Supply chain information technology advocates used to boast that the information was almost more important than the shipment itself. You don't hear that claim much any more, but underlying it was an essential truth about supply chain management: Clear, accurate and timely communication between shippers and receivers is fundamental.
Nowhere is that more true than in the often prickly relationship between consumer packaged goods (CPG) companies and their retailer customers. Requirements placed on CPG companies by the Wal-Marts, Targets and other big box companies are becoming ever more onerous. Make a mistake on a shipment—deliver it late (or at the wrong time) or incomplete or with the wrong goods or with inaccurate documentation—and you risk not only losing the sale but also being slapped with a penalty.
For all the talk of collaboration, it's all too clear that the retailers are still calling the shots. But the CPG companies aren't wasting energy complaining about it. "Beating up on the big retailers is passé," says Thomas Bornemann, managing partner for Clarkston Consulting, which has a large consumer goods practice. "Whatever the initiative is, it has to be used internally to improve. Companies that embrace that idea are going to win."
Their victory will be achieved largely through a number of emerging technologies. Mike Dempsey, industry strategy leader for RedPrairie, a supply chain software systems provider, says, "The big point is changing distribution patterns."He says the pressure to reduce cycle times among retailers is throwing new demands on suppliers, primarily in the area of software.
"It ties back to globalization," he says. "Products are being manufactured on a worldwide basis. They are going to lower-cost labor markets. You have to create solutions that support those movements." Systems have to be developed to overcome the inherent contradiction between offshore sourcing and demands for shorter cycle times. "The primary way to mitigate it is through software technology and optimization tools," he says.
Bornemann is not persuaded that the offshore sourcing of consumer products is as widespread as is generally assumed—for the very reason that it's difficult to reconcile with demands for responsiveness."Outsourcing is not nearly as pervasive as people think because of that problem," he says. He reports that Procter & Gamble, for instance, will not outsource its core manufacturing because it's almost impossible to control.
The answer for CPGs is more actively collaborating with their customers, better understanding what they expect and making the exchange of information between the parties speedier and more accurate.
"We're seeing a new emphasis on customer intimacy," Bornemann says. What that means is that both CPG companies and the retailers see credibility as a two-way street, he explains.
For example, though retailers still demand the "perfect order"—one that's on time and complete and is accompanied by correct information —they're also willing to share performance information with their suppliers. That scorecard gives the CPG companies the information they need to dissect and solve problems.
Coty Inc. is one company that gleaned valuable performance and operating data from its customers' scorecards. A couple of years back, Coty and Clarkston developed a customer scorecard that measures Coty's performance from its customers' perspective. The goal of the scorecard was to improve those customers' satisfaction with Coty's performance, which would in turn reduce compliance fees charged by the retailers.
Coty implemented the scorecard with five customers last year and currently uses it with 15 customers. The metrics derived from the scorecard have allowed Coty to improve its order fill rates, reduce out-of-stock occurrences and eliminate order cancellations resulting from data errors, according to Clarkston. Coty has also increased the frequency of its advance shipping notifications (ASNs) to improve shipment visibility—a decision derived from what it learned from the scorecard reports.
The goals of greater accuracy and fewer penalties are closely connected with one of the more important trends by the CPGs. "One of the biggest drivers I am seeing is managing the customer as a profitable entity," Bornemann notes. Many suppliers to Wal-Mart, for instance, have established offices in the retail giant's home town of Bentonville, Ark. They offer something like one-stop shopping to Wal-Mart, taking consolidated orders for all Wal-Mart locations at that one point. Not only does that make life easier for Wal-Mart, Bornemann says, but it also allows the CPGs to handle the volume better.
Then there's the issue of getting goods to the retailers, often on short notice. That need to respond quickly has led many CPGs to regionalize their distribution centers in an attempt to get physically closer to the customer's final distribution point. "That makes it more difficult to manage," Bornemann acknowledges, "but they're getting control. We're continuing to see that trend. You have got to get closer; you have to be quicker."
Even then, short lead times are problematic, and they continue to force CPGs to keep finished-goods inventory levels high. Finished-goods inventory levels are as much or more about customer service than supply chain management effectiveness. "Finished-goods inventory won't go away until we get to a responsive supply chain and make to order," Bornemann says. "The next 10 years of supply chain will be focused on that.
"Information technology plays a big part in that," Bornemann continues. "With good IT, you can do things in seconds versus days. You can cut a lot of cycle time out. Also, you can collaborate much further up the chain."
The demands for visibility emerging from the retail sector are also driving some IT investment. John Fontanella, vice president, supply chain management at AMR Research, says, "A lot of CPGretailer communication is still via EDI or ASNs. But the retailers want to look further upstream."
Related to that are two technological innovations that have evolved rapidly over the last two or three years: the WorldWide Retail Exchange (WWRE) and UCCnet.
The WWRE, which was started by a group of major retailers in 2000, aims to link suppliers and retailers in order to automate supply chain processes and thus reduce inefficiencies. It currently has 64 retail members and claims to have saved members more than $1 billion.While started by retailers, it operates as an independent company and neutral intermediary. WWRE, which has become a major business- to-business exchange in the retail marketplace, adds that its products include planning, negotiation, purchasing and logistics modules.
UCCnet, an offshoot of the Uniform Code Council, provides standards-based electronic commerce services, with an eye toward allowing participants to synchronize item information in 23 industries using the Internet. Founded in 1998 and launched in 2000, it now has more than 750 members, including 416 added during the first half of this year.
An example of UCCnet at work is communication between Kraft Foods and Shaw's Supermarkets, a New England grocer. In the past, each time Kraft launched a new product or changed product specifications, someone at Shaw's had to go in and manually update the grocer's systems. Using UCCnet technology, Kraft is able to send Shaw's data in XML (extensible markup language) form that allows the grocer to quickly update data on Kraft products in its ERP and other systems.
UCCnet says that studies by the Grocery Manufacturers of America, the Food Marketing Institute and UCCnet indicate that the technology's benefits could be substantial, including reductions in invoice discrepancies, reductions in product delivery errors, improved purchase order quality and better retail scanning accuracy.
UCCnet and WWRE are two of a number of related technologies that are creating the tools for development of what has been called intelligent response. "When you look at supply chain process management," Dempsey says, "you'll find there are really three elements to it. There's the data integration layer. Suppliers and retailers are integrating data. Once you get that, you begin to get visibility. Coupled with that is the event management level. Event management software is there today that can identify specific occurrences or lack of occurrences and provide information. Beyond that, the real purpose of visibility and event management is it can do what [consulting firm] Gartner [Group] called intelligent response. If you need to make better decisions about the supply chain, these systems provide data and you can arrange for a predetermined automatic response to events."
Engulfed by the radio wave?
The next major technology that will affect the relationship between CPGs and their customers is one that may not be new but has nonetheless received extraordinary attention over the last year—RFID.
Despite mandates by Wal-Mart and the Department of Defense for quick implementation of RFID systems, the trend may not take hold as quickly as some of the publicity might imply. "Overall, this industry knows that it will be quite a while—five to 10 years—before RFID tags that are both readable and writable will permeate this industry," Bornemann says. Part of the reason is the expense involved in implementing the technology—an estimated $2 million per DC or factory just for the hardware, he reports. And standard protocols are just on the verge of widespread adoption. Even so, companies are beginning to think about how to derive internal benefits from RFID technology.
"Customers of CPG companies are putting stakes in the ground mandating inclusion of tags in cases and pallets for their benefit," says Christopher Verheuvel, vice president of the retail group for Manugistics Group Inc., a large provider of supply chain software systems. Indeed, only last month,Wal-Mart reaffirmed its commitment to phasing in RFID throughout its distribution network in 2005, with a goal of having it completed by the end of 2006.
"The real question becomes, 'OK, Mr. CPG manufacturer, if you're going to invest, wouldn't you like to get some benefit, too?'" says Verheuvel. "We've started talking to CPG executives and they've faced the business reality of what their customers are asking."
He says that the RFID systems' efficiency in collecting accurate data is the key. "RFID allows you to respond more effectively," he says. "It's well known that CPGs carry excess inventory because they have to support the Wal-Marts against their service levers. The closer you can get to the execution, the less inventory you have to carry."
But the real test of RFID will be whether the benefits are widespread.Verheuvel thinks they will be. "There will always be integration issues," he says."More important are the business process issues. What is the value to the organization? You have to look at the cost of integration, the physical tags and readers, the business process costs. Then you have to make a decision. Is the tradeoff of a more nimble supply chain worth it? Almost always, the answer will be yes."
Verheuvel also believes that adoption of RFID will proceed faster than most observers are predicting. "Whenever you think item tagging will occur," he says, "it will happen sooner."