A Lot of Pioneers, But No Leaders

The food industry is rife

with pioneering projects to exploit the potential of e-business. These projects are sponsored by some of the most important industry organizations, ranging from the UCC to GMA. The work they are doing is important to the future of our industry. This month I want to discuss just a few of these projects.

What frustrates me is not the projects themselves, but the fact that for each to achieve true success it must become part of an organized industry effort. I must emphasize the word "organized." Every time the food industry has made a paradigm shift in its business process it has come as a result of a cross-industry committee of industry leaders. The UPC project and Efficient Consumer Response are two that immediately come to mind. There was a need for a blue ribbon committee to establish priorities, provide resources and set the level of expectation for both the industry and the companies participating in the various dimensions of the effort.

The Uniform Code Council is working on UCCNet. GMA is working on DSD, particularly scan-based trading. The National Retail Foundation recently acquired the ARTS organization and its pioneering efforts to establish retail standards. Together these two organizations effectively control the Voluntary Inter-industry Commerce Standards (VICS) Committee of the UCC. The VICS Committee has sponsored the efforts to establish standards for CPFR (collaborative planning, forecasting and replenishment).

To me these projects are somewhat akin to the experiences of the blind men who touch the elephant: Each feels one part of the elephant and tries to describe what the animal is like. Each of these projects focuses on one dimension of the business-to-business process. Yet no one is looking at the whole opportunity and setting expectations for total change.

Let's give credit where credit is due. The food industry would never be as ready as we are today to tackle e-business if it were not for the efforts of everyone involved with ECR. ECR broke down years of antagonism between buyers and sellers. It established the principle that, working together, all parties can achieve benefits. It raised the standard for merchandising professionalism and for the expectations of each party's role in the buying and merchandising process.

Today retailers routinely share data with their supplier partners. Today we have proven that by sharing data both manufacturer and retailer can achieve benefits and that where the balance of benefits is skewed in one direction the parties can reach realistic standards for sharing both the benefits and the risks. Just look at the shared benefit programs of leading companies like Procter & Gamble. We have dissected and analyzed every part of the supply chain process to identify ways that, within the current process, costs can be reduced. Please note my emphasis on the words "within the current process," for that was the focus of ECR.

As regular readers of my column know, I feel strongly that the potential benefits of e-business will occur only when, as an industry, we are prepared to rethink that process with the goal of creating a new paradigm that takes advantage of current and emerging technologies. (Along these lines, FMI and GMA will hold an e-business summit in Chicago June 23-25. This program could be the launch pad for the food industry's e-business initiative, so anyone who believes this is important should make sure to attend.)

My favorite quote is from a futurist by the name of Gary Hammel: "A company can control its own destiny only if it understands how to control the destiny of its industry. To do so, it must change in some fundamental way the rules of an industry." In two sentences he says it all.

We must understand the pioneering programs that are currently underway, but we must not assume that by themselves they are changing the industry. The industry changes because the leaders, represented by FMI, GMA and FDI, want it to change and are willing to invest their collective reputations and resources to make that change happen.

With this said, let's look at those pioneering projects. UCCNet is sponsored by the Uniform Code Council. It has as its objective the goal of establishing how the industry could take advantage of the current EDI standards on the Internet. There should be no doubt in your minds about the potential of the Internet and its potential impact on both our business-to-business activities and our business-to-consumer programs. The former need industry standards and the latter are entrepreneurial in nature and will rise to meet the standards set by the expectations of our customers and our competitors.

The project is destined to establish the conclusions most of you have. It is cheaper to send data over the Internet than it is to use our current methods of sending and receiving EDI data today. In fact, it is so much cheaper that it makes sharing some forms of data a viable process. The process has moved from limited experiments between a designated retailer and manufacturer to the next step, which is to define the concepts of an industry extranet.

An extranet is a controlled Internet facility that can only be used by companies who have the privilege of using it. The Internet is a public facility that can be used by anyone. The technology required is the same. The controls to assure speed, reliability and confidentiality of the data are significantly different. There should be no viruses allowed on an extranet, nor should any hacker be able to penetrate and capture data exchanged over that network. If there were not total and absolute confidentiality, the facility would serve no purpose.

It must be operational 99.9 percent of the time, and we all know how easy it is today to lose your Internet connection. It must support very high speed communications because the data exchanged can be very voluminous.

Lastly, to make an extranet work, it must have a formal form of governance. A business structure is required that has a board of directors that sets business standards and a technical board that sets standards for the security, transactions and technology used on the network.

The value of the UCCNet project is that it is a serious effort to establish requirements. Its shortcoming is that it is focusing on the use of existing EDI-UCS standards and not on rethinking the entire process. The UCC is the custodian of retail standards, and it is appropriate that this organization find new ways to extend the viability of an established standard.

Rethinking the entire process requires industry leaders and a total industry format. For example, why does a retailer send EDI data, resembling its paper purchase orders, to a manufacturer who then reformats the data to resemble its own paper order forms? Why don't we use a collaborative technology like Lotus Notes to share a common document? Changes are made to the common document in such a manner that both parties can see the changes and react to them. Changes in order quantity, prices, delivery dates would all be posted to the shared file. We could practically eliminate invoice deductions through the use of a shared electronic document.

On an industry extranet we could have a library of those shared documents that would be maintained by the companies hired by the industry to run the network.



GMA's DSD Committee is doing pioneering work in the area of scan-based trading. A landmark report was issued about a year ago detailing the experience of companies that partnered with H.E. Butt to examine the issues and costs associated with SBT. Unfortunately, too many retailers interpreted that report as documenting a process that was not cost-effective. The test went to great lengths to validate store physical inventories throughout the project. The conclusion was that this effort offset most of the direct labor savings opportunities for both retailer and vendor.

What has changed? Recently, reports have been published about a further test of one of those vendors, Earthgrains, and a new retailer, Schnuck Markets, Inc. The conclusions reached in their project was that once a realistic level of shrink was established, the effort required to validate physical inventories was minimal.

The benefit for the vendors was that they could reduce the labor associated with back door receiving by an average of 20 minutes per delivery and that this time could be used to effectively merchandise their products. This investment of time resulted in a five percent increase in sales. Since the retailer has only one back door receiver, it has no expectations of saving store labor. However, the sales increase benefits both the retailer and the vendor. The initial repurchase of inventory by the vendor allows the retailer to set a new expectation for product profitability. It is reasonable to expect that ultimately an SBT relationship will result in more favorable retail pricing and promotion of the products supplied by those companies.

This research also validates the importance of the Internet. Schnucks shares daily scan data, by store, with Earthgrains. The retailer currently uses Sterling Commerce to provide EDI communications. Sharing scan data over the Sterling network is defined as a "premium" transaction and carries fees that would make the cost of exchanging daily store-level scan data prohibitive for both parties. Using the Internet reduces the costs to a non-issue.

This leads me to the last pioneering effort, that of CPFR. CPFR combines the data-sharing aspects of SBT with the sharing of sales planning and forecasting. The standards for CPFR are being set by the VICS Committee, whose members are almost all retailers or mass merchandisers like Kmart and Wal-Mart. While supermarket chains like Kroger and Wegmans have participated in CPFR pilot projects, there is no formal food industry representation on this standards-setting committee, unless you consider Kmart and Wal-Mart food retailers.

What is CPFR? In essence, the retailer shares its forecasting of demand and its sales programs with partnering vendors. Together, the parties rationalize expectations of demand far enough in advance to assist the vendor in its manufacturing planning. The demand takes the form of a series of purchase orders extending well into the future, with those within a near-term period frozen and those beyond it used as a guide for the manufacturer.

The end result should be lowering of the cost of goods for the manufacturer and more complete orders delivered on a more timely basis to the retailer. The process of sharing expectations leads to very complicated data sharing, since the data shared now includes forecasts of demand, promotional data and inventory data.



The experiences to date with CPFR indicate that this sharing process is more effective if manufacturer and retailer have common tools for forecasting. We can expect to see new software products and companies emerge. At FMI's recent MarkeTechnics show I was particularly impressed with the software suite from a new company, Syncra Software, which included an enormous array of tools to refine the demand forecasting process. The underlying issue with CPFR, beyond the coordination of data and conclusions, is how both partners will share the benefits, which for the most part accrue to the manufacturer. Some will argue that CPFR will inevitably lead to vendor-managed inventories and that when this occurs we may be moving to apply the concepts of SBT to warehouse inventories as well.

I began this article with the premise that we need a single industry focus to exploit these opportunities. The ARTS organization set up such a structure over two years ago called CORTEC (Coalition on Retail Technology) to focus on setting standards for instore technology. FMI, NACS and NACDS are members of this group, which focuses on the underlying technology.

What the food industry needs is the management attention on changing the process that's supported by that underlying technology, whether it is instore or the Internet. In the chicken or the egg scenario I believe it's the policies and goals that precede the technology. What do you think?