As with all complex management theories, ECR has its share of misconceptions about its purpose, function, implications for daily business and ultimate beneficiaries.
Two of the more prevalent misconceptions define ECR as either a replacement for Category Management (CM) or as a dressed-up Continuous Replenishment Program (CRP). While both perceptions harbor some aspect of the truth, they're really only part of the larger picture and don't do justice to the far-reaching implications and benefits of ECR theory for retailers, manufacturers and consumers. In practical terms, CM and CRP are the foundation for implementing ECR.
ECR is a broad-based business management theory that looks specifically at re-engineering work processes and industry practices to achieve maximum efficiency in four primary areas:
Store assortments: This is really one aspect of Category Management, simplistically defined as "what to put on the shelf." A more complete definition is "the process of applying category-specific information to merchandise management in a way that improves total category productivity and profitability." Using EDI and other information sources, including scanner output, CM works to optimize future sales. Traditional shelf management is more narrowly focused on "what was" and "what is" rather than on "what can be achieved."
Product replenishment: If CM is "what to put on the shelf," CRP is "how to get it there as cheaply as possible." More specifically, Quick Response is the umbrella term for the process of getting products efficiently from the manufacturer's warehouse to the retailer's store shelves. In contrast, CRP only addresses the link between the manufacturer's and retailer's warehouses.
CRP works to replenish products based on actual and forecasted store/consumer demand, rather than on the old methods of ordering product to meet bracket requirements or to take advantage of a forward buying or diverting opportunity.
Promotion: The goal of ECR is to improve efficiency in trade and consumer promotion by eliminating such inefficiencies as forward buying and diverting. ECR theory recommends a system where retailers only receive manufacturer allowance money for products they sell to consumers at reduced prices. In theory, since fewer manufacturer dollars will be "wasted," they will invest in more frequent and deeper promotions. In turn, the retailers will reap more incremental sales and everyone will benefit.
Product introductions: ECR theory advocates a team approach between retailers and manufacturers to develop products that anticipate and respond to consumer needs and demands-rather than the wasteful practice of me-too products and the subsequent retailer demand for slotting and failure fees.
What are the benefits of ECR theory? The Food Marketing Institute Council Report on ECR projects the following results: $30 billion in total systems savings, $10 billion in savings for warehouse-supplied dry grocers 41% less total system inventory, and an 11% reduction in retail prices for the consumer (assuming all savings are passed through).
As well, consumers could expect better choice and fresher product, and increased shopping convenience. Benefits to the supplier could include reduced out-of-stocks, enhanced brand integrity and improved distributor relationships.
So where's the "reality" of ECR implementation in the midst of all this theory? In practice and in the near-term, the most practical and painlessly achieved applications will be the dynamic duo of CM and CRP. Achieving maximum efficiency in trade promotion and product introduction practices will be a tougher goal to achieve, one that means giving up some familiar, comfortable and profitable (in the short term) practices in exchange for the longer view that will ultimately benefit everyone-retailer, manufacturer and consumer.
Mr. Ball is executive director of Dechert-Hampe & Co., sales and marketing consultancy, Trumbull, Conn.