Retail purchasing hubs promise better control of chaotic inventory system

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If trading exchanges for the retail industry were already up and running, a blue jean company might never lose the pulse of the market by producing jeans teenagers don't want. Convenience stores might never run out of bottled water during the hottest of hot days. And big retail stores might not stock more than three weeks' inventory.

That's the consensus of a string of experts closely watching the emergence of retail e-marketplaces.

They say newfangled Internet networks will dramatically alter b-to-b relationships in retail, where quarterly and in some cases annual product orders have traditionally been puzzled together by weighing long-range demand forecasts against the longevity of the supplier relationship and the power of the supplier's brand.

Orders, which were once processed through software code that allowed for only the most rudimentary information, will soon be laden with plain English instructions for routing, payment, reordering, marketing and promotion. And it won't cost retailers a red cent.

"This is the real deal," says Kevin Costello, managing partner of digital markets for Arthur Andersen, Atlanta. "In retail, inventory is stacked up in a variety of places. You never know what products will sell, let alone whether a particular color of a dress will sell.

"Now, we're looking at a retail ecosystem. It operates as one organism. It'll definitely save money. And it means collaboration is king."


Amidst pie-in-the-sky promises of a new retail structure, which could shave billions off the cost of goods sold, some see a downside.

Retail exchanges, which espouse ever-more-automated business processes, miss the nuance of retailing, where human--yes, human--buyers make judgments by touching the fabric, playing with a gizmo or talking with neighbors about what they might like.

"It'll be much harder for suppliers to market themselves," says Walter Loeb, president of Loeb Associates, New York, which specializes in consulting with retailers on supplier relationships. "On the retailer side, I still think personal contact is necessary. Fashion and seasonal merchandise does not lend itself to this."

Yet the transition is already under way. Consider what's taken place in the past four weeks:

  • Chevron Corp. and Oracle Corp. have teamed with Wal-Mart subsidiary McLane Co. to form RetailersMarketXchange, aimed at $200 billion in annual trade among distributors of such products as pop, aspirin and magazines to quick-stop shops.

  • A consortium of 50 of the largest suppliers of consumer packaged goods, ranging from General Mills to Johnson & Johnson, plan to spend another $200 billion on a trading network of their own. The manufacturers have agreed to put aside longstanding rivalries over whose cereal is better, or whose soft drink has more fizz in order to make the system tick, says Bill James, VP of industry relations for the Grocery Manufacturers of America, Washington, the project's coordinator.

  • The touchstone for retail's makeover came when Sears, Roebuck & Co. and French retailer Carrefour announced plans to create a network that will handle the $80 billion in supply purchases they make annually.

    Called GlobalNetXchange, the trading network will handle purchases from 50,000 suppliers and distributors, and the door is wide open for other big retail chains to jump in, says Jeremy Hollows, Carrefour's CIO. A few days ago, Carrefour broke in the system by buying "tens of thousands" of TV sets from a supplier running a reverse auction on the site, Hollows says.


    While none of these exchanges are fully operational, they all promise a shift. They'll create mini-economies, which whipsaw information up and down the supply chain.

    The trading exchange data will allow suppliers to anticipate high demand or sluggish sales, and tell retailers when suppliers can't get the raw materials to stock store shelves with products.

    Retailers will be able to tell manufacturers how well their promotional campaigns are working in real time, with data culled from cash registers and other points of sale. And cash will shift without using electronic data interchange, or EDI--an arcane technology that requires both programming expertise and leased telephone lines.

    "I have probably 12 people in all of our company who can understand the code that's embedded in EDI," says Jerry Miller, senior VP and CIO of Hoffman Estates, Ill.-based Sears. "I have 700 who understand XML [extensible markup language] and other Web-based languages. You could hire people coming out of high school who understand it."

    Sears and Paris-based Carrefour will move all EDI transactions to a Web-based system within the next 18 months. That's good news for suppliers, who bear the cost of transactions on what are called proprietary networks.


    Indeed, retailers were attempting to speed up consumer response prior to the advent of the trading networks.

    The granddaddy of all retail supply chain gurus is Wal-Mart Stores Inc. With each new store opening, it has used its market muscle to draw down supplier prices.

    It has worked with suppliers to give them responsibility--almost as if they were renting--for store shelf space. And they've improved margins not by charging the consumer more, but by squeezing dollars out of the supply chain through information.

    "Wal-Mart changed the whole dynamic," says George Whalin, president of Retail Management Consultants, which specializes in the b-to-b side of retail. "They've beat up on suppliers like nobody else's business. And throughout the industry, that's become the way things are done."

    It is industry taboo for a supplier to air a beef about a retailer publicly, Whalin says. Indeed, numerous calls to manufacturers yielded no response. But make no mistake, raw material suppliers, manufacturers and distributors are all wringing their hands over change on the horizon, Whalin says.

    "Affiliations of these sorts are good for one side and dangerous for the other," Whalin says. "Manufacturers and suppliers are always a little nervous when companies are getting together to flex their muscles."


    Automation can bring rewards for suppliers, especially with the large national brands. With products from such suppliers as Proctor & Gamble and Coca-Cola Co., negotiations on the way the manufacturer will support and advertise its products are a standard part of any price negotiation. Once a product is positioned, it is up to the store to run specials and merchandise.

    With these new trading marketplaces, suppliers will be able to track the efficacy of national campaigns from a single store in Topeka, Kan., or all the stores in the borough of Manhattan.

    "For big suppliers, we can eliminate costs and radically improve communication by moving a whole load more information than you ever could with EDI," says Hollows, whose Carrefour sells mostly grocery items in Europe. "We will be able to help with all phases of their marketing, including product launches."

    Sears' Miller was one of many caught up in the promise of the Web. He sees new marketing models emerging.

    "Nobody's crystal ball is all that clear," Miller says. "But suppliers will come up with many ways to make themselves more compelling to a retailer. A number of marketing models will appear. The really beautiful thing about this technology is it takes on a life of its own, and it only takes a few months."

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