REENGINEER TOTAL CHANNEL COSTS FIRST OR...?
A quiet force named "quick response" (QR) is chomping away at the volume, profits and life-expectancy of traditional channels. Wal-Mart was the first to activate and name this channel replenishment system in 1986. In February, 1992, a grocery industry study concluded that if it adopted QR, then total channel costs could be reduced by $30 billion and pipeline inventory investment by 41%. These savings would then presumably be competed away to consumers lowering our grocery prices by 11%.!*
"Incredible"- you say? We all thought that the grocery channel was miraculously efficient with laser beams, bar codes, etc. But, there is more to tell about this FMI study. It didn't use the term "quick response", but rather "efficient consumer response" (ECR). History asks-why the new term? QR experiments which re-engineered channel procedures began in 1981. Since '86, more than 20 large retail/distribution firms have successfully adopted QR. Then in '90 Wal-Mart applied QR to the grocery business and zoomed past $3 billion in sales by '93 year-end.
Perhaps the grocery industry doesn't want to openly admit that an outsider appears to be restructuring their mature industry. The industry was justifiably proud to pioneer check-out scanning in 1976, but for the last six years they have failed to see the difference between automating old methods and using technology to re-engineer them.
Diplomatic denial in word choice is forgivable, but continued inaction to the Wal-Mart threat is not. So, how well are traditional grocery distributors and retailers responding to their wake-up call? A December '93 survey of the top 100 retailers and top 25 distributors found that:
· 6% plan to adopt QR within 1 to 2 years;
· 6% plan to go to QR in more than 2 years;
· 64% have no plans for QR (73% of the retailers!)
Regardless of what the 64% are thinking, many will be going out of business. And, what questions should all other distribution channel participants be asking - what is QR? How does it work? Who is already using this weapon? Must we adopt it or die? How can we begin to implement it on a rough approximate basis with our channel partners?
HOW DOES QR WORK?
When an everyday item is hypothetically sold from a store or used by a commercial customer of a distributor, a scanning of a barcode would check out the item as well as be electronically totaled and automatically reported back to both a distribution center and a manufacturer on an hourly to weekly basis. The distributor would have both an open purchase order with the customer and a "vendor managed inventory"(VMI) responsibility to quickly replenish whatever has been sold or used. The manufacturer would have similar responsibilities for replenishing the distribution center. This two-step, top-off replenishment system would have no - re-order points, stock-checking clerks, buyers, paperwork or errors in the channel.
The economic benefits start with inventory. With top-off replenishment, inventory per stocked item can typically be reduced by 30 to 80% at all three channel locations. Retailers might then choose to double their stocked items within the same space for the same investment. Because faster lead times for replenishment increase the accuracy of demand forecasting, fill-rates approach 100% to increase service satisfaction and sales to customers. Total costs of operations for the big, pioneering retailers have dropped 5 to 10% or more. Perhaps, less efficient channels could do better.
Consider some ballpark figures. Wal-Mart's total cost of operations are running at 15% of sales plus 9% for operating profit. And, Wal-Mart sells items at more than 30% off of "manufacturers' list prices". But, many traditional two-step retail and contractor channels have grown dependent upon "list pricing" with high cumulative markups to cover high costs of traditional business practices. No wonder Wal-Mart is wiping out mainstreet USA.
This simple overview can not cover the complexity and variety of QR implementation, but the gross cost differences between traditional channels and QR operators are compelling. Yet, even as Wal-Mart goes into both bigger cities and into the grocery businesses, most of the besieged, entrenched competitors don't understand their structural disadvantages. They think they will survive by trying harder.
WHO ELSE IS USING QR?
Well over 20 integrated retail giants are already exploiting QR. Andersen Consulting and Wal-Mart alumni are leading agents for spreading the technology. And, there are different QR flavors.
J.C. Penney and The Limited, for example, can knock-off emerging female fashion ideas from concept to goods in the store within 1000 hours. Pep Boys Autoparts has combined more items in-stock at higher fill-rates and lower prices with drive-in service bays to fix your car while you wait. Parts cost 50% less than a franchised dealer's prices and labor is about 20% less with no appointment, drop-off and come back later problems.
W.W.Grainger sells 45,000 items through three steps - a storage tower, regional warehouses and 330+ stores - at a cost of 26% of sales. While most QR discounters target the fast-moving items that traditional wholesalers sell, Grainger is stealing sales on the slow moving items. QR will allow Grainger to eventually double the items available in a local store with higher fill-rates and trim prices if they like. And, look for their catalog to move rapidly towards 100,000 items!
Lowe's is the first home center chain to adopt QR. With their two warehouses and QR, they can be the first and perhaps the only player to put a big box store in small and medium markets. They are targeting high-quality freight items that will go well through their automated two-step capability - like, plumbing, electrical, tools and fasteners. All of their stores will continue to have direct store delivery of bulky, high freight items like lumber.
Home Depot is gearing up for QR. When the national market gets too crowded with big-box competitors and two or more have QR capability, look out! Competitive necessity will drive these stores to double their stocked items to about 60,000 with higher fillrates, compete away about 5% of their productivity savings by lowering prices and go more aggressively after the segments of new construction, buy-it yourself, and installation sales. Many traditional channels that have already lost volume to these big home centers would like to believe that the worst is over. It is just beginning.
The impact of QR on distribution channels is now in the growth stage of its life cycle curve and is still grossly under realized by channel traditionalists. It is not too late, however, to experiment with cobbling together simple approximations of Wal-Mart's world class system with leading-edge "partners" on both the buy and sell side. With some measurable, testimonial successes, perhaps other suppliers and customers will join in.
Adopting QR is not optional, but necessary. First movers will minimize losses to "alternate channels", and they will maximize the damage to their traditional competitors who persist with old ways and costs. It's time to quickly get QR-smart!
Merrifield Consulting Group, Inc.