Collaboration in the Consumer Packaged Goods (CPG) industry is not a new concept. It has steadily evolved over the past two decades in concert with improvements in technology and ever shifting market forces. Today those forces continue to transform the industry landscape. As big players like Wal-Mart and Procter & Gamble continue their quest for market control, retailers and manufacturers alike are scrambling to protect their share of the market, and are being forced to approach the market in a more collaborative manner. No longer is the "me-You" approach going to work. A "We" approach that focuses on the objectives and goals of retail and manufacturing partners will ensure a more efficient and effective go to market approach for both parties.
Although there is currently a lot of discussion surrounding collaboration, and the concept is creating a lot of buzz, it is easier said than done. We felt it would be prudent for our clients to understand the benefits of collaboration, whether those benefits are being obtained and which retailers and manufacturers are doing a good job at collaboration. A final goal of our study was to assess where manufacturers and retailers should focus resources going forward.
Between October 2003 and January 2004 Archstone conducted an industry survey with a select cross section of clients to gauge the status of collaboration in the industry. We surveyed retailers across the grocery, drug and mass channels. Manufacturers included food, beverage, household products and personal care.
The last few years have seen a significant number of changes in the US Grocery Industry. The retail channel has become more fragmented with considerable "blurring" across traditional lines. The growth of price oriented channels has occurred at the grocery retailer's expense (fig. 1) - it is estimated that the share of supermarkets grocery dollars will decline from 77% in 1997 to 63% in 2005. Super-centers have taken the majority of this business away going from 4% in 1997 to 13% in 2005. The leading US Supermarket in 2002 was Wal-Mart with 19% of sales. A full 7% points behind was Kroger at 12% . Wal-Mart's size and scale is only going to continue to grow. Retailers need to realize that they cannot hope to compete with Wal-Mart's scale and 4-40% price differential.
For the manufacturer, the rise of private label, the increased sophistication of the retailer, the rise in importance of value chains such as Wal-Mart and club stores, along with channel blur and industry consolidation, has forced manufacturers to deliver improved products and greater retail incentives for ever decreasing margins. Retailers are no longer willing to simply take a manufacturer's product based on the brand name alone - they now demand innovation and creative ideas across merchandising, promotions, analysis and supply chain in support of that product.
Given these pressures, the incentive to collaborate for both the manufacturer and the retailer is financial improvement to both the top and bottom line. In our survey both retailers and manufacturers identified profitability, sales dollars and sales growth as the top reasons to collaborate. However, not surprisingly, the retailer, unlike the manufacturer felt that category profitability, category sales and store traffic were more important.
Manufacturers were much more focused on operating cost. This is consistent with a growing trend by manufacturers to understand cost to serve and a general migration from sales based performance to a profit based performance management approach. A similar perspective was noted in a separate Archstone Consulting Study we performed around the supply chain. In that study, we noted an increased focus on cost to serve but also a fragmented ownership of cost to serve within the manufacturer's organization which created a barrier to fully adopting a profit based approach.
Whatever the agreements and disagreements currently are around collaboration, it is clear that if collaboration is to lead to shared objectives and the financial gains that result, communication between the two sides must improve.
What is clear is that the benefits from collaboration are not being fully realized today and neither the manufacturers nor retailers are satisfied. The positive impact of collaboration on each of 13 specific business objectives fell below expectations for retailers and manufacturers alike.
In our view, the difficulty in execution has stalled progress in collaboration activities and has prevented both manufacturers and retailers from reaping the benefits they seek. For example, some retailers have not followed through on their talk. They refer to collaboration in strategic discussions but tend to revert to their old buy low ways when action is required. Manufacturers tell the same stories about the same retailers. Likewise, many manufacturers have taken an incredibly narrow view of collaboration. They think EDI and a little Vendor Managed Inventory is sufficient. They have not built any special skills or services to leverage with their retail partners. Generally this has been at their peril. Leaders are getting better and the laggards are falling behind.
Successful collaboration will occur if resources are aligned around the 3 dimensions retailers and manufacturers agreed were going to be most important in the future: Communication, Shared Objectives and Innovation.
Given the findings , we created the "Collaboration Dynamic" model . The basic requirement to enter into any type of relationship is the deployment of meaningful analytical tools that lead to unique findings and insights into the business. Retailers indicated their ongoing reliance on manufacturers for consumer insights as retailers are not staffed, trained or equipped with this expertise. Incremental to this are systems that provide accurate and timely information exchange. Without these 3 fundamentals, collaboration will never succeed.
Manufacturers and retailers must also align around: supply chain and cost management. By ensuring the supply chain organization gets the right product to the right place at the right time, they are able to spend time focusing on the marketing and merchandising of product. Supply Chain is just one component of the foundation. The other component is Cost Management. By better understanding cost to serve and reducing costs throughout the channel, much more efficient and cost-effective end-to-end product delivery, promotion and merchandising can be achieved.
Account Management requires allocating human capital to an account or manufacturer. It is important that allocation of human capital is performed at the appropriate level. Manufacturers must assign empowered, senior level account leads that have a vertically and cross-functionally aligned team around them. This type of arrangements facilitates joint decision making and problem solving between the manufacturer and retailer. Professional relationships are important. We are often surprised to find manufacturers who effectively have 85% of their volume with 15 retailer trade accounts but do not have dedicated cross-functional teams empowered to support those accounts.
Innovation was highlighted as vital to successful collaboration. This can be used as a means to differentiate oneself against Wal-Mart's low price strategy as well as provide additional value to consumers. Manufacturers that develop leading innovations for retailers are well positioned to be a leading collaborative partner. Traditionally, manufacturers have been poor at this. Retailers that are potential strategic partners don't want the same idea to be shopped around to their competitors. Manufacturers whose account teams can bring in well thought out, innovative, and non-generic insights and ideas to grow the business can both expect to collaborate more effectively with the retailer as well as differentiate themselves vs. their competition. Retailers may even be willing to sign NDA's to facilitate this. Innovation does not start and end with new products. Innovative ideas might also occur around: promotion, packaging, category growth, merchandising, channel development, supply chain strategy, cost management or any other areas that will be of benefit to profitably growing the business with the retailer.
Communication is of prime importance. Breakdowns in this are common as commitments from senior management are misaligned with execution at the division and local levels for both manufacturers and retailers. Gaps between the goals of upper and middle level management impede a consistent approach to strategic thinking. We consistently heard about "flavor of the moment" direction given by senior management. That is to say, if focus on margin, is the "flavor of the moment" (vs. inventory or merchandising or promotions), that is where middle management will focus their energy. This approach pulls middle management away from the overall business objectives in favor of "making the quarterly numbers". This is an important gap given the stated focus of several retailers around centralized planning and management. Manufacturers have become frustrated by the lack of coordination between central and local planning or purchasing groups. As various levels of management continue to work at cross purposes, resources become misaligned, creating the perception that upper level management is not committing the resources needed to execute on the strategy.
Another communication gap is between operations and merchandising. All too often when trade promotions are implemented or ad campaigns are run, the product is unavailable to the consumer due to an out-of-stock. In fast selling or promoted products a recent study found that retail out of stocks regularly exceed 10%, and can cost a grocery retailer about 4% of total sales . It is estimated that over the course of one year, out-of-stocks puts $6 billion in retail sales into play. Clearly, not communicating has significant impact on retailers and manufacturers alike. Without open communication channels, significant misunderstanding can be introduced into the relationship.
The need for good, open internal communication also exists for both the retailer and the manufacturer. All too often we hear of manufacturers in which the marketing team is not talking to the supply chain team, or the retailer buyer is not communicating with the merchandise planning or supply chain functions. By focusing on the team "We" based approach versus the more siloed "Me-You" approach all parts of the firm will become more effective in their positions.
Good communication requires a level of trust and openness that may regularly require the sharing of financial and margin goals. This type of strong, open and directed contact around shared objectives and goals will result in effective collaboration. Openness and honesty allows partners to understand tradeoffs and compromises that need to be made when partners are trying to decide the optimal marketing mix both within a category and across categories. Clearly defining and communicating mutual objectives, ensures each side fully understands the others goals. Communication such as this facilitates the ability to make trade-offs to create a win win solution for all partners so that both sides' goals can ultimately be met.
It was clear in our study that misaligned metrics, lack of visibility into shared goals, and conflicting objectives all impede the ability of participants to collaborate effectively. Establishing shared objectives minimizes these risks. However, establishing shared objectives without developing a vehicle for measurement by which to determine the success/failure of the initiatives is fruitless. One manufacturer summed it up "where we don't push the formality of planning (with a scorecard and performance measurement), we tend not to execute as well". By sharing goals and jointly developing a performance measurement scorecard, shared objectives can be managed to and collaboration can be used to drive improved business results.
We asked retailers and manufacturers alike to rate the other on collaboration performance and found that a major barrier to successful collaboration is the inability to overcome basic business fundamentals. Cost management, analysis and system tools are all basic components that were viewed as generally weak across the board. Without getting the basic tools to business in place, it is very difficult to escalate the relationship to one of trust and shared objectives.
In addition, no one believed the other was doing a good job around some of the more complex elements: category management, supply chain management and communication. Going forward for successful collaboration, manufacturers and retailers will need to segment their partners in terms of value and strategic fit. Through our research, we developed tools to help segment the potential partners by size, growth projection, cost to serve, complexity, willingness to collaborate, profitability and organization alignment with collaboration objectives. An approach such as this facilitates the deployment of resources to the most profitable collaborative partners.
Despite the poor performance to date, there were some standouts. Interestingly, and despite their reputation and history of dictatorial demands, Wal-Mart and Procter & Gamble were the only 2 partners to be rated consistently best in class across all collaboration dimensions by their partners. Retailers identified Procter & Gamble three times as often as the next leading manufacturer as a top 3 partner for collaboration. On the other side of the equation, 91% of manufacturers surveyed agreed that Wal-Mart was one of the top 3 retailers to collaborate with across all dimensions we surveyed.
Procter & Gamble works hard to understand the retailers and they are proactive in trying to resolve issues: "Procter & Gamble is a leader in doing joint business plans and really asking us questions, proposing ideas and then not just jamming them down our throat". "Procter & Gamble's in here saying how can we take two days out of the supply chain? What if we try this and what if we try that? It's forward thinking versus just reacting to yesterdays newspaper".
From the retail side, Wal-Mart was singled out as a leading collaborator. Some of the reasons include their interest in sharing information and the visibility manufacturers have into objectives:
The hallmark of Wal-Mart and Procter & Gamble's success can be attributed to their focus on the key components of collaboration: innovation, communication, supply chain and cost management as well as the fact that they get the basic business requirements right. Another key factor that they have addressed is the business of using joint score cards to guide and measure performance. Using a scorecarding system to manage expectations both internally and externally helps to alleviate the tendency to over-promise and under-deliver on commitments. This type of program leads to the development of performance based contracting arrangements that are mutually beneficial to both parties.
No longer is the "Me-You" go to market approach going to work for manufacturers and retailers. Instead, a "We" focus around the key components of collaboration: Innovation, Communication, Cost Structure and Shared Objectives are tools that partners must deploy to compete. Wal-Mart and Procter and Gamble appear to have successfully mastered the art of collaboration. However, they operate at a scale at which no other retailers and manufacturers are able. We can learn from their collaborative example. To compete with the two giants, retailers and manufacturers need to learn to approach their strategic relationships from a "We" mentality that fosters collaboration around unique, business building ideas.
Collaboration with every potential partner will also not be effective. Every company from big to small must strategically evaluate who they want to collaborate with in order to remain competitive in today's CPG environment. Analysis will force companies to segment partners along multiple dimensions including cost-to-serve, cost management, communication, profitability, innovation, supply chain and account teams so that resources can be placed behind the partners with the highest potential for mutual growth.
Attaining the benefits of collaboration requires a fundamental re-assessment of business dynamics. Once potential opportunities have been assessed and potential partners selected, the business can be refocused and changes made to more effectively align around the key components of collaboration: Shared Objectives, Communication, Innovation, Account Teams, Supply Chain Management and Cost Management. Taking a "We" approach will position partners to collaborate more effectively in today's ever-challenging and ever-competitive retail landscape.