VANTAGE POINT: The Seven Habits of Highly Effective Retail Execution for CPG Companies

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VANTAGE POINT: The Seven Habits of Highly Effective Retail Execution for CPG Companies

02/24/2009
By Dr. Jonathan Golovin, chairman, CEO and co-founder of Retail Solutions

The retail industry is redefining itself. The boundaries between the responsibilities of the retailer and the manufacturer are blurring, as retailers look for expertise -- and resources -- from their most trusted suppliers. For consumer packaged goods (CPG) companies, this opens a new set of opportunities, but also a new set of challenges: CPG companies now have the opportunity to support retailers all the way down to store operations at the shelf, but need to master a new set of skills, with new tools and new intelligence to leverage their customers' data rather than just their own internal (e.g., ERP) data.

This new role and capability, "Retail Execution", is quickly establishing itself as a source of competitive advantage in the CPG industry. A few industry leaders have already set up processes and operations, often within their customer teams, to address these new opportunities. These leaders find their initiatives to be self-funding through increased sales, reduced costs and improved productivity from their people.

Retail Execution is not a typical business process reengineering program requiring re-organization or capital expenditures. It is a way to leverage new visibility into retail operations to help CPG companies maximize the productivity of their existing resources and systems -- with a tangible ROI and immediate payback. Its implementation often involves the use of operational retailer data to drive collaborative business processes which leverage the CPG's insights to drive action at retail.

A simple example of Retail Execution in practice is the way that leading CPG customer teams provide store-UPC level order allocation recommendations to their retail customer for upcoming promotions. While the retailer has historically executed this process on their own, many are finding that their CPG vendors can offer greater insights and deliver better results by allowing them to initiate the process.

Paraphrasing Stephen Covey's "7 Habits of Highly Effective People", this article details the seven habits of forward-looking CPG companies who are defining Retail Execution by sharing some of the results they have achieved through their transformation of the retailer-manufacturer relationship.

Habit No. 1: Get Visibility Down to the Store and Onto the Shelf

For the past few decades, the lifeblood of the CPG industry has been syndicated data. As a tool to empower corporate marketing, product development, pricing strategy, its utility may still be unmatched. However, it lacks the timeliness and granularity (e.g., store-UPC-day) necessary to facilitate Retail Execution. Even a company with superior overall performance will find underperforming store-item combinations, or particular days that regularly go out of stock. It is the ability to identify these problematic store-item combinations and then bring them in line with the average that will enable that company to break through to the next level of performance. The alternative is to simply continue to manage by averages and achieve average results.

The broader availability of point-of-sale (POS) and inventory data by day, by store, and by SKU is a critical enabler of that performance break through. Most U.S. food, drug and mass retailers share data today (though at various levels of granularity), and the CPG companies understanding the potential of Retail Execution have also understood that they have to harness that data, the primary raw material, to derive new actionable intelligence. Most have designed and implemented (or are implementing) a corporate demand signal management (DSM) strategy. For instance, Unilever now has near-real time visibility available for each of their SKUs at over 20 retailers and over 30,000 stores, along with a two-year history. This gives them (and others following that path) a tremendous opportunity to identify retail execution issues and react quickly to minimize their impact -- and find opportunities that would benefit from being rolled out across all of their retailer customers.

This timely, high-resolution visibility across all customers is the first habit -- and the foundation to Retail Execution. It is the core enabler for CPG companies looking to understand, transform and sometimes create collaborative retailer-supplier processes that effectively deliver results.

Habit No. 2: Leverage Retailer Data to Drive Assortments and Merchandising

Originally the responsibility of category leaders exclusively, having a role in building the right assortments and merchandising vehicles is becoming more and more widespread amongst suppliers. At the same time, micro-assortments, item proliferation, private-label growth all make it more and more critical for consumer goods companies to maximize their sales in the space allotted to them in each store.

With daily POS data, industry leaders know, with a very limited time lag, which products work and which don't in each individual store and cluster. They can easily infer which products' coverage should be extended to stores where it is not currently stocked. Adjustments can be suggested and implemented sooner, without having to wait for the typical end-of-cycle review. Regular meetings with retailer category managers or store and area managers are more fact-based. Suppliers can look at actual shopper behavior in all stores -- rather than rely on sampling.

More importantly, suppliers can become real partners to their retailers' category managers. By conducting the item-by-item, store-by-store analysis that retailers don't have the resource to complete systematically themselves, suppliers can help optimize the merchandising function -- and directly benefit as a result.

Habit No. 3: Design and Execute Effective Promotions and New Product Introductions

Similarly to merchandising, POS data can be leveraged to design, plan and execute more effective promotions down to the store level, by understanding the geo-demographic and store-specific factors that drive lift. Promotion design decisions involve which items to include and in what mix; what type of advertising and display vehicles to use (if at all); and the trade fund terms to incent optimal execution. A leading CPG company recently reported that it switched its display strategy at a retailer because they found that stores not complying with the use of end-caps had actually achieved better results when dump-bins were used to feature their items instead.

Once the retailer and supplier agree on a promotion's design, planning ensues. Here, the supplier can then recommend and ensure that the right quantities are allocated to each store up-front with operational plans in place to support rapid replenishments during the promotion as well as the draw-down of any excess stock left over. By applying these principles, Kimberly-Clark achieved a 167 percent improvement in sales and a reduction in out-of-stock by 8 percent between two similar promotions.

Habit No. 4: Forecast Based on Consumer Demand, not Retailer Orders

The availability of POS data also transforms the way forecasting can be done. Most forecasts today are generated by using customer order (or shipment) data, as opposed to using actual sales through the stores. With retailer orders typically varying twice as much as POS from week-to-week, the infamous bullwhip effect transforms minor changes in consumer demand into huge shifts in ordering patterns at the supplier -- leading to periods of overproduction and excess inventory followed by shortages and expedited orders.

With retailers employing more and more promotions and new product introductions to drive demand, simply creating a baseline demand forecast is now a complex exercise. Traditional approaches leveraging shipment histories combined with sales and marketing insights result in biased forecasts with a high degree of unnecessary volatility. By properly incorporating end store sales data in their forecasting algorithms, suppliers have a tremendous opportunity to improve forecasts -- and remove outliers from their forecast inputs -- cutting inventory requirements at both their warehouses and the retailers' DCs (especially in VMI relationships). Unilever has publicly shared the benefits of a 9 percent improvement in baseline forecast accuracy leading to a 15 percent reduction in safety stocks by leveraging data from Food Lion's data sharing program: Vendor Pulse.

Habit No. 5: Don't Accept Out of Stocks as a Fact of Life

The fifth habit of Retail Execution finally brings a partial solution to one of the most enduring challenges faced by the retail industry; on-shelf availability.

Out-of-stock resolution has always been a reactive process, or associated with long-term transformation and process improvement. With the availability of near-real time POS data, it can finally be turned into a more responsive and even proactive process. Relatively simple analyses can now tell automatically where and when a product is out of stock with just a single day lag, and advanced science can identify the root cause of the on-shelf availability issue and offer a prescriptive solution. This enables suppliers to both react to issues faster and, more importantly, prevent their reoccurrence. In the current economic climate, this has moved from an issue of tactical relevance to one of strategic importance since any out of stock creates an excuse for the shopper to try a store brand instead.

Habit No. 6: Maximize In-Store Merchandiser Productivity

Merchandisers, whether internal or outsourced, play a critical role in Retail Execution, as they are the ones validating promotion, new product introduction and planogram execution compliance and resolving out of stocks.

Retail Execution can transform the way merchandisers deliver value. The first five habits of Effective Retail Execution have the potential to arm merchandisers with a to-do list focusing exclusively on the highest value action items. With the sixth habit, instead of conducting store visits based on a standardized set of tasks, merchandisers can now focus on what really creates value for both the retailer and the manufacturer by using fact-based, up-to-date alerts and action items targeted at resolving high-value issues. And, as few industry leaders have recently demonstrated, all of this can be done without changing existing store calling plans or spending any additional time in the store.

Habit No. 7: Build Collaborative Business Processes

Merchandisers, however, are just one way of creating value with this new operational intelligence. While suppliers are invited to play more and more of a role in supporting joint value creation with the retailer, it is still the ultimate responsibility of the retailer to decide what actions they will allow in their stores. A product display left in the back of the store during a promotion will not get moved onto the sales floor if the store manager does not allow it. The store's perpetual inventory for an item will not get corrected if the replenishment specialist or department manager has no interest or motivation to make the adjustment.

The last habit of effective Retail Execution (and its most critical component) is the establishment of collaborative processes between the retailer and the supplier that ensure actionability. Retail Execution means that the new intelligence developed by the supplier using retailer data is then shared with that retailer in an effort to drive improvements in the joint processes that drive increased sales and reduced costs for both parties.

This is the most critical step and perhaps the one that will also separate the companies who gain a competitive advantage through Retail Execution over the ones who lag behind. Retail Execution establishes a foundation of collaborative processes and joint goals which lead in turn to higher performance and ultimately to more trust-filled relationships. And, one thing we all know is that a retailer's trusted suppliers will always find a way to outperform their peers.

Let me know your thoughts. You can reach me at [email protected].
 
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Dr. Jonathan Golovin is the chairman, CEO and co-founder of Retail Solutions. He was also the founder and chairman of Consilium Inc., the largest independent Manufacturing Execution System (MES) Company (now Applied Materials) and of Vigilance, a leading event management company. In 2001, he was awarded the Ernst & Young Entrepreneur of the Year Award for emerging companies and is the author of Achieving Stretch Goals, published by Prentice Hall.