices. During the 2nd Official ECR Europe Conference in Amsterdam, Brown and Visconti (1996) presented results of their study, where European manufacturers and retailers indicated a high and steadily growing commitment to ECR within their firms. The majority of manufacturers (78 %) and retailers (81 %) stated some implementation of ECR within their supply chains.However, Brown and Visconti (1996) could identify some controversial results too, as manufacturers and retailers do not focus in a joint manner in the different ECR areas. For example, while manufacturers in the replenishment area concentrated on the use of EAN-barcodes, pre-scheduled deliveries and continuous replenishment programs, retailers tended to address POS scanning accuracy and joint project teams. Manufacturers also intended to work on joint category management and joint new product planning and testing projects more. Retailers rather concentrated on the use of space management tools and continuous deals on selected SKU’s. From that perspective, ECR presents itself twofold. On the one hand, the presentation of successful pilot studies or other successful cases at various ECR conferences spreads a lot of optimism. On the other hand, academia and business practice evaluate the ECR-rules and ideas with skepticism (see also Kotzab 1999). Alvarado and Kotzab (2001) reported on the difficulties of many ECR-suggestions to arrive at the next level after the introduction phase of an ECR-life cycle. Mouzas and Araujo (2000) referred to plenty of promising pilot studies in the beginning of an ECR-partnership, which cannot be repeated in a continuing project due to the lack of cooperation ability of participants. But Stank et al. (1999, p. 36) confirmed in their study, the positive effects for the companies’ performance by such an arrangement. Also, Corsten and Hatch (2001) verified empirically that the application of ECR accounts for 37 % of the total performance of Sainsbury’s suppliers. Corsten (2001) furthermore distinguishes between various forms of ECR that stand for different levels of interdependence and level of coordination between the involved channel members (as outlined in Figure 8:8). The goal of ECR in the first stage (= Industry ECR) is to gain critical mass by adapting common standards. This is necessary in order to move to the next step, where only selected players collaborate by applying commonly developed business processes (= network ECR). The final stage is reached by cooperating in a dyadic partnership (= Partnership ECR). 203

Special IT-based retail trends

Figure 8:8 Different stages of ECR (Corsten 2001, p. 151)

204

Kotzab The previously presented empirical results on the diffusion of ECRstandards show that most industries can now be considered as industrial ECR-environments on the verge of becoming network ECRenvironments. A recent study performed by Lothia et al. (2004) in Japan confirmed this notion. The example of the Austrian ECR-initiative presented in Figure 8:9 highlights this notion. The member organizations have fully agreed on the implementation of general standards that are now going to be translated to specific processes. However, not all organizations are either able or willing to perform these processes, nevertheless, the total ECR-model is dependant on the implementation of the general standards.

IT-based retail trend # 2 – Collaborative Planning, Forecasting and Replenishment (CPFR) The conceptual understanding of Collaborative Planning, Forecasting and Replenishment In 1995 the first real collaborative model, ‘Collaborative Planning, Forecasting & Replenishment (CPFR)’ was introduced in connection with a pilot project among Wal-Mart, Warner-Lambert, Benchmarking Partners, SAP and Manugistics (Cooke, 1998). CPFR can therefore be viewed as an evolution of CRP as it is also based on customer demand, and, as the first technique, is able to co-ordinate demand processes with supply processes with respect to the creation of value for the endcustomer. Consequently, CPFR transforms the supply chain planning from being ’push’ to being ’pull’ controlled, as delivery plans are being crafted in accordance with common demand prognoses, which are regularly updated with the latest data. Three years later, in 1998, The Voluntary Interindustry Commerce Standards (VICS), that holds the copyrights for the name of CPFR, defined the concept as “a collection of new business practices that leverage the internet and electronic data interchange in order to radically reduce inventories and expenses while improving customer service" and also introduced a nine-step process model as a guideline for CPFR collaboration (see Tables 8:4 and 8:5).

205

Special IT-based retail trends

Figure 8:9 Implementation rates of ECR standards and processes within the Austrian ECR-initiative (Source: Kotzab/Teller, 2003).

206

Kotzab Step

Activity

1

Develop

Description Front-

End Agreement

A front-end agreement is developed. Criteria for success is established. Identification of the CPFR project owners in the companies. Financial reward and contribution system is agreed upon.

2

Create

Joint

Business Plan

A joint Business Plan for the areas of collaboration is created Plans regarding advertising campaigns etc.

3-5

Sales

Forecast

Collaboration

The parties get together with each of

their customer

demand prognoses in order to establish a common prognosis. In case of deviation of forecast, the partners 6-8

Order

Forecast

Collaboration

meet to discuss deviations and to update the joint forecast. The partners share replenishment plans and discuss deviations and constraints.

9

Order Generation

The reordering process/goods flow is initiated. Result data is discussed (POS, orders, shipments). Forecast deviation and stock level problems are identified and solved.

Table 8:4 A short overview of the CPFR-activities. As suggested previously, the CPFR process, to a large extent, builds on the exchange of information among collaboration partners. This exchange of information can be carried out with the help of various technologies such as EDI (Electronic Data Interchange), private networks or the Internet (XML). For the processing of information a large number of software programs have been developed to support the CPFR processes (e.g. Syncra, Logility, Manugistics; i2 Technologies, E-Millennium, E3, J.D. Edwards, Numetrix og Excentric, SAP, Oracle, Baan or Peoplesoft ). Whereas the previous methods such as VMI (vendor-managed inventory) or CRP (continuous replenishment program) mainly focused on collaboration concerning replenishment/reordering, the CPFR concept is far more ambitious. In addition to collaboration concerning replenishment, it also promotes integration of planning and forecasting processes. The VICS-definition also suggests that the Internet and electronic data interchange (EDI) are substantial prerequisites of CPFR.

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Special IT-based retail trends

1. Develop Collaboration Arrangement

Exception Criteria

Buyer Business Development Activities

Exception Criteria

2. Create Joint Business Plan

Seller Business Development Activities

3. Create Sales Forecast Buyer Exception Triggers

Seller Exception Triggers

4. Identify Exceptions for Sales Forecast Exception Items

5. Resolve/ Collaborate On Exception Items

Buyer Decision Support Data

Seller Decision Support Data

6. Create Order Forecast

POS Data

Order Forecast

Seller Materials & Production Planning

Frozen Forecast

7. Identify Exceptions for Order Forecast

Buyer Exception Triggers

Constraints Seller Exception Triggers

Exception Items

Consumer

8. Resolve/ Collaborate on Exception Items

Buyer Decision Support Data

Updated Data for Exception Items

Seller Decision Support Data Unresolved Supply Constraints

Long Term Short Term

Retail Store

9. Order Generation

Produce Product

Order PO

Feedback

Buyer Receiving

Product

Delivery Execution

Order Filling/ Shipment Execution

Order filling feedback

Buyer Activities

Either/ Joint Activities

Seller Activities

Table 8:5 The CPFR-process according to VICS (www.vics.org). ECR Europe (2000) later presented the concept in a more general way by defining CPFR as “a cross-industry initiative designed to improve the supplier/manufacture/retailer relationship through comanaged planning processes and shared information”. In spite of the minor discrepancy in the definitions of CPFR, there is little doubt that the ruling perception of CPFR is based on the VICS definition. An important issue for CPFR is that the successful application of the concept consists of more than partners, who are merely opening up and exchanging information.

208

Kotzab The predominant part of the process consists of partners joining in a number of joint planning activities in different time horizons (e.g. Fliedner 2003; CCG 2001; Figure 8:10).

F

Forecasting

equ fore iremen cast t s

3. R

Collaboration

C

er ord f o te ts pda s 8. U foreca

P R

orde tion of rs

ful fil l nera ment

Short term

Medium term

9. G e

Re

p

Or de r

7. Id e de ntif vi ica a it o tion ns o f

Long term

asts

les

forec

Sa

of n o ti ca s it fi tion en ia Id dev 4. of date 5. Up ment re requi asts r o f ec

6. Or der

l era ts n Ge en 1. reem ag ment elope tive v e D 2. ra ollabo of a c ess plan busin

ing n n Pla

len i s h me

nt

Figure 8:10 The planning wheel of CPFR (adapted from CCG 2001) Therefore, CPFR is seen as a collaboration concept in which two or more parties in the supply chain, plan a number of sales promoting activities and create synchronized forecasting prognoses together. Production and replenishment processes are then established on these plans and prognoses)

209

Special IT-based retail trends

CPFR’s supply chain peculiarities Some authors see CPFR as an evolution of Efficient Consumer Response (ECR), vendor managed inventory systems (VMI) and continuous replenishment programs (CRP) (e.g. Barrat & Oliveira 2001 or Stank et al. 1999). The essence of CPFR can therefore be characterized as addressing the deficiencies found in those previous forms of collaboration, such as (see Barratt & Oliveira 2001): x x

x x

x

The influence of promotions in the creation of the sales forecast (and its influence on inventory management policy) The influence of changing demand patterns in the creation of the sales forecast (and its influence on inventory management policy) The common practice of holding high inventory levels to guarantee product availability on the shelves; The lack of general synchronization (or co-ordination) in the manufacturer’s functional departments (sales/commercial, distribution and production planning); The multiple forecast developed within the same company (marketing, financing, purchasing and logistics).

As CPFR is presented as a holistic approach to SCM (VICS 1998, 1), the concept can be confronted with the notion of supply chain relationship integration and SCM’s theoretical backbones – transaction cost theory and network approach (see e.g. Skjoett-Larsen 1999; Skjoett-Larsen et al. 2003). In accordance with the large focus on information sharing collaboration, SCM was introduced by using the improvement of relationships among companies as its starting point. Anthony (2000) emphasizes that ”collaborative relationships transform how information is shared between drive change to the underlying business processes”. This perception of collaboration as an integration of business processes has received much attention during the last decade. Bowersox et al. (2000) emphasize that the greatest potential lies in the integration with external partners of trading. There is a perception that supply chain members, to a larger extent, have to ”collaborate on planning and execution” with respect to creating a synchronized supply chain (Anderson and Lee 1999). The development of supply chain collaboration though, can also be described as using the following three types of relationships – transactional, information sharing and collaborative relationships.

210

Kotzab Each has had their individual period of recognition (see e.g. Stank et al. 1999). A transactional relationship focuses on the individual product transaction without any relational development within the area of information sharing. Such a relation is also known as ”arm’slength” relation and is often marked by mistrust and competition (e.g. Sako 1992). Information sharing relationships follow the idea of creating more streamlined business processes via an open exchange of information (Baiman and Rajan 2002 ; Lee 2000 or Buzzell and Ortmeyer 1995). Collaborative relationships aim for total supply chain visibility and refer to more than only ordinary or passive information exchange. The supply chain members commonly plan and synchronize activities and business processes (Stank et al. 2001). In that sense, CPFR can be understood as a collaborative relationship concept. As Skjoett-Larsen et al. (2003) demonstrate CPFR can also be explained from a transaction cost approach (TCA). The rationale behind the basic level of CPFR is to reduce transaction costs in the exchange processes between partners in the supply chain. By sharing information about forecasts, inventory levels and point-of-sale data, the collaborating firms can minimize their transaction costs and obtain a higher efficiency in their operations. The transaction costs can be subdivided into three categories: contact costs, contract costs and control costs. With contact cost, all the resources used to seek information about potential trade partners to start closer partnerships with, are meant. Contract costs refer to costs related to bargaining and creating contracts. Here, the focus is to assure the party that bares the greatest risk and therefore, seeks to reduce a potential loss, and at the same time keeping the counterpart within the contract. If the contract is not fulfilled, there will be compensation for the partner, who has invested the most. Finally, the control or enforcement costs, are costs related to problem solving and renegotiations of contracts between the partners. In the long run all three categories of costs can be reduced, when firms collaborate closely and on a long-term basis. Various constructs of TCA can be used to explain the governance structures of CPFR, such as asset specificity, credible commitments, exchange of “hostages”, calculative trust and safeguards against opportunism (Williamson 1985). According to the network approach (e.g. Haakansson & Snehota, 1995), business relationships can also be described by a few, typical features, such as: adaptations, cooperation and conflict, social interaction and routinization. According to SkjoettLarsen et al. (2003), CPFR requires adaptation of information systems and administrative activities. It involves close collaboration as well as being aware of potential conflicts related to sharing risks and benefits. 211

Special IT-based retail trends It presumes the development of social bonds and trust relationships, which tie the companies together. Finally, it tends to become institutionalized and routinized over time. The routines help the companies reduce transaction costs and facilitate resolution of potential conflicts. Therefore, the network approach is appropriate to describe and analyze the dynamic processes and development of relationships in CPFR.

Different forms of Collaborative Planning Forecasting Replenishment Analogical to Corsten’s (2001) distinction of different forms of ECR, Skjoett-Larsen et al. (2003) presented a stage-model of CPFR, that differentiates between three forms of CPFR: basic, developing and advanced, depending on the scope and the depth of the collaboration of the involved parties (see Figure 8:11). The idea behind this differentiation is the notion of different governance structures that should be applied in order to implement CPRF successfully (see Table 8:6). Dimensions

Basic CPFR

Shared information

Sales

Developed

Advanced CPFR

CPFR orders

and Demand data

Demand data

confirmation

Order

planning Order

Inventory data

data

data

planning

Promotion data

Promotion data

Production data

Production data

Degree of discussion

No

Some

Frequently

Co-ordination/

No

Some

All activities

No

No

Knowledge

Evaluation

No

No

Experiences

Type of relationship

Transactional

Information

Mutual learning

synchronization Competence development

sharing

Table 8:6 Selected dimensions of different CPFR-levels (adapted from Skjoett-Larsen et al. 2003, p. 537).

212

Kotzab

Figure 8:11 Different stages of CPFR (Source: Skjoett-Larsen et al. 2003)

213

Special IT-based retail trends The CPFR arrangement in the case of basic CPFR, can be considered as classical market governance, as the investments in that arrangement are rather non-specific and the frequency of the arrangement is recurrent. The investments in developed CPFR though, can be characterized as being mixed with recurrent frequency. Skoett-Larsen et al. (2004, p. 538) consequently see this arrangement as needing a bilateral governance structure. Advanced CPFR is assessed by the authors as a form of unified governance structure with idiosyncratic investments and recurrent frequency.

IT-based retail trend # 3 – The Global Commerce Initiative Many companies that we find in the FMCG-industry are also actively involved in other industries and thereby looking for consensus based cooperation strategies in their distribution channels. Besides that, distribution channels are impacted by increasing globalization on the one hand, and regionalization on the other (e.g. CGECGI 2003). Beyond these developments, The Global Commerce Initiative (GCI) was founded in 1999 by manufacturers, retailers and other sponsoring organizations, such as regional ECR initiatives to "improve the performance of the international supply chain for consumer goods through the collaborative development and endorsement of recommended voluntary standards and best practices" (GCI 2004). The GCI is organized as a voluntary body on a global level and is the single unifying force that brings supply chain members together, in order to simplify and enhance the globally valid EAN.UCC standards (Fischer 2001; GCI 2003). Within this body, several global working groups formulated proposals on different standardization issues (see Table 8-7). These suggestions should improve the supply chain efficiency for all organizations involved, no matter the size and location of the supply chain partner (GCI 2003).

214

Kotzab GCI Working Group

Objective

Direct Store Delivery

Development of a business model for direct store deliveries with a capacity to build extensions where necessary and to drive broad implementation

GCI Coordinators

Development of strategies for aligning internal functions and business processes with external standards

GCI

Electronic

Product

Code GCI

Development of applications to identify goods, locations and shipments along the supply chain

Global

Data

Synchronization

Development of applications for proper master data exchange

Implementation Team GCI Network

Collection of the needs of the participating companies, organizations and individuals

Global Scorecard

Development of global measurement tools to assess the implementation or performance within the company and within the supply chain

CPFR

Development of alignment strategies to harmonize demand with supply through data exchange

Marketing & Communication

Development of marketing tools to promote GCI’s efforts for global standardization

Global

Product

Classification Service

Providers

Product reference that allows a global standardized positioning of items

&

Development of electronic trading and service platforms

Exchanges

Table 8:7 Global Commerce Initiative Working Groups (Source: GCI 2004). References Ahlert, D. : Vertikalisierung der Distribution. Die kundenorientierte Neugestaltung des Wertschöpfungprozeß-Managements, In: Beisheim, O. (ed.) : Distribution im Aufbruch. Bestandsaufnahme und Perspektiven, Vahlen, München, 1999, 333 – 350. Alvarado, U. & H. Kotzab: Supply Chain Management. The Integration of Logistics in Marketing. Industrial Marketing Management, 30, 2, 2001, 183 – 198. Anderson, D & H. Lee: Synchronised supply chains: the new frontier. In: ASCET (ed.), Achieving Supply Chain Excellence Through

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Special IT-based retail trends Technology, Vol 1, Montgomery Research Inc., San Francisco, 1999, 12-21. Anthony, T.: Supply chain collaboration: success in the new Internet economy. In: ASCET (ed.), Achieving Supply Chain Excellence Through Technology, Vol. 2, Montgomery Research Inc., San Francisco, 2000, 41-44. Baiman, S. & M. Rajan: The Role of Information and Opportunism in the Choice of Buyer-Supplier Relationships, Journal of Accounting Research, 40, 2, 2002, 247-278. Barratt, M & A. Oliveira: Exploring the experiences of collaborative planning initiatives, International Journal of Physical Distribution & Logistics Management, 31, 4, 2002, 266 – 289. Bengtsson, M. & S. Kock: Coopetition in business networks – to cooperate and compete simultaneously, Industrial Marketing Management, 29, 2000, 411-426 Biggs, D.: Efficient Consumer Response. Where We’ve Been and Where We’re Going. Annual Conference of the Council of Logistics Management, Toronto, 1999. Bowersox, D. , D. Closs, T. Stank & S. Keller: How Supply Chain Competency Leads to Business Success, Supply Chain Management Review, 4, 4, 2000, 70 – 78. Brandenburger. A. & B. Nalebuff: Co-opetition, Doubleday, New York, 1996. Brown, P. & M. Visconti: Progress to Date and the Way Forward. Presentation at the 2nd Official ECR Europe Conference, Amsterdam, Netherlands, 1996. Browning, C.: Efficient Consumer Response: Its Lessons for Everyone. Presentation at the 1997 Council of Logistics Management Annual Conference, Chicago 1997 Buzzell, R. & G. Ortmeyer: Channel partnerships streamline distribution, Sloan Management Review, 36, 3, 1995, 85-96

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Kotzab Centrale für Coorganisation (CCG) (2001): Managementinformation CPFR Collabora-tive Planning, Forecasting and Replenishment – Gemeinsame Planung, Prognose und Warenbevorratung, Juli 2001. Clarke, I.: Retail power, competition and local consumer choice in the UK grocery sector, European Journal of Marketing, 34, 8, 2000, 975 – 1002. Cooke, J.: VMI: very mixed impact? Logistics Management Distribution Report, 37, 12, 1998, 51-53. Corsten, D. & D. Hatch: Implementation and Success of ECR in Europe, Presentation at the 6th ECR Europe Conference in Glasgow, May 15-17, 2001. Corsten, D. (2000), Standards, Processes and Capabilities – A New View on Co-operation in the Consumer Goods System, Logistics Research Network 2000 Conference Proceedings, Hines, P. (ed.). Cardiff, UK, pp. 147 – 152. ECR Europe (ECRE): CEO Overview - Efficient Consumer Response, 1997 ECR Europe (ECRE): European Value Chain Analysis Study - Final Report, 1996. ECR Europe: A Guide to CPFR implementation, 2000 ECR-Espana: Results of Phase I of E.R. in Spain. The Vision of E.R.Spain, Opportunity Framework and Pilot Projects Definitions, ECREspana, Barcelona, 1997 ECR-Europe: Focus areas of ECR. http://www.ecrnet.org/ ECR/ecr.wwv_main.main?p_language=us&p_cornerid=842&p_currco rnerid=1&p_full=1, 2002-13-04, 2002 ECR-Italy: The supply chain pilot projects results. Management summary report. Milano, ECR Italia, 1997. ECR-Österreich-Initiative (ECR-Austria) : ECR Handbuch II. ECRÖsterreich. EAN, Wien, 1999.

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Special IT-based retail trends ECR-Österreich-Initiative (ECR-Austria) : ECR-Handbuch Österreich. EAN, Wien, 1997. Efficient Consumer Response Austria (ECRA): Efficient Consumer Response, http://www.edi.org/ecr/start.html, 27.05.2000, 2000. Fernie, J.: The internationalization of the retail supply chain. In: Fernie, J. & L. Sparks (ed.): Logistics and Retail Management, Kogan Page, London, Boca Raton, 1999, 47 – 65. Fischer, S.: CEO’s push ahead with global standards, GCI Press release 01/31, 2001. Fliedner, G. : CPFR : an emerging supply chain tool, Industrial Management & Data Systems, 103, 1, 2003, 14-21. Food Marketing Institute (FMI): http://www.fmi.org/pub/ Pubs_searchresults.cfm, 2000-05-27, 2000. Gill, L. & R. Allerheiligen: Co-operation in channels of distribution: physical distribution leads the way, International Journal of Physical Distribution & Logistics Management, 11, 8, 1981, Global Commerce Initiative (GCI) (2001): VICS Collaborative Planning Forecasting and Replenishment (CPFR®), Global Commerce Initiative Recommendation June 30, 2001 Global Commerce Initiative (GCI): GCI Special Report, Around the world with GCI, London, GCI, 2003. Global Commerce Initiative (GCI): The case for global standards, Cap Gemini, GCI, 2002. Global Commerce Initiative (GCI): www.cgi-net.org, 22-05-2004 Halldorsson, A., H. Kotzab, J. Mikkola & T. Skjoett-Larsen: Design and managing supply chains: Theoretical foundation and application: In: Aronsson, H. (ed.): Nofoma 2004. Challenging Boundaries with logistics. UniTryk, Linköping, 2004, 247 – 262 Heide, J.: Interorganizational Governance in Marketing Channels, Journal of Marketing, 58, 1, 1994, 71 – 85.

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Kotzab Johnston, R. & P. Lawrence: Beyond Vertical Integration - the Rise of the Value-Adding-Partnership. Harvard Business Review, 4, 1988, 94 –101. Joint Industry Project on Efficient Consumer Response (JIPOECR): ECR Alliances. A best practices model, Grocery Manufacturers of America, 1995 Joint Industry Project on Efficient Consumer Response (JIPOECR): 1997 ECR Industry Benchmarking Survey, 1998. Joint Industry Project on Efficient Consumer Response (JIPOECR): ECR 1995 Progress Report, Grocery Manufacturers of America, 1996a. Joint Industry Project on Efficient Consumer Response (JIPOECR): The ECR scorecard, Grocery Manufacturers of America, 1996b. Kahn, B. & L. McAllister: Grocery revolution. The new focus on the consumer, Addison-Wesley Publication Co., Reading, 1997. Koch, C.: It all began with Drayer, CIO Magazine, August 1, 2002, 1 Kotzab, H. & P. Schnedlitz: The Integration of Retailing to the General Concept of Supply Chain Management Concept, Journal für Betriebswirtschaft, 49, 1999, 140-153. Kotzab, H. & Teller, C. (2003): Value-adding partnerships and coopetition models in the grocery industry. International Journal of Physical Distribution and Logistics Management, 33, 3, 268-281 Kotzab, H., D. Grant, D & T. Reutterer: Efficient Consumer Response and Business Excellence. Findings from the Austrian grocery supply chain. In: Coleshill, P. (ed.): Organisational Excellence, Managing Information. Proceedings of the 3rd multinational alliance for the advancement of organisational excellence (MAAOE) Conference, 2002, 237-247. Kotzab, H., T. Skjoett-Larsen, C. Andresen & C. Thernoe: Logistics managers’ perception and viewpoint to interorganizational supply chain collaboration by CPFR. In: Spengler, T., S. Voß & H. Kopfer (ed.): Logistik Management, Prozesse – Systeme – Ausbildung, Springer, Berlin et al., 65-78. 219

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Kotzab, H.: Improving supply chain performance by Efficient Consumer Response? A critical comparison of existing ECRapproaches, Journal of Business and Industrial Marketing, 14, 5/6, 1999, 364-377. Kotzab, H.: Neue Konzepte der Distributionslogistik Handelsunternehmen. Dr. Th. Gabler, Wiesbaden, 1997.

von

Lee, H: Creating Value through Supply Chain Integration, Supply Chain Management Review, 4, 4, 2000, 30-36. Lothia, R., T. Xie & R. Subramaniam: Efficient Consumer Response in Japan. Industry concerns, current status, benefits, and barriers to implementation, Journal of Business Research, 57, 2004, 306-311. Meffert, H. : Zwischen Kooperation und Konfrontation: Strategien und Verhaltensweisen im Absatzkanal. In : Beisheim, O. (ed.) : Distribution im Aufbruch. Bestandsaufnahme und Perspektiven, Vahlen, München, 1999, 407 - 424. Mouzas, S. & L. Araujos: Implementing programmatic initatives in manufacturer-retailer networks, Industrial Marketing Management, 29, 3, 2000, 293 – 303. Ortega. B.: In Sam we trust. The untold story of Sam Walton and WalMart, the world’s most powerful retailer, Times Business, New York, 2000 Picot, A., R. Reichwald & R. Wigand: Die grenzenlose Unternehmung. Information, Organisation und Management, 4th edition, Wiesbaden, Gabler, 2001. Pine II, J., D. Peppers & M. Rogers: Do you want to keep your customers forever, Harvard Business Review, 73, 2, 1995, 103-114 PriceWaterhouseCooper (PwC): Europan Retailing 2010. www.ideabeat.com/ResLib/pricewaterhouse/euroretail2010/page1.htm, 2000, accessed June 24, 2000. Ritter, S. (2002): Global Standards show real savings for consumer products, GCI-Press release, New York, Oct, 21, 2002.

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Kotzab Sako, M: Prices, Quality and Trust. Inter-firm Relations in Britain & Japan. Cambridge University Press, Cambridge, 1992. Salmon, K.A.: Efficent Consumer Response. Enhancing Consumer Value in the Grocery Industry. FMI, Washington, 1993. Schnedlitz, P.: „Verkaufsmaschinen“ als Danaergeschenk?, Cash, 10, 1994, 122 – 128. Skjoett-Larsen, T., C. Thernoe & C. Andresen: Supply chain collaboration : Theoretical pespectives and empirical evidence, International Journal of Physical Distribution and Logistics Management, 33, 6, 2003, 531-549. Skjoett-Larsen, T.: Interorganisational Relations from a Supply Chain Management point of view, Logistikmanagement, 2, 1, 1999, 96-108. Stank, T., M. Crum & M. Arango: Benefits of Interfirm Coordination in Food Industry Supply Chains, Journal of Business Logistics, 20, 2, 1999a, 21 – 42. Stank, T., P. Daugherty & C. Autry: Collaborative Planning: supporting automatic replenishment programs, Supply Chain Management, 4, 2, 1999b, 75-85. Svensson, G.: A firm’s driving force to implement and incorporate a business philosophy into its current business activities: the case of ECR, European Business Review, 14, 2002, 20-29. Voluntary Interindustry Commerce Standards (VICS): Collaborative Planning Forecasting and Replenishment. Voluntary Guidelines. VICS, 1998 Walton, S.: Made in America. My Story. New York, 1992. Whipple, J.S., R. Frankel, R. & K. Anselmi: The Effect of Governance Structure on Performance: A Case Study of Efficient Consumer Response, Journal of Business Logistics, 20, 2, 1999, 43-62. Williamson, O.: The Economic Institutions of Capitalism. The Free Press, New York, 1985. www.vics.org, 2003, State: 15.01.2003

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Special IT-based retail trends Zineldin, M.: Co-opetition: the organisation of the future. Marketing Intelligence Planning, 22, 7, 2004, 780-790

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CHAPTER 9

B2B Relationships in Retailing Mogens Bjerre Introduction The structural change among retailers in the FMCG-sector has lead to fewer, larger and more centralized retailer organizations. This structure represents a market situation that is quite different from the market situation faced by suppliers, as it was 10-15 years ago. The supplier’s sales organization traditionally focused on the relations to customers and the marketing organization on the relation to end-users. Structural change among customers leads to changes in the supplier’s sales organization, as the supplier reflects the customer structure and decision making process. The marketing organization has not affected by this. However, introducing key account management gradually requires a different approach to marketing (Lawrence, 1983; Corstjens & Corstjens, 1995; Bjerre, 1995), as it brings the customer into focus. Thereby the customer becomes a focus area of marketing, in the same way as products or brands (Lawrence, 1983), however with a need for coordination and cooperation with the focus and initiatives from consumer marketing. The theoretical contributions and practical experience do furthermore agree, that the introduction of key account management always proceed the introduction of trade marketing. Trade marketing will therefore often, at least initially, be a support function towards key account management, handling data gathering, analysis, development of presentations to the key account, developing the planning and strategy base, structuring the information concerning the key account and developing in-store marketing materials.This chapter focuses on key account management, the analysis of trade marketing and other functions within relationship marketing. Thus in the following part of this chapter, trade marketing will be described as part of key account management. The discussion of trade marketing management will be based on existing definitions of trade marketing, and will result in a conceptual framework combining key account management, trade marketing and trade marketing management. 223

B2B Relationships in Retailing

Defining a Key Account Although key accounts are the basic element in key account management, they are given different labels. Some call these customers for key customers, large accounts, large customers, national accounts, special accounts etc. (Barett, 1986, Corstjens & Corstjens, 1995; Lawrence, 1983; Moriarty and Shapiro, 1980, 1981, 1984; Randall, 1994; RottenburgerMurtha, 1992; Stevenson, 1980, 1981). Key accounts are customers recognized by the supplier as the most important customers. The importance may stem from a number of different characteristics, among which Lawrence (1983, p. 35) points to the following: “. a key account is a not just a large customer with many branches and a wide geographical coverage. ... But the important thing is that they are all coordinated into one “account”, which pays the bills, combines the buying power, and conducts the negotiation”. Barett (1986) also points to size as important and mentions that this can be measured in terms of sales volume. According to Bjerre (1995) a key account is not just characterized by size and/or sales volume, but adds: x Having a centralized decision making process, and/or x Possessing future potential, and/or x Good image - seen from a supplier’s point of view In other words, certain criteria has to be fulfilled if the customer is to be regarded as a key account - and these criteria’s are defined by the supplier. Thus, these customers are offered special attention, as pointed out by Stevenson (1981, p. 119): “… when very large and/or important customers are afforded special treatment and special status.” Rottenberger-Murtha (1992) takes this further by adding that the demands of the key account is important (p. 40): “… certain major accounts that have unique demands and expectations requiring similar specific solutions and special attention.” As the dyadic perspective has been used as a platform for analyzing key account management, it has become quite apparent, that existing literature concerned with key account management neglects the strategies and interests of the key account completely. Thus, existing literature on key account management appears to be dominated by sales oriented “supplier perspective” in which suppliers need to make adjustments according to individual customers, if these customers fulfill certain criteria, such as the one mentioned above. This perspective can historically be linked to the understanding of the FMCG-sector as a sector focusing on the distribution of goods to end-users. 224

Bjerre Although key accounts are recognized as important customers it is often difficult to describe their value to the supplier. Lawrence (1983, p. 36) states the importance of key accounts to the supplier should be compared to the importance of brands to a supplier of branded goods: ”The immediate consequence is that each major account assumes an importance to the supplier, in terms of contribution to total sales volume and to profit, probably equal to or even greater than any one of his product lines. Obviously the large account therefore merits the same degree of planning, nurturing and monitoring as any product - in other words the same degree of marketing attention.” This statement marks an important change within most sales and marketing organizations, as strategies, planning, and monitoring traditionally have been a marketing domain. Developing strategies, plans and monitoring individual key accounts will therefore imply that marketing techniques are implemented in relation to the management of key accounts. Miller and Heiman (1991, p. 4) presents importance as: "..... if you consider it important, it’s by definition a Key Account”. The documentation of the supplier’s knowledge about the single key account often labeled customer information, will typically contain elements such as: x x x x

Customer profile, i.e., customer characteristics Customer strategy, i.e., customer positioning Customer budget, i.e., trading terms Customer contracts, i.e., documentation of yearly negotiation

The customer profile is an important part of key account information systems that according to Bjerre (1995, p. 128) covers the majority of the following elements: x x x x x x x x x x x x

The customer’s organization, in terms of chain(s) Volume Ownership Management structure Functional and personal relations No. of chain(s) and no. of stores Geographical coverage Overall strategy Classified in accordance with the four types Interest in supplier-customer alignment Target segments Historical performance 225

B2B Relationships in Retailing x IT-systems x Future plans The sources to the information recorded in a key account profile may be the key account manager, members of the key account’s organization and/or members of the supplier’s organization handling various tasks. The knowledge of the key account typically grows as the alignment becomes closer and as the cooperation develops over time. The key account profile is often used as a tool to record knowledge about the specific key account and typically used as a planning base when the key account manager sets the future targets in relation to the key account. Customer strategy is concerned with the classification of the strategy pursued by the specific retailer, as described in the chapter “Retailer Strategies”. Based on the key account profile a SWOT-analysis is often completed in order to take the competitors of the customer into account. This type of analysis may give the supplier an indication of the customer’s future performance and future challenges, thus providing the key account manager with an opportunity to develop strategies, plans, and initiatives that may improve the customer’s performance and profitability. The customer specific strategies, plans, and activities are then budgeted in a yearly customer budget, which also contains the customer specific trading terms. Customer specific trading terms are increasingly based on open and general elements that in principle are open to all customers, and are based on the notion of “something-for-something”, i.e. that specific rebates or allowances to the customer reflect actual performances by the customer vis-à-vis the supplier. Miller and Heiman (1991) further introduces key accounts as “external assets”, and makes the point, that they should be managed as all other important assets, such as the supplier’s brands. Thus, based on the discussions above, the first elements of the definition of a key account used throughout this dissertation will be: x A key account is a customer that the supplier handles as a market per se, and has decided to invest in, in the same way as the supplier invests in other markets x The criteria for identifying key accounts are equal to the criteria used to identify other markets

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Supplier – Customer Relationships Treating key accounts as assets could indicate that suppliers regard key accounts as something that “belongs” to a supplier - they do not, the fact is that it may be exactly the opposite. The implications of this are that the supplier can not control the key account and that the key account can not and should not be managed. Thus the supplier does not manage the key accounts as distribution channels to the end-user, but may be able to manage the supplier-customer alignment and the relation with key accounts. This may prove to be quite difficult as retail customers pursue different strategies, including some of non-integration with suppliers1. This does not exclude the possibility of the supplier managing the relationship and the alignment between the supplier and the customer, but gives restraints to these. Organizational relations between a supplier and a customer described in 5 levels of alignment, ranging from “spectator” to “partner” (Kurzrock, 1996, p. 121). The five levels are presented below. Their inclination to the supplier to develop a specialized transaction structure is commented in relation to each alignment level. x Spectator - there is no sales relationship with the customer. The customer deals with the competitors, does not see a need for the suppliers products and services, or the supplier chooses not to work with the customer. This level of alignment does not incline the supplier to develop a specialized transaction structure. x Vendor - the supplier is on relatively equal terms as competitors are, supplying products and services to the customer. This level of alignment may incline the supplier to develop a specialized transaction structure. x Preferred Provider - one supplier has been chosen by the customer and has the largest share (or total share) of the customers business. The supplier advises the customer on products and services. This level of alignment does incline the supplier to develop a specialized transaction structure. x Business Consultant - the supplier helps the customer manage part of the business. The supplier consults the customer to meet the customer’s long-term business goals. This level of alignment does incline the supplier to develop a specialized transaction structure. x Partner (Ally) - the supplier manage the customers business in the suppliers area of expertise providing bottom line value that cannot be provided without the supplier. The supplier is considered an integrated part of the customer’s organization. The supplier 1

See chapter on Retailer Strategies

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B2B Relationships in Retailing provides completely integrated systems to run the operation, and the product mix is often composed of the suppliers products and services as well as the competitors products and services. This level of alignment does incline the supplier to develop a specialized transaction structure. It is important to note that only four of the five steps actually identify a relation between the supplier and customer. Hence just four levels are of interest in relation to key account management. Kurzrock (1996) notes that there are three indicators related to the five steps of alignment, namely the relationship (as described above), the access to different levels in the customers organization, and the resources invested by the supplier. This is presented in Figure 9:1below.

Figure 9:1 Characteristics of the Five Levels of Alignment Source: Kurzrock, 1996, p. 122. Moore (1994) provides an extensive definition of key account management focusing on the elements of the relation: “... the managerial role in relation to objectives, strategies, standards, monitoring, the 228

Bjerre coordinating role in relation to distribution department, financial department, sales, consumer marketing, trade research, trade promotion, customer buying, customer stock control, customer merchandising, customer distribution department, customer finance department, the informative role internally and externally and finally as responsible for customer negotiations.” It is difficult to identify elements and responsibilities in relation to a key account, which are not covered by this definition. Thus Moore appears to view key account management as a total concept, implying that the key account manager is totally responsible for all aspects relating to the key account. Implementing a concept like this would be a radical change for many FMCG-suppliers. McDonald (1998, p.3) points to the reluctance among retailers to enter mutual exclusive relations with suppliers and explains this by the notion that retailers possess a powerful position in the supply chain as owners of the interface with endusers. Regarding key accounts as assets has been carried even further by Moore (1994) who introduced the concept of “account equity” which would be structured along the principles of brand equity. This has not been taken further. Thus, based on the discussions above, the first elements of the definition of key account management used throughout this dissertation will be: x Key account management is the investment and integration of business processes from supplier to end-user aiming at adding value to the key account. x As there are four different alignment levels, four different levels of key account management exist

The Role of the Key Account Manager The titles used in relation to key account management may to some extent reflect the differences in managerial focus and asset specificity. However differences in titles typically reflect the way in which the supplier perceives its customers, the key account manager’s charge, the key account manager’s geographical responsibility, the number of key accounts, and other responsibilities. Thus the key account manager’s title are often a combination of the elements listed below: x Subject - Account, Business, Client, Client Business, Customer, Customer Business, Key Account. Large Account x Charge - Director, Manager, Senior x Geographical area - International, National, Regional x Responsible for one or more key accounts x Other responsibilities, such as staff responsibility 229

B2B Relationships in Retailing The key account managers personal attributes has been discussed by several authors - and there has been a tendency towards making lists containing every positive trait and none negative. Davies (1993, pp. 196-197) lists the attributes identified by himself and Thomas2, and adds that differences among various authors may be determined by their different views on key account management: x x x x x x x x x

Capable of building long-term relationships Intellectual, usually graduate level A business strategist, numerate and financially literate Good presentation and inter-personal skills Good at building personal relationships Service orientated Understands retailing as a business Understands the motivation of retail buyers Able to coordinate the activities of the manufacturer to suit the retailer’s needs x Creative and resilient x Able to influence senior management in both manufacturer and retailer

It should be noted that developing a finite list of personal attributes for a key account manager is possible, but it would not provide new insight. The level of authority is often mentioned as a key element in understanding key account management – and retailers often complain, that the key account managers do not possess sufficient authority internally, i.e. they do not have the full responsibility of the key account. Furthermore the level of authority is typically not discussed in detail, as the individual author basically does not operate with more than one type/form of key account management. Recruiting and training of key account managers also differ widely among firms - some firms have developed minutely detailed career-path systems to reach the position as key account manager, whereas other firms recruit externally when the need arises. Thus, some key account managers have more than 15 years experience within the firm before they are appointed key account manager, whereas others have no prior experience in the firm. Throughout this chapter all these different titles will be represented by the term “key account manager”. Differences will primarily be related to the four different types of key account management.

2

Thomas, H. (1989), Grand Nationals, Marketing, June 1, p. 29.

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Bjerre Thus, based on the discussions above, the first elements of the definition of key account manager used throughout this dissertation will be: x The key account manager is the person handling the supplier’s investment and integration of business processes towards a key account

Organizing towards Key Accounts Different organizational locations of the key account managers are often presented as part of the definition of key account management. As indicated earlier, the customer’s interest in developing closer relations with suppliers may also influence the organizational location, i.e. the key account manager can be located in the: x x x x

Sales function Marketing function Separate function Customer’s organization

These four different locations present various advantages and disadvantages. The advantages and disadvantages are summarized below in figure 9:2. It should be noted that some of the differences between various authors are based on their different beliefs concerning the organizational location of the key account manager, typically based on experience or references to practical examples. Handling key accounts is one of the more complicated aspects of key account management. Barret (1986) takes a simplified approach, as he defines key account management as targeting the largest and most important customers by providing them with a special treatment. Special treatment is not defined further, but it is indicated that this treatment will differ from the treatment offered to other customers. Barret (1986) does, however, underscore that key account management is too complicated to be handled by one person the key account manager. Key account management should be a team organization, in which key account managers are responsible for the team. Whether the key account manager handles more than one key account is not discussed. Rottenberger-Murtha (1992) stresses the importance of dedicating one person to each key account, and regards the key account manager as responsible for handling the relationship with the key account no matter whether the relation is supported by a team organization or not.

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B2B Relationships in Retailing ORGANIZATIONAL LOCATION

SALES FUNCTION

MARKETING FUNCTION

ADVANTAGES

DISADVANTAGES

o Key accounts are customers o Sales is important part of KAM o KAM needs to handle staff

o Key accounts are special customers o KAM works crossfunctional o KAM should focus on key accounts

o Part of the strategy develoment o KAM is marketing o KAM has no staff

o Loosing touch with field sales o becoming too strategic o KAM should also handle staff

o KAM can focus on KA SEPARATE FUNCTION o KAM’s may become professionals

CUSTOMER’S ORGANIZATION

o KAM can gain intimate insight o KAM can provide improved planning information

o KAM may loose business scope o KAM’s may become isolated

o KAM may „forget“ whose interests to serve

Figure 9:2 Advantages and Disadvantages of different Organizational Locations. Source: Compiled and based on Bjerre (1995), Corstjens & Corstjens (1995), Davies (1993), Langdon (1995), Miller & Heiman (1991), Moore (1994), Rackham (1988), and Randall (1994). Moore (1994) refers to Randall’s (1994) organizational development, suggesting that there may be some development over time or at least some different organizational structures that can be applied buy the supplier. However there is neither preconditions attached to the different structures nor a discussion of pro’s and con’s of the different structures, apart from the following comment (Randall, 1994, p. 126): “There is no one best solution, which will fit any organization. ... Choosing what is best for your firm will demand sensitivity to its current position and to the demands of the future.” Arajou and Muzas (1994) have identified four elements of what they call “key account business”: 1. 2. 3. 4. 232

Key account business as tailor-made transaction Key account business as relationship management Key account business as an organizational form Key account business as a managerial task

Bjerre Bjerre (1995) have stressed the importance of the key account’s satisfaction and the development of the key account’s competitive advantage: “… the fact, that senior employees are appointed, and on the company’s behalf, being responsible for ensuring and foreseeing the best possible customer satisfaction and develop strong competitive advantages, efficiently and profitable.” This definition also underscores the need for seniority of the key account manager and agrees with Moore, that the key account manager acts on behalf of the company, not on behalf of a single part of the organization. Kurzrock (1996) introduces two important aspects of key account management - one is the change of the organizational interface between a supplier and a customer. This is the change from the organizational interface where a key account manager is solely responsible for a key account to the key account manager being responsible for a cross-functional team that is responsible for a key account (Kurzrock, 1996, p. 17). These two principally, very different, approaches are also discussed by Futtrell (1993) and Hirsch and Jackson, 1996, however, without any suggestions or guidance to when which would be appropriate. Millman (1995) offers an interesting distinction between six different stages of the relationship and relates different labels to these stages, however as the focus is the development of the relation these stages are not seen as organizational structures. Presenting the organization supporting key account management is often found in organizational diagrams, as they are often used to communicate internally to other parts of the organization. Lately new organizational structures have emerged, and changing the overall focus dramatically and introducing new organizational principles, in which sales and marketing are structured in accordance with the key accounts needs. The first step taken, as illustrated in Figure 9:3, when introducing key account managers is the development of key account documentation, such as key account strategies, market positioning etc. Thereby it often becomes evident that trade marketing should supplement the traditional consumer oriented marketing function – either as a part of the marketing function or as a part of the sales function. Thus trade marketing becomes the coordination interface between sales and marketing. The next step, as illustrated in Figure 9:4, is the development based on gradual development of competence and marketing based tools within trade marketing, gradually making trade marketing responsible for clearing pricing, promotion programs, etc..

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Figure 9:3 Geographically and Product based Sales and Marketing Organization. Source: Based on Randall, 1994, p.126 and Bjerre, 1995, p. 125

Figure 9:4 Trade Marketing as Interface. Source: Based on Randall, 1994, p.126 and Bjerre, 1995, p. 125. The step following this is the development of an trade development function that is responsible for the gradual introduction of key account priority systems and overall strategy development in relation to customers and key accounts. The introduction of key account priority systems often divides the trade marketing function into two parts, one that focuses on the 234

Bjerre strategic elements and one that focuses on the tactical and operational elements of trade marketing. Trade management is often used to describe these priority systems and the more strategically oriented planning, monitoring and follow-up on the overall business development of the specific key account and the relationship with the key account, and is illustrated in Figure 9:5 below.

Figure 9:5 Trade Management. Source: Based on Randall, 1994, p.128 and Bjerre, 1995, p. 125 Key account teams or business teams (Randall, 1994, p.128) may be established on a temporary basis and will often exist within a matrix organization. The ultimate step of organizational orientation towards key accounts is to establish separate key account groups or in other words to divide the sales and marketing organization in accordance with the key accounts, as illustrated in figure 9:6. George, Freeling & Court (1994) presents the necessary elements in a cross-functional team handling key account management consisting of six supporting elements or functions within the supplier’s organization (apart from the customer business manager (key account manager)). The six elements or functions are: x x x x

Category planner - related to the category sales director Customer category manager Supply Chain specialist Space management specialist 235

B2B Relationships in Retailing x Sales information specialist x Retail sales manager

Figure 9:6 Separate Account teams. Source: Based on Randall, 1994, p.128 and Bjerre, 1995, p. 125. It is important to note that the team approach is needed to handle the complexity related to the sales and marketing tasks towards the retailer and the handling of marketing tasks towards the end-users together with the retailer. Implicitly these solutions will be customized from key account to key account. Weitz, Castleberry and Tanner (1992) supports the crossfunctional team concept by listing the elements that should be present in the team (apart from the ones mentioned above): x x x x

Manufacturing specialists Purchasing specialists Accounting and finance specialists Negotiation trainers

These descriptions are based on the matrix-organization to ensure the maximal utilization of specialists and at the same time ensuring dedication of resources to each key account .It is important to note, that these structures are often temporal in their initial phases and are later relieved of more permanent structures – as the organization develops from single contact point – the key account manager to multiple contact points – the key account team. Time is introduced by Pardo, Salle and Spencer (1995, p. 127) as key account management is regarded as: “… the adaptation process the supplier firm goes through over time with a view to optimal 236

Bjerre management of these key accounts.” The time perspective is also mentioned by Hayes, Jenster and Aaby (1996, p. 377) in their definition of key account management: “… a method, where individual sales are secondary to the establishment of an ongoing, mutually beneficial relationship between important accounts and the firm. Strategic account relations are an extension of major account management where a select customer in effect become a partner in a long-term joint venture.” As illustrated above no single organizational structure can be used to describe all key account management forms. However, there is a development from single point contact structures between the supplier and the key account to multi-point contact structures. This development could also be referred to as “the development from on-face-to the-customer to key account teams”. Thus, when referring to the organization supporting the key account manager, the following definition will be used throughout the chapter: x The organizational structure and processes in the supplier’s organization supporting the key account manager and/or the key account management function.

Marketing to Key Accounts – Trade Marketing The concept of trade marketing has gradually developed over the years and there are a number of different definitions and/or descriptions presented by different authors. As was the case for key account management, it has not been possible to identify a gradual development of concepts, nor has it been possible to identify accumulation of insights. The first definition of trade marketing was presented by Lawrence (1983, p. 11): “What the manufacturer must do therefore is to cultivate the development of his marketing policies through the trade by equal attention both to the needs of the consumer and the needs of the distributive trade.” According to Lawrence (1983) this requires development of an effective appeal to the distributive trade. Supplier involvement can be one of two, as Lawrence makes the distinction between “active” retailers in which the supplier is involved (either by a franchise set-up, approving the retailer, authorizing the dealership etc.) and “passive” retailers in which the suppliers have no involvement. Lawrence (1983, pp. 11-18) further introduces the notion of the “Twin Marketing Strategies”, one aiming at the consumer and one aiming at the distributive trade. The basic thoughts related to these two strategies regard the retailers as channel members, and

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B2B Relationships in Retailing the supplier’s reaction is one of adaptation of the selling strategy to the individual retailers. Therefore the retailer interface to the supplier may the management of the retail organization, a buyer and a marketing manager or by a category manager that is responsible for buying and marketing, or the individual store manager. Thus trade marketing has several focuses: x The retail organization, the retail buyer and marketing manager, and the individual store manager x The end-user(s) shopping in the stores This split can also indicate the how differences in definitions – presented earlier – have developed, and at the same time underline that key account management precedes trade marketing, as key account management identifies the “focus object” for trade marketing. Trade marketing focusing on marketing to the retailer consists of the following parts: x Monitoring general trade developments x Retailer trends from other (and perhaps more developed markets) x Positioning of supplier vs. other suppliers x Trade promotions x Monitoring key account performance x Key account presentations and simulations x Key account staff training/education This type of documentation is often based on a common structure, and then adapted according to the specific key account. Figure 9:7 below was presented by Lawrence (1983) and summarizes the notion of the twin marketing strategies and the interaction between them. Retailers goals are (apart from realizing their overall strategies) often centered on increasing their share of consumers’ total shopping expenditure, on increasing the average size of shopping baskets. This often implies that more than one supplier needs to be involved and this may lead to a situation where the retailer combines the forces of more than one supplier. Trade marketing focusing on marketing to the end-user(s) consists of the following parts – this is sometimes labeled the in-store part of trade marketing: x End-user promotions (price, competitions, etc.) x Signs, pallet-wrappings, displays 238

Bjerre x Monitoring results x Analysis and tests to gain insight into the end-user as end-user and as buyer

Company Business Strategy

Appeal to consumers (Marketing strategy) Target consumer groups Product type and range Sales objectives per product

Appeal to distributive trade (Selling strategy)

JOINT PLANNING

Strategy per trade group or customer

Strategy per product oPerformance oAppearance oPrice oPromotion

oAdvertising

Target distribution channels Active/passive distrbution Sales objectives per distributor

To impress and support the trade

oProduct mix oBasis of dealings oTrade terms/rewards oPenetration oSelling/servicing oMerchandising/display oSupply/delivery oMarket support oStaff training TRADE FUNCTION

Suited to customers of the trade sector

oIn stockability oDisplay of product oConsumer price charged oPromotional activity

CONSUMER

Figure 9:7 Combining Trade Marketing and Consumer Marketing Source: Lawrence, 1983, p. 12 Lawrence (1983, p. 11) explicates the twin marketing strategies by claiming, that the business mission

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B2B Relationships in Retailing “… sub-divides itself into the two complementary strategies, one for the marketing of the product range to its consumers, and simultaneously one for achieving this marketing through the distributive trade.” Lawrence indicates that the retailers take care of the distributive function within the supply chain, however as the retailers are developing the own marketing positioning they do no longer regard themselves as distributors. Thus it may still be relevant to distinguish between consumer and trade marketing, but it is important to recognize the need for a change in content of trade marketing. Moore (1994) has pointed to some of the key elements in a change of the trade marketing concepts, that is defined in the following way: “A recognition of trade customers needs and the translation of this recognition into positive, pro-active thinking in the application of sales, marketing, production, distribution and support functions; on a customer-specific basis, to bring about enhanced profitability for customer and manufacturer without compromising brand integrity17.” And he continues to list the most important elements of trade marketing: x x x x x x x

Trade research Trade communication Merchandising/POS Trade promotion Physical distribution Sales representation Trade terms

Thus Moore comments on the necessity of changing the managerial mode from reactive to pro-active combined with an internal and external profitability focus. The difficult element of the definition is to avoid compromising brand integrity, as Moore also stresses the need for customer-specificity. The differences in the definitions presented above is also noted by Randall (1994, p. 118), who defines trade marketing as: “Trade marketing tries to meet the new demands from an increasingly powerful retail trade. The term is so imprecise, and practice so varied, that there is no consensus on what tasks should be included. Some of the more obvious are: x Providing advice on, and interpretation of, models such as DPP and space management x Coordinating customer intelligence 17

Underlined by Moore.

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Bjerre x Representing the customer point of view to sales and marketing x Collating market data for presentations to customers Some companies have given much greater responsibility to a trade marketing group.” And he continues (Randall, 1994, p. 120); “In practice this can vary from a small group whose job is mainly to collate information for the sales force to a major new department with a board director.” As mentioned earlier Randall introduces a number of different organizational structures. However they are introduced without any comments whatsoever. Davies (1993, p. 198) introduces the trade marketing mix, as the traditional 4 P’s are supplemented by the 2 S’s: x Promotion, balance resources between consumer and trade promotions x Product, continued development of the brand franchise x Price, avoid focus on this x Place, possible switching of resources between markets (channels) x Service, is a key non-price factor x Sales, changing the role from sales to trade marketers Davies uses the terms trade marketer and national account manager, and gives only hints to the distinctions between these. However the national account manager is responsible for strategic and tactical negotiations, whereas the trade marketer is responsible for the day-to-day business (Davies, 1993, p. 196). The growing importance of trade marketing is also mentioned by Corstjens and Corstjens (1995, p. 8), as they introduce the strategic perspective: “ Trade marketing has grown in importance and must change in nature. Trade marketing means managing a strategy triangle: balancing customer value with customer profitability while avoiding customer dependence.” However Corstjens and Corstjens (1995, p. 222) also points to a central difference between trade marketing and consumer marketing as they underline that: “Trade marketing is industrial marketing - business-tobusiness marketing. In essence, trade marketing is a balancing act involving three issues. .. First, maximizing the value offered to retailers. . Second, ensuring the profitability of individual accounts. . Third, since the client base is much more concentrated in industrial markets, the danger of dependence is much more dramatic.”The comparison between trade 241

B2B Relationships in Retailing marketing and business-to-business marketing raises a number of questions such as: x Can different key accounts be served with identical branded products? x Can the sales and marketing organization cope with key account specific solutions? x Is it possible to calculate key account profitability and the key account’s profitability using existing registrations? Bjerre (1995) distinguishes between two different forms of trade marketing, one labeled trade marketing and one labeled trade marketing management. Trade marketing is described as: “The activities related to supporting the sales function (field sales and key account management). These activities include presentations, development of in-store material, analyzing customer (retailer) data, developing and servicing tools used by the sales function, and being responsible for consumer marketing activities in relation to instore and customer activities". Trade marketing management is described as: “… the concept concerned with all aspects of the sales and marketing-effort towards the customer (at retail chain and store level) and together with the customer towards the customer’s customers. The purpose is to manage the relations and creating a lasting business advantage for the customer becoming the preferred supplier. It is not just selling to the retailer, but also selling with the retailer. Thus it is the combination of business-to-business and business-toconsumer marketing into business-to-business-to-consumer marketing.” As can be seen from the above, there has not been developed any model or listing of arguments, presenting the reasons why one should choose one solution and not the other. Nor has there been developed any form of normative statements indicating when different elements of trade marketing may be appropriate or not. Thus, the definition of trade marketing that will be used throughout the chapter is divided into the following elements: x Trade Marketing is the supplier’s marketing towards customers (key accounts) x Trade Account Marketing is the integration of supplier’s and customer’s (key account’s) marketing towards endusers x Trade Management is the management of the customer portfolio, i.e., the key accounts

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Conclusion Based on the earlier presentation of key account management and trade marketing, we conclude by setting up the following definitions: x A key account is a customer that the supplier handles as a market per se, and has decided to invest in, in the same way as the supplier invests in other markets x The criteria for identifying key accounts are equal to the criteria used to identify other markets. x Key Account Management is the integration of business processes from supplier to end-user aiming at adding value to the supplier’s customer. x As there are four different alignment levels, four different levels of key account management exist x The key account manager is the person handling the supplier’s investment and integration of business processes towards a key account. x The organizational structure and processes in the supplier’s organization supporting the key account manager and/or the key account management function. x Trade Marketing is the supplier’s marketing towards customers. x Trade Account Marketing is the integration of supplier’s and customer’s marketing towards end-users. x Trade Management is the management of the customer portfolio, i.e., the key accounts. The relations between the different definitions are illustrated in Figure 9:8.

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Figure 9:8 Combining Key Account Management and Trade Marketing Source: Developed from Lawrence, 1983, p. 12

References Arajou, L. & Muzas, S.; Key Account Business Development, Paper presented at the 10th IMP Conference, 1994. Barett, J.; Why Major Account Selling Works, Industrial Marketing Magazine, vol. 15, pp. 63-73, 1986. Bjerre, M.; Trade Marketing Management – Hvorfor? – Hvordan?, Børsens Forlag, 1995

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Bjerre Corstjens, J. & Corstjens, M.; Store Wars: The Battle for Mindspace and Shelfspace, Wiley, 1995. Davies, G.; Trade Marketing Strategy, Paul Chapman Publishing, 1993. Futtrell, C.; Sales Management, The Dryden Press, 1993. George, M., Freeling, A. & Court, D.; Reinventing the Marketing Organization, THE McKINSEY QUARTERLY, Vol. 4, 1994. Hayes, , Jenster, P. & Aaby, N.; Business Marketing, Kurzrock, W.; The Sales Strategist, Irwin, 1996. Langdon, K.; Key Accounts are different: Solution selling for Key Account Managers, Pitman Publishing, 1995. Lawrence, A.; The Management of Trade Marketing, Gower, 1983. McDonald, M.; Key Account Management, Butterworth-Heinemann, 1998. Miller, R. B. & Heiman S. E.; Successful large account management, Warner Books, 1991. Millman, T.; Key Account Management in Business-to-Business Markets, in A. Payne (ed.) Advances in Relationship Marketing, Kogan Page, 1995. Moore, B.; Key Account Management, Presentation at conference arranged by LOGISYS, Copenhagen, 1994. Moriarty, R. T. & Shapiro, B. P.; National Account Management, MSIreport, pp. 80-104, 1980. Moriarty, R. T. & Shapiro, B. P.; National Account Management – Emerging Insights, MSI-report, pp. 82-100, 1981. Moriarty, R. T. & Shapiro, B. P.; Organizing the National Account Force, MSI-report, pp. 84-101, 1984. Pardo, C., Salle, R. & Spencer, R.; The Key Accountization of the Firm, Industrial Marketing Management, Vol. 22, pp. 123-124, 1995. Rackham, N.; Account Strategy for Major Sales, Gower, 1988.

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B2B Relationships in Retailing Randall, G.; Trade Marketing Strategies: The partnership between manufacturers, brands and retailers, Butterworth-Heinemann, 1994. Rottenberger-Murtha, K.; A “NAM” by Any Other Name, Sales and Marketing Management, Vol. 44, pp. 40-46, 1992. Stevenson, T. H.; Classifying a Customer as a National Account, Industrial Account Management, vol. 9, pp. 133-196, 1980. Stevenson, T. H.; Payoffs from National Account Management, Industrial Account Management, vol. 10, pp. 119-124, 1981. Weitz, B. A., Castleberry, S. B. & Tanner, J. F.; Selling: Building Partnerships, Irwin, 1992.

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CHAPTER 10

Customer Relationship Marketing (CRM) in Retailing Thomas Foscht, Thomas Angerer and Bernhard Swoboda

The increasing importance of customer orientation Customer orientation is not only the core of the modern understanding of marketing but also one of the crucial success factors of management. In their bestseller "In Search of Excellence", Peters/Waterman (1987) presented the close-to-the customer philosophy as one of eight success factors. Although the needs and desires of customers have always been central points of marketing, since its publication more and more companies have been focusing on systematically analyzing the expectations of their customers and on implementing the analyses in their internal and external services. The main aim of customer orientation is to create customer value by meeting the expectation of the customer, which will in turn lead to a win-win-relationship for both the supplier and the customer (Bruhn 1999, p. 10). This complex challenge to management including the regular measurement of customer satisfaction, the management of the customers' structure and the customer-oriented organization of the whole company is called Relationship Marketing. In the past years particularly in retailing a great many instruments and measures were developed in order to gain more information about the customer, to build the fundament for a dialogue on a regular basis, a long-term relationship and to finally retain the customer to the company. The basis of this aim is the systematic analysis of customer information, which is usually gained through customer cards and receipts. A lot of effort was invested to gather and analyze this information in the past years with the target to create a strong data warehouse. Retailers are putting a lot of energy into the systematic analysis and use of data to build closer relations with their customers. Current slogans like “data mining” or “CRM (Customer Relationship Management) prove this trend to be true. 247

Customer Relationship Marketing (CRM) in Retailing In everyday management these terms are usually associated with the analysis and implementation of IT-solutions. In order to stress the strategic or instrumental aspect of the creation and intensification of customer relationship, this chapter will not refer to Customer Relationship Management but to Customer Relationship Marketing. To sum up, one can say that in the theoretical and applied approaches a change of paradigm concerning the aims and focus of marketing strategies has been taking place. In the past decades the main idea was to focus on acquiring new customers whereas today most of the marketing budget is spent on measures to retain the current customers of a company. The decreasing efficiency of classical marketing instruments also contributes to the shift in how the budget is spent. The main reason for this development could be the fact that customer satisfaction and loyalty have been recognized as a key path to profitability (Reichheld/Sasser 1991, pp. 108116 and Reichheld 1997).

Customer satisfaction as a fundamental concept Overview The concept of customer satisfaction plays a central role in both modern theory and application of marketing. As it is the central aim of all market and customer oriented activities it is also called the fundamental concept of marketing. High customer satisfaction is a reliable indicator of a company’s future since it generally correlates positively with customer loyalty and ensures a continuing cash flow in future (Bailom/ Hinterhuber/Matzler/Sauerwein 1996, p. 117). Customer satisfaction might not be a guarantee for their retention but it is definitely an antecedent of repeat purchase behaviour (Homburg/Giering/Hentschel 1998, p. 83).

Theoretical basis of customer satisfaction Customer satisfaction is generally seen as the result of a complex psychological process of comparison where the customer compares the perceived experiences (real output) – e.g. the products or the store – with experiences and expectations (expected output) they had before the real output (Foscht/Swoboda 2004, p. 208). In this process expectations and perceived services can both be influenced by a range of factors (see Figure 10:1) (Meyer/Dornach 1998, p. 249).

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Figure 10:1 Factors influencing customer satisfaction. Source: adapted from Meyer/Dornach 1998, p. 250. 249

Customer Relationship Marketing (CRM) in Retailing The factors that influence customer satisfaction can change over time, e. g. due to changes of life stage, of income, of the economic and social environment or of life style. Relationship Marketing considers these very changes for instance in its cycle approach, focusing not on single psychological factors but on the relationship between consumer and supplier and splitting this relationship into different phases. In extreme cases the whole process of business dealings is considered (see Figure 10:2). This perspective results from the fact that in Relationship Marketing the long-term effect is vital and the short-term one rather neglected. The aspect of a long-term relationship is still being neglected and is a challenge in terms of being applied in growing complex and difficult markets. In case the expectations of the customer are exceeded, the customer will be convinced (high satisfaction). However, in case the expected output is by far beyond the real one the customer will be disappointed (dissatisfaction). If expectation and output are more or less balanced, the customer will be satisfied. Since all consciously or unconsciously perceived outputs are the factors determining the result of the comparison as much as the company’s image does, customer satisfaction can be regarded as an indicator of perceived quality. The so-called global satisfaction refers to the whole company, whereas due to satisfaction concerning single output features (e. g. friendliness of the sales staff, price/quality-ratio, size of assortment) more subtle judgements can be made which, in turn, are the basis of improvement. Customer satisfaction – no matter if seen from a global or detailed perspective – is more and more seen as a pre-profit index for the comparison with competitors, with previous activities and of different stores within one retailing chain.

The impact of customer (dis)satisfaction The main reason why customer satisfaction plays such an important role in marketing is its positive impact on customer retention or repeat purchase behaviour (e.g. Homburg/Giering/Hentschel 1998, pp. 93). On average loyal customers have lower price elasticities and purchase more often. Even if customer satisfaction at a high level is often an antecedent of customer loyalty, phenomena like for instance “variety seeking behaviour” show that satisfied customers do not necessarily have to be loyal (Bänsch 1995, Gierl 1993). However, basically one can say that satisfied customers are more willing to repurchase and that they are more loyal. In addition they have a higher resistance to competing offerings.

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Figure 10:2 Life cycle of customer relationship. Source: Stauss/Seidel 2002, p. 23 251

Customer Relationship Marketing (CRM) in Retailing The following consequences of high customer satisfaction have been identified in empirical studies (Kotler/Bliemel, p. 37): x x x x x

Satisfied customers tend to buy new products and to substitute old products with new ones. Satisfied customers recommend the company and its products. Satisfied customers have lower price elasticities. Satisfied customers often provide the company with new ideas and stimulus. Satisfied customers are less expensive to serve than new customers as transactions between customer and company are rather routinized.

Customer retention in retailing Conceptual definition and aims Despite the fact that the term customer retention is of general usage and often refered to, it is still a complex construct. Customer retention comprises all measures of a company aiming at the stabilization or extension of the customer relationship (Bruhn, p. 112). Customer retention seen from the supplier’s point of view is an activity while seen from the customer’s point of view it can be called a state, which reflects the customer’s retention to a store and the consequent reduced tendency to switch stores. Features of real customer loyalty are not only the retention to a store but also the positive attitude towards this store. Otherwise one might be tempted to perceive as loyalty habitualized shopping, spurious repeat purchases or buying in a store simply because there is no alternative available. Customer retention management deals with the systematic analysis, concept, application and control of all measures aiming at the customers’ future intention to continue doing business with their preferred retailer (Homburg/Bruhn, 1998, p. 8). Economic aims of customer retention primarily focus on ensuring or driving sales, the share of market and the profits higher. The most important pre-profit aims of customer retention, however, are increasing the satisfaction after the purchase and the customer loyalty to the retailer. All in all it is quite obvious why customer retention is called the “new best possible marketing strategy” (Bliemel/Eggert 1998, p.37) despite the fact that it is heading towards the opposite direction of current trends in consumer behaviour. Agreement can mostly be found concerning the “new”, “hybrid” or “multioptional” customer’s decreasing willingness to be retained (Liebmann 1996, p. 43).

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Customer retention programmes in retailing Overview Multiple factors have an impact on the customer’s retention to a store. In the first line it is affected by the classical fundamental qualities of a store (Hansen 1990, p. 138). According to empirical studies, these are the factors that are very often referred to as the main reason why the store in question has been chosen (Arend-Fuchs 1995, p.124). Among these factors are store location, assortment, price/quality-ratio, product quality, friendliness and competence of the sales people. If on the basis of these factors the retailer is regarded as attractive, the way is paved for a high percentage of loyal customers. Apart from that there are several instruments in retailing in order to actively promote customer retention. Some authors distinguish between different measures of customer retention on the basis of the four classical marketing instruments (the 4 P’s) (Diller/Müllner 1998, p. 1224). According to this approach e. g. event marketing, direct mails, customer journals, telephone marketing and customer clubs and cards are part of promotion policy while discount- und bonus systems, flexible price strategies and other monetary incentives are part of price policy (Bruhn 1999, p. 134). A main feature of customer retention in retailing is the necessity to increasingly focus on smaller consumer groups in a more detailed manner. Here customer value plays an important role and has an impact on the content of the measures and programmes used to retain customers. The basic idea of calculating life cycle value is the transfer of investment calculation methods to customer retention. Customer lifetime value refers to the value of a customer or of a future customer. What is particularly interesting is the customer value coming from customers talking to potential customers or showing them their consumer behaviour. These people can be advocates and acquire new customers. Their value is also called acquisitory or communicative value. The value of information is of great interest, too. Customers who complain and by doing so inform the company about lacks are less prone to switch and are the basis of this value (Gierl/Kurbel, p. 176). Tailored programmes for profitable customers In retailing there are more and more approaches using a rather detailed segmentation of customers as a basis for the creation and increase of profitable customer relationships and for creating tailored programmes in line with the customer value (Liebmann/Angerer/Gruber 2003, p. 125 ff). 253

Customer Relationship Marketing (CRM) in Retailing For the Austrian “do it yourself” specialist Baumax, for instance, people building their houses turned out to be a very interesting customer segment (LZ, 26.2.2004). Using the communication tool, Baumax targets the advertisement at these customers before they change from an early stage like for example installation to a later stage like furnishings. By analyzing data from receipts and customer cards, this company wants to fine-tune its offerings to it’s “A” customers’ needs in future. By doing so, new information is gained to make ABC analyses, to measure the cross-selling potential, to support the position of their own brands, to plan and controll the sales. Finally, information is gained about the life cycle of products, which can optimize price, range of products and promotion. Customer cards Unlike the USA, where at the beginning of the twentieth century retailers like Sears, Roebuck & Co. introduced so called charge cards, in the German speaking countries retailers discovered this customer retention instrument quite late. In 1959 the Bavarian chain Breuninger was the first German retailer using customer cards. Other retailers like Quelle, Hertie, Adler and Douglas did so only a great many years later (Schmalen/Schachtner 1999, p. 140). A system of customer cards comprises the permanent collection, transfer and use of information. As a result there are different types of customer cards. There are customer cards which can also be used as credit cards in the sense that customers can pay with them, however, usually only at the retailer that issued them (Berekoven 1995, p. 260). There is a clear trend towards the so-called smart cards or chip cards. Those retailers that do not hand out their own customer cards but have their place on the chip of a Eurocheque card which most of the customer always have with them might be particulary successful. In this context the food retailer Billa, a company of the REWE group, is a good example. There are further customer cards like discount cards which can usually not be used as a means of payment but if presented at the checkout the customer will – often once or twice a year – get a discount of generally three percent on the purchase. The extent of how often a customer card is used and how much it improves the customer retention depends primarily on how attractive the advantages are. These advantages should not be limited to advantages concerning payment and discount as they can be longterm guarantees of quality and service, delivery, generous exchange of goods, birthday presents and invitations to product presentations, exhibitions or other events (Kaapke 1999, p. 173). Last but not least there are also affinity or co-branded cards. These customer cards are produced in cooperation with credit card enterprises like VISA, Mastercard/Eurocard or Diners Club (Schminke 1992, p. 129).

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Foscht, Angerer, Swoboda The main advantage of these affinity cards is at the same time the main disadvantage, i. e. due to the open system customers can increase the sales of competitors. Customer clubs Not unlike the customer cards’ purpose, the customer clubs’ one is to retain those customers who either in the past used to identify themselves more with the company or who played an important role because they purchased much or were opinion leaders. The main features of these clubs often are (Butscher 1998. p. 21): Customer clubs are founded, planned and administered by a company or an organization but not by customers. x Customer clubs offer their members a range of financial and nonfinancial advantages. x Through customer clubs a regular dialogue-oriented communication takes place. x

Members of a customer club get a card, however, it is no means of payment or of collecting discount points. What they offer is having access to services non-members do not have access to. Advantages for regular customers (e. g. club journal, club events and other meetings) are for retailers a possibility to establish a dialogue, to exchange information on a regular basis and to intensify an emotional relationship and the identification of the club members with the retailer. However, often customer retention seems to be regarded as a prerequisite and not the consequence of customer clubs. An analysis of the customer clubs of a specialist store, for instance, showed that clubs can only slightly intensify the already existing customer retention. The high customer retention of customer clubs to the retailer often highlighted seems rather to be due to the selection of the customers than to the services of the club (Diller 1997, p. 41). Successful customer clubs attempt to address homogeneous customer groups in a customized way. That does not only apply to different age groups ( e. g. Woolworth Junior Club or senior clubs of American banks) but also to customers having similar life styles (e. g. IKEA) or e. g. depending on the purchase rate – customer status (e. g. Tesco Club Card in gold, silver or bronze).Tesco’s club card is the prerequisite for its loyalty programme to address different customer segments in a tailored manner. The basis of the programme were six cards which was gradually extended. Today there are nine cards which offer commission on items and tailored services. 255

Customer Relationship Marketing (CRM) in Retailing Among them are e. g. financial services, holiday offers or social services like the Baby Club where new parents can exchange their experiences and get everything babies and mothers need. These services have the effect of a closer customer retention in communities. A so-called “emotional bonus” – as it is called by Tesco – is an additional reason to decide for a Tesco Clubcard. The basic idea is that the bonus offers something money cannot buy, e.g. the community (Liebmann/Angerer/Gruber 2003, p. 165). In future, certain club services might be offered primarily via the internet (e. g. the Sam’s Club of Wal-Mart), which opens doors to enhancing the feeling of being part of a community especially in the field of interactive communication (e. g. discussion plenaries). In addition, this medium renders it possible to create a relatively inexpensive “virtual customer club” for certain customers (Foscht/Swoboda 2004, p. 206). Bonus and loyalty programmes Apart from customer cards and clubs, loyalty programmes based on a points system are becoming increasingly popular in retailing. Similar to the frequent flyer programmes of airlines, retailers are attempting to activate the “collecting drive” of their customers by converting purchases into points and supplying presents and commissions once a certain level has been reached.Just like airlines offer bonus miles for flights that are fully booked and for months in which the demand decreases, bonus points could be used as a means of sales promotion of certain items and on days on which there is not much demand. The bonus and loyalty programmes become more attractive, the higher the number of cooperating partners where purchases can also be converted into points. These so called multi-partner programmes offering customers presents and commissions seem to be a trend in loyalty programmes particularly in England, France and the USA. One very successful customer card system in Germany is for instance Payback. According to experts, in future the market could be divided into the competing industries retailing and service (airlines, hotels, restaurants, telephone communication services). Complaint management In general, the main feature of customer retention programmes is the attempt to retain the satisfied customer. Quite often the second level of customer retention, i. e. the stabilization of threatened relationships to dissatisfied customers, is neglected (Stauss/Seidel 2002, p. 24). On this level complaint management plays an important role. It is the complex management of planning, implementing and controlling all measures of a company regarding complaints (Wimmer 1985, p. 233). 256

Foscht, Angerer, Swoboda An accommodating and quick complaint management basically aims at regaining customer satisfaction. Apart from that there are several minor aims (Stauss/Seidel 2002, p. 24): x x x x x x

Satisfaction after the complaint, avoiding costs caused by other reactions of dissatisfied customers (e. g. ombudsman, lawyer, consumer protection organization), implementation and visibility of a customer oriented strategy, spreading positive word-of-mouth to increase purchase, analysis and use of complaint information, reduction of internal and external costs due to mismanagement.

A further aim of complaint management is to positively affect the repurchase intention, to reduce the number of unvoiced complainers and to stop customers from leaving (Bruhn 1999, p. 177). So one central task of complaint management is to facilitate complaints for dissatisfied customers in order to have them complain directly or indirectly. Services Services are appropriate means to retain the customer to the company. Some examples are the guarantee (e. g. cash back for each expired item a customer discovers), different kinds of delivery or the special treatment of regular customers in the British retailer Safeway (e. g. self scanning machines and special check-outs). Dialogue oriented and direct communication Current studies emphasize the increasing importance of direct and dialogue oriented communication. The personal interaction, e.g. event marketing and promotions, are regarded as extremely important. Direct marketing is gaining importance. However, comprehensive customer data are essential in order to offer tailored products. The German self-service department store Real of the Metro Group is a good example. Concerning customized communication through CRM, this company plays a leading role. At the moment Real is differentiating ten groups each with about 400 000 customers. These groups are described as oriented towards “fresh products”, “convenience”, “baby products”, “low prices”, “basic cooking”, “traditional convenience”, “basic nutrition”, “additional nutrition” or “international premium products” (LZ, 18.3.2004). In 2003 the company successfully sent tailored mails. A toys mailing was sent to 380 600 families with children up to ten years just shortly before Christmas which made almost 44% of these families buy items at Real. 257

Customer Relationship Marketing (CRM) in Retailing The data for detailed customer analyses are gained through the Payback Bonus Card, a partner card cooperating with companies like AOL, HDI, Galeria Kaufhof, Apollo Optik, Europcar, Obi and dm. The German drugstore-chain dm, for instance, focuses on dialogue marketing with the aim that the customer goes to dm and either through purchase or a conversation ends up in a dialogue with the retailer. Approximately between 120 and 150 direct mails are sent to twenty different customer segments a year. Depending on the mailing eight to eighteen items are recommended. The sender is the local store or the local store manager. In order to be able to send these mailings, dm first needed to make sure that its approximately 800 000 customers agreed (LZ, 19.2.2004). Dialogue oriented marketing strategies are often regarded as a typical feature of Relationship Marketing (Foscht/Swoboda 2004, p. 229). As a consequent, interaction gains importance, like e. g. approaches to management of customer feedback (Angerer 2003) show. This example shows that dm is systematically trying to use the customer retention potential of a professionally designed communication. A great many retailers have not optimized their communication in terms of addressing customers according to their type (Angerer 2004a, 2004b). Couponing Couponing is used for promotion and customer retention. Customers receive coupons which entitle them to a discount or a free gift (Bauer/Görtz 2003, p. 107). In the USA it has been in use for some decades, in Europe its importance seems to be increasing these days. Due to the tradition of couponing, various kinds of it have emerged, like e. g. information, bundling, item, discount, shopping, loyalty, mail-in, pre-sales or after-sales coupons (Kreutzer 2003, p. 8 f). From the customer retention management’s perspective, coupons are a suitable means to intensify and promote customer retention in each stage of customer life cycle. In the early stage, for instance, coupons (e. g. sampling coupons) can be used to make people start thinking about a product (Foscht/Swoboda 2004, p. 230). Discount coupons can be part of customer retention management and be issued to intensify the use of a product, aftersales coupons can be issued to increase repurchase intentions. In case a relationship has come to an end, coupons can be efficiently issued to gain back past customers (Kreutzer 2003, p. 14). Customer newspapers and customer journals Customer newspapers and customer journals are often used as part of a company’s customer retention programme.

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Foscht, Angerer, Swoboda While in the past they used to support public relations and were presented as free material around the check-out, today they are primarily sent to a selected group of regular customers and potential customers. If the company succeeds in branding this medium as a branch journal dealing with interesting issues and problems concerning the products and services it offers without stressing too much the advantages of its own products then the promoting effect can be enormously high (Lob/Walter 1993, p. 28). Interactive media Interactive media can be further means of customer retention. They are getting more and more popular since they offer multiple possibilities to implement customer orientation regarding product, distance and time (Löbler 1997, p. 18). Especially in the field of the three fundaments of customer orientation (Barth/Stoffl 1997, p. 8) – flexibility, cost reduction and improvement in efficiency – there seem to be more ways to develop strong relations with the customer (Foscht/Jungwirth 1999, p. 235). Interactive media can be adapted on- and offline. Offline there are for instance infoterminals offering detailed information concerning e. g. different types of wine. Among the online media the internet is very popular but companies are gradually making their first steps towards m-commerce. One example is the Karstadt department store in the Bavarian city of Stuttgart. The slogan is “This window sends you a voucher via sms” and those who have a mobile phone with infrared-interface can participate. Karstadt has, among others, used this marketing instrument to successfully promote the departments Young Fashion and Comic. After only one week the feedback rate for Young Fashion was higher than 280. Karstadt ensures that the interactive element is embedded in the philosophy of Permission Marketing. The message will only be received if the customer uses the infrared-interface of the mobile phone (LZ, 14.4.2004).

Perspectives of Customer Relationship Marketing in retailing Early views of marketing focused on acquiring new customers, on purchase and every single transaction. In the past years, however, developing strong, lasting relations with customers became the core of marketing. By allocating great amounts of money to data warehouses, a great many retailers have set the course for individualized relationships to their customers. In order to be able to realize the real depth of information in the customer data, further investments of analyzing tools, e. g. data mining or analytical CRM will be necessary.

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Customer Relationship Marketing (CRM) in Retailing These are important antecedents of addressing customers according to their value and their preferences and of offering tailored services. Through clearly defined programmes for target groups, retailers gain a competitive advantage because they are seen with different eyes and develop their own unique profile. A fact that should be considered is that by analyzing customer data only patterns of relationships to current customers can be discovered and not relationships to potential customers. As a result it is highly recommended to add data of non-customers gained through marketing research and connect them via “data enrichment” or “data matching”. Marketing research also has the advantage that due to the anonymity of the person interviewed personal data, e. g. psychographic or life style information, can be gained which make it possible to develop smaller segments of customers. This approach based on marketing research can substitute expensive implementations of data warehouses or CRM systems for small- and medium-sized enterprises. To sum up, one can say that the strategically oriented Customer Relationship Marketing approach is a very effective means of increasing the marketing success in an environment that is becoming more and more complex.

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