Efficient Consumer Response is an approach to the improvementof the value chain, that promises to deliver financial benefits worth around 5% of retailsales, depending on the situation to which it is applied. It was originally developed inthe grocery industry but the principles have far broader application. Its strength is thatan entire value chain, from manufacturers’ suppliers to the final consumer has beenanalysed in total to identify opportunities for improvement.
Many significant improvements lie at the manufacturer /retailer interface and involve both the supply of goods and the generation of demand(through promotional activities etc). Many of the improvements require collaborativeaction between trading partners (not least the adoption of facilitating technology) and acost model has been developed to assist in the negotiations over the sharing of costs andbenefits between partners. This briefcase guide explains the origins of Efficient ConsumerResponse, the potential benefits and how these benefits may be realised.
What is Efficient Consumer Response?
Efficient Consumer Response (ECR) improves the supply of goodsthrough the value chain to the consumer. It has been applied to groceries, frozen foodsand healthcare products; however the principles are equally applicable to other fastmoving consumer goods and consumer durables. This value chain spans the consumer,retailers, wholesalers, manufacturers and their suppliers. It may also involve brokers andthird party distributors.
The ECR project has produced a possibly unique analysis.Unusually, participants within a value chain who have normally had an adversarialrelationship have produced:
- an activity-based model of the business processes within the entire value chain coupled with an allocation of costs to those processes maturity profiles, i.e. qualitative benchmarks that allow working practices to be compared with best practice
- key performance indicators, designed to improve the operation of processes as a whole
The process analysis not only encompasses the activitiesfor the supply of goods but also those that generate demand. This is particularly valuablesince most analyses of the value chain, even those which consider the demand pull from theconsumer, treat the value chain as a means of satisfying customer demands and do notconsider the means of stimulating that demand.
The origins of ECR
ECR first began in the United States (US) grocery industry in1993, in a report ‘Efficient Consumer Response – Enhancing Consumer Value in theGrocery Industry’1. The objective was to improve the operation of thegrocery value chain, especially through better cooperation between trading partners withinit. Having obtained the benefits, there remains the contentious issue of who should reapthem. Although the emphasis has been placed on delivering benefits to the eventualconsumer, in practice they can accrue anywhere within the value chain depending on marketpressures. ECR has now crossed the Atlantic and is being adopted in continental Europe andthe United Kingdom (UK).
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The driving force behind the initiative has been therealisation that in many countries the effect of competition has been to create anadversarial climate which has increased not decreased non-value-added activities.Furthermore the pace of competition is set to increase. In Europe, for example, theconsumer market is characterised by a combination of threats and constraints, such as:
- a stable population
- a blurring of distribution channels (perhaps best symbolised by petrol stations turning into supermarkets and supermarkets selling petrol) leading to enhanced competition
- the entry of alternative retailing methods (e.g. electronic home-based methods) which could subtract market share from existing participants
Given this environment there is a recognition that futurecompetition has to be constructive not destructive.
Scope of benefits
The anticipated benefits are broad. Grouped according to thefive dimensions of value chain performance, they include:
- Cost – ECR has the potential to reduce non-value-added activities and also to lower inventory. The financial benefits amount to around 5% of retail sales
- Timeliness – ECR promotes better transmission of data and the synchronisation of activities within the value chain
- Quality – ECR enables consumers’ expectations to be better met, through higher process and delivery reliability and the avoidance of the degradation of perishable goods
- Customer service – ECR leads to improved customer service in areas as diverse as the avoidance of stock-outs, the ability to be responsive to particular customer requests and the provision of stores that allow consumers to make choices more easily (e.g. by better designed store layouts and displays)
- Adaptability – ECR explicitly targets new product introduction as a process to be improved
Scale of benefits
It is the headline figure of financial benefits that attractsattention. However, estimates of the headline figure vary:
- in 1993, the original US report1 estimated benefits to 10.8% of retail sales (8.5% relating to operating costs and 2.3% to finance charges, reduced through lower inventory and fixed assets.)
- in 1994, the Coca-Cola Retailing Research Group, Europe (CCRRG,E) published a report Supplier – Retailer Collaboration in Supply Chain Management2 (a very similar concept to ECR) and calculated an average benefit of 2.9% of retail sales. The report attributed the lower figure to different starting conditions in the US and the recognition that some marketing-related benefits were not available to the whole industry but only some operators (hence lowering the industry average)
- in 1996, the European Value Chain Analysis Study, estimated benefits of 5.7% of retail sales (4.8% relating to operating costs and 0.9% relating to inventory). This was based on an observed benefit of 3.0% in a sample of 15 companies, extrapolated on the grounds that the sample was more competent than the industry average. This report attributed the difference between its 5.7% estimate and the CCRRG,E estimate of 2.9% to the broader scope of its study which included production and raw material suppliers and a wider set of Category Management concepts (defined below)
Despite the variation, there is consensus within theindustry that the scale of the benefits attributable to ECR in Europe amounts to some 5%of retail sales. However a few words of caution are appropriate.
Caution over benefits
Although there is confidence that ECR will deliver benefits,care needs to be taken in projecting savings from ECR. In particular:
- there has been some loose use of the word savings. In many cases, expenditure is not reduced, however a benefit is obtained from an increase in volume and a lowering of unit cost
- some postulated benefits may not accrue in all cases. For example, the original ECR report accounted for a reduction in inventory holding permitting a decrease in store backroom space, an increase in selling space and a consequent increase in revenue. Such a sequence may occur but it need not
- the size of the benefits for a particular company depends on its starting position
- many benefits are not available to the whole industry, only some operators. The CCRRG,E report noted this explicitly. The demand generation benefits were particularly potent for individual operators, around 3% of retail sales, but amounted only to 0.9% for the industry as a whole (because many operators would be excluded from the trading relationships used to generate the benefits)
- This is not to be sceptical about ECR. On the contrary, it is an indication that ECR should be embraced rapidly, before the competition. Those companies that adopt it should see benefits but, if the whole market is static, this will be at the expense of their competitors.
Structure of ECR model
To create the benefits, ECR advocates four strategies3:
- Replenishment – the replenishment of goods is of course the most fundamental function of the value chain but one which is not carried out with uniform efficiency. For example, in the grocery industry in the US the level of inventory within the value chain exceeds 100 days whereas in the UK the figure is less than 30 days. The differences are not only confined to inventory levels: the level of non-value-added activities varies widely as does the inherent efficiency of the physical distribution network
- New product introduction – it is reported that most new product introductions fail; for example in the groceries market it has been estimated that over three quarters of new products introduced do not obtain a significant presence. The inherent loss is enormous, both as regards the wasted effort in attempting to introduce the failed products and in the lost potential sales
- Promotions – lack of co-ordination on product promotions within the value chain can lead to raised inventory and misdirected incentives
- Store assortments – the joint planning of displays and layouts has been shown to boost sales, providing joint benefits to both manufacturer and retailer. The manufacturer enjoys higher product sales while the retailer has the joint benefit of increased direct sales and the multiplier effect of ancillary sales arising from the consumers’ presence in the store.
Application of ECR strategy
Of the four strategies listed above, the latter three fallinto the area of Category Management whilst the first is in the realm of Supply ChainManagement. Category Management is concerned with generating demand. Supply ChainManagement, as the name implies, addresses the supply side of the equation; in the area ofreplenishment, six themes have been identified: integrated suppliers, synchronisedproduction, continuous replenishment, automated store ordering, reliable operations andcross-docking.
All these ECR strategies need to be applied. In the US, theemphasis has been on using ECR to improve Supply Chain Management; there are very highlevels of inventory and non-value-added logistics activities and this area of co-operationseems to be less sensitive than that of demand creation.
However, in continental Europe and the UK the CategoryManagement aspects of ECR will be given full prominence.
Other aspects of the ECR architecture have been defined, forexample, four major business processes: Replenish Products, Introduce Products, PromoteProducts and Merchandise Products, each correspond to an ECR strategy.
These processes are shared by up to four trading partnersin the value chain, namely: retailers, wholesalers, manufacturers and their suppliers; inaddition there may well be third party distributors and brokers involved.
The European Value Chain Analysis Study3identified five product distribution channels, specific to Europe: self-distributingretailers, wholesaler-delivered, wholesaler-cash & carry, direct store delivery-fullservice and direct store delivery-delivery only. Finally the report also identified fourenabling technologies: item coding and database maintenance, electronic data interchange,electronic fund transfer and activity-based costing.
We now describe how the high-level process architecture isbroken down into finer detail through activity analysis.
ECR activity analysis
The four core processes have been analysed into primaryactivities and then into a full activity dictionary. Activity dictionaries are a valuabletool in applying ECR. They allow a definition of:
- who is doing what within the value chain
- how much is being spent on each activity and where there are potential savings in non-value-added activities
- how costs vary for an activity (i.e. the cost drivers) and the most appropriate performance measures
The activities go into a reasonable amount of detail; forexample, in the US Grocery Industry Activity Model, the four processes are broken downinto 17 primary activities and then into 70 supporting activities (the European modeldiffers slightly with 18 primary activities). We show a similar model for food brokerswith 19 primary activities and 92 supporting activities. It can be seen that many of theactivities are not specific to the brokering of food.
It can be useful to use a standard activity model becausetrading partners will recognise the classifications. However it is not difficult to builda customised activity model; an activity analysis is undertaken, the activities are linkedto the top-level processes and the costs are then allocated to activities.
|Sales & Promotion Planning
|Manage Sales Plan
|Develop sales plan
|New item cut-in
|Damaged goods administration
|Monitor sales plan
|Rotate shelf stock
|Develop call plan
|Set up/maintain order system
|Maintain display racks
|Schedule product delivery
|Handle damaged goods
|Order follow up
|Execute Sales Presentation
|Bring on New Lines
|Plan food shows
|Conduct shelf Management
|Food show administration
|Analyse category data
|Conduct/attend food shows
|Quote commodity pricing
|New line data entry
|Retailer Business Review
|Conduct shelf management
|Monitor retail pricing
|Analyse category data
|Monitor competitive activity
|Prepare product surveys
|Order/maintain POS & racks
|Direct and control
|Principal Business Review
|Conduct shelf management
|Conduct retail travel
|Budgeting & financial plan
|Accounts payable & receivable
|Conduct consumer marketing
|New Item Introduction
|Conduct shelf management
|Analyse category data
|Conduct store demonstrations
Need for action
When displayed in all its glory this ECR architecture canappear very formidable and off-putting. It needs to be emphasised, therefore, that ECR isprimarily concerned with changing behaviour. The analysis is a valuable tool to achievethis, not an end in itself.