The Hindu Business Line : Consumer as the core

Manufacturers, wholesalers, retailers and supply chain providers find they need to reinvent their business relationships to do away with inventory and non-value added costs to provide efficient consumer response (ECR). Catalyst takes a look at this movement which is gaining ground in India.

It's a typically beastly, sweltering morning in Chennai, when Ramesh Krishnamoorthy, a regular shopper at supermarket chain FoodWorld steps into the cool confines of its Adyar outlet, breathing a huge sigh of relief. But, he's soon hot and bothered all over again when he finds that his favourite brand of shampoo, made by a prominent multinational, is out of stock on FoodWorld's shelves. Sure, he's buying other things, but it's the shampoo he wanted, for which he braved the heat to get to FoodWorld. Would he be interested in a substitute? enquires the helpful salesgirl. No, he isn't. Only that brand works for him. So, he leaves, feeling distinctly ill-disposed towards the brand. A lost customer for the brand and the store? Stock-outs, an Indian retailing reality, can be as high as 30-35 per cent, even for a top brand from an MNC with a supposedly well-oiled distribution system and in a top-notch retail outlet.

How's this for an unlikely alliance? Baby and women products company Johnson & Johnson has a 'backhaul' arrangement with fast moving consumer goods major, Nestle, where the arrangement consists of a shared transporter, Transport Corporation of India, which delivers goods for Nestle as well as J&J from the manufacturing locations to warehouses. Says Narendra Ambwani, Managing Director, J&J, "Most of Nestle's production locations are centred around Delhi while J&J's is around Mumbai. Since both these locations are big markets for both the companies, TCI optimises the transportation costs between these two locations. The benefits are faster turnaround times, with lower cost." Not to mention, quicker stocks of each companies' products on shelves in both cities.

DISPARATE events, one should think. But, the effort to make sure that Ramesh Krishnamoorthy gets his shampoo when he wants it off FoodWorld's shelf and the logistics arrangement that Nestle and J&J have sewn up is all part of the same movement - Efficient Consumer Response or ECR, the new buzzword that is fast gaining currency in the lexicon of the fast moving consumer goods (FMCG) industry. In the days to come, this movement is expected to gain speed and momentum as more manufacturers and retailers join hands in a collaborative venture, all with one common objective - to cater to the whims and fancies of the consumer. Or, as the ECR's lofty mission statement states, "working together to fulfil consumer wishes better, faster and at less cost".

Driving the ECR movement are the brightest and best in the FMCG industry - from J&J and Nestle to Godrej, Colgate Palmolive and Hindustan Lever, who are among the 10 founder members of ECR India. Also in this core group is prominent retailer FoodWorld, logistics provider Transport Corporation, consultants PricewaterhouseCoopers and barcode specialist EAN India. The membership of the movement has now grown to 25.

Says J&J's Ambwani, Co-Chairman of ECR India, and among the prime movers of the movement, "At the heart of the initiative is the consumer, and the entire raison d'etre is to provide better value to the consumer. All the initiatives of ECR India will in effect translate into better supply chain efficiencies, the benefits of which will be passed down to the consumer, either as lowered costs or fresher products and definitely increased availability on the shelf. The companies and the retail trade benefit because of a reduction in the complexity of transactions which means lower costs. " Adds Raghu Pillai, President, RPG Enterprises' retail business, and Co-Chairman, ECR, "A beginning has been made with all the supply chain players talking to each other. There's huge scope for efficiencies in the entire system and even if we can crack the stocking of goods when we want, that in itself will make a huge difference."

What's ECR?

ECR as a concept gained ground in the US in 1993 in response to market conditions there like low growth, high competition, consumer pressure, emergence of new channels and highly efficient new entrants and the fact that traditional adversarial relationships resulted in high costs. Moreover, the emphasis in the industry was on trading rather than on consumer needs. The ECR response was to focus on consumers and work together - within departments, with partners and with competitors. This movement quickly gained ground in Europe in 1994, in Asia in 1996 and Latin America in 1998 and now has seeped into India.

ECR India is an independent joint trade and industry body "to promote the use of ECR techniques as a means of removing unnecessary costs from the supply chain and making the sector, as a whole, more responsive to consumer demand".

Explains Arindam Guha, General Manager, Commercial, FoodWorld Supermarkets Ltd, "ECR is essentially a practice in the FMCG industry, given the nature of the products. In India, the push has come from MNC players whose overseas partners have seen the benefits derived from ECR." For example, HLL, the largest player in the FMCG business, is a key player in the ECR movement here. Unilever is an active member of ECR in most parts of the world - North America, Europe, Asia and Latin America. Currently, Unilever's co chairman, Antony Burgmans, is the co-chair of ECR Europe. Says a HLL spokesman, "HLL sees considerable value in the ECR movement for all stakeholders - consumers, retailers and manufacturers. Hence it is an active member of the initiative." Adds a Nestle spokesman, "The success of the ECR initiative will reduce overall waste in the system and benefit not only Nestlé but the entire industry."

So, while key constituents of the movement are gung-ho about the movement gaining ground in India, they are well aware that it is not something that can be transplanted in toto from the West and imposed on the Indian retailing system, given its fragmentation and peculiarities. Says J&J's Ambwani, "ECR needs to be re-invented for India, since India is unlike any other country when it comes to the extent of fragmentation. The hurdles would be to involve the distributors/ retailers in this initiative. This means that we need to educate and communicate these principles, so that the efficiencies are generated and shared across the supply chain."

Nestle too recognises that it's going to be a long haul. Says a Nestle spokesman, "Since there is very little organised data available, planning becomes difficult and because there are virtually no organised representative trade bodies, implementation of initiatives is also very difficult and slow. It is therefore necessary to understand that the results will be slower in the traditional trade environment of the Indian market compared to, say, the more organised markets of the West."

Why ECR?

The ECR movement began in the US because US retailers could not digest the fact that manufacturers weren't giving special treatment and terms to Club stores and mass merchandisers. Also, many of the methods used to buy, sell and move goods to the ultimate consumer are inefficient, ineffective and out of touch with new retail formats. An analysis of the supply chain threw up several inefficiencies in procurement, distribution and in service. In that context, it was felt that manufacturers, wholesalers, retailers and supply chain providers needed to reinvent their business relationships to remove excess layers of inventory and non-value added costs.

For example, one bugbear for Indian retailers is the high carrying costs of inventories, needed because of the inefficiencies in the system and the generally high levels of stock-outs.

On an average, Indian grocery retailers need to carry at least 45 days of stocks against a retailer, say in Thailand, who carry only around 12 days of stock.

"Aggregate stock-out level is still the benchmark for supply chain efficiencies," says FoodWorld's Guha.

An analysis done in select FoodWorld outlets showed that stock-outs were as high as 25-35 per cent even for some of the bigger companies. Each company looked at the top 10-15 stock-keeping units (SKUs) in some 'A' category outlets. "The analysis showed that some sensitive products were missing from the portfolio. This could be a lot higher at non-'A' outlets," says Guha. "We as retailers have been able to see what stock-outs do - we see loyalty shifts and it's an opportunity lost," he adds.

Studies show that reported savings in costs for industry because of ECR was 10 per cent or $30 billion of the $360 billion grocery sector. The savings in Europe could be even more or $33 billion. The potential benefits, says a study on ECR, are significant - increased sales of 5-30 per cent because of improved service levels, elimination of retail stock-outs and a more focussed SKU assortment. ECR also reduces inventories through reduced lead times and better information flows and reduces obsolete stock and lowers operating costs.

Win-win for all

It's early days yet, but given the levels of commitment of all the players involved, there are gains to be made. More companies and retailers have evinced interest in the concept. There are barriers to be overcome - information should be shared, essentially non-competitive in nature, resource commitments need to be there as well as the will of senior management. It has the potential too to have spin-off benefits for third party players, as Vineet Agarwal, Executive Director, Transport Corporation of India, says, "We believe it will help in creating standards for the entire logistics industry and bring in greater efficiencies. With a number of other initiatives like backhaul management and shared warehousing, it will also lead to additional business for third party logistics providers."

J&J's Ambwani says that the benefits accrued to any manufacturer or retailer is primarily on account of the efficiencies generated in the system due to a reduction of complexity and uniform standards. For J&J, the benefits accruing on account of the ECR India initiatives will be increased availability through lower stock-outs, a common standard for measurement across the industry thereby highlighting scope for improvements in the supply chain, lowered transportation, warehousing costs and better service to customers (lowered inventory, faster response times).

As in all such efforts, expect the consumer to have the last word on whether ECR is working.

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