Institute of Marketing &
Innovation
University of Natural Resources and Applied Life Sciences Vienna, Austria
A 1190 Vienna, Peter Jordan Straße 82
tel. +43 1 47654/3560
fax +43 1 47654/3562
mailto:schiebel@edv1.boku.ac.at
The European VCA
Study demonstrates the importance of a positive obsession
about generating consumer value, balanced by an equitable
agreement on rewarding trading partners based on their
true contribution to creating this long term value.
Implementing ECR
will result in a 5.7% reduction in consumer prices for
the average business in the grocery supply chain. This
reduction is composed of a 4.8% reduction in operating
costs and a 0.9% reduction of inventory levels. Of course,
this number differs for specific product categories and
distribution channels, but in every case, ECR creates
significant cost reduction opportunities.
Most business
growth is related to gaining market share by shifting
demand. Delay in ECR implementation risks shifting market
share to competitors already adopting ECR. Results from
companies already persuing ECR Category Management
suggest that business growth for leading companies could
result in three times the normal business growth expected
using current capabilities.
Key words:
Efficient Consumer Response, Value Chain Analysis*,
Common language
* The author
would like to thank Coopers & Lybrand ECR Center of
Exellence, Utrecht (The Netherlands) for having the
opportunity to recommand to their Final Report and the
ECR Board Austria for help.
[top]
Efficient Consumer Response (ECR: Category
Management, Product Replenishment and Enabling
Technologies) is a global movement in the grocery
industry focusing on the total supply chain (suppliers,
manufacturers – including agriculture, wholesalers
and retailers) working closely together to fulfil the
changing demands of the grocery consumer better, faster
and at less cost.
Consumers today
are demanding more for less of retailers and
manufacturers. But: What does more for less mean ? How do
we define consumer wishes ? How do we determine how well
we are fulfilling these needs ? How do we assess the
potential impact of ECR ? How do we make good choices
about where to focus our energy ? Responding to these
questions is the purpose of Value Chain Analysis (VCA).
VCA has been
defined as an integrated set of tools (Activity Based
Cost Structure, Proprietary Costs, External Costs and
Internal Costs) and processes that are used to define
current costs and performance, as well as to assess the
potential impact of proposed ECR improvement concepts
across the entire supply chain for consumer goods product
categories. Additionally these tools and processes work
together collectiveley to generate priorities and action
plans.
In its original
version, as developed to support the USA ECR Performance
Measurement Operating Committee years ago, VCA was
focused on defining current costs and estimating cost
reduction opportunities. However, as VCA has matured from
hundreds of applications over the last couple of years,
ist tools haven been expanded to include (a) the
assessment of ECR impact on business growth, in terms of
consumer demand and on market share and (b) the
definition and communication of a shared vision, both
internally and with key trading partners, regarding the
impact of ECR on their business.
VCA supports
these needs by providing a common language that can be
used by companies and their trading partners to benchmark
currrent performance and set a future for ECR initiatives
on vertical cooperations between agriculrute and the
grocery industry.
The purpose of
the European VCA Study, as stated by the ECR Board, was
to assess the applicability of the ECR concepts for
typical European trading partners in grocery products,
while identifying and quantifying the range of benefits
that can be expected from ECR implementations.
[top]
In order to fully
understand the value chain analysis tool, an
understanding of its scope is necessary. When conducting
a VCA study, several decisions must be made before to
beginning. First, companies need an understanding of the
interaction of trading partners. Secondly, they must
select a croup of product categories to analyse, and
finally they must identify the relevant distribution
channels that are involved.
[top]
The design of the
VCA study allows it to examine up to five product
categories and their flow through the supply chain. It is
important to understand the meaning of product category.
Looking at one product category allows for the comparison
of data with other companies in the same product category,
as well as trading partners in the same product category.
An example: A
company has decided to look at product category cheese.
Cheese is a sub-category of Refrigerated Dairy Products
which is a sub-group of Refrigerated Products which is a
sub-group of Non-Dry Grocery Products.
Product
categories are an area of the VCA study which pose
problems for companies. At the heart of this problem is
typically a different definition of the `category‘
from the retailers perspective as compared to the
manufacturers view as well as from the consumers view. An
unexpected gain from VCA, that we had not originally
anticipated, came from companies re-evaluating their
business in this way.
[top]
The VCA study examines up to five
distribution channels at one time. The distribution
channels recognise that product flow is identical at the
front and back ends of the supply chain, although between
the manufacturer and the retailer's store shelves the
flows are very different.
[top]
Value chain analysis is a
comprehensive look at the activities of four trading
partners: manufacturers, retailers, wholesalers and
suppliers. Understanding the interaction of these trading
partners as well as their roles within the supply chain
is important in understanding the product and information
flow which is integral to ECR. The VCA model would treat
the relationship between a retailer and a manufacturer.
In this case, the model uses one product group for both
trading partners. This allows them to join their
individual data sets in an effort to understand the flow
of product through their related distribution channels.
[top]
VCA has been
defined as an integrated set of tools and processes that
are used to define current costs and performance, as well
as to assess the potential impact of proposed ECR
improvement concepts across the entire supply chain for
consumer goods product categories. Additionally these
tools and processes work together collectively to
generate priorities and action plans.
The Activity
Based Cost Structure permits companies to look at costs
in a standard structure across the entire value chain for
each product category, as is illustrated in the exhibit
below.
'Proprietary
Costs‘ are those costs that are incurred in
supporting the business, plus profit margins. These costs
fall outside the scope of the VCA study and are captured
for the specific company conducting the study - but never
carried into the database nor shared with any other party.
'External Costs‘
are funds paid out to other companies for: Ingredients,
packaging and products; Advertisement campaigns; Consumer
promotions; Trade deals (actual treated as a ‚revenue‘
flow).
'Internal Costs‘
are those costs that are incurred within the company to
perform 18 specific activities related to Introduction,
Merchandising, Promotion and Replenishment of products.
Maturity Profiles
allow a company to assess how much progress they have
made towards a full implementation of specific ECR
concepts, using a standardised scorecard. The scorecard
establishes specific measures, which must be met for each
of the ECR improvement concept criteria, in order for a
company to qualify for a certain level of maturity. This
standardisation ensures that when companies benchmark
their capabilities against those of their trading
partners, they are using the same criteria.
Key Performance
Indicators (KPIs) are used to benchmark current
capabilities and set future non-financial performance
goals. They include considerations such as promotion
effectiveness, delivery reliability, inventory turns,
order fill rates and assortment complexity. It is
important to note that the ECR KPIs address the most
critical performance measures associated with all four
primary business functions: introductions, assortment
management, promotions and replenishment.
The VCA model
uses the grocery industry activity model as a structure
to capture current company costs, introduce reduction
estimates for those costs, and provide baselines for
other trading partners in the supply chain.
While many people
think of benchmarking as capturing ‚best-in-class‘
information, the practice has a much wider application,
and can be used to simply `drive a stake in the ground´
against which others can be measured. The need for
consistency is imperative within the benchmarking process
in order to allow comparisons across multiple companies,
trading partners, product groups, and so forth.
Company
benchmarking is important because it allows companies to
benchmark their current cost structure to other similar
companies. Using the Activity Based Cost structure, a
company can easily benchmark itself across trading
partners, distribution channels and product categories.
[top]
Using the
standardised VCA tools, the unique VCA process can be
broken down into four inter-related models: The Grocery
Industry Activity Model; The Company Cost Benchmarking
Model; The ECR Concept Assessment Model; and the VCA Cost
Reduction Estimating Model.
To begin, one
must first understand how these models operate separately,
and then realise how they function collectively. Because
VCA is an integrated set of tools and processes which
work together to set priorities and designate action
plans, each tool is integral and unique to the VCA
process, and must be used properly to ensure the
integrity of the data that has been collected.
The Grocery
Industry Activity Model is used to break down a higher
level process or task into the specific activities being
performed and to communicate to participants key
information about those activities. Costs are captured as
either internal costs, external costs and proprietary
costs which are then spread across all trading partners.
The VCA model uses the Grocery Industry Activity Model to
capture current company costs, introduce reduction
estimates for those costs and to provide baselines for
other trading partners in the supply chain. Primary and
secondary activities are defined for the four key
business processes: Introduce Products. Merchandise
Products. Promote Products and Replenish Products.
The Company Cost
Benchmarking Model gathers data from two sources -
Activity Based Costing (ABC) and Key Performance
Indicators (KPIs) - to allow companies to benchmark their
current cost structure against those of other similar
companies as well as to benchmark themselves across
trading partners, distribution channels and product
categories.
The Concept
Assessment Model defines the expected impact of a
proposed change on the activities captured in the Grocery
Industry Activity Model. For VCA, the Concept Assessment
Model draws upon a library of baseline cost reductions
defined by product categories and distribution channels.
Coopers & Lybrand developed these baseline cost
reductions as a result of their world-wide industry
experience.
The Cost
Reduction Estimating Model brings togesther all the
collected VCA data, industry benchmarks, and cost
reduction estimates. The output of the Cost Reduction
Estimating Model is ECR cost reduction estimates
specifically for the company performing the VCA. These,
in turn, provide a biasis for the ECR priorities and
action plans.
[top]
In this section,
we will detail (interprete) the findings from the
European VCA Study. The key findings in this section will
be grouped into three areas: Shared vision, cost
reduction and business growth.
[top]
The leading
European retailers are already thought to be the most
progressive in the world in their implementation of many
of the concepts promoted by ECR. These leading retailers
are pulling their European manufacturers into more
aggressive ECR implementation programs.
The European VCA
Study demonstrates the importance of a positive obsession
about generating consumer value, balanced by an equitable
agreement on rewarding trading partners based on their
true contribution to creating this long term value.
Clearly, in many
cases this is easier said than done. Not every company is
sufficiently knowledgeable about its own activities,
costs and profitability at the product, distribution
channel and customer level to be truly capable of
considering its impact on the total value chain.
All too often
managers spend too little time making the basic trade-offs
that are involved in maximising consumer value, such as
those between consumer advertising funds, trade deals and
product costs for instance. Far too many managers still
operate in ‚vertical silos‘ with too little
knowledge of how their activities link into the total
value chain. Additionally, much activity is still a knee-jerk
reaction to competition, rather than a leading edge
response to consumer demands.
VCA relies on
maturity scorecards to assist companies in gaining a
stronger understanding of their own activities, costs and
profitability. Maturity scorecards encourage managers to
look outside their vertical silos in order to understand
how their activities are linked to those of the rest of
the organisation. As managers look internally and
externally, they will begin to focus on and understand
the entire supply chain.
Beyond maturity
profiles, interviews with top management in the
participating companies have reinforced the perception
that ECR is driving a basic shift in the ‚Rules of
the Game‘ for successful companies. Three
significant patterns have emerged from the European VCA
Study:
At the top of the
list is a basic shift away from wasting time on
adversarial relationships with key trading partners
towards one of working more closely together to maximise
the value provided to consumers.
Hand-in-glove
with this shift towards working more closely together is
the recognition by businesses that whatever they do must
make business sense to each trading partner, and that
there must be a willingness to share in both the pain and
the benefits from better serving consumers.
To realise these
benefits, it is clear that changes benefiting only one
link in the value chain may in fact be counterproductive
from the consumer's perspective, and that the greatest
improvements will come from optimising the performance of
the entire value chain through focusing on competence and
speed for every activity, and on interaction between
trading partners.
[top]
Implementing ECR
will result in a 5.7% reduction in consumer prices for
the average business in the grocery supply chain. This
reduction is composed of a 4.8% reduction in operating
costs and a 0.9% reduction of inventory levels. Of course,
this number differs for specific product categories and
distribution channels, but in every case, ECR creates
significant cost reduction opportunities.
Looking at the
costs for the total supply chain provides an
understanding of which trading partner is incurring which
costs, either internally or externally. This provides
companies with a better understanding of the activity
costs that they incur internally and with their trading
partners. ECR encourages trading partners to compare and
contrast their information, in order to ensure that
consistent and high quality information is being used to
drive the decisions that are made in the supply chain.
Using trade
association estimates, the European VCA Study used $572bn
as the amount of money European consumers spend annually
on grocery products. This money enters the supply chain
with the consumer purchasing products from the retailer.
Excluding proprietary enterprise costs and operating
margins for all trading partners, the VCA studies
captured all costs related to this $572bn in sales. These
costs total $491bn or about 86% of total consumer sales.
The costs incurred by retailers averages 14.9% of
consumer price, or roughly $85bn. Manufacturer costs
average 38.0% of the consumer price, or about $218bn, not
including the costs of ingredients and packaging which
are allocated to the supplier.
Raw material and
packaging suppliers receive on average 32.8% of the
consumer price in revenue from the manufacturers or about
$188bn. Since the European VCA Study did not closely
examine suppliers, we are unable to show a detailed cost
structure. Nonetheless, given that these costs represent
a substantial portion of the consumer price, they can not
be ignored when pursuing ECR opportunities.
It comes as no
surprise that the cost structure for a manufacturer is
quite different from that of a retailer. Examining the
manufacturer's stand-alone cost structure provides an
insight into where the costs are incurred. These activity
costs can then be used as a ‚universal‘ cost
structure in order to drive cost reduction estimates.
Manufacturers, on
average, spend the greatest amount of their costs on
ingredients and packaging (46.4%). Internally
manufacturers incur 21.3% of their costs on replenishing
products, leaving about 7% to introduce, merchandise and
promote products. Funds used for trade deals, advertising
and consumer promotions account for a substantial 25.2%
of total manufacturer costs. Inventory, expressed as a
percent of revenue, accounts for just over 10%.
Merchandise and
replenish product drive costs incurred by retailers,
accounting for over 80% of their total costs. Consumer
promotions and advertising account for an additional 17%
of the costs. However, as illustrated by the bar chart,
it is important to recall that all retailer costs account
for less than 15% of the consumer price. Note that
retailers view trade deal funds as a revenue, offsetting
some of their internal and external costs. On average,
inventory accounts for 6% of total revenue.
The actual cost
reductions that are available are very context-specific,
and the division of the ‚pot‘ between
alternative courses of action such as lowering retail
prices, improving profit margins or investing in demand-creation
activities will depend on companies' individual
competitive environments.
Cost reductions
come from two sources: operating costs (4.8% out of the 5.7%
total savings) and inventory (0.9% out of the 5.7% total
savings).
Again, it is
worth emphasising the point that the average operating
costs and inventory reductions that are available to the
grocery industry as a whole are likely to be higher than
for this study sample, which was biased towards the
larger and more progressive companies. Even taking the
average 5.7% figure, this translates into over US$33
billion worth of savings across the entire European
grocery industry.
Within the
participating companies, the largest estimated reduction
in operating costs totalled 6.5% of the retail price.
Combining this fact with weighted maturity profiles
reflecting the ‚average‘ European retailer and
manufacturer, the reduction in operating costs for the `average´
company is calculated to equal 4.8% of the retail price.
[top]
Most business growth is related to gaining
market share by shifting demand. Delay in ECR
implementation risks shifting market share to competitors
already adopting ECR. Results from companies already
persuing ECR Category Management suggest that business
growth for leading companies could result in three times
the normal business growth expected using current
capabilities.
Business
Growth has proven to be of equal - if not greater -
importance, compared to cost reduction in the
implementation of ECR.
ECR helps increase sales by ensuring that
the right products are at the right place at the right
time. Additionally, ECR seeks to increase the sensitivity
that exists between manufacturer and retailer by ensuring
that consumer expectations are always understood. This
permits them to more consistently offer those products
that consumers desire.
Retailers will
see business growth in the form of market share resulting
from increased consumer traffic and more purchases per
visit. Manufacturer growth from ECR will stem from
increased sales of existing products as well as from an
increased focus on the effectiveness of new product
introductions.
Best-in-class‘
companies have outstanding control of Product
Replenishment. This excellence in supply chain operations
gives these companies three advantages for business
growth: they can respond much more quickly to
shifting consumer needs; they have eliminated non-value-added
replenishment costs which can be used for value-added
activities or passed on as price reductions; and they
have minimised the capital tied up in inventory, so they
can use these funds in much more productive ways.
[top]
During a Value Chain Analysis study,
a large amount of data is generated, which needs careful
interpretation to distil the key messages. How do
companies interpret and act upon its findings? It should
be stressed, however, that interpretation is not an exact
science and it would be wise to seek the help of a
skilled VCA practitioner.
The European VCA
Study key findings in this area were:
- the majority of participating
companies have as yet failed to establish a sound
infrastructure basis for Category Management;
both manufacturers and retailers scored lower on
infrastructure than on the three other Category
Management concepts;
- manufacturers generally lag
behind retailers on introducing a full category-based
organisational structure;
- even leading retailers have
weaker information system support than most
manufacturers - this could be an obvious
opportunity for relationship building; and
- there are isolated examples of
highly advanced, mutually beneficial joint
category management programmes occurring.
The European VCA
Study showed that:
- presently this subject is
better understood by the retailer than by the
manufacturer; and
- sharing data and decision-making
power is a common barrier to progress.
The process of
implementing ECR within the European grocery industry
does not stop with the European VCA Study. Rather, the
process will vigorously continue into the future.
It is proven time
and again, that a common language between trading
partners is best provided through a VCA process.
[top]
1. Coopers & Lybrand and ECR
Europe. 1996. European Value Chain Analysis, Final Report,
Utrecht
2. ECR-Österreich-Initiative.1999.
ECR Handbuch II, Von der Idee zur Umsetzung, Wien
3. Kotler, Ph. 1997. Marketing
Management, New Jersey
4. Zickmund, W.G. and D’Amico,
M. 1996. Marketing, St. Paul
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