Success Strategies in Channel Management

1. Success Strategies in Channel Management Logistics and Supply Chain Management

2. The Importance of Logistics in Channels Inventory Management in Marketing Channels Inventory Holding Costs Reducing Inventory Pseudo Inventory Reduction Real Inventory Reduction Sec4-1.ppt Logistics and Supply Chain Management Supply Chain Management Efficient Consumer Response Changes in Merchandising Category Management Physical Efficiency versus Market Responsiveness Critical Supply Chain Elements Fulfilment and Transportation Documentation

3. Logistics is the management of the flow of physical materials. In the context of marketing channels, physical distribution and logistics have traditionally been used interchangeably, with the understanding that only finished goods are part of distribution and the proper concern of a marketing channel manager. This, and many other ideas about channel logistics, has changed radically since the 1980s. Logistics has metamorphosed into the concept of Supply Chain Management (SCM), which in turn has come to implicate every element of the Value-Added Chain. Going backward, or upstream, this means channel logistics encompasses not only inventories of finished goods but also work in process (WIP) and raw materials. Indeed, SCM at its fullest goes back not only to the factory floor but also to the suppliers of the suppliers of the suppliers. Logistics and Supply Chain Management

4. Logistics and Supply Chain Management • The implications also go downstream. Every player in a channel sends information or places orders that triggers behaviour by any and every other player, including those downstream. This is not just a matter of stockpiling or moving inventories, it may be marketing behaviour. For example, what is going in the warehouse may signal a supplier not to offer a promotion this month, or to offer one price instead of another price. Inventory management may result in a change of assortment, with some SKUs being eliminated and others being added, to be produced to the express specifications of a single customer. • These are marketing decisions. The idea that logistics should influence marketing - which is one premise of SCM.

5. What is SCM? • The idea of a channel becoming more effective (better meeting the buyer's service output demands) while simultaneously cutting costs is the promise of SCM. Is it merely fanciful? • Is it the latest slogan, the most recent buzz-word or fad? Will it be outmoded in a matter of years?

6. Logistics involves - the processing and tracking of value offers during warehousing, inventory control, transport, customs documentation (a small issue or a non-issue inside trading zones), and delivery to customers. Consumers are increasingly demanding and increasingly diverse in what they demand. It is difficult to have the right flavours, sizes, variety, packages - every consumer insists on some combinations in some categories that other consumers value little. To have the right SKU (stock-keeping unit) at the right time and place makes a difference in sales and in store loyalty. Industries sometimes overlook that logistics can improve effectiveness. They more often see primarily its role in increasing efficiency by cost cutting. And indeed, the potential for cost cutting in channels is enormous. But how to do it, and how to do it without reducing buyer appeal? The answers to this question are many. Let us start with what is to be sold: the inventory. The Importance of Logistics in Channels

7. To fulfil an order in a marketing channel is to obtain the items and prepare them to ship, otherwise known as picking and packing. Catalogue organisations master the art of shipping small lots directly to individuals, or quite often they contract with an organization that has mastered the art, that is, a fulfilment house. Third-party logistics providers (3PL). Logistics is more and more being reconsidered, re-bundled, and outsourced - not just to a single party. In this vein, a striking phenomenon has been the explosive growth of third-party logistics providers (3PL), otherwise known as contract logistics providers (mercifully, this has not been made into an acronym). Many alliances (multiple organisations) also exist, for example, between freight forwarders (organisations that arrange transportation) and organisations that actually do the transportation (such as airlines). Fulfilment and Transportation

8. Documentation Order Processing, Invoicing, and Payments • A major facilitator of logistical change is reduction in the exchange of documents and in the amount of human processing they require. Handling the documentation consumes large amounts of clerical time and opens the door to errors of transcription. Document handling has been greatly reduced due to the growth of Electronic Data Interchange, or EDI. This means direct, company-to-company communication strictly via computer, with no human intervention. This computer-to-computer exchange can be of anything: queries about the status of inventories, orders, reports of receipt of goods, invoices, and even automatic money transfers to pay the invoices. In theory, the idea is simple.

10. Supply Chain Management • A good working definition of SCM is that it is an organizing concept that starts with customer service and argues that this results from the cumulative efforts of the entire channel. Customer service cannot be interpreted as the sole responsibility of any single channel member. The guiding principle is to unify product flows and information flows up and down the production and distribution chain. Doing this requires • (1) a market orientation, focused on the last customer; • (2) effective channel management, to enable smooth transfers of product and information; and • (3) effective logistics.

11. Efficient Consumer Response (ECR) is a landmark in marketing channels. It has wrought radical change in the U.S. grocery industry, and that change is spreading to other sectors and other countries. Its success is surprising, given how different it is from the usual operating methods of most channels. Indeed, ECR is so successful that some critics are now declaring it outdated and looking for a new movement to replace it. The main areas are: A continuous replenishment program (CRP). The goal is to end the bullwhip effect. The method is to use purchase data captured via scanners from the final buyer to inform all upstream supply chain members of demand, right back to the suppliers of suppliers. This requires massive standardization of codes and methods, and implementation of EDI. Efficient Consumer Response

12. A scourge of the industry is poorly calibrated promotions that wreak havoc with pricing and buyer behaviour. Non-targeted promotions encourage price comparisons and brand switching purely for temporary price cuts. At the wholesale level, manufacturer promotions lead to huge demand spikes. These push factory production up too high, then down too low. This, in turn, pushes inventory up too high (resulting in spoiled food) or down too low (running out of stock). Changes in product introduction Thousands of new-product introductions, most of which fail, are endemic to grocery retailing. ECR calls for combining market research commissioned by channel members in order to forecast new-product success better on a store-by-store basis, or based on reasonable store groupings (store clusters). ECR and Efficient Pricing and Promotions.

13. Changes in Merchandising. • This is the same idea (combine research) for the purpose of finding better ways to merchandise brands and their associated categories (e.g., snack foods, pet food, soups) store by store, or cluster by cluster. Over time, these ideas have been developed and expanded. ECR has become an umbrella term that now encompasses a variety of means by which pure grocers combat alternative format stores. Some major operational features of ECR follow.

14. Historically, retailers think of what they sell in terms of how they buy: one brand of one type of item Category management is the principle that a higher level of aggregation is called for. A consumer's shopping list is composed of product categories Therefore, a retailer should think in terms of a value offer category, and manage it as a whole, rather than managing each product – brand and letting the collection of items amount to a category. Further, in the spirit of ECR, retailers and suppliers should work together to understand each category's dynamics as perceived by the consumer. Category Management and Efficient Promotions.

15. The category management focus is related to the idea of an efficient assortment: Having what the customer wants and skipping the rest. Category management sparks thinking about efficient promotions. These can be defined as limited-time offers that are win–win for all parties. This means that they (1) move product (the manufacturer's concern), (2) drive store traffic and category sales (the retailer's concern), and (3) provide added value (to the targeted consumer). This third objective masks the real concern of many producers: that their promotions do not offer value to their brand-loyal shoppers, nor do they build brand loyalty within the segment of consumers who rely solely on promotions to decide what to buy. Category Management

16. Continuous Replenishment. • Continuous replenishment planning (CRP) is the practice of replacing stock based on speedy knowledge of consumer "withdrawals" (i.e., sales). More precisely, in SCM the term means partnering between distribution channel members in order to replace the traditional practices (push systems, stocking to fore-cast) with a pull system. In this pull system, a retailer's stock is replenished based largely on actual sales data from the end of the supplier chain (the consumer). • The goal is to automate the process related to warehouse fulfilment and shipping, using consumer demand (captured by scanners) to trigger just-in-time restocking. By automating, ECR practitioners seek to cut errors and processing costs, which are substantial. For example, British grocer Sainsbury's estimates that one-quarter of the chain's Supply Chain Management budget is spent confirming the location and movement of inventory.

17. Obstacles to ECR. • One of the greatest barriers to ECR is the necessity of trusting other channel members. Trust and good working relationships are necessary for the information exchange, joint planning, and joint actions that underpin efforts to make the entire grocery channel respond to consumers while cutting waste. And trust is essential for continuous replenishment. The idea of making another party responsible for one's own stock, and doing so without an abundant safety stock, is a very difficult one for many industries to accept. • Trust is based on equity. The fundament of ECR is not that channel members share risk and information to produce gains for the channel as a whole, but that they then share the gains equitably. Opportunism (reneging on a promise to compensate all players fairly) is fatal to ECR.

18. Rapid Response, or Quick Response (QR), is another approach to Supply Chain Management. It appears similar to, and is often compared with, ECR, but is really quite different. In some ways, QR is like ECR. The fundamental pull system idea - let the consumer tell the entire channel what to make and what to ship, then do it quickly - is the same. The emphasis on inter-firm cooperation, data analysis, data transmission, inventory management, and waste reduction is the same. The fundamental difference is in the volatile, unpredictable nature of what is being sold. For FMCG (fast-moving consumer goods) categories, such as toothpaste, consumers know well in advance what they want and what they don't want. ECR enables them to tell the retailer and the suppliers readily. Rapid Response

19. Thus, whereas ECR focuses on shipments and promotions, QR focuses more on manufacturing. QR organisations are heavy users of flexible manufacturing techniques. ECR is about demand that consumers know they will have. QR is about demand that consumers don't sense themselves until they're at the point of purchase. Both are pull systems that respond to a consumer. But ECR focuses on being efficient (holding down physical costs), whereas QR focuses on being quick; that is, fast to produce what the market has just decided it wants. Rapid Response

20. What Is the Right Supply Chain? • To this point, we have discussed building blocks of Supply Chain Management and have seen them put together in different ways to serve different environments. Which model is better: the QR philosophy (keep manufacturing design flexible, don't focus on minimizing transportation costs) or the ECR philosophy (fix design, control costs tightly)? Both are pull systems, but differ in how and when they react.

21. A good starting point is the nature of demand for a brand. A functional brand is of a product that is a staple, which people buy in many outlets and which serves basic, stable needs. Thus, the brands have stable, predictable demand and long life cycles. This invites competition, which creates low margins. In contrast, an innovative brand of a product is new and different. This enables it to earn higher margins. But the sales cycle of the value offer – brand is short and unpredictable, in part, because such brands are quickly imitated, and their advantage dissipated. The key to supplying functional goods is to hold down three types of costs: (1) manufacturing, (2) holding inventory, and (3) transportation. Supply chains for these value offers need to be physically efficient. At the factory, this means running at high capacity; in the warehouse, fast-turning inventory. Value offers are designed once and for all to make them easy to manufacture and to maximize their performance. Cost and quality are the criteria used to select suppliers. Physical Efficiency versus Market Responsiveness