Sustainable Competitive Advantage in the 2010 s

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1 Sustainable Competitive Advantage in the 2010 s Retail Execution Management: The Next Critical Capability for Leading Consumer Goods Companies A Retail Solutions White Paper December 2009 Powering Retail Execution

2 Executive Summary In challenging economic times, the increased availability of downstream data (such as point-of-sale and inventory by day, by store and by SKU) opens up a new set of opportunities for CPG companies: Retail Execution Management. With Retail Execution Management, leading manufacturers transform near-real time granular retailer data into actionable visibility into the store and onto the shelf, to react faster to issues in the store, plan supply chain, marketing, sales, field operations and category management activities more effectively and understand the real key success factors of the joint retailer-supplier operation. This new set of capabilities is allowing leading manufacturers to grow sales by 2 to 4%, increase gross margin by 1 to 1.5%, decrease inventory levels by 20 to 40% and improve sales effectiveness by 20 to 40% without requiring profound modifications to enterprise processes. To capture these benefits, companies need to: Establish a data management strategy that will make daily, near-real time, cleansed and harmonized operational retailer data widely available across the enterprise Integrate this data with applications designed to handle this level of granularity (unlike most applications currently in place) and deliver alerts and decision recommendations that affect revenues, margins, and inventories Embed the alerts and lessons learned from this data into actionable business processes, eventually shared with the retailer, down to the store level Extend this strategy across all retailer customers to disseminate best practices and capture extended benefits stemming from an enterprise-wide implementation such as forecasting and S&OP Not to be confused with store execution or with retail reporting, Retail Execution Management is a disruptive capability that will build a sustainable competitive advantage for early CPG adopters Retail Solutions Inc. All Rights Reserved.

3 It s 9am, Monday morning. In every store your field team is visiting today at Retailer A, the merchandiser in charge has been sent a custom todo-list, automatically integrated to her handheld device, to address out-of-stocks (along with their root cause, such as phantom inventory or replenishment settings), promotion execution issues, distribution voids and other causes of lost sales. As she is checking the items on her list, she is providing feedback on her device to identify whether an issue was found and if so, fixed. In the meantime, back at headquarters, your replenishment specialist is already looking at a list of stores for Retailer B in which your last promotion sold more than expected during the weekend and starts issuing expedited store-specific orders for the retailer buyer to approve ensuring you are not losing sales later in the week. Your marketing team is seeing that 10% of the stores at Retailer C have inventory and are still not scanning your brand new product, while some stores are selling faster than expected and are in urgent need of replenishment, with their days on hand coverage now at less than two days. On this basis, they start a dialog with their buyer to ensure action is being taken and product is being moved to the sales floor. As they prepare for a promotion in two weeks at yet another retailer, your trade promotion team is analyzing the results of three past events at this retailer to understand stores where out-of-stock situations have consistently occurred and determine the optimal allocation at the store level, suggesting force-outs to the retailer. As the price for the new promotion is different from any prior price point, they look at the actual, fact-based price elasticity curve to ensure once more that the forecast takes into consideration real market demand. To prepare for a senior meeting between your head of sales and a retailer, a sales analyst is pulling together the list of topics that need attention. Using that retailer s data, the slides cover an insightful analysis of cluster penetration to justify the inclusion of one of your best sellers into an extended set of stores. The materials for the meeting also include suggestions on where inventory can be reduced along with how to improve upcoming promotions, with analysis backed up by the retailer s data rather than specific anecdotes or gut feeling. Without any intervention, forecasts have been updated based on the actual sales at each of your customers in the past week rather than only on your shipments. This forecast has automatically fed your replenishment systems from VMI to DSD and has been integrated to give your production department an updated view of consumer sales and update your S&OP in real-time. Across functions, locations and hierarchical levels, your entire organization is using near real-time retailer data, by day, by store, by item to drive decisions and focus resources on the highest value items for yourself, your retailer customers and shoppers. You have developed deep partnerships with your customers, based on trust, collaboration and joint action that leverage the most up to date information and insights. It is 2010, and eight of the top ten consumer packaged goods companies are already well on their way to achieving this level of maturity. Their senior management views Retail Execution Management as a strategic enterprise initiative that provides a first mover competitive advantage. Welcome to the era of Retail Execution Management. 3

4 Finding the Next Competitive Advantage The New Challenge: It Has Never Been Challenging Let me think about my private label business... Reduce inventory and the numbers of SKUs......but do not impact out-ofstocks and revenues! Improve working capital! Cut inventories but not service levels! Grow revenues! Protect prices and planogram/ SKUs! Improve margins! Cut or freeze headcount (but not the amount of work)! Figure 1 A Day in the Life of a CPG Executive Consumer Goods (CPG) manufacturers are facing an unprecedented set of challenges today. Retailers, while pushing their private label brands aggressively, require assortment rationalization and inventory reduction without impacting out-of-stock rates. In the meantime, shareholders pressure companies for working capital improvement, sales growth and margin preservation, the latter often coming in the form of cost cutting initiatives. Looking for the Next Generation of Competitive Advantage Over the last two decades, CPG companies have mostly focused on improving their own operations. From APS to ERP, from CRM to TPM, these initiatives often established competitive advantage for early adopters by building critical capabilities: Visibility, common business processes and key performance indicators across all business units Single product and customer master Optimization of production plans, inventories, transportation These projects delivered: supply chain and operational performance has improved considerably all the way to retailer s DC but at the store, where the shopper first meets your products, performance suddenly degrades Retail Solutions Inc. All Rights Reserved.

5 Most capabilities stop at the point where your goods enter the customer s warehouse: the store typically remains mostly a black box to CPG companies. Initiatives designed to bridge the information gap between retailers and manufacturers, such as ECR (Effective Customer Response) or CPFR (Collaborative Planning, Forecasting and Replenishment) failed to achieve broad adoption and benefits as they also do not address the issues that impact the shoppers experience in the store. There is broad recognition that there is tremendous improvement potential on many store operational metrics, as shown on Figure 2 a potential that could provide the next generation of competitive advantage to CPG companies who understand how to realize it. Regular turns business Promotions New product introductions Inventory, forecasting and replenishment On average, in one of the most widely quoted statistics in the industry, out-of-stocks level stands at 8% Perpetual inventory is typically inaccurate in over 65% of cases Promotion out-of-stock level hovers around 16% 40% of promotions fail to achieve their revenue goals 35% of promotional displays are not implemented correctly Depending on surveys, it is estimated that 70 to 80% of new product introductions fail with each store spending on average $270 per new product introduced (and a significant portion funded by slotted fees) It takes on average 4 weeks for a typical new product to scan at 80% of the stores of a retailer In 2008, the national average weekly forecast error stood at 45 percent at the shipping location Finished goods inventory measured in average days of supply grew by 2 days between 2005 and 2008 Figure 2 CPG-Retail Industry Operational Metrics. Source: GMA, IRI, AC Nielsen Extending Your Supply Chain beyond Your Own Four Walls The dynamics of the retail-cpg industry are changing. Following Walmart s lead, most retailers are now sharing granular point-of-sale and inventory information by day, by store and by SKU. As exhibited in Figure 3, formal data sharing programs are in place at most large retailers, with many of the remaining ones currently looking at establishing similar programs or providing data to their suppliers through one-on-one agreements. 5

6 Channel Supercenter Mass Drug Convenience Grocery Club Dollar International Known Retailers Sharing Downstream Data Walmart Target CVS, Duane Reade, Rite Aid, Walgreens 7-Eleven Food Lion, Hannaford, Meijer, Publix Costco, BJ s Wholesale Dollar General, Family Dollar Auchan, Carrefour, Metro, Sainsbury s, Tesco Figure 3 Partial List of Leading Retailers Sharing Downstream Data A new set of opportunities for CPG manufacturers Most CPG companies have garnered some experience with downstream data and have found clear wins. The classical what gets measured gets improved model may have played a part in the early experimentation, but industry leaders have found sustainable value creation in process changes driven by the new availability of this data. Thinking in terms of process changes rather than report building, focusing on creating actionable information and alerts rather than on managing data, these companies started redesigning some of the core elements of the shared retailer-manufacturer supply chain and uncovered extremely compelling business cases. Figure 4 offers a non-exhaustive list of areas where downstream data, combined with the right set of tools and algorithms, can have a dramatic effect on the financial performance of the organization Retail Solutions Inc. All Rights Reserved.

7 1990 s and 2000 s 2010 s Onward Requirements Old Approach Limitations Resulting Issues New Approach / Best Practice Required Visibility By Store By Day Promotion Forecasting and allocation Forecast total sales by retailer Incorrect allocation by store Out-of-stocks Forecast and forceouts by store Sales (promotions/ baseline) Inventory SALES Out-of-Stocks (turn business) New Product introductions (NPls) Focus on meeting orders to retailer DC Forecast and sales rates by retailer No visibility at store level (execution issues) Incorrect allocation by store, low execution compliance Distribution voids phantom inventory Out-of-stocks Detected voids and ghost inventory in neat-real time, by store Monitor by store - inventory in store, selling, out-of-stocks Sales, Inventory, Warehouse movement Sales, Inventory Correct ACVslotting Pay for slotting No compliance monitoring Distribution voids Monitor planogram compliance by store Sales, Inventory INVENTORY Baseline Forecast by DC VMI Forecast based on orders or shipments Replenishment based on orders manual for promotions Does not consider real sales and inventory by store Does not take into account store inventory Low forecast accuracy, excess intentory, out-ofstocks Out-of-stocks Robust POS-based forecasting Forecast based on store-level sales and inventory Sales, Inventory Sales (promotions/ baseline). Inventory - with history (and DC) (w) Promotion Forecast Forecast retailer sales at Old chain Approach level Incorrect allocation per store Excess inventory both before and after the event Forecast and forceouts by store Sales (promotions/ baseline) Inventory Promotion Pricing Centralized model is based on samples Sub optimal pricing Lost margin, low forecast accuracy, low lift Pricing based on real sales elasticity (historical sales by price point) Sales in value and units MARGIN Promotion Design and ROI Analysis Cost of Displays Same Emphasis on displays Greater cannibalization than expected 60-70% store execution compliance Low overall promotion ROI Wasted displays, sustainability impact Design based on actual cannibalization Execution compliance monitoring to set use of displays by store Sales by promotion by cluster Sales, Inventory Shrink and Reclaim, Returns and Markdowns Negotiated acceptable rates and fees No control or ability to impact reclaim Lost margin Analyze DC/store inventory and case size to understand root cause; promotion forecast Sales, Inventory Customer Teams Walmart team has a system Others work with Excel Manual, individual efforts Firefighting, no best practice sharing, little sustainability Specific tools to support key business processes SALES EFFECTIVENESS Store Operations, Merchandisers Standard task lists for all stores Limited time, no measure of effectiveness Suboptimal use of resources Direct by $ value of expectations Measure compliance and ROI Combination of all of the above Response to Retailer Issues/ Calls After the fact fire drills All reactive e.g. Did we miss a shipment? Proactive monitoring of issues-with root causes (both yours and theirs) Combination of all of the above 7

8 Introducing Retail Execution Management Some CPG companies understood the potential of granular downstream data several years ago. As the industry was grappling with Demand Signal Repositories (DSRs), defined by AMR Research as robust centralized databases that store large volumes of demand data such as POS data, inventory movement, promotional data, and customer loyalty data, visionaries in the industry focused on the value rather than on the technical infrastructure, on the why rather than on the how. Going from the experimentation phase to sustainable value creation and competitive advantage requires thinking differently about supply chain, sales, marketing and field operations: most functions inside a manufacturer s organization can become more effective and more efficient if they have access to relevant, up-to-date, granular and easy-to-use operational data providing visibility into their customers operations. Equally importantly, downstream data becomes a foundation to bring together and focus historically siloed functions onto a single priority: higher sales at a lower total cost at each of your retailer customers. The Emergence of a New Discipline at the Corporate Level On this foundation, it is now possible to define Retail Execution Management as a new enterprise-level discipline, along with six critical qualifiers (Figure 5). Leveraging Granular Data in Near Real Time Retail Execution Management Across all Retailers Sharing Data Integrated to Applications Designed to Leverage this Data Cleansed and Harmonized Actionable Down to the Store Level Figure 5 Introducing Retail Execution Management The following pages will explain why each of these criteria is essential to the success of Retail Execution Management Retail Solutions Inc. All Rights Reserved.

9 Granular Data Can my organization really cope with daily data? This question is at the heart of many downstream data programs. While managing data by store and by SKU has quickly become a standard, many CPG companies are struggling with the notion of daily data and tend to think that they can start with weekly granularity, a decision often fueled by concerns about data overload and paralysis by analysis along with storage and BI requirements. Retail Execution Management requires daily data While these fears are grounded and understandable based on past experiences, this single decision will destroy more than half of the potential value from Retail Execution Management, making the business case significanly less compelling. As highlighted in Figure 4, the majority of the use cases for Retail Execution Management start with daily data. Without daily data, you won t be able to identify out-of-stocks, reliably understand execution of promotions and product launches or provide merchandisers with relevant and value-added to-do-lists. At best, with weekly data, you will be able to enrich your category management decisions and forecasting processes with retailer data but you will miss out the transformative, disruptive effect of Retail Execution Management. In Near Real Time The ability to intervene and correct issues in near-real time is paramount to capturing the value of Retail Execution Management. Building a merchandiser to-do-list based on week-old data will try to address many issues that may have been solved already and miss out on many others that may have emerged since the to-do-list has been compiled. Without immediate visibility over the rate of sales in this store, you cannot send an expedited shipment to a store to address a potential out-of-stock situation. You need to see Sunday data on Monday morning Clean and Harmonized In October 2008, AMR Research ran a survey of 156 companies about their approach to leveraging retailer data and their challenges. The second biggest issue overall (and the first one among companies managing data from more than 10 retailers) was Data Cleansing and Harmonization. Garbage in Garbage Out applies to Retail Execution Management, too Retailer data unfortunately is far from perfect, and detecting and correcting the errors in the data on a daily basis from each data source (a single retailer may send data from multiple systems) can be a daunting task. 9

10 However, this is only the first step of transforming retailer data into information relevant to end-users. It must next be translated into their products and hierarchies, calendars, geographies and organizations (as opposed to the retailer s nomenclatures) and enriched with the relevant attributes from the supplier organization (such as margins, prices ) so that it is easily understood by and relevant to the end-user and to ensure it can be seamlessly integrated into your legacy systems (such as your replenishment or trade promotion management solutions). Integrated to Applications Designed to Leverage this Data Current systems and applications do not support Retail Execution Management and reporting is not enough Most enterprise systems today do not have applications that leverage and are not equipped to deal with the volume of daily data at the store level for each SKU. The traditional levels of data management tend to be the week and/or the warehouse. Unfortunately, even if your systems can handle daily data, traditional BI tools for data slicing and dicing will only help capture a subset of Retail Execution Management capabilities: for example, a zero-sale in a store for a product on a given day does not necessarily mean an out-of-stock; and even if the product were to be out of stock, it does not tell you anything about the root cause of the issue. In the afore-mentioned AMR Research survey, the number one issue with retailer data sharing programs was Don t Know What to Do with the Data. It could also have been translated into Don t Have Applications to Leverage the Data. Applications today are emerging to support many of the use cases of Retail Execution Management: making them an integral part of your approach from the early roll-out stages will significantly speed up the time to value. Actionable Down to the Store Level A report does not create value: taking action does. The foundation of Retail Execution Management consists of business processes, eventually shared with the retailer, to ensure that every alert, every report has an ability to trigger an action or calculation or is fed into another system application to solve a problem or capture an opportunity and create value. Understanding how each alert or each recommendation stemming Retail Execution Management does not end with a report it actually starts with a report from the data is leveraged and acted upon, linking your processes to the retailers processes and getting buy-in from your trading partners (both the retailers and eventually merchandisers and brokers) are critical capabilities in translating data into action. Once this work is complete, Retail Execution Management refocuses the entire organization, across company boundaries, onto the highest value tasks affecting your performance in the store and at the shelf making your customer teams, replenishment specialists, marketing teams and field sales more effective and more efficient Retail Solutions Inc. All Rights Reserved.

11 Across all Retailers Many point solution providers offer a data management solution for a specific retailer helping you manage or extract value from their data specifics. However, many Retail Execution Management use cases depend on cross-retailer visibility: from forecasting to S&OP, from cross-retailer promotion analysis to merchandiser effectiveness. A corporate approach to Retail Execution Management brings significantly greater Start with two or three retailers but the value of Retail Execution Management is maximized with 20 to 30, globally benefits compared to a team-by-team approach. Piloting at a few given retailers is important to proving the business case, but a corporate implementation brings enterprise-wide benefits that cannot be achieved in a single retailer-supplier relationship. Companies can ensure that best practices are implemented across retailers and each team is given the same capability to leverage retailer data into reduced out of stocks, lower inventories, higher margins and improved retailer collaboration. The Outcome: Retail Execution Management If your approach has included all six criteria, you now have the foundation for a successful Retail Execution Management capability. Your associates are getting data reflecting the latest sales and movements at the retailer every morning, in an easy-to-understand and actionable way and can both intervene to correct execution issues and leverage that data to make better decisions. From sales to supply chain and from marketing to field operations, across divisions and geographical boundaries, your organization has the tools and capabilities to focus on growing sales at each and every retailer store and supporting operational decisions, from the detailed operational level to strategic, long-term planning. Welcome to Retail Execution Management. Do Not Confuse Retail Execution Management with Retail reporting: reporting consists of retrospective reports on performance supported by data warehouses, often aggregated at the weekly level. In constrast, Retail Execution Management focuses on translating visibility (at the level of detail that is most actionable, down to day-store-sku) to a set of best practice business processes and actions and applications that are aimed at improving your performance on key indicators with tangible ROI. Store execution: store execution (sometimes also referred as retail execution) focuses on driving actions by merchandisers or the sales force at the store, often from standard task lists such as checking out-ofstocks, planogram compliance, promotion and NPI execution. This capability greatly benefits from Retail Execution Management, which focuses on optimizing. 11

12 A Disruptive Source of Competitive Advantage The Disruptive Potential of Retail Execution Management Let s take a theoretical example. A recent promotion your company was considered successful: with a 150% lift, it achieved sales goals and the decision was taken to re-run the event in a few months with a similar set-up. Retail Execution Management may give you a completely different perspective and many opportunities to capture value that you would have missed in a traditional approach. With detailed data by day, you may realize that on the third day of the promotion, more than 15% of stores were actually out-of-stock. With that understanding, you could improve future promotion allocation and force-outs. On the other hand, you also find that 12% of the stores had inventory remaining after the promotion: their performance may be improved with a lower allocation to avoid markdowns. With detailed data by store, you may realize that some stores exhibit a lift of more than 200% while others barely show any sales improvement. Further analysis of pricing may show that some stores have actually not implemented the price as agreed. Based on that information, you could direct your sales force to these stores for the upcoming promotion. You also may realize that some specific consumer segment (based on store socio-demographic clusters) did not respond well to the promotion and apply this learning to future events. With data in near-real time, you may identify stores selling faster than expected after the initial two days and expedite orders to the relevant stores to avoid out-of-stocks. You may also fix any compliance issues based on lift discrepancy by agreeing with the retailer on a response strategy to any issues that may arise. By applying these methods, customers have found that sales for a specific promotion can easily be improved by 20-40% and up to 160%. Retail Execution Management is disruptive it is a new source of competitive advantage based on new visibility and applications specifically designed to leverage it. No other system or alternate source of information can help you achieve these benefits. Tying Retail Execution Management to your ERP Strategy Retail Execution Management can be seen as extending the logic driving your ERP beyond your enterprise it leverages new visibility to enable more effective resource planning and allocation guidelines. However, ERP providers are not in a position today to offer these capabilities to their customers: most ERP databases manage data at the weekly level, most applications operate at the warehouse level. Equally importantly, ERP today are focused internally rather than externally Retail Solutions Inc. All Rights Reserved.

13 There is little doubt that ERP solution providers will offer part or all the capabilities of Retail Execution Management in the future after the technology lag has passed. Advanced Planning and Scheduling became part of the standard ERP suite but almost 10 years after i2 started offering it in the early 1990 s. Similarly, it took seven to 10 years to see ERP vendors incorporate the CRM capabilities offered by Siebel as early as This technology lag is the opportunity window for early adopters to gain competitive advantage. Building the Business Case and Getting Started Based on initial customer implementations across all segments of consumer goods industry, there is evidence that Retail Execution Management has a tremendous impact on all key corporate performance metrics. Early adopters have experienced: 2-4% sales growth 30% reduction in out-of-stocks 1 to 1.5% increase in gross margin 20-40% lower inventory levels 20-40% improvement in sales effectiveness The projects are typically self-funding: most companies need just a few quick wins (such as the one described earlier for a promotion) to fund an entire corporate implementation. Retail Solutions is supporting more than 300 CPG companies in their transformation towards Retail Execution Management. You too can start today: be live with three retailers within a two-month period and get on the path to sustainable competitive advantage. 13

14 About Retail Solutions Inc. Retail Solutions powers Retail Execution Management. Retail Solutions develops and delivers a comprehensive suite of software-as-a-service (SaaS) solutions that turn retailer data, such as point-of-sale (POS), supply chain, merchandiser feedback and loyalty data into actionable visibility into the store and onto the shelf. Leading companies such as 3M, Abbott, Bausch & Lomb, Bayer, Coca-Cola, Colgate-Palmolive, Crayola, Clorox, Heineken, HP, Kao Brands, Kraft, Nestlé, Novartis, Procter & Gamble, Reckitt- Benckiser, Schering-Plough Corp., Stemilt and Unilever trust Retail Solutions to grow their retail sales, maximize in-store operation productivity, plan and execute more effective promotions, reduce their costs and join efforts with retail partners to improve shelf availability and consumer satisfaction. Please visit for more information Borregas Avenue Suite 201 Sunnyvale CA tel: fax: info@retailsolutions.com