EFFICIENT CONSUMER RESPONSE (ECR) AS STRATEGY IN

MANUFACTURER-RETAILER NETWORKS

Luis Araujo and Stefanos Mouzas

Senior Lecturer and Doctoral Student

Department of Marketing

The Management School

University of Lancaster

U.K.

ABSTRACT

This paper discusses the issues of strategy in the context of manufacturer-retailer networks in Germany. Our view of strategy from a network perspective is influenced by two different starting points. Strategic change is effected through changes in practices in concrete relationships, and the cumulative effect of changes in dyadic relationships influences both the position and the network structures in which the focal actor finds itself. On the other hand, strategies cannot be seen simply as the idiosyncratic product of the circumstances each firm faces. The embeddedness of business networks in institutional structures makes the firm a target of intervention for all those who seek to govern economic life.In this paper, we want to focus on one comprehensive initiative that is currently sweeping many manufacturer-retailer networks in Europe and North America, and goes under the label "Efficient Consumer Response" (ECR) or "Quick Response" (QR) initiatives. The logic of this initiative means a complete redesign of the business process from manufacturers' production lines to retailers' shelves and has important consequences at the level of electronic data interchange, creation of transparent and activity-based cost accounting and performance measurement systems, logistics and stock replenishment, new product introductions, promotions and organisational forms..The paper will present empirical evidence on the progress of ECR initiatives in Germany and will focus on the extent to which the adoption of this initiative is promoting radical changes in manufacturer-retailer networks. The paper will conclude with some reflections on the process of firm and network government by initiatives such as ECR.

13

INTRODUCTION

The objective of this paper is to examine and elaborate the notion of strategy from a

network perspective. In doing so, we want to take into account the interrelation of strategy

as the idiosyncratic product of a firm's trajectory of evolution and strategy as the adoption

of pre-packaged programmatic initiatives designed and promoted by third parties, namely

consultants and trade associations, who constitute themselves as experts in the government

of economic life. These pre-packaged initiatives are then transferred and tailored to the

specific circumstances of each individual company.

In this paper, we want to focus on one, integrated and comprehensive programmatic

initiative that is currently sweeping many manufacturer-retailer networks in Europe and

North America and goes under the labels "Efficient Consumer Response" (ECR) or "Quick

Response" (QR) initiatives. The logic of ECR means a radical redesign of the business

process from manufacturers' production lines to retailers' shelves and has important

consequences at the level of electronic data interchange, creation of transparent and

activity-based cost accounting and performance measurement systems, logistics and stock

replenishment, new product development and introductions, promotions and organisational

forms (e.g. shift from brand to category management systems). In some senses, these

initiatives can be seen as the retailing counterpart of lean production initiatives in supply

chains. 1

The structure of the paper is as follows : in the first part, we will review existing views of

strategy from a network perspective and introduce the notion of programmatic initiatives

as attempts to govern economic life, or to put it another way, to influence the strategies

adopted by firms and the structure of the networks in which they are embedded. In second

part, we will focus specifically on ECR as one type of programmatic initiative aimed at

governing manufacturer-retailer networks and present empirical evidence on the progress

management consultancy reports we accessed

14

of ECR initiatives in Germany. The paper will conclude with some reflections on the

process of strategy making and network government by programmatic initiatives.

THE NOTION OF STRATEGY FROM A NETWORK PERSPECTIVE

The starting point for a review of strategy from a network perspective is Axelsson's (1992)

comparison of different perspectives on strategy and how they treat the relationship

between the focal actor and the environment. The classical and dominant view of strategy

conceives the actor and the environment as separate and sharply differentiated entities or,

to paraphrase Astley (1984, p. 526), firms are regarded as solitary entities confronting a

hostile, faceless and atomistic environment. The provenance of these arguments can be

ascribed to an open systems conceptualisation of the firm-environment relationship which

regards strategy as the attempt to achieve a degree of fit between the resources and

activities of an organisation and the characteristics of the environment (Hakansson and

Snehota, 1989).

A variation on the dominant theme is provided by notions of dyadic, formal cooperation

and collective strategies in what essentially remain open systems views of the

organisation-environment relationship (Axelsson, 1992). If the addition of formal,

cooperative relationships between organisations to the open systems perspective on

strategy has proceeded apace (see e.g. Smith, Carroll and Ashford, 1995), little effort has

been devoted to developing the notion of collective strategy (but see e.g. Oliver, 1988 ;

Dollinger and Golden, 1992). There is, within this perspective on strategy, an appreciation

of the limitation of seeing the environment as necessarily hostile and faceless, but the

notion of cooperation is deployed mainly within the context of domesticating adverse

environmental forces.

The network critique of the open systems approach to strategy formation is by now well

rehearsed (Hakansson and Snehota, 1989; Axelsson, 1992; Friedberg, 1993; Araujo and

Easton, 1996). The 'environment' is not perceived, understood and somehow brought

within the firm as an abstract topology but as a set of relationships with other corporate

15

and individual actors whose identities matter - customers, suppliers, banks, professional

and trade associations, distributors, etc. The 'environment' of an organisation is thus not an

ecology of niches with an heterogeneous and pre-determined distribution of resources but

composed of other organisations, who collectively define and recursively organise that

environment

Strategic action from a network perspective, concerns the "... efforts directed by actors to

influence (change or preserve) their position(s) in network(s)" (Johanson and Mattsson,

1992, p. 214). Thus strategic action does always involve attempts to mobilise and enrol

others in the network and is primarily directed at those with whom the focal actor conducts

exchange relationships. Johanson and Mattsson (1992) regard strategic action as being

directed at the relationships of the focal actor, or at relationships between other actors in

the network or directed at relationships with other networks. Any of these goals may be

achieved by cementing, protecting, seeking disengagement from or changing the character

of existing relationship, as well as seeking the establishment of new relationships. Any of

these actions may have as its objective, the influence of perceived connections between

relationships and thus the reshaping of the network structure to one's own advantage.

Another, admittedly underdeveloped notion advanced by Johanson and Mattsson (1992)

concerns the 'network theory' held by an actor. Strategic actions may also be directed at

changing the network theories of other actors and bringing them into alignment with one's

own network theory. Thus a firm's efforts to change network positions can also

communicate to others its own expectations and interests about the network structure in

which they are embedded.

Johanson and Mattsson's (1992) 'network theory' concept shares many features with

Weick's (1995) notion of sense-making. Like Weick's sense-making notion, network

theories contribute actively to the process of a firm's identity construction, they are

retrospective in the sense that they provide a plausible narrative for past events and current

positions, they are the ongoing product of social interactions, they are inferred from a

variety of cues rather than objectively given, and they are enacted in the sense that network

16

structures are as much interpreted as produced by the actors' own actions and the

cumulative effects of those actions.

On the other hand, both the concept of network theory and Weick's notion of sense-

making do not account for the fact that organisations and networks are also embedded in

institutional contexts. Thus network theories do not emerge solely as a result of the

idiosyncratic experience of individuals and organisations. Institutions provide a bridge

between cognition and social life, by supplying individuals and organisations with ready-

made rule systems and habits of thought. For example, North (1990, p. 3) states :

"Institutions are the rules of the game in a society, or more formally, are the humanly

devised constraints that shape human interaction. In consequence they structure incentives

in human exchange, whether political, social, or economic". In short, institutions act as

repositories of sedimented experience and suppliers of rule systems that help shape

cognitive processes by providing frameworks for interpreting and representing information

as well as behavioural routines.

In this paper we want to explore the notion that strategies are the products of deliberate and

emergent responses (Mintzberg and Waters, 1985) to the idiosyncratic network positions

of individual firms, but also that strategies are often influenced by the wider institutional

context in which firms find themselves. In particular, we want to focus on the role of

'programmes' or 'initiatives' as attempts to steer organisations in a strategic sense.

Programmes or initiatives can be conceived as coherent and integrated attempts at

governing the enterprise, with sets of procedures, spaces of representation, technologies of

calculation, accountability modes, etc., and a rhetoric that links these heterogeneous

elements together and provides a rationale for their juxtaposition (Miller and Rose, 1990).

Miller and Rose (1990, p. 5) make a cogent argument for the importance of rhetoric or

'discourse' as a technology of thought, requiring attention to the range of technical

instruments (e.g. writing, numbering, computing) that render a field of activity knowable,

calculable and administrable. A variety of different forces can only be enrolled in a

governing network if a shared vocabulary exists and objectives and values can be

translated from one 'language' into another. The language of expertise and professionalism

17

plays a role here, in setting claims to "objective", disinterested truth and in suggesting

means for achieving the desired results.

Programmatic initiatives thus constitute one of the ways through which economic life can

be governed and firms and networks steered in a strategic sense. They are assembled from

a tool-kit of assorted principles, packaged and sold as systemic solutions to a cascade of

problems suddenly brought together into a coherent narrative of symptoms and root causes.

In particular, management consultancy firms constitute themselves as experts on specific

domains with trade and professional associations, government agencies and ministries,

promote their expertise in managerial journals and trade conferences, etc. As a number of

commentators have remarked (Eccles and Nohria, 1992 ; Abrahamson, 1996 ; Kieser,

1997) most of these programmatic initiatives can be classed as temporary management

fashions that seem to capture the imagination of managers, popular management

magazines, etc. for a while before disappearing into oblivion.

Kieser (1997, p. 57) regards management fashions as an arena in which different groups of

participants - management consultants, managers, business school academics, editors of

management magazines, etc.- attempt to advance their interests. Participants succeed in

their objectives of obtaining economic and symbolic resources such as public image and

esteem, career progression, etc., to the extent that they are able to enrol further participants

into it. Rhetoric is the input currency of the cooperative game that aims at extending the

boundaries of this arena. To Kieser's notion of a cooperative game, we would add that

these arenas extend themselves not simply through the co-optation of further members of

the same class of actors - i.e. more management consultants - but to the extent that they are

able to enrol other actors - e.g. business interest associations, trade institutes - and their

targets, business firms, as clients. The implementation of concrete initiatives in firms gives

legitimacy to the management fashion, creates opportunities to reappraise the programme's

principles in the light of experience, and provides templates for emulation that further

enhance the credibility of the programme vis-a-vis potential clients. Only through

extending the boundaries of their arenas in this way, can proponents of initiatives expect to

reap the economic and symbolic capital that Kieser alludes to.

18

Although a clean break with the past and novelty claims appear to be pre-conditions for the

success of management fashions (Kieser, 1997), in reality the rhetorical presentation of

initiatives as ground breaking is more important than a strict claim of novelty for all its

components. Grint's (1994) analysis of business process reengineering (BPR) initiatives

leads to the conclusion that few, if any, of the principles underlying BPR can be regarded

as truly novel. Finally, if most programmatic initiatives (e.g. BPR, TQM) have taken the

individual business firms as the target of their intervention, in the last few years we have

witnessed a number of initiatives targeted specifically at the governance of interfirm

relationships (see e.g. Macbeth and Ferguson, 1994) and business networks.

One of the most notorious of these initiatives is lean production or lean supply (Womack,

Jones and Roos, 1990 ; Lamming, 1993). The essence of lean supply is to separate out the

production system from the network governance system (Johanson and Mattsson, 1992)

and focus on the most efficient means of delivering value to the ultimate consumer.

Lamming (1996, p. 187) summarises the aims of lean supply as follows :

"In lean supply, the entire flow from raw materials to consumer is considered as an

integrated whole. Interfaces between stages (i.e. between companies suppliers and

customers) are thus seen as artificial - created not as natural transformation stages in the

development (or addition) of value, but as a result of the economic arrangement of assets

(boundaries of firms) governed by many other factors (e.g. labour skills, convenient

configurations of technology, geographical location of raw materials, etc.). The

fundamental principle of lean supply is that the effects of costs associated with less than

perfect execution of a sub-process are not limited to the location of the execution. ... This

is a fundamental point since lean supply does not recognise the traditional positions of

customer and supplier, which tend to obscure the central quest for the removal of waste."

Over the last few years, and spurred by a number of important developments in technology

and the business fortunes of the retailing sector, a concept known as efficient consumer

response (ECR) or quick response partnershipping (QR) has been developed in the USA.

In the next section we will introduce briefly the nature of ECR initiatives before

proceeding to document how they have been introduced in Germany and present some

19

empirical results of our own research on the implementation of ECR initiatives in

manufacturer-retailer networks.

EFFICIENT CONSUMER RESPONSE (ECR) AS A STRATEGIC INITIATIVE

As in the case of lean supply, in the retailing sector there have been important

developments centred on increasing the efficiency of manufacturer-retailer networks,

eliminating waste and improving informational, monetary and physical flows in the

network, from the production line of manufacturers to the shelves of retailers. In the words

of Buzzell and Ortmeyer (1995, p. 86) these arrangements "... seek to achieve some of the

efficiencies of vertically integrated systems without common ownership".

In short, the whole supply chain is opened up for scrutiny and each linkage is carefully

examined with a special emphasis on delivery and stock replenishment, price management

and promotions, trade conditions and allowances, as well as communication and

information systems for order processing, billing, etc. According to one influential study of

the grocery industry in the USA (Kurt Salmon Associates, 1993), saving potentials in the

supply chain of the grocery industry could reach 10.8 % of turnover or US $30 billion. In

Germany, leading manufacturers and retailers estimate the saving potential at 5.7 % of

turnover. However such ambitious targets should be treated with caution.

ECR or QR is the usual term to describe this initiative in the literature (Femie 1994, 1995 ;

Whiteoak, 1994 ; Fiorito et al, 1995 ; Buzzell and Ortmeyer, 1995).2 According to Fiorito

et al. (1995, p. 16) the differences between QR and ECR is that QR is the more appropriate

term for the department store-type distribution and general merchandise industries such as

apparel where the focus is on time compression economies (see e.g. Richardson, 1996),

and ECR applies to food product and the grocery industry where item movement rate is

much faster than in most department store-type outlets. Fisher (1997) promotes a

2 Although these initiatives have been barely been acknowledged in the academic literature, the popular business process has devoted a large amount of space to cover developments in this field. A search in the ABI / Inform database uncovered a total of 143 articles on QR and ECR between January 1996 and March 1997, mostly on trade journals and popular management magazines.

20

distinction between supply chains for functional and innovative products that parallels the

distinction offered by Fiorito et al (1995).

The implementation of ECR rests thus upon a different conception of the business system

and the role of each actor in the supply chain. As in lean supply, ECR requires a mode of

thinking geared to the analysis of activities with little respect for formal, legalistic

boundaries of firms and seeks to transform and expand performance and accounting

measures to the sphere of interorganisational relationships. The focus of ECR is generally

agreed to be in increasing the efficiency of promotions, new product introductions, store

assortments and stock replenishment (see e.g. Progressive Grocer Annual Report, April

1996 and Lebensmittelzeitung LZ 45, November 1996).

ECR is framed under the notion of making the whole manufacturer-retailer network

accountable to the consumer. Indeed, the rhetoric of most consultancy and trade magazines

propounding the virtues of ECR emphasise consumer sovereignty and convenience as the

key drivers for change, rather than the removal of waste as in lean supply. Consultancy

organisations provide a vital link to understand how ECR has been problematised and

ready-made solutions, couched in the language of expertise and consumer sovereignty,

made available. They have cooperated with both trade and manufacturers in the

implementation of ECR solutions by selling their know-how, software products and

training. They have also teamed up with industry and trade associations to diffuse "best

practice", collaborated with trade publications to highlight problems and pinpoint

solutions, and made numerous presentations both to individual companies and trade

conferences.

In Germany the role of Roland Berger, the leading management consultancy firm,

exemplifies this process. Roland Berger is actively involved in associations like ECR

Europe a Pan-European association of manufacturers and retailers set up to share ECR

experiences and expertise -, cooperates with trade magazines (such as Lebensmittelzeitung)

and is an active participant in the relevant trade conferences. Other consultancy companies

are also active in niche areas such as EDI systems or logistics providing valuable

assistance to smaller companies.

21

Consultancy organisations have also been instrumental in the diffusion of practices across

industries as well as country boundaries. For example, it is widely recognised that the most

significant advances in QR and ECR have been made in North America and the transfer of

those practices to other parts of the world is proceeding apace (Kurt Salmon Associates,

1996). Indeed a recent report on supply chain management in the US grocery industry

(Morehouse and Bowersox, 1995) looks forward to the evolution of the industry's supply

chain in the 21st century built on the foundations laid by ECR initiatives. However, Fernie

(1994) remarks that much of what is heralded in US reports on ECR has already been

implemented in the UK grocery retailing sector.

In the next section, we will focus on the transfer of ECR practices into Germany and

document how these practices have been incorporated in the activities of manufacturers

and retailers.

ECR IN GERMANY

The retailing system in Germany is highly integrated and revolves around the tight

coordination between large retailer groups and large manufacturers of fast moving

consumer goods (frncgs). The retailers, given their privileged position of interfacing

directly with consumers through 76,000 outlets reaching a population of approximately 35

million households, are at the hub of this network dictating, to some extent, the pattern of

activities of other network members. For a similarly framed discussion, albeit using a

systems metaphor, of the UK retailing system see Frances and Garnsey (1996) and for an

international comparison of grocery retail chains see Fernie (1995).

The last decade has been an era of radical restructuring for retailers. Hypermarkets, large

superstores and the more aggressive discounters were able to increase market share at the

expense of other outlets. The smaller supermarkets that sell mostly fresh fruit, vegetables

and milk / dairy assortments lost significant share to either bigger hypermarkets or hard

discounting stores. Hypermarkets and larger superstores focus equally on non-food and

food products offering a broad assortment to the consumer, while discount stores are food

10

22

and drinks oriented. The restructuring of the trade structure had a dramatic impact in the

total number of retail outlets. The number of outlets declined from 85,294 in 1991 to

75,667 in 1996.

The second important trend has been the concentration of the trade partly related to

mergers and acquisitions. The seven most important retail groups today control 20,100

outlets and represent a turnover of 262 billion DM. The number of outlets and the

purchasing volume provide the basic platform of retailers' power in the network. While the

number of outlets determines the control over geography and distribution, the purchasing

volume dictates prices and conditions.

Cooperation between manufacturers and retailers in the area of supply chain management

were sporadic in the 1980s and early 1990s. Between 1990 and 1995 they became more

frequent, increased in importance and injected a new atmosphere in the manufacturer-

retailer relationships. Business jargon was enriched with terminologies such as direct

product profitability (DPP), continuous replenishment programmes (CRP), cross-docking,

electronic data interchange (EDI) systems, standing for some of the many joint initiatives

between manufacturers and retailers.

Recent developments in this area are traceable to the following structural changes :

1. The stagnation in consumer demand setting limits for volume and profit growth, (see

figure 1). Consumer demand is fragmenting and consumption patterns becoming

more diverse, opening the doors to a constant stream of new products. Brands are

proliferating, in particular retailer brands, intensifying competition within each

product category. According to Nielsen Marketing Research the share of retailer

brands in the total retailer turnover increased from 6.7 % in 1990 to 10 % in 1996.

11

23

1000

900

800

700 j

600

500

400

300

200

100

0III! <

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Year

Billions DM

Figure 1

(Growth of Total Grocery Retail Turnover in Germany 1985-1995)

2. The rapid growth of discount channels and category specialists, the so called category

killers (i.e. a channel that specialises exclusively in a particular product category).

This trend is forcing broad assortment retailers to evaluate carefully what items

should they carry for each category and to monitor performance by item and by

category on a store by store basis.

3. The increasing complexity of transactions involving numerous products, services,

price variations, delivery schedules, etc. Concentration in the retail trade and shelf

space limitation in stores have increased competitive pressures, putting a premium on

revenue and profitability of stores for every square meter of available floor space. The

drive to examine costs for every step of the business process and derive new cost

accounting and profitability measures that take into account economies of speed and

simplification of procedures have proved irresistible.

12

24

4. The introduction of new information and telecommunications technology, namely

EPoS scanners and EDI systems. Information technology has allowed retailers to

determine with great accuracy consumer off-takes to a fine level of detail (e.g. for

every brand, for every package size, etc.). The same systems allow controlled

experiments regarding for example, special promotions, line extensions, or the impact

of a temporary increase in shelf space devoted to one brand. Finally, information

technology allows retailers to measure relatively quickly the sales performance and

profitability of every product they sell. However, scanner terminals as the

fundamental building block of this IT edifice are still rare in Germany. The German

Trade Institute (DHI) estimates that from a total number of 75,677 outlets in 1996

only 17,010 were equipped with scanner terminals. For a summary of trends in the

adoption of EDI in the UK and Germany see Reekers and Smithson (1994) and for an

argument as to how ECR initiatives rely on adoption of information and

communication technologies see e.g. Fernie (1995).

These structural rearrangements provided the spur for the search of productivity gains

beyond the boundaries of manufacturers and retailers. In particular, the conjunction of

modest or no growth in volume plus the increasing availability of enabling technology

made the adoption of ECR, an initiative predicated on removing waste and increasing the

efficiency of the whole business network, increasingly attractive. Despite one of the

highest in Europe gross trade margins, 22.7 % of the total turnover, the average net margin

varies between 0.5 % - 1.5 %. In the UK, the average gross margin in the retail business is

22.8% of the total turnover and the net margin varies between 5 - 7 %.

A lot of the traditional activities within the retailer-manufacturer supply chain are

characterised by a tendency to push the product to the end of the supply chain, to the

consumer. The push effect is evident by a series of sequential phenomena in the supply

chain causing a bullwhip effect (Lee et al, 1997) ;3

3 Lee et al (1997, p. 93) define the bullwhip effect as the amplification of demand order variabilities up the supply chain, from the retailer shelves to the manufacturer's plant, and attribute it to four separate factors : demand forecast updating, order batching, price fluctuation and rationing and shortage gaming behaviour.

13

25

- Manufacturers over-produce to achieve economies of scale ;

- Manufacturers' warehouses work with considerable safety stocks ;

- Manufacturers draft ambitious marketing / sales plans ;

- Retailers undertake ambitious purchasing volumes to achieve better conditions ;

- Manufacturers load the distributors ;

- Distributors load the retail outlets resulting in the :

- Widespread variance in the supply of outlets with some carrying excessive stock

whilst others find themselves out of stock

This traditional sequence described by Lee et al. (1997) is caused by distorted information

flow from one end of the supply chain to the other and optimistic forecasts, resulting in an

average stock inventory in the whole chain of over 50 days. During the years of continuous

volume growth the elimination of these excessive inventory costs was not an issue.

Manufacturers and retailers were busy in their own spheres of action, manufacturers

concerned with the development and marketing of new products, expansion into foreign

markets and quarterly results. On the other hand, retailers were busy with mergers and

acquisitions, the geographical coverage of their outlets and expansion into other European

countries. It was the first signs of stagnation and decline in consumer demand that set

alarm bells ringing and provided the impetus for removing wastage and inefficiencies in

the supply chain.

It is within this broad scenario that the major tenets of ECR have been embraced by a

number of manufacturers and retailers in Germany, as the route for cutting costs, removing

wastage in the supply chain and strengthening the bonds between manufacturers and key

account retailers. In the next sections, we will present a short case study on the attempts of

two major fmcg manufacturers to implement ECR and change their network position by

enrolling other actors to abide by their agendas and plans. Before we proceed to our

empirical results we will introduce briefly the methodology used in our study.

14

26

METHODOLOGY

We used the case study as the research methodology to investigate the introduction and

implementation of ECR initiatives in manufacturer-retailer networks in Germany. The case

study is a form of enquiry that investigates a contemporary phenomenon within its real life

context ; when the boundaries between phenomenon and context are not clearly evident

and in which multiple sources of evidence are used (Yin, 1994). The key advantage of case

research lies in its ability to capture complex interdependencies by handling rich sources of

data and multiple forms of data collection (Easton 1995).

In all, we interviewed three retailers, six major fmcg manufacturers, three companies

concerned with logistics and IT and three consultancy companies all active in the field of

ECR. The 24 interviews were conducted with middle managers in functional areas such as

logistics, data processing, purchasing, key account management and marketing. The

interviews were conducted between September 1996 and March 1997. The interview

topics covered a number of issues concerned with the implementation of ECR namely

trade allowance systems, EDI systems, CRP and category management. In addition to

collecting primary data, we also accessed archival records from two market research

companies and the second author was also a participant observer in the 1997 yearly

negotiations between the trade and fmcg manufacturers.

We selected a number of retailers and manufacturers to study the implementation of ECR

initiatives. For limitations of space, in this paper we will only report the results of ECR

initiatives in two large fmcg manufacturers, Alpha and Beta. 4 Alpha is a multinational

producer of a wide range of fhicgs but particularly strong in the area of cosmetics, laundry

and cleaning products. Its turnover for 1995 reached 5.4 billion DM. The Beta group is a

German based multinational producer of fhicgs, particularly strong in the areas of cleaning

and laundry products as well as cosmetics and had a turnover of 14.1 billion DM in 1995.

Beta ranked as the first fmcg manufacturer in Germany in terms of 1995 turnover and

Alpha sixth. The two companies are direct rivals and compete for shell space in many key

1 For reasons of confidentiality the names of the companies have been disguised.

15

27

account retailers. Traditionally, they are highly aware of each others' moves and

countermoves and their rivalry is mediated by their attempts to enrol retailers and other

network actors as allies in the pursuit of their competitive strategies (Araujo and Mouzas,

1997).

THE IMPLEMENTATION OF ECR INITIATIVES IN LEADING FMCG

MANUFACTURERS

Alpha's managers considered the German fmcg market as one of the most difficult markets

in the world, given its appetite for high rebates, low trade margins and potential for

dissatisfied customers. The stagnation in consumer demand over the last few years (see

figure 1) had persuaded the company to look for ways to improve the efficiency of its

systems and cooperate with its key accounts. The company looked at a range of

possibilities for implementing ECR in Germany. The company relied on the experience of

its parent company in the USA and the help of a major IT supplier to kick start the process

in Germany.

During 1993 and 1994 Alpha and a major retailer had worked together in a pilot project

with the objective of increasing efficiency in the supply chain. The aim of this project was

to produce a paperless interface in terms of ordering and invoicing between the two

organisations. At the end of the pilot project information regarding products and prices was

exchanged electronically between the two organisations and transport, delivery

information and invoices were sent via EDI. Towards the end of 1995 Alpha decided to

roll out a full blown ECR initiative aimed at its key accounts and featuring a new trade

allowance system designed to provide the necessary incentives for enlisting their support.

For years Alpha had felt that the yearly trade negotiations between the trade and

manufacturers focused on the wrong issues. An internal consumer behaviour study had

revealed that only 25 % of German consumers appeared to be store-loyal. On average,

German consumers picked up special offers in seven stores. With the exception of one

hard discounting chain, prices of frncgs were neither transparent to the consumer nor price

16

28

claims reliable. Price variations, temporary reductions, special offers and promotions all

contributed to the confusion and led consumers to be wary of price claims and behave

smartly - i.e. shop around for the lowest price offers.

For Alpha this panorama was the direct result of the hard bargaining that took place at the

annual trade negotiations. Manufacturers appeared too eager to maximise volumes and key

accounts appeared only interested in maximising rebates and trade allowances. Perhaps the

most obvious problem of the existing system was the pronounced bullwhip effect in the

supply chain (Lee et al., 1997), given that temporary price reductions contributed to

pushing large volumes into the supply chain well ahead of consumer demand.

In the 1996 yearly negotiation Alpha introduced a new trade allowance system

categorising trade allowances into four areas. Two of the areas were linked to logistics and

provided simple, volume related rebates. The two other areas labelled ECR 1 and 2 were

directly aimed at introducing CRP and EDI as a means of automating ordering and

invoicing. ECR 1 provided a 1 % rebate on all orders and invoices transmitted via EDI and

on acceptance of whole palettes. ECR 2 provided another 1 % rebate for electronic

payment, CRP and integrated data interchange. Moreover, Alpha introduced an extra 2 %

rebate for all invoices settled within 14 days.

This new trade allowance system simplified the more than 24 different forms of rebates

that prevailed under the old trade allowance system. Under the old paper-based system,

from the 600,000 invoices that Alpha produced annually, 200,000 needed reworking or

rechecking. Every iteration usually cost 0.7 DM or a total of 14 million DM annually.

Similarly, a large retailer can deploy up to 100 people to process and check invoices.

Alpha's CRP system relies on consumer off takes and point of sale technology to pull

volume through the chain. The company implemented the new system in cooperation with

a major multinational supplier of IT equipment, who provided the necessary technology,

and benefited from the corporate experience in 12 countries with 27 key accounts. The

system works on the basis of the central warehouse of a key account retailer sending

electronically and on a daily basis, all the necessary data (stock level, off-takes and orders

for each product) to a computer, owned and operated by the IT provider, in Orleans

17

29

(France). Every morning an Alpha employee in the Customer Service Department is

connected to the Orleans computer and accesses information on the most up to date,

'optimised' order volume for each key account. Order quantities are rounded off in palette

sizes for maximum loading of the delivery trucks. The Alpha employee can either activate

the order or modify the quantity or timing of delivery in consultation with the key account.

The system then sends the order information to the key account for confirmation - Alpha

regards this procedure as unnecessary but useful to allay retailer fears that they no longer

control the process.

The Orleans system then sends via EDI the order to the processing system at Alpha's so

that it can be registered, checked and forwarded to production plants. The results of this

programme have so far been very encouraging from Alpha's point of view, after

overcoming some initial resistance from retailers. The sales rotation of products increased

from 13-23 days to 28-44 per year, whilst the service degree (an Alpha internal term,

meaning percentage of orders completed without errors in accordance with retailers'

schedules) jumped to 98-99 %. The average stock in central warehouses had decreased

between 46 and 65 % and in relation to periods without special offers, stocks were down

by 60 %. For Alpha the net cash flow benefit of implementing this initiative is estimated at

10 million DM annually.

In turn, and according to a consultancy firm estimates, these improvements accounted for a

15 % reduction in warehousing and handling costs for retailers. Furthermore, out of stock

situations were nearly eliminated and consumer offtakes increased by 3.6 to 5.3 % vis a

vis a control group without the benefit of CRP. Also, product relaunches or new product

introductions reached the retailer shelves quicker ; in pilot project with key accounts

adopting CRP the lead time had been cut from 25 to 12 days. The savings for key accounts

were estimated by one leading consultancy firm as 15 % of total logistics costs.

The success and momentum of Alpha's ECR initiative was not lost on Beta. Its primary

objective in ECR was to develop a continuous, no-errors, no-paper information and

product flow. Beta attempted to emulate the trade allowance system pioneered by Alpha

and run a number of pilot projects with its accounts to gain experience in selected

18

30

components of ECR. More interestingly, Beta chose to run its ECR initiative under a

powerful Trade Marketing department, with a minimum of reorganisation and placing the

emphasis on the integration of functional specialisms.

Essentially, the new structure of the Trade Marketing Department whose head reports

directly to Beta's top management, contemplated the addition of a category management

section which provided a complementary, category based analysis and research function to

the ones traditionally performed by the information management section, usually centred

on general market analysis and key accounts. The company's Trade Marketing manager

explained that: "... the new structure is both complete and flexible. The four sections work

together every effectively. Category management analyses data [scanner, trade and

consumer data] and makes recommendations for action. Sales support contributes with

space optimisation proposals, key account services implements account specific

programmes and information management provides all the necessary information and

communications internally and externally".

So far, Beta's experiment has been restricted to a few accounts as mentioned earlier but the

company has already produced a glossy brochure detailing its competencies in "Partnering

and Efficient Consumer Response" inviting retailers to cooperate with Beta. But the results

of some pilot projects have been largely disappointing. For example, the pilot project run

by Beta in cooperation with a medium-sized key account retailer (turnover of 3.26 billion

DM, 489 outlets in Central and Northern Germany) had revealed a number of problems.

The retailer and Beta discovered that they knew little about each other and found it

difficult to interface in the areas of logistics and purchasing - sales / marketing. The cost -

benefit relationship of their EDI experiment was also disappointing. They both concluded

that only increases in scale would bring about significant benefits and that there was a fair

amount of work to be done in order to standardise data formats. Other conclusions of this

pilot project are also worth mentioning : the retailer was persuaded to make substantial

investments in scanner terminals and communication technologies and use the off-take

data for space management and CRP as well as contemplate the structural changes

necessary to operate an ECR system. Beta has now instituted a trade allowance system

19

31

very similar to Alpha's and is planning to capitalise on existing standards and protocols for

data interchange (e.g. EDIFACT, EANCOM) as well as clearing centres (e.g. TELEKOM

networks) to roll out the initiative to other key accounts.

DISCUSSION

Our exploratory study of the implementation of ECR practices in manufacturer-retailer

networks in Germany revealed a rather patchy pattern of adoption in line with previous

studies elsewhere (see e.g. Fiorito et al., 1995). Partly this is a result of the slow rates of

diffusion of the enabling technologies, namely scanner terminals as reported earlier and

EDI systems (see Reekers and Smithson, 1994). The implementation of QR and ECR

strategies is entirely reliant on the use of these technologies. Without standards for product

identification and data interchange (e.g. consumer off-take data at the point of sale) the

whole concept of QR or ECR is unfeasible. But some of these technologies have been

available for a while and examples of QR or ECR partnershipping have only been found in

the last three or four years.

Our argument in this paper has been that the adoption of these technologies is greatly

facilitated when they are linked to an integrated initiative, with its assemblage of

techniques and practices, management systems and an appropriate rhetoric. Clearly, as we

have argued earlier, the stagnation of consumer demand and the pressure on profit margins

has also been an important catalyst for the adoption of ECR initiatives in Germany.

As we have seen in the case of both Alpha and Beta, the implementation of ECR initiatives

is crucially dependent on their ability to get others, in this case crucially key account

retailers, to abide by the plans they have developed. More importantly, perhaps, the

wholesale adoption of ECR requires radical changes in the operating philosophy of both

fmcg manufacturers and retailers and poses threats to the existing structural arrangements

and role allocation in the manufacturer-retailer dyad.

For example, CRP requires an important role reversal in the manufacturer-retailer dyad. A

traditional function of retailers, order placement (i.e. definition of order size and timing of

20

32

delivery) is automated and responsibility for its operation passed on to the manufacturer.

Also, CRP or vendor managed inventory programme ultimately questions the role of the

manufacturer sales force. The primary role of a manufacturer's salesforce has always been

to build up distribution and push brands at the point of sale. CRP systems effectively

bypass the salesforce function and reverses the emphasis on building up volume in the

distribution channel. The first requirement of a CRP is the willingness of the trade to

provide relevant stock and consumer off-take data to manufacturers. Ideally, the trade

simply gives up the right over controlling the flow of goods from manufacturers to their

shelves. However, in the pilot projects we have analysed the trade refused to give up this

right and demanded the inclusion of an interim stage where they could confirm or refuse

the CRP-generated order.

The threat to the existing order embedded within a sweeping initiative like ECR causes

other problems too. For example, Alpha's redesign of its own trade allowances systems

was put forward as an incentive for key accounts to adopt EDI interfaces with Alpha and

also to pave the way to introduce further components of the ECR package, namely

efficient assortment and new product launches. But the impeccable internal logic of this

move conflicted with the existing mode of operation of some of its key accounts, who

argued that Alpha's model of supply chain management is only suited to the needs of

Alpha and hypermarket chains, who cooperated with Alpha in pilot projects. Three key

account retailers went as far as temporarily delisting several of Alpha's product lines.

Alpha responded with an additional offer, rewarding extraordinary key account

performance and restoring the feeling that these key accounts had not lost their special

status.

In short, the strategic importance and promise of ECR sparked off a flurry of pilot projects

which tested some of the technical infrastructure required to run the initiative and some of

its components. External consultants often supported these pilot projects providing

valuable advice and sometimes even the IT equipment to run the experiment successfully -

as the case of Alpha and the Orleans computer illustrate. But when it comes to

appropriating the results of pilot project and roll out the initiative a number of surprises

21

33

may occur. Suddenly, a set of attractive ideas to simplify procedures, cut wastage and

reduce costs are seen to imply a series of other changes that ultimately mean nothing less

than a total re-engineering of both the manufacturer and retailer's operations. More

specialists and consultants are drafted in to decompose some of these holistic problems

into more manageable tasks, staying within a specific functional area (e.g. logistics, data

processing) and working to a tight budget.

The awareness of the impact of some of the changes currently being proposed and an

appreciation of the total costs involved is still very much underdeveloped in the companies

we have looked at. On the other hand, the pressure to extend these initiatives and recruit

further allies is still on. Alpha, for example, calculates that in the area of CRP alone a

manufacturer must achieve 30 to 40 % of its volume going through CRP before it can reap

substantial economies of scale with the scheme.

CONCLUSION

In this paper we have explored the problems associated with attempts by fmcg

manufacturers and retailers in Germany to implement ECR initiatives as means of

changing or preserving their network position. We have looked at ECR implementation as

a programmatic initiative designed to steer firms and networks in a strategic sense, aiming

both to change practices and structures at an intraorganisational level as well as redesign

the interface between manufacturers and retailers. Whilst we have emphasised the

systemic and integrative nature of ECR as a business philosophy and as a package

promising to deliver significant benefits to all those who embrace it in its totality, our study

highlights the partial and often tentative version of ECR being adopted by manufacturers

and retailers in Germany.

The likelihood of ECR creating faultlines with existing practices and management

technologies is high and no doubt, explains partly the partial and sometimes contested

adoption of ECR practices. Beta's experience is typical in this regard. Beta's foray into

ECR can be seen as a direct competitive response to the initiative undertaken by Alpha, its

22

34

main rival. The company simply added a new section (category management) to a large

Trade Marketing Department and relies on the coordination of the new section with the

existing sections within the department (sales service, key accounts service and

information management) to implement ECR initiatives. Its 'expertise' is packaged and

sold to key account retailers as the coordination of these different areas of activity.

Miller and O'Leary (1993, p. 192) comment that managerial expertise and corporate

governance in general is a congenitally "failing" activity, in the sense that a succession of

change initiatives and programmes all problematising other modalities of governance and

purporting to address or remedy those deficiencies, is well illustrated by our study. In

practice, we have witnessed the 'failure' of many of programmatic initiatives in the sense of

either abandonment of the programme in mid-stream or very selective implementation of

aspects of it. For example, statistics on the failure of programmes like BPR or TQM run

well over 70 % - however that figure was arrived at (Grint, 1994). ECR is no different in

this respect. For example, category management systems often regarded as the capstone of

ECR initiatives, is only being implemented very selectively in the German manufacturer-

retailer network (Araujo and Mouzas, 1995).

On the subject of BPR initiatives, Grint and Willcocks (1995, p. 102) comment that this

initiative is premised on deracination, in the sense that radical changes in productivity can

only be achieved through the uprooting of traditional practices and management norms. In

the case of BPR, the recommendations seem to point towards the urgency of implementing

radical change, as if incremental change is itself a major barrier to the achieving the

productivity gains that BPR promises. In short, part of BPR's philosophy seems to be

notion that only swift implementation will remove the organisational politics that could

impede its progress (Grint and Willcocks, 1995).

ECR is, perhaps, a slightly more complicated case than BPR even though some of the

features highlighted by Grint and Willcocks ( 1995) are present here. As we have argued

throughout this paper, ECR relies not only on internal changes but also on enrolling others

to adopt similar changes and align their management systems and structures with the

initiating firm. As we have shown, the radical nature of ECR practices (e.g. category

23

35

management, CRP) conflicts with many existing practices in both retailers and

manufacturers and the incremental and partial adoption of new practices contributes

inevitably to a watering down of its radical objectives and ambitious performance targets.

It appears that only when the initiative is championed by upper organisational echelons are

its more radical implications pushed to their logic conclusion. Otherwise, political

resistance, the pressure to keep volumes up and focus on quarterly results, continue to sap

middle managers' energies and deflect their attentions elsewhere.

In conclusion, rather than emphasise the systematic effects of programmatic initiatives as a

means to steer firms and networks in a strategic sense, we prefer to highlight the partial,

incomplete and truncated nature of the versions that eventually find their way to the

specific context of each company. It is at the junction of systematic and abstract blueprints

for strategic and the historically situated practice of each company that these initiatives are

interpreted and implemented. Whilst it is too early to assess the long term impact of ECR

as a mode of governing manufacturer-retailer networks in Germany, the odds seem stacked

against the achievement of the more radical productivity gains that ECR promotes on

behalf of consumer sovereignty. Like many before it, ECR may soon become a

management fashion that run its course.

24

36

REFERENCES

Abrahamson, E. (1996). Management Fashion. Academy Of Management Review. 21(1), 254-285.

Araujo, L., and Easton, G. (1996). Strategy - Where Is the Pattern ? Organization. 3(3), 361-383.

Araujo, L., and Mouzas, S. (1995). Manufacturer-Retailer Relationships in Germany : The Institutionalisation of Category Management. Paper presented at the IMP llth International Conference. Interaction, Relationships, Networks. Manchester Federal School of Management.

Araujo, L., & Mouzas, S. (1997). Competition and Cooperation in Vertical Marketing Systems. In H. G. Gemunden, T. Ritter, & A. Walter (Eds.), Relationships and Networks in International Markets . Oxford: Pergamon.

Astley, W. G. (1984). Towards an Appreciation of Collective Strategy. Academy of Management Review. 9. 526-535.

Axelsson, B. (1992). Corporate Strategy Models and Networks - Diverging Perspectives. In B. Axelsson and G. Easton (Eds.), Industrial Networks : a New View of Reality (pp. 184-204): Routledge.

Buzzell, R. D., and Ortmeyer, G. (1995). Channel Partnerships Streamline Distribution. Sloan Management Review. 36(3). 85-96.

Dollinger, M. J., and Golden, P. A. (1992). Interorganizational and Collective Strategies In Small Firms - Environmental-Effects and Performance. Journal Of Management. 18(4). 695-715.

Easton, G. (1995). Methodology and Industrial Networks. In K. Moller and D. T. Wilson (Eds.), Business Marketing : an Interaction and Network Perspective . Norwell, Mass.: Kluwer.

Eccles, R. G., and Nohria, N. (1992). Beyond the Hype. Rediscovering the Essence of Management. Boston, MA.: Harvard Business School Press.

Fernie, J. (1994). Quick Response : An International Perspective. International Journal of Physical Distribution and Logistics Management. 24(6). 38-46.

Fernie, J. (1995). International Comparisons Of Supply Chain Management In Grocery Retailing. Service Industries Journal. 15(4). 134-147.

Fiorito, S. S., May, E. G., and Straughn, K. (1995). Quick Response in Retailing : Components and Implementation. International Journal Of Retail and Distribution Management. 23(5). 12-21.

Fisher, M. L. (1997). What is the Right Supply Chain for your Product? Harvard Business Review. 75(2). 105-116.

Frances, J., and Garnsey, E. (1996). Supermarkets and Suppliers In the United- Kingdom - System Integration, Information and Control. Accounting Organizations and Society. 21(6). 591-610.

Friedberg, E. (1993). Le Pouvoir et la Regie. Dynamiques de 1' Action Organisee. Paris: Editions du Seuil.

25

37

Grint, K. (1994). Reengineering Organisations : Social Resonances and Business Process Reengineering. Organization. 1(1), 179-201.

Grint, K., and Willcocks, L. (1995). Business Process Reengineering In Theory and Practice - Business Paradise Regained. New Technology Work and Employment. 10(21 99-109.

Hakansson, H., and Snehota, I. (1989). No Business is an Island: The Network Concept of Business Strategy. Scandinavian Journal of Management. 4(3). 187-200.

Johanson, J., and Mattsson, L.-G. (1992). Network Positions and Strategic Action - an Analytic Framework. In B. Axelsson and G. Easton (Eds.), Industrial Networks : a New View of Reality (pp. 205-217): Routledge.

Kieser, A. (1997). Rhetoric and Myth in Management Fashion. Organization. 4(1X 49-74.

Kurt Salmon Associates, (1993), Efficient Consumer Response : Enhancing Consumer Value in the Grocery Industry. Research Department, Food Marketing Institute, Washington, DC.

Kurt Salmon Associates (1996). OR and ECR. Survival Necessities. RIS News, Consumer Goods Supplement, Spring.

Lamming, R. (1993). Beyond Partnership. Strategies for Innovation and Lean Supply. Hemel Hempstead: Prentice-Hall.

Lamming, R. (1996). Squaring Lean Supply With Supply Chain Management. International Journal Of Operations and Production Management. 16(2). 183-196.

Lee, H. L., Padmanabhan, V., and Whang, S. (1997). The Bullwhip Effect on Supply Chains. Sloan Management Review. 38(3). 93-102.

Macbeth, D. K., and Ferguson, N. (1994). Partnership Sourcing : An Integrated Supply Chain Approach. London: Pitman - Financial Times.

Miller, P., and Rose, N. (1990). Governing Economic Life. Economy and Society. 19(1), 1-31.

Miller, P., and O'Leary, T. (1993). Accounting Expertise and the Politics of the Product : Economic Citizenship and Modes of Corporate Governance. Accounting. Organizations and Society. 18(2/3X 187-206.

Mintzberg, H., and Waters, J. A. (1985). Of Strategies, Deliberate and Emergent. Strategic Management Journal. 6(3X 257-272.

Morehouse, J. E. and Bowersox, D. J. (1995). Supply Chain Management. Logistics for the Future. Research Department, Food Marketing Institute, Washington, DC.

North, D. (1990). Institutions. Institutional Change and Economic Performance. Cambridge: Cambridge University Press.

Oliver, C. (1988). The Collective Strategy Framework - an Application to Competing Predictions Of Isomorphism. Administrative Science Quarterly. 33(4). 543- 561.

Reekers, N., and Smithson, S. (1994). EDI in Germany and the UK : Strategic and Operational Use. European Journal Of Information Systems. 3(3). 169-178.

Richardson, J. (1996). Vertical Integration and Rapid Response In Fashion Apparel. Organization Science. 7(4). 400-412.

26

38

Smith, K. G., Carroll, S. J., and Ashford, S. J. (1995). Intraorganizational and Interorganizational Cooperation - Toward a Research Agenda. Academy Of Management Journal. 38(1). 7-23.

Weick, K. E. (1995). Sensemaking in Organizations. Thousand Oaks, CA.: Sage.Whiteoak, P. (1994). The Realities of Quick Response in the Grocery Sector : A

Supplier Viewpoint. International Journal Of Physical Distribution and Logistics Management. 24(1 OX 33-39.

Womack, J. P., Jones, D. T., and Roos, D. (1990). The Machine that Changed the World. New York: Rawson Associates.

Yin, R. K. (1994). Case Study Research : Design and Methods. (2nd ed.). Newbury Park, CA.: Sage.

27

39

40