BrainTrust Query: Why are European retailers closer than U.S. retailers to achieving the optimal demand-driven supply chain?
By Kevin Stadler, Vice President of Sales and Marketing, SAF USA, Inc.
U.S. retailers, currently dealing with a stagnant economy and pressure from more European retailers entering the domestic market, are reassessing what it takes to gain and sustain a competitive advantage in the industry.
The main goal of the retail supply chain has always been to get the right product to the right place at the right time and in the right amount. Due to limited and costly space, many European retailers have focused on demand-driven, computer generated ordering processes that they see as bringing them closer to achieving an optimal supply chain. In contrast, the U.S. retail environment appears more focused on the supply chain than on the demand chain.
Global retailers indicate that the transformation to demand-driven replenishment can provide substantial returns. Retailers have reported to SAF USA that they are achieving sales increases of between 0.5 percent and 1.35 percent. Lowering inventory by 30 percent while reducing out-of-stocks by 60 percent is not uncommon.
The impediment to many new implementations is the prospect of an “all or nothing” plan. Therefore, a new methodology that can take the large journey and break it down into steps is becoming popular. Typically, it involves three phases: 1) Forecast Assisted Ordering; 2) Predictive Inventory Ordering; and 3) Full Computer Generated Ordering. Each step requires incrementally more information and effort while providing incremental benefits along the way.
Discussion Questions: Do you agree that European demand-driven supply chain efficiencies are well ahead of their U.S. counterparts? Why or why not? Do you think U.S. retailers will be more apt to take a gradual approach to implement computer generated ordering rather than leaping into an “all or nothing” approach? Do you have other recommendations for U.S. retailers?
We need to remember that we are looking at different consumer markets. The amount of “impulsive” purchases in Europe is much lower that in the USA (I have lived the first 35 years of my life in Europe), which means that forecasting overseas is somewhat easier. However, through the current economical situation in the USA I feel that the consumer’s mindset is changing. Of course this will have serious consequences for all parties involved in the supply chain.
Remember that in many product categories that up to 60% of sales were unplanned purchases. Relying on the consumer to tell you want they “need” does not help to sell the consumer on what they “want.” Optimal demand-driven supply chain if not executed with the full input of marketing and experts in merchandising, sometimes results in “sales prevention.”
The European market is completely different from the US market, especially in relationship to supermarkets. There is much less variety, flavors and categories. The promotional structure and shopping habits are completely different. This allows for a much more stable demand view, allowing for forecasting to be much more stable.
The US marketplace faces much more difficulty in maintaining inventory integrity and working through the differences of the promotional environment.
There are also item data issues that make this environment a bit more unique.
The challenges should make any retailer pause and move slowly. It’s not to say it’s not worth the effort as it is, however, the challenges create a learning curve greater than you’d expect at the onset of the endeavor.
European retailers are further ahead than US retailers because of private label concentration; of course they have higher rates of automated ordering, as they don’t have the nightmare of system integration that US manufacturers have.
There are also US retailers using this model, moving to this model, and experimenting with this model. They also find good returns. I mean having access to real time data (to identify those last minute purchases when they are being made), comparing real time data to historical trends (to identify deviations that need to be addressed), and monitoring the real time data in real time. Relying on consumers, retailers, or distributors to tell you what they think they will sell is inherently flawed.
Reading this item, I feel compelled to beat the In-Store Implementation drum again:
Demand-based replenishment is a fine thing, but only if the demand signal is reliable and accurate. As far as I can tell, European food retailers are not ahead of North American chains at monitoring and managing shelf conditions.
Excess inventory and out-of-stocks are the twin spawn of inadequate shelf management and lack of shelf visibility. No level of supply chain process sophistication can fix this in the absence of an improved In-Store Implementation discipline that incorporates a plan-do-measure methodology.
European retailers are not “closer” than most US retailers to achieving demand driven supply chain systems. In fact, the very facet of most retailers responding on a global supply chain system that includes an e-commerce facet as well as a fully global, multi-warehouse system is rare in Europe.
We can take the leaders in any particular category, and it is not a European organization that leads in technological innovation and logistical implementation, but is instead an American company. From mass merchandisers like Wal-Mart, to Do-It-Yourself retailers like Home Depot, or Warehousers like Costco, American Companies are clearly leaders in logistical and supply chain implementation.
I think the premise is wrong here…I don’t believe it is retailers who are not demand driven but rather the manufacturers. It is common knowledge that less than 20 percent (and probably closer to 10 percent) of the items in a supermarket sell less than a case per week. So the inventory tie up is the result of case packs built to obtain display space on the shelf and assortment decisions that are merely meant to visibility of the manufacturer’s product line.
Why does the retailer put up with this? I think they’re called “slotting fees.” Just as Wall Street is learning, hiding the financial factors doesn’t make them go away, it merely distorts the execution.
The real issue is to agree on what we mean by Demand Driven. In a retail supply chain there is only one demand and it is Consumer Demand. All other demands, up and down a given Retail Supply Chain can and should be calculated.
We first need to understand what this means and its implications. Then, and only then, should we ask ourselves how trading partners can effectively collaborate to streamline their respective supply chains, improve in-stocks and lower their costs and inventories.
It’s odd to compare European retailers to American retailers’ supply chain systems. There are so many retailers, with such a wide variety of expertise. I doubt that most generalizations would be useful.
Furthermore, reported inventory savings and sales improvements for any new systems and procedures often reflect the previous backward state more than the brilliance of the new solution. Translation: if the retailer is 25 years behind the times, almost any new system will generate great improvement.
First of all, supply, demand and regulation are inseparable so any mention of one of these needs to pay respect to the others. Secondly, the European market is less uniform than the US so it is hard to group it all together. So I’ll focus on Europe’s largest market, Germany.
WWII and its aftermath left Germans to focus on bare necessities and products with proven functionality at rock bottom prices. Paired with this were laws limiting opening hours, forbidding rebates and forcing a 2 year guarantee on all products sold.
Success in this environment could only be achieved through slim margins, high volume and low costs. Slim margins are best achieved through private label merchandise. High volume is achieved through low prices. Low costs are achieved through limited promotions (helped by the anti-rebate law), high sales per square foot, per employee, per hour opened, little “customer service” and low overheads. Inevitably, private label merchandise and simple retail forms came to dominate.
In the US, supermarkets grew out of suburban wealth and space and little regulation. US supermarkets see themselves as the customer end of the CPG supply chain. They provide the real estate for the likes of P&G, Unilever and Nestlé while at the same time are open 24 hours and bag your merchandise. The constant coupons and rebates and direct mailings from competing branded manufactures have reinforced the US customers expectation of choice and variety and immediate yet limited-time savings. Thus the US market has become extremely complicated and US consumers have exceedingly diverse expectations which has made it difficult for US supermarkets to keep up.
US supermarkets try to be everything to everyone, a goal which inevitably is impossible. They wish to offer “customer service” but one must wonder if 10 different brands of ceasar salad dressing or roasted garlic tomato sauce are truly “serving” the customer. Here in California, Trader Joe’s is the only retailer with a lean operation focused on the customers’ needs. Their stores offer decent variety and prices with a decent shopping experience. They offer little in the way of branded goods and are generally open only 12 hours a day. There’s little coincidence that they are owned by the Albrecht family who happen to be the owners of Germany’s largest supermarket chain, Aldi.
‘jlmcnamara’ got it right. America grew up with plenty of space and learned to “stack it high and watch it fly,” which is very supply driven.
The best Demand Driven retailers I’ve seen in the US are the American subsidiaries of a European conglomerate. Space, and the execution of space plans, is critical to any Demand Driven network. Europeans retailers tend to understand their space better, and are more successful the American retailers at delivering CAO and other similar initiatives.