ECR and grocery retailing: An exploratory financial statement analysis

Journal of Business Logistics, 2001 by Brown, Terence A, Bukovinsky, David M

Efficient Consumer Response (ECR) is a food industry strategy introduced in 1993 in which distributors and suppliers work together to increase value for the consumer (Bowersox et al. 1999, p. 5). "By jointly focusing on the efficiency of the total grocery supply system, rather than the efficiency of individual components, they are reducing total system costs, inventories, and physical assets while improving the consumer's choice of high quality... grocery products." (Salmon 1993, p. 1).

ECR uses four basic strategies to accomplish its goals: efficient store assortment, efficient replenishment, efficient promotion, and efficient product introductions. (The brief descriptions provided below are based on the extensive discussion of ECR by King and Phumpier 1996).

Efficient store assortment is based on modern category management techniques that focus on a limited number of broad product categories instead of many individual products. These categories are managed to meet the specific needs of a store's customers while allowing the retailer to improve efficiency in space utilization by eliminating duplicate products.

Efficient replenishment attempts to improve inventory control and ordering processes through automation. Product receipts and sales are tracked continuously and data on sales and inventory levels are transmitted via Electronic Data Interchange (EDI) from the retailer to the food manufacturer. This allows for lower order processing costs, fewer errors, and reduced inventory in relation to sales, but requires significant investment in information systems and expertise (King and Phumpier 1996, p. 1183-1185).

Efficient promotion is an attempt to change a selling strategy commonly used in the food industry. Typically, food manufacturers offer special low price, large volume deals to promote a product's sale. Retailers buy large quantities of the product and store it until it is eventually sold, thereby increasing inventories and holding costs. (This is called forward buying.) However, the buyer may keep only part of the purchase and re-sell the rest to others in different geographic areas (where the deal is not currently available) thus increasing transport costs. (This is called diverting.) Efficient promotion encourages establishment of somewhat lower manufacturer prices in return for a steady stream of purchases by retailers. This would reduce inventory, transport, and production costs.

Efficient product introduction is an effort to reduce unnecessary costs associated with the introduction of new products that eventually fail. By using consumer demographic data from retailers "Preferred Shopper" programs, it is easier to predict new product success or failure and the types of customers most likely to adopt a potential new product. By eliminating failures earlier in the new product development cycle, total new product development costs can be reduced.

In summary, the grocery supply chain under ECR would have manufacturers, wholesalers, and retailers tied to each other with information systems. Current data on consumer sales would flow from the point of sale back to wholesalers and/or manufacturers; product would flow forward in response. Such a system would allow an even flow of product from producer to consumer that minimizes inventory throughout the system while reducing out of stocks and increasing responsiveness to consumer demands. ECR advocates estimate an overall cost savings of 10.8% from ECR adoption (Salmon 1993, p. 4).

Implementing ECR is a challenging and time consuming task. Significant investment in information technology and expertise is often required. However, the major challenges have to do with people and organizational issues. Employees must be retrained and new organizational structures and measurement techniques adopted.

... organizational barriers are both cultural and functional. The traditional vertical, top-down organization structure, in which each function operates separately and is measured independently, is a major barrier because every ECR change crosses functional boundaries. The measurement systems commonly in use are another major impediment because everyone has been conditioned to focus on the efficiency of individual parts of the system, while no one looks at the whole system (Salmon 1993, p. 4).

Further complicating ECR implementation is the fact that its success requires adoption by a substantial number of firms in the food channel. A retailer or manufacturer must make investments in technology, expertise, and training. These investments will not pay dividends until critical mass, i.e., a large enough volume of business, is reached using ECR procedures. It is believed that the ECR critical mass occurs when about one-third of a firm's business is conducted using ECR procedures (Salmon 1996). No matter how thoroughly one firm in the supply chain adopts ECR, it will not get maximum benefit until enough of its business partners do likewise.

RESULTS TO DATE

A review of the literature on ECR results reveals early progress in implementing ECR (Salmon 1996) but growing disaffection in the trade press. (For a recent literature review, see Stank, Crum, and Arago 1999.) Additional material on ECR and other replenishment programs can be found in Collins 1997; Daugherty, Myers, and Autry 1999; Harris, Swatman, and Kurnia 1999; Hoban 1998; Pearce 1997; Vergin and Barr 1999; Whipple, Frankel, and Anselmi 1999; and Whiteoak 1999).