EFFICIENT CONSUMER RESPONSE (ECR) AS STRATEGY IN
MANUFACTURER-RETAILER NETWORKS
Luis Araujo and Stefanos Mouzas
Senior Lecturer and Doctoral Student
Department of Marketing
The Management School
University of Lancaster
U.K.
ABSTRACT
This paper discusses the issues of strategy in the context of manufacturer-retailer networks
in Germany. Our view of strategy from a network perspective is influenced by two
different starting points. Strategic change is effected through changes in practices in
concrete relationships, and the cumulative effect of changes in dyadic relationships
influences both the position and the network structures in which the focal actor finds itself.
On the other hand, strategies cannot be seen simply as the idiosyncratic product of the
circumstances each firm faces. The embeddedness of business networks in institutional
structures makes the firm a target of intervention for all those who seek to govern
economic life.
In this paper, we want to focus on one comprehensive initiative that is currently sweeping
many manufacturer-retailer networks in Europe and North America, and goes under the
label "Efficient Consumer Response" (ECR) or "Quick Response" (QR) initiatives. The
logic of this initiative means a complete redesign of the business process from
manufacturers' production lines to retailers' shelves and has important consequences at the
level of electronic data interchange, creation of transparent and activity-based cost
accounting and performance measurement systems, logistics and stock replenishment, new
product introductions, promotions and organisational forms..
The paper will present empirical evidence on the progress of ECR initiatives in Germany
and will focus on the extent to which the adoption of this initiative is promoting radical
changes in manufacturer-retailer networks. The paper will conclude with some reflections
on the process of firm and network government by initiatives such as ECR.
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INTRODUCTION
The objective of this paper is to examine and elaborate the notion of strategy from a
network perspective. In doing so, we want to take into account the interrelation of strategy
as the idiosyncratic product of a firm's trajectory of evolution and strategy as the adoption
of pre-packaged programmatic initiatives designed and promoted by third parties, namely
consultants and trade associations, who constitute themselves as experts in the government
of economic life. These pre-packaged initiatives are then transferred and tailored to the
specific circumstances of each individual company.
In this paper, we want to focus on one, integrated and comprehensive programmatic
initiative that is currently sweeping many manufacturer-retailer networks in Europe and
North America and goes under the labels "Efficient Consumer Response" (ECR) or "Quick
Response" (QR) initiatives. The logic of ECR means a radical redesign of the business
process from manufacturers' production lines to retailers' shelves and has important
consequences at the level of electronic data interchange, creation of transparent and
activity-based cost accounting and performance measurement systems, logistics and stock
replenishment, new product development and introductions, promotions and organisational
forms (e.g. shift from brand to category management systems). In some senses, these
initiatives can be seen as the retailing counterpart of lean production initiatives in supply
chains. 1
The structure of the paper is as follows : in the first part, we will review existing views of
strategy from a network perspective and introduce the notion of programmatic initiatives
as attempts to govern economic life, or to put it another way, to influence the strategies
adopted by firms and the structure of the networks in which they are embedded. In second
part, we will focus specifically on ECR as one type of programmatic initiative aimed at
governing manufacturer-retailer networks and present empirical evidence on the progress
management consultancy reports we accessed
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of ECR initiatives in Germany. The paper will conclude with some reflections on the
process of strategy making and network government by programmatic initiatives.
THE NOTION OF STRATEGY FROM A NETWORK PERSPECTIVE
The starting point for a review of strategy from a network perspective is Axelsson's (1992)
comparison of different perspectives on strategy and how they treat the relationship
between the focal actor and the environment. The classical and dominant view of strategy
conceives the actor and the environment as separate and sharply differentiated entities or,
to paraphrase Astley (1984, p. 526), firms are regarded as solitary entities confronting a
hostile, faceless and atomistic environment. The provenance of these arguments can be
ascribed to an open systems conceptualisation of the firm-environment relationship which
regards strategy as the attempt to achieve a degree of fit between the resources and
activities of an organisation and the characteristics of the environment (Hakansson and
Snehota, 1989).
A variation on the dominant theme is provided by notions of dyadic, formal cooperation
and collective strategies in what essentially remain open systems views of the
organisation-environment relationship (Axelsson, 1992). If the addition of formal,
cooperative relationships between organisations to the open systems perspective on
strategy has proceeded apace (see e.g. Smith, Carroll and Ashford, 1995), little effort has
been devoted to developing the notion of collective strategy (but see e.g. Oliver, 1988 ;
Dollinger and Golden, 1992). There is, within this perspective on strategy, an appreciation
of the limitation of seeing the environment as necessarily hostile and faceless, but the
notion of cooperation is deployed mainly within the context of domesticating adverse
environmental forces.
The network critique of the open systems approach to strategy formation is by now well
rehearsed (Hakansson and Snehota, 1989; Axelsson, 1992; Friedberg, 1993; Araujo and
Easton, 1996). The 'environment' is not perceived, understood and somehow brought
within the firm as an abstract topology but as a set of relationships with other corporate
15
and individual actors whose identities matter - customers, suppliers, banks, professional
and trade associations, distributors, etc. The 'environment' of an organisation is thus not an
ecology of niches with an heterogeneous and pre-determined distribution of resources but
composed of other organisations, who collectively define and recursively organise that
environment
Strategic action from a network perspective, concerns the "... efforts directed by actors to
influence (change or preserve) their position(s) in network(s)" (Johanson and Mattsson,
1992, p. 214). Thus strategic action does always involve attempts to mobilise and enrol
others in the network and is primarily directed at those with whom the focal actor conducts
exchange relationships. Johanson and Mattsson (1992) regard strategic action as being
directed at the relationships of the focal actor, or at relationships between other actors in
the network or directed at relationships with other networks. Any of these goals may be
achieved by cementing, protecting, seeking disengagement from or changing the character
of existing relationship, as well as seeking the establishment of new relationships. Any of
these actions may have as its objective, the influence of perceived connections between
relationships and thus the reshaping of the network structure to one's own advantage.
Another, admittedly underdeveloped notion advanced by Johanson and Mattsson (1992)
concerns the 'network theory' held by an actor. Strategic actions may also be directed at
changing the network theories of other actors and bringing them into alignment with one's
own network theory. Thus a firm's efforts to change network positions can also
communicate to others its own expectations and interests about the network structure in
which they are embedded.
Johanson and Mattsson's (1992) 'network theory' concept shares many features with
Weick's (1995) notion of sense-making. Like Weick's sense-making notion, network
theories contribute actively to the process of a firm's identity construction, they are
retrospective in the sense that they provide a plausible narrative for past events and current
positions, they are the ongoing product of social interactions, they are inferred from a
variety of cues rather than objectively given, and they are enacted in the sense that network
16
structures are as much interpreted as produced by the actors' own actions and the
cumulative effects of those actions.
On the other hand, both the concept of network theory and Weick's notion of sensemaking do not account for the fact that organisations and networks are also embedded in
institutional contexts. Thus network theories do not emerge solely as a result of the
idiosyncratic experience of individuals and organisations. Institutions provide a bridge
between cognition and social life, by supplying individuals and organisations with readymade rule systems and habits of thought. For example, North (1990, p. 3) states :
"Institutions are the rules of the game in a society, or more formally, are the humanly
devised constraints that shape human interaction. In consequence they structure incentives
in human exchange, whether political, social, or economic". In short, institutions act as
repositories of sedimented experience and suppliers of rule systems that help shape
cognitive processes by providing frameworks for interpreting and representing information
as well as behavioural routines.
In this paper we want to explore the notion that strategies are the products of deliberate and
emergent responses (Mintzberg and Waters, 1985) to the idiosyncratic network positions
of individual firms, but also that strategies are often influenced by the wider institutional
context in which firms find themselves. In particular, we want to focus on the role of
'programmes' or 'initiatives' as attempts to steer organisations in a strategic sense.
Programmes or initiatives can be conceived as coherent and integrated attempts at
governing the enterprise, with sets of procedures, spaces of representation, technologies of
calculation, accountability modes, etc., and a rhetoric that links these heterogeneous
elements together and provides a rationale for their juxtaposition (Miller and Rose, 1990).
Miller and Rose (1990, p. 5) make a cogent argument for the importance of rhetoric or
'discourse' as a technology of thought, requiring attention to the range of technical
instruments (e.g. writing, numbering, computing) that render a field of activity knowable,
calculable and administrable. A variety of different forces can only be enrolled in a
governing network if a shared vocabulary exists and objectives and values can be
translated from one 'language' into another. The language of expertise and professionalism
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plays a role here, in setting claims to "objective", disinterested truth and in suggesting
means for achieving the desired results.
Programmatic initiatives thus constitute one of the ways through which economic life can
be governed and firms and networks steered in a strategic sense. They are assembled from
a tool-kit of assorted principles, packaged and sold as systemic solutions to a cascade of
problems suddenly brought together into a coherent narrative of symptoms and root causes.
In particular, management consultancy firms constitute themselves as experts on specific
domains with trade and professional associations, government agencies and ministries,
promote their expertise in managerial journals and trade conferences, etc. As a number of
commentators have remarked (Eccles and Nohria, 1992 ; Abrahamson, 1996 ; Kieser,
1997) most of these programmatic initiatives can be classed as temporary management
fashions that seem to capture the imagination of managers, popular management
magazines, etc. for a while before disappearing into oblivion.
Kieser (1997, p. 57) regards management fashions as an arena in which different groups of
participants - management consultants, managers, business school academics, editors of
management magazines, etc.- attempt to advance their interests. Participants succeed in
their objectives of obtaining economic and symbolic resources such as public image and
esteem, career progression, etc., to the extent that they are able to enrol further participants
into it. Rhetoric is the input currency of the cooperative game that aims at extending the
boundaries of this arena. To Kieser's notion of a cooperative game, we would add that
these arenas extend themselves not simply through the co-optation of further members of
the same class of actors - i.e. more management consultants - but to the extent that they are
able to enrol other actors - e.g. business interest associations, trade institutes - and their
targets, business firms, as clients. The implementation of concrete initiatives in firms gives
legitimacy to the management fashion, creates opportunities to reappraise the programme's
principles in the light of experience, and provides templates for emulation that further
enhance the credibility of the programme vis-a-vis potential clients. Only through
extending the boundaries of their arenas in this way, can proponents of initiatives expect to
reap the economic and symbolic capital that Kieser alludes to.
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Although a clean break with the past and novelty claims appear to be pre-conditions for the
success of management fashions (Kieser, 1997), in reality the rhetorical presentation of
initiatives as ground breaking is more important than a strict claim of novelty for all its
components. Grint's (1994) analysis of business process reengineering (BPR) initiatives
leads to the conclusion that few, if any, of the principles underlying BPR can be regarded
as truly novel. Finally, if most programmatic initiatives (e.g. BPR, TQM) have taken the
individual business firms as the target of their intervention, in the last few years we have
witnessed a number of initiatives targeted specifically at the governance of interfirm
relationships (see e.g. Macbeth and Ferguson, 1994) and business networks.
One of the most notorious of these initiatives is lean production or lean supply (Womack,
Jones and Roos, 1990 ; Lamming, 1993). The essence of lean supply is to separate out the
production system from the network governance system (Johanson and Mattsson, 1992)
and focus on the most efficient means of delivering value to the ultimate consumer.
Lamming (1996, p. 187) summarises the aims of lean supply as follows :
"In lean supply, the entire flow from raw materials to consumer is considered as an
integrated whole. Interfaces between stages (i.e. between companies
suppliers and
customers) are thus seen as artificial - created not as natural transformation stages in the
development (or addition) of value, but as a result of the economic arrangement of assets
(boundaries of firms) governed by many other factors (e.g. labour skills, convenient
configurations of technology, geographical location of raw materials, etc.). The
fundamental principle of lean supply is that the effects of costs associated with less than
perfect execution of a sub-process are not limited to the location of the execution. ... This
is a fundamental point since lean supply does not recognise the traditional positions of
customer and supplier, which tend to obscure the central quest for the removal of waste."
Over the last few years, and spurred by a number of important developments in technology
and the business fortunes of the retailing sector, a concept known as efficient consumer
response (ECR) or quick response partnershipping (QR) has been developed in the USA.
In the next section we will introduce briefly the nature of ECR initiatives before
proceeding to document how they have been introduced in Germany and present some
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empirical results of our own research on the implementation of ECR initiatives in
manufacturer-retailer networks.
EFFICIENT CONSUMER RESPONSE (ECR) AS A STRATEGIC INITIATIVE
As in the case of lean supply, in the retailing sector there have been important
developments centred on increasing the efficiency of manufacturer-retailer networks,
eliminating waste and improving informational, monetary and physical flows in the
network, from the production line of manufacturers to the shelves of retailers. In the words
of Buzzell and Ortmeyer (1995, p. 86) these arrangements "... seek to achieve some of the
efficiencies of vertically integrated systems without common ownership".
In short, the whole supply chain is opened up for scrutiny and each linkage is carefully
examined with a special emphasis on delivery and stock replenishment, price management
and promotions, trade conditions and allowances, as well as communication and
information systems for order processing, billing, etc. According to one influential study of
the grocery industry in the USA (Kurt Salmon Associates, 1993), saving potentials in the
supply chain of the grocery industry could reach 10.8 % of turnover or US $30 billion. In
Germany, leading manufacturers and retailers estimate the saving potential at 5.7 % of
turnover. However such ambitious targets should be treated with caution.
ECR or QR is the usual term to describe this initiative in the literature (Femie 1994, 1995 ;
Whiteoak, 1994 ; Fiorito et al, 1995 ; Buzzell and Ortmeyer, 1995).2 According to Fiorito
et al. (1995, p. 16) the differences between QR and ECR is that QR is the more appropriate
term for the department store-type distribution and general merchandise industries such as
apparel where the focus is on time compression economies (see e.g. Richardson, 1996),
and ECR applies to food product and the grocery industry where item movement rate is
much faster than in most department store-type outlets. Fisher (1997) promotes a
2 Although these initiatives have been barely been acknowledged in the academic literature, the popular business process has
devoted a large amount of space to cover developments in this field. A search in the ABI / Inform database uncovered a total
of 143 articles on QR and ECR between January 1996 and March 1997, mostly on trade journals and popular management
magazines.
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distinction between supply chains for functional and innovative products that parallels the
distinction offered by Fiorito et al (1995).
The implementation of ECR rests thus upon a different conception of the business system
and the role of each actor in the supply chain. As in lean supply, ECR requires a mode of
thinking geared to the analysis of activities with little respect for formal, legalistic
boundaries of firms and seeks to transform and expand performance and accounting
measures to the sphere of interorganisational relationships. The focus of ECR is generally
agreed to be in increasing the efficiency of promotions, new product introductions, store
assortments and stock replenishment (see e.g. Progressive Grocer Annual Report, April
1996 and Lebensmittelzeitung LZ 45, November 1996).
ECR is framed under the notion of making the whole manufacturer-retailer network
accountable to the consumer. Indeed, the rhetoric of most consultancy and trade magazines
propounding the virtues of ECR emphasise consumer sovereignty and convenience as the
key drivers for change, rather than the removal of waste as in lean supply. Consultancy
organisations provide a vital link to understand how ECR has been problematised and
ready-made solutions, couched in the language of expertise and consumer sovereignty,
made available. They have cooperated with both trade and manufacturers in the
implementation of ECR solutions by selling their know-how, software products and
training. They have also teamed up with industry and trade associations to diffuse "best
practice", collaborated with trade publications to highlight problems and pinpoint
solutions, and made numerous presentations both to individual companies and trade
conferences.
In Germany the role of Roland Berger, the leading management consultancy firm,
exemplifies this process. Roland Berger is actively involved in associations like ECR
Europe
a Pan-European association of manufacturers and retailers set up to share ECR
experiences and expertise -, cooperates with trade magazines (such as Lebensmittelzeitung)
and is an active participant in the relevant trade conferences. Other consultancy companies
are also active in niche areas such as EDI systems or logistics providing valuable
assistance to smaller companies.
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Consultancy organisations have also been instrumental in the diffusion of practices across
industries as well as country boundaries. For example, it is widely recognised that the most
significant advances in QR and ECR have been made in North America and the transfer of
those practices to other parts of the world is proceeding apace (Kurt Salmon Associates,
1996). Indeed a recent report on supply chain management in the US grocery industry
(Morehouse and Bowersox, 1995) looks forward to the evolution of the industry's supply
chain in the 21st century built on the foundations laid by ECR initiatives. However, Fernie
(1994) remarks that much of what is heralded in US reports on ECR has already been
implemented in the UK grocery retailing sector.
In the next section, we will focus on the transfer of ECR practices into Germany and
document how these practices have been incorporated in the activities of manufacturers
and retailers.
ECR IN GERMANY
The retailing system in Germany is highly integrated and revolves around the tight
coordination between large retailer groups and large manufacturers of fast moving
consumer goods (frncgs). The retailers, given their privileged position of interfacing
directly with consumers through 76,000 outlets reaching a population of approximately 35
million households, are at the hub of this network dictating, to some extent, the pattern of
activities of other network members. For a similarly framed discussion, albeit using a
systems metaphor, of the UK retailing system see Frances and Garnsey (1996) and for an
international comparison of grocery retail chains see Fernie (1995).
The last decade has been an era of radical restructuring for retailers. Hypermarkets, large
superstores and the more aggressive discounters were able to increase market share at the
expense of other outlets. The smaller supermarkets that sell mostly fresh fruit, vegetables
and milk / dairy assortments lost significant share to either bigger hypermarkets or hard
discounting stores. Hypermarkets and larger superstores focus equally on non-food and
food products offering a broad assortment to the consumer, while discount stores are food
10
22
and drinks oriented. The restructuring of the trade structure had a dramatic impact in the
total number of retail outlets. The number of outlets declined from 85,294 in 1991 to
75,667 in 1996.
The second important trend has been the concentration of the trade partly related to
mergers and acquisitions. The seven most important retail groups today control 20,100
outlets and represent a turnover of 262 billion DM. The number of outlets and the
purchasing volume provide the basic platform of retailers' power in the network. While the
number of outlets determines the control over geography and distribution, the purchasing
volume dictates prices and conditions.
Cooperation between manufacturers and retailers in the area of supply chain management
were sporadic in the 1980s and early 1990s. Between 1990 and 1995 they became more
frequent, increased in importance and injected a new atmosphere in the manufacturerretailer relationships. Business jargon was enriched with terminologies such as direct
product profitability (DPP), continuous replenishment programmes (CRP), cross-docking,
electronic data interchange (EDI) systems, standing for some of the many joint initiatives
between manufacturers and retailers.
Recent developments in this area are traceable to the following structural changes :
1.
The stagnation in consumer demand setting limits for volume and profit growth, (see
figure 1). Consumer demand is fragmenting and consumption patterns becoming
more diverse, opening the doors to a constant stream of new products. Brands are
proliferating, in particular retailer brands, intensifying competition within each
product category. According to Nielsen Marketing Research the share of retailer
brands in the total retailer turnover increased from 6.7 % in 1990 to 10 % in 1996.
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23
1000
900
800
700 j
600
500
400
300
200
100
0
1985
III!
1986
1987
1988
1989
1990 1991
Year
1992
1993
1994
1995
<
Billions DM
Figure 1
(Growth of Total Grocery Retail Turnover in Germany 1985-1995)
2.
The rapid growth of discount channels and category specialists, the so called category
killers (i.e. a channel that specialises exclusively in a particular product category).
This trend is forcing broad assortment retailers to evaluate carefully what items
should they carry for each category and to monitor performance by item and by
category on a store by store basis.
3.
The increasing complexity of transactions involving numerous products, services,
price variations, delivery schedules, etc. Concentration in the retail trade and shelf
space limitation in stores have increased competitive pressures, putting a premium on
revenue and profitability of stores for every square meter of available floor space. The
drive to examine costs for every step of the business process and derive new cost
accounting and profitability measures that take into account economies of speed and
simplification of procedures have proved irresistible.
12
24
4.
The introduction of new information and telecommunications technology, namely
EPoS scanners and EDI systems. Information technology has allowed retailers to
determine with great accuracy consumer off-takes to a fine level of detail (e.g. for
every brand, for every package size, etc.). The same systems allow controlled
experiments regarding for example, special promotions, line extensions, or the impact
of a temporary increase in shelf space devoted to one brand. Finally, information
technology allows retailers to measure relatively quickly the sales performance and
profitability of every product they sell. However, scanner terminals as the
fundamental building block of this IT edifice are still rare in Germany. The German
Trade Institute (DHI) estimates that from a total number of 75,677 outlets in 1996
only 17,010 were equipped with scanner terminals. For a summary of trends in the
adoption of EDI in the UK and Germany see Reekers and Smithson (1994) and for an
argument as to how ECR initiatives rely on adoption of information and
communication technologies see e.g. Fernie (1995).
These structural rearrangements provided the spur for the search of productivity gains
beyond the boundaries of manufacturers and retailers. In particular, the conjunction of
modest or no growth in volume plus the increasing availability of enabling technology
made the adoption of ECR, an initiative predicated on removing waste and increasing the
efficiency of the whole business network, increasingly attractive. Despite one of the
highest in Europe gross trade margins, 22.7 % of the total turnover, the average net margin
varies between 0.5 % - 1.5 %. In the UK, the average gross margin in the retail business is
22.8% of the total turnover and the net margin varies between 5 - 7 %.
A lot of the traditional activities within the retailer-manufacturer supply chain are
characterised by a tendency to push the product to the end of the supply chain, to the
consumer. The push effect is evident by a series of sequential phenomena in the supply
chain causing a bullwhip effect (Lee et al, 1997) ;3
3 Lee et al (1997, p. 93) define the bullwhip effect as the amplification of demand order variabilities up the supply chain, from
the retailer shelves to the manufacturer's plant, and attribute it to four separate factors : demand forecast updating, order
batching, price fluctuation and rationing and shortage gaming behaviour.
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- Manufacturers over-produce to achieve economies of scale ;
- Manufacturers' warehouses work with considerable safety stocks ;
- Manufacturers draft ambitious marketing / sales plans ;
- Retailers undertake ambitious purchasing volumes to achieve better conditions ;
- Manufacturers load the distributors ;
- Distributors load the retail outlets resulting in the :
- Widespread variance in the supply of outlets with some carrying excessive stock
whilst others find themselves out of stock
This traditional sequence described by Lee et al. (1997) is caused by distorted information
flow from one end of the supply chain to the other and optimistic forecasts, resulting in an
average stock inventory in the whole chain of over 50 days. During the years of continuous
volume growth the elimination of these excessive inventory costs was not an issue.
Manufacturers and retailers were busy in their own spheres of action, manufacturers
concerned with the development and marketing of new products, expansion into foreign
markets and quarterly results. On the other hand, retailers were busy with mergers and
acquisitions, the geographical coverage of their outlets and expansion into other European
countries. It was the first signs of stagnation and decline in consumer demand that set
alarm bells ringing and provided the impetus for removing wastage and inefficiencies in
the supply chain.
It is within this broad scenario that the major tenets of ECR have been embraced by a
number of manufacturers and retailers in Germany, as the route for cutting costs, removing
wastage in the supply chain and strengthening the bonds between manufacturers and key
account retailers. In the next sections, we will present a short case study on the attempts of
two major fmcg manufacturers to implement ECR and change their network position by
enrolling other actors to abide by their agendas and plans. Before we proceed to our
empirical results we will introduce briefly the methodology used in our study.
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26
METHODOLOGY
We used the case study as the research methodology to investigate the introduction and
implementation of ECR initiatives in manufacturer-retailer networks in Germany. The case
study is a form of enquiry that investigates a contemporary phenomenon within its real life
context ; when the boundaries between phenomenon and context are not clearly evident
and in which multiple sources of evidence are used (Yin, 1994). The key advantage of case
research lies in its ability to capture complex interdependencies by handling rich sources of
data and multiple forms of data collection (Easton 1995).
In all, we interviewed three retailers, six major fmcg manufacturers, three companies
concerned with logistics and IT and three consultancy companies all active in the field of
ECR. The 24 interviews were conducted with middle managers in functional areas such as
logistics, data processing, purchasing, key account management and marketing. The
interviews were conducted between September 1996 and March 1997. The interview
topics covered a number of issues concerned with the implementation of ECR namely
trade allowance systems, EDI systems, CRP and category management. In addition to
collecting primary data, we also accessed archival records from two market research
companies and the second author was also a participant observer in the 1997 yearly
negotiations between the trade and fmcg manufacturers.
We selected a number of retailers and manufacturers to study the implementation of ECR
initiatives. For limitations of space, in this paper we will only report the results of ECR
initiatives in two large fmcg manufacturers, Alpha and Beta. 4 Alpha is a multinational
producer of a wide range of fhicgs but particularly strong in the area of cosmetics, laundry
and cleaning products. Its turnover for 1995 reached 5.4 billion DM. The Beta group is a
German based multinational producer of fhicgs, particularly strong in the areas of cleaning
and laundry products as well as cosmetics and had a turnover of 14.1 billion DM in 1995.
Beta ranked as the first fmcg manufacturer in Germany in terms of 1995 turnover and
Alpha sixth. The two companies are direct rivals and compete for shell space in many key
1 For reasons of confidentiality the names of the companies have been disguised.
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account retailers. Traditionally, they are highly aware of each others' moves and
countermoves and their rivalry is mediated by their attempts to enrol retailers and other
network actors as allies in the pursuit of their competitive strategies (Araujo and Mouzas,
1997).
THE IMPLEMENTATION OF ECR INITIATIVES IN LEADING FMCG
MANUFACTURERS
Alpha's managers considered the German fmcg market as one of the most difficult markets
in the world, given its appetite for high rebates, low trade margins and potential for
dissatisfied customers. The stagnation in consumer demand over the last few years (see
figure 1) had persuaded the company to look for ways to improve the efficiency of its
systems and cooperate with its key accounts. The company looked at a range of
possibilities for implementing ECR in Germany. The company relied on the experience of
its parent company in the USA and the help of a major IT supplier to kick start the process
in Germany.
During 1993 and 1994 Alpha and a major retailer had worked together in a pilot project
with the objective of increasing efficiency in the supply chain. The aim of this project was
to produce a paperless interface in terms of ordering and invoicing between the two
organisations. At the end of the pilot project information regarding products and prices was
exchanged electronically between the two organisations and transport, delivery
information and invoices were sent via EDI. Towards the end of 1995 Alpha decided to
roll out a full blown ECR initiative aimed at its key accounts and featuring a new trade
allowance system designed to provide the necessary incentives for enlisting their support.
For years Alpha had felt that the yearly trade negotiations between the trade and
manufacturers focused on the wrong issues. An internal consumer behaviour study had
revealed that only 25 % of German consumers appeared to be store-loyal. On average,
German consumers picked up special offers in seven stores. With the exception of one
hard discounting chain, prices of frncgs were neither transparent to the consumer nor price
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claims reliable. Price variations, temporary reductions, special offers and promotions all
contributed to the confusion and led consumers to be wary of price claims and behave
smartly - i.e. shop around for the lowest price offers.
For Alpha this panorama was the direct result of the hard bargaining that took place at the
annual trade negotiations. Manufacturers appeared too eager to maximise volumes and key
accounts appeared only interested in maximising rebates and trade allowances. Perhaps the
most obvious problem of the existing system was the pronounced bullwhip effect in the
supply chain (Lee et al., 1997), given that temporary price reductions contributed to
pushing large volumes into the supply chain well ahead of consumer demand.
In the 1996 yearly negotiation Alpha introduced a new trade allowance system
categorising trade allowances into four areas. Two of the areas were linked to logistics and
provided simple, volume related rebates. The two other areas labelled ECR 1 and 2 were
directly aimed at introducing CRP and EDI as a means of automating ordering and
invoicing. ECR 1 provided a 1 % rebate on all orders and invoices transmitted via EDI and
on acceptance of whole palettes. ECR 2 provided another 1 % rebate for electronic
payment, CRP and integrated data interchange. Moreover, Alpha introduced an extra 2 %
rebate for all invoices settled within 14 days.
This new trade allowance system simplified the more than 24 different forms of rebates
that prevailed under the old trade allowance system. Under the old paper-based system,
from the 600,000 invoices that Alpha produced annually, 200,000 needed reworking or
rechecking. Every iteration usually cost 0.7 DM or a total of 14 million DM annually.
Similarly, a large retailer can deploy up to 100 people to process and check invoices.
Alpha's CRP system relies on consumer off takes and point of sale technology to pull
volume through the chain. The company implemented the new system in cooperation with
a major multinational supplier of IT equipment, who provided the necessary technology,
and benefited from the corporate experience in 12 countries with 27 key accounts. The
system works on the basis of the central warehouse of a key account retailer sending
electronically and on a daily basis, all the necessary data (stock level, off-takes and orders
for each product) to a computer, owned and operated by the IT provider, in Orleans
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(France). Every morning an Alpha employee in the Customer Service Department is
connected to the Orleans computer and accesses information on the most up to date,
'optimised' order volume for each key account. Order quantities are rounded off in palette
sizes for maximum loading of the delivery trucks. The Alpha employee can either activate
the order or modify the quantity or timing of delivery in consultation with the key account.
The system then sends the order information to the key account for confirmation - Alpha
regards this procedure as unnecessary but useful to allay retailer fears that they no longer
control the process.
The Orleans system then sends via EDI the order to the processing system at Alpha's so
that it can be registered, checked and forwarded to production plants. The results of this
programme have so far been very encouraging from Alpha's point of view, after
overcoming some initial resistance from retailers. The sales rotation of products increased
from 13-23 days to 28-44 per year, whilst the service degree (an Alpha internal term,
meaning percentage of orders completed without errors in accordance with retailers'
schedules) jumped to 98-99 %. The average stock in central warehouses had decreased
between 46 and 65 % and in relation to periods without special offers, stocks were down
by 60 %. For Alpha the net cash flow benefit of implementing this initiative is estimated at
10 million DM annually.
In turn, and according to a consultancy firm estimates, these improvements accounted for a
15 % reduction in warehousing and handling costs for retailers. Furthermore, out of stock
situations were nearly eliminated and consumer offtakes increased by 3.6 to 5.3 % vis a
vis a control group without the benefit of CRP. Also, product relaunches or new product
introductions reached the retailer shelves quicker ; in pilot project with key accounts
adopting CRP the lead time had been cut from 25 to 12 days. The savings for key accounts
were estimated by one leading consultancy firm as 15 % of total logistics costs.
The success and momentum of Alpha's ECR initiative was not lost on Beta. Its primary
objective in ECR was to develop a continuous, no-errors, no-paper information and
product flow. Beta attempted to emulate the trade allowance system pioneered by Alpha
and run a number of pilot projects with its accounts to gain experience in selected
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components of ECR. More interestingly, Beta chose to run its ECR initiative under a
powerful Trade Marketing department, with a minimum of reorganisation and placing the
emphasis on the integration of functional specialisms.
Essentially, the new structure of the Trade Marketing Department whose head reports
directly to Beta's top management, contemplated the addition of a category management
section which provided a complementary, category based analysis and research function to
the ones traditionally performed by the information management section, usually centred
on general market analysis and key accounts. The company's Trade Marketing manager
explained that: "... the new structure is both complete and flexible. The four sections work
together every effectively. Category management analyses data [scanner, trade and
consumer data] and makes recommendations for action. Sales support contributes with
space optimisation proposals, key account services implements account specific
programmes and information management provides all the necessary information and
communications internally and externally".
So far, Beta's experiment has been restricted to a few accounts as mentioned earlier but the
company has already produced a glossy brochure detailing its competencies in "Partnering
and Efficient Consumer Response" inviting retailers to cooperate with Beta. But the results
of some pilot projects have been largely disappointing. For example, the pilot project run
by Beta in cooperation with a medium-sized key account retailer (turnover of 3.26 billion
DM, 489 outlets in Central and Northern Germany) had revealed a number of problems.
The retailer and Beta discovered that they knew little about each other and found it
difficult to interface in the areas of logistics and purchasing - sales / marketing. The cost benefit relationship of their EDI experiment was also disappointing. They both concluded
that only increases in scale would bring about significant benefits and that there was a fair
amount of work to be done in order to standardise data formats. Other conclusions of this
pilot project are also worth mentioning : the retailer was persuaded to make substantial
investments in scanner terminals and communication technologies and use the off-take
data for space management and CRP as well as contemplate the structural changes
necessary to operate an ECR system. Beta has now instituted a trade allowance system
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very similar to Alpha's and is planning to capitalise on existing standards and protocols for
data interchange (e.g. EDIFACT, EANCOM) as well as clearing centres (e.g. TELEKOM
networks) to roll out the initiative to other key accounts.
DISCUSSION
Our exploratory study of the implementation of ECR practices in manufacturer-retailer
networks in Germany revealed a rather patchy pattern of adoption in line with previous
studies elsewhere (see e.g. Fiorito et al., 1995). Partly this is a result of the slow rates of
diffusion of the enabling technologies, namely scanner terminals as reported earlier and
EDI systems (see Reekers and Smithson, 1994). The implementation of QR and ECR
strategies is entirely reliant on the use of these technologies. Without standards for product
identification and data interchange (e.g. consumer off-take data at the point of sale) the
whole concept of QR or ECR is unfeasible. But some of these technologies have been
available for a while and examples of QR or ECR partnershipping have only been found in
the last three or four years.
Our argument in this paper has been that the adoption of these technologies is greatly
facilitated when they are linked to an integrated initiative, with its assemblage of
techniques and practices, management systems and an appropriate rhetoric. Clearly, as we
have argued earlier, the stagnation of consumer demand and the pressure on profit margins
has also been an important catalyst for the adoption of ECR initiatives in Germany.
As we have seen in the case of both Alpha and Beta, the implementation of ECR initiatives
is crucially dependent on their ability to get others, in this case crucially key account
retailers, to abide by the plans they have developed. More importantly, perhaps, the
wholesale adoption of ECR requires radical changes in the operating philosophy of both
fmcg manufacturers and retailers and poses threats to the existing structural arrangements
and role allocation in the manufacturer-retailer dyad.
For example, CRP requires an important role reversal in the manufacturer-retailer dyad. A
traditional function of retailers, order placement (i.e. definition of order size and timing of
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delivery) is automated and responsibility for its operation passed on to the manufacturer.
Also, CRP or vendor managed inventory programme ultimately questions the role of the
manufacturer sales force. The primary role of a manufacturer's salesforce has always been
to build up distribution and push brands at the point of sale. CRP systems effectively
bypass the salesforce function and reverses the emphasis on building up volume in the
distribution channel. The first requirement of a CRP is the willingness of the trade to
provide relevant stock and consumer off-take data to manufacturers. Ideally, the trade
simply gives up the right over controlling the flow of goods from manufacturers to their
shelves. However, in the pilot projects we have analysed the trade refused to give up this
right and demanded the inclusion of an interim stage where they could confirm or refuse
the CRP-generated order.
The threat to the existing order embedded within a sweeping initiative like ECR causes
other problems too. For example, Alpha's redesign of its own trade allowances systems
was put forward as an incentive for key accounts to adopt EDI interfaces with Alpha and
also to pave the way to introduce further components of the ECR package, namely
efficient assortment and new product launches. But the impeccable internal logic of this
move conflicted with the existing mode of operation of some of its key accounts, who
argued that Alpha's model of supply chain management is only suited to the needs of
Alpha and hypermarket chains, who cooperated with Alpha in pilot projects. Three key
account retailers went as far as temporarily delisting several of Alpha's product lines.
Alpha responded with an additional offer, rewarding extraordinary key account
performance and restoring the feeling that these key accounts had not lost their special
status.
In short, the strategic importance and promise of ECR sparked off a flurry of pilot projects
which tested some of the technical infrastructure required to run the initiative and some of
its components. External consultants often supported these pilot projects providing
valuable advice and sometimes even the IT equipment to run the experiment successfully as the case of Alpha and the Orleans computer illustrate. But when it comes to
appropriating the results of pilot project and roll out the initiative a number of surprises
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may occur. Suddenly, a set of attractive ideas to simplify procedures, cut wastage and
reduce costs are seen to imply a series of other changes that ultimately mean nothing less
than a total re-engineering of both the manufacturer and retailer's operations. More
specialists and consultants are drafted in to decompose some of these holistic problems
into more manageable tasks, staying within a specific functional area (e.g. logistics, data
processing) and working to a tight budget.
The awareness of the impact of some of the changes currently being proposed and an
appreciation of the total costs involved is still very much underdeveloped in the companies
we have looked at. On the other hand, the pressure to extend these initiatives and recruit
further allies is still on. Alpha, for example, calculates that in the area of CRP alone a
manufacturer must achieve 30 to 40 % of its volume going through CRP before it can reap
substantial economies of scale with the scheme.
CONCLUSION
In this paper we have explored the problems associated with attempts by fmcg
manufacturers and retailers in Germany to implement ECR initiatives as means of
changing or preserving their network position. We have looked at ECR implementation as
a programmatic initiative designed to steer firms and networks in a strategic sense, aiming
both to change practices and structures at an intraorganisational level as well as redesign
the interface between manufacturers and retailers. Whilst we have emphasised the
systemic and integrative nature of ECR as a business philosophy and as a package
promising to deliver significant benefits to all those who embrace it in its totality, our study
highlights the partial and often tentative version of ECR being adopted by manufacturers
and retailers in Germany.
The likelihood of ECR creating faultlines with existing practices and management
technologies is high and no doubt, explains partly the partial and sometimes contested
adoption of ECR practices. Beta's experience is typical in this regard. Beta's foray into
ECR can be seen as a direct competitive response to the initiative undertaken by Alpha, its
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main rival. The company simply added a new section (category management) to a large
Trade Marketing Department and relies on the coordination of the new section with the
existing sections within the department (sales service, key accounts service and
information management) to implement ECR initiatives. Its 'expertise' is packaged and
sold to key account retailers as the coordination of these different areas of activity.
Miller and O'Leary (1993, p. 192) comment that managerial expertise and corporate
governance in general is a congenitally "failing" activity, in the sense that a succession of
change initiatives and programmes all problematising other modalities of governance and
purporting to address or remedy those deficiencies, is well illustrated by our study. In
practice, we have witnessed the 'failure' of many of programmatic initiatives in the sense of
either abandonment of the programme in mid-stream or very selective implementation of
aspects of it. For example, statistics on the failure of programmes like BPR or TQM run
well over 70 % - however that figure was arrived at (Grint, 1994). ECR is no different in
this respect. For example, category management systems often regarded as the capstone of
ECR initiatives, is only being implemented very selectively in the German manufacturerretailer network (Araujo and Mouzas, 1995).
On the subject of BPR initiatives, Grint and Willcocks (1995, p. 102) comment that this
initiative is premised on deracination, in the sense that radical changes in productivity can
only be achieved through the uprooting of traditional practices and management norms. In
the case of BPR, the recommendations seem to point towards the urgency of implementing
radical change, as if incremental change is itself a major barrier to the achieving the
productivity gains that BPR promises. In short, part of BPR's philosophy seems to be
notion that only swift implementation will remove the organisational politics that could
impede its progress (Grint and Willcocks, 1995).
ECR is, perhaps, a slightly more complicated case than BPR even though some of the
features highlighted by Grint and Willcocks ( 1995) are present here. As we have argued
throughout this paper, ECR relies not only on internal changes but also on enrolling others
to adopt similar changes and align their management systems and structures with the
initiating firm. As we have shown, the radical nature of ECR practices (e.g. category
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management, CRP) conflicts with many existing practices in both retailers and
manufacturers and the incremental and partial adoption of new practices contributes
inevitably to a watering down of its radical objectives and ambitious performance targets.
It appears that only when the initiative is championed by upper organisational echelons are
its more radical implications pushed to their logic conclusion. Otherwise, political
resistance, the pressure to keep volumes up and focus on quarterly results, continue to sap
middle managers' energies and deflect their attentions elsewhere.
In conclusion, rather than emphasise the systematic effects of programmatic initiatives as a
means to steer firms and networks in a strategic sense, we prefer to highlight the partial,
incomplete and truncated nature of the versions that eventually find their way to the
specific context of each company. It is at the junction of systematic and abstract blueprints
for strategic and the historically situated practice of each company that these initiatives are
interpreted and implemented. Whilst it is too early to assess the long term impact of ECR
as a mode of governing manufacturer-retailer networks in Germany, the odds seem stacked
against the achievement of the more radical productivity gains that ECR promotes on
behalf of consumer sovereignty. Like many before it, ECR may soon become a
management fashion that run its course.
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