This means that, of the 3.2 million stockkeeping units that could possibly be stocked in-store, supermarkets have to display the 30,000 to 50,000 items that accurately match store-specific consumer demand, while offering the lowest possible price and maintaining as little inventory in the pipeline as is practical.
For the brand marketer, there's new pressure to restructure the way they develop, manufacture, distribute, price, advertise and sell their products-to better deliver value at every point in the supply chain.
It's all a part of the new order created a number of years ago by Efficient Consumer Response, a process that seeks to change the grocery industry, reducing costs throughout the entire distribution system. An essential component of the plan is continuous replenishment, which demands that all of the participants in the supply chain become intimate partners.
"Conceptually, CRP [Continuous Replenishment Program] is the right way to go," says Jim Huguet, president of consultancy NEO Inc. "But it's been difficult for marketers, as well as retailers, to get the mass required to make it work."
Even a consumer product behemoth such as Procter & Gamble Co. can find it difficult to make CRP work properly, industry executives say.
With CRP, retailers, wholesalers and marketers use computer-generated information to forecast inventory requirements and create orders, replacing the traditional replenishment process driven by distributor-generated purchase orders. The requirement? That retailers and marketers work together to forecast consumer demand accurately.
"CRP means that marketers and retailers have to open their books," says Gary Stibel, co-founder of the New England Consulting Group. "They have to trust each other."
While the grocery industry's top associations admit that few companies have reached the point where the benefits of using CRP offset completely the investment in the process, the Grocery Manufacturers of America and Food
Marketing Institute contend that this is "one of the key strategies to driving costs and inefficiencies out" of the system.
When CRP works, the results can be significant. A GMA/FMI report notes that retail/warehouse inventory levels can be slashed 15% to 60%, reducing the pressure for retailers to build additional warehouse space. Inventory turns also increase, resulting in fresher products for consumers.
"ECR and CRP are not just EDLP, or logistics," says Rich Sherman, senior VP, IRI Logistics, a unit of Information Resources Inc., referring to the "everyday low price" buzz-term. "It's a fundamental change in how companies in the grocery industry conduct business."
James River Corp. jumped into CRP even before the enthusiasm for ECR began, "simply because the cost of handling paper products tends to be very high," says Paul Bova, VP-general manager, customer brands. "Any effort that we could make to reduce costs, we wanted to be in the forefront."
Mr. Bova says James River, which markets Northern bathroom tissue, Brawny paper towels and Dixie cups and plates, is now doing CRP with approximately 33 customers, including individual divisions of large chains such as Kroger Co.
He points out that about 30% of a manufacturer's shipments must be managed by CRP before benefits begin to accrue.
For supermarkets, CRP is helping "level the playing field" between themselves and mass merchandisers.
"We have to cut handling costs out of the distribution center if we're going to compete against the discounters and the supercenters," says Ken Johnson, VP-grocery and nonfoods merchandising at Hannaford Bros., a $2 billion New England supermarket retailer.
"We buy a lot of product in less-than-truckload quantities, which is more expensive than full truckloads. That's okay when the competition is other supermarkets, but when it's against discounters, we can't be paying several percentage points more," he notes.
What Hannaford is doing is to consolidate small orders from several manufacturers who stockpile products at the same warehouse. Working with a third-party broker, Pezrow Distributors, Hannaford now is able to fill complete truckloads with products from compatible manufacturers, such as Clorox Co. and First Brands.
This also saves participating marketers money, because the cost of processing a small order is greater on a cost-per-unit basis than a truckload order.
"Now we're getting four or five vendors on one purchase order at the best possible price," says Mr. Johnson, cost savings that he says are passed along to the consumer at the retail level.
It may seem like a simple solution-one that should have been thought of years ago-to reduce costs, but Mr. Johnson points out that the trade "didn't have to think about it sooner."
Yet in the grocery industry, suspicion among partners in the food chain runs so deep that it often requires the use of outside, or third, parties to bring everyone to the negotiating table.
Non-Stop Logistics is one such third-party facilitator. It aims to bring each side together in a distribution system that predicts what is going to sell in a particular market over the next three months, by SKU.
"What we've developed is an approach that, rather than buying and storing products in warehouses, we provide information to manufacturers that results in the production of only the amount of products the stores will need for that time period," says Homer Dunn, president-CEO of the West Coast company.
"We can tell a specific company what to ship day-by-day, and we update that information daily," he claims.
"The result is a reduction of inventory levels by 65% to 75% that a retailer has to warehouse, and it reduces the shipping and handling costs by as much as a dollar a case."
In an industry where manufacturers can move more than 100 million cases a year, and where even pennies can mean the difference between profit and loss, Mr. Dunn believes his company has the knowledge and technology necessary to squeeze costs out of shipping and distribution.
In simulations performed by Non-Stop, Mr. Dunn says, the company has been able to predict inventory needs within 98% to 99% accuracy. This summer, Non-Stop will begin an in-market test of its distribution system in North Carolina with seven marketers.
A key factor in making all these logistical decisions is the increased availability not only of in-store scanner data but, in the case of IRI Logistics, combining that store-specific sales data from InfoScan Census (scanner data from every store in the chain, not a sample) with geodemographic data from sources such as Spectra Marketing and MarketMetrics.
IRI Logistics was formed last year to offer retailers, marketers and other trading partners a comprehensive source of supply-chain planning and logistics solutions. Its Logistics Partner is a single forecasting and CRP system that can be used to reduce inventory levels, backup stock and transportation costs while increasing sales and customer service levels at stores.
"Ideally, retailers want to replenish the shelf as soon as a consumer takes away a particular product," says Mr. Sherman.
"But since we can't beam products immediately to the store, we can track those product movements and exchange that information between trading partners almost immediately to keep products moving continuously."
Mr. Sherman claims this forecasting system is 80% to 85% accurate in predicting product movement at the SKU level-vital information that's shared with retailers, wholesalers, distributors and marketers.
"The goal is to have a timely, accurate, paperless information flow that will then result in a smooth, continual product flow matched to consumption," the executive says.
"The industry has to begin to forecast how consumers buy products, even though this challenges everything the industry has historically done."
There is a growing sense of urgency within the grocery industry that it has to change in order to survive.
"Anything that helps us compete against the supercenters, we have to be willing to try," says Mr. Johnson, even if the cost of admission to the new playing field includes sharing sensitive purchase data with marketers and distributors.
"It's all a matter of trust, an opportunity that we shouldn't ignore," says Mr. Bova in agreement.