effect of governance structure on performance: A case study of efficient consumer response, The

Journal of Business Logistics, 1999 by Whipple, Judith Schmitz, Frankel, Robert, Anselmi, Kenneth

The grocery industry has undergone significant change with the advent of the Efficient Consumer Response (ECR) initiative. In spite of the promised benefits of ECR, much remains to be done in order to reach the goal of true supply chain integration in the food system. While the foundation for ECR implementation has been provided in theory, the reality is that many firms do not understand how to make the practice of ECR work. One step in better translating ECR theory to practice is to examine manufacturer-material/logistical service supplier relationships in the food chain. We provide a framework for determining how performance can be improved for the entire supply chain by better managing inbound supply relationships. Specifically, we discuss the effect of asset specificity and information application on governance structure to achieve ECR performance.

In the last two decades, the grocery industry has been significantly affected by many changes. These include increased competition due to substantial industry consolidation and alternative distribution/retail formats; threatened profit margins; altered consumer demographics, lifestyles, and demand patterns; and recognized inefficiencies, such as excessive inventories, inaccurate information, and unnecessary administrative activities.1 These problems encouraged the grocery industry to reexamine the food system for potential improvements. One result was the creation of the efficient consumer response (ECR) initiative, which began in the early 1990s.

ECR is defined as "a grocery industry strategy in which distributors and suppliers are working closely together to bring better value to the grocery consumer."2 The main philosophy is that all channel members should be integrated and focused on creating an efficient and effective supply system. While supply chain integration pertains to various industries, ECR extends beyond such integration to include not only more efficient replenishment, but also more efficient store assortment, promotion, and new product development. Expected benefits include lower total system inventories and costs, enhanced consumer value in choice and quality of products, and more successful development of consumer-driven products. For example, it is estimated that inventory can be reduced by 41 % to provide savings of $30 billion, and dry grocery lead times can be reduced from 104 days of supply to 61 dayS.3 While it is argued that the figure of $30 billion may be inflated 4 it is still widely acknowledged that improvements in inventory performance are certainly possible throughout the food system.

A core requirement for achieving the benefits of ECR is to establish better relationships, such as alliances, with supply chain partners. This encourages hybrid-integrative governance to develop throughout the supply chain. Essentially, a hybrid-integrative governance structure incorporates the main strength of vertical integration (control) with the main strength of market exchange (production benefits from outsourcing).

Hybrid-integrative governance structures use contracts and/or close relationships to safeguard specific investments in physical and human assets, as well as to adapt better to uncertain conditions! Through such structures, partners expect increased supply chain efficiency and effectiveness, and, they are willing to modify their traditional business practices in order to improve the overall system.

While marked improvements have been shown in the industry, the ECR initiative has not yet fully realized its expected benefits. What appears to be holding the industry back is a lack of integration throughout the supply chain.6 This is particularly true with respect to supply chain inventory, which has not decreased to the anticipated levels due to (1) continued forward buying and diverting practices; (2) poor communication among retailers, manufacturers, and suppliers (especially with respect to promotions); and (3) a lack of implementing technologies and software that offer real-time information exchange.7 ECR has also remained primarily focused on outbound movements in the supply chain (i.e., from the manufacturer to the retailer). As stated by Mathews8 in reviewing the 64th Annual Report of the Grocery Industry, "the bottom line is that the perceived direct benefits of ECR have failed to trickle down through the industry, making ECR still more a matter of promise than performance (p. 26)."

In order to achieve trickle-down effects, ECR must include inbound movements between manufacturers and material suppliers as well as enlist expertise from logistical service suppliers. This expanded focus will require that manufacturers move some portion of their inbound relationships from pure transactional exchanges to hybrid-integrative forms of governance. The problem for many manufacturers is that they are not sure how to determine which relationships should be transactional and which should be hybrid-integrative.

Achieving a seamless inbound relationship is further complicated by the inherent differences between material suppliers and logistical service suppliers. These differences surround the degree of simultaneity involved in the business exchange. Simultaneity refers to the production and consumption of benefits. When benefits are "sold, produced, and consumed" concurrently, simultaneity is high. In this case, production and consumption of the product and/or service are considered inseparable.9 For example, logistical services are performed when consumed, so simultaneity is high. Conversely, material suppliers provide a tangible good that enables a gap to develop between production and consumption. This gap is formed when inventory is committed in the supply system. As such, simultaneity can be relatively low in a transaction between a manufacturer and a material supplier. The degree of simultaneity directly affects transaction costs (e.g., the costs of adapting to uncertainty, safeguarding against opportunism, and measuring performance) as well as supply chain efficiency and effectiveness.