RSR Research: The Most Complicated Supply Chain Idea in the World

Apr 28, 2011
Nikki Baird

Through a special arrangement, presented here
for discussion is a summary of an article from Retail Paradox, Retail Systems
Research’s weekly analysis on emerging issues facing retailers.

A.T. Kearney
has done a lot of work around the apparel supply chain, and one thing they
discovered was that when a third party gets involved in the supply chain, serving
an intermediary role between supplier and manufacturer, it creates efficiencies
in the supply chain that well exceed the cost that the third party adds. Think
Li & Fung and apparel sourcing.

From an economics point of view, I guess
it goes something like this: the costs of many manufacturers doing business
with many suppliers grows to the point where someone sees an opportunity to
consolidate the relationships by acting as an intermediary. Speaking at a breakout
session at NRF’s first annual
supply chain conference, A.T. Kearney’s Kumar Venkataraman said
that they have seen up to 30 percent cost reduction in the entire value chain
when an intermediary steps in.

But then the session explored why has this kind
of relationship not taken off in the fast-moving consumer goods supply chain?
And they asked it not just of the relationships between raw ingredient suppliers
and manufacturers but also between manufacturers and retailers. Why haven’t
companies like Procter & Gamble,
Kraft, Target, and Walmart gotten together to create a grocery equivalent of
Li & Fung to lower their supply chain costs?

At the Q&A point, the room
seemed to agree that data exchanges such as Worldwide Retail Exchange (WWRE)
perhaps counted as an attempt, but that aside from the costs and complexities
of these kinds of exchanges, retailers and manufacturers just seemed unwilling
to collaborate on anything strategic. Competition of private label may also
get in the way. Still, Mr. Venkataraman said (I’m
paraphrasing), “But
given the cost reductions that a third party has brought to apparel, wouldn’t
it be possible for manufacturers to collaborate enough on the supply side to
cut their prices enough to make private label irrelevant?”

The session
ended before I had could ask a number of questions like: Isn’t
the Li & Fung of grocery actually companies like Nash Finch and Unified
Grocers? Distributors that serve independent and small chain grocers so that
they can pool their buying power?

I also eventually came up with one area where
I could see the potential for collaboration for even larger retailers, and
that’s around cross-channel — buy online, pick-up in store. Yes, I can see
that, but the real advantage of that model for grocery is access to the long
tail of products that rarely see the light of day on the shelf.

How to do that? Why not a third party? Someone
who stocks these oddball SKUs so that they can be delivered to any retail store
within, say, a 3-5 day window max? Hmm. I would be very interested in seeing
a business plan for something like that — as long as the most complicated
supply chain idea in the world can actually deliver on its promised value.

Discussion Questions: Why haven’t CPG brands and their retail customers partnered to create a grocery equivalent of Li & Fung to lower their supply chain costs? In what areas may a sourcing intermediary particularly help in the procurement process for CPG brands?

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6 Comments on "RSR Research: The Most Complicated Supply Chain Idea in the World"

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Dan Berthiaume
Dan Berthiaume
10 years 14 days ago

Part of the reason may be that apparel products are overwhelmingly sourced from the Far East, making the involvement of Hong Kong-based Li & Fung necessary for simple logistical reasons. Since many CPG products are sourced in North America, there is no geographic need for a third party pushing supply chain participants toward what they could then discover is a great source of savings.

Gene Hoffman
Gene Hoffman
10 years 14 days ago

A great many apparel products are sourced overseas. That makes a group like Li & Fong a potentially profitable source for lowering supply chain costs for companies buying such imported goods.

As for U.S. supermarkets, most of the finished products they procure for sale are sourced in America. While CPG companies source many food ingredients for further processing world wide, the inherent margins and values of commodities may not consistently be as high as in fashion goods. CPG companies seem circumspect as to the value of group purchasing … and they may also be cautious of working with competitors.

Ben Sprecher
Ben Sprecher
10 years 14 days ago
I guess I’m missing something… wouldn’t these intermediaries in the grocery space be distributors like C&S Wholesale, Associated Wholesale Grocers, Bozzutos, etc.? For many smaller retailers, distributors *do* lower supply chain costs, because they can consolidate purchasing and distribution infrastructure, and because they can negotiate better prices with manufacturers than can smaller chains and independent operators. And even for larger retailers with their own supply chains, they will often turn to specialty food distributors like Davidson Specialty Foods to handle the complex world of lower-velocity, higher-SKU-count specialty and gourmet foods. I guess I’m not familiar enough with the supply-chain side of the business to understand what a third-party intermediary would bring that isn’t done by these traditional, well-established distributors. As to why big chains don’t band together and build a unified cross-retailer supply chain, I think it probably boils down to a few things: – Some chains (e.g., Walmart) see their supply chain efficiency as a competitive advantage – Larger chains don’t want to lend their purchasing power and negotiating leverage to their smaller competitors… Read more »
Ed Dennis
Ed Dennis
10 years 14 days ago
The fact of the matter is that the grocery industry has had a complete supply chain management system available for a number of years. This system was built to handle the produce industry which has the most complicated supply chain of any product when you consider that sourcing can be specified down to the seed and field, the harvest crew, the processing station, and so on through the supply chain to the store. These same systems can be used for beef, poultry, hogs, seafood and any other product you can imagine. Try looking at Do some research and you will learn that your wildest fantasy has a system available and evolving to meet your needs. The WWRE adopted Foodlinks predecessor as its preferred produce ecommerce solution. As several major grocery chains are utilizing this system, we can assume that availability isn’t the problem. I think the problem is that merchants have tried to use the supply chain as a proprietary profit center. Walmart has probably gotten more press on their logistics system than… Read more »
Ralph Jacobson
10 years 13 days ago

CPG manufacturers and retailers have not typically learned from other segments of retail or other industries. Case in point: supermarket loyalty (really just “frequent-shopper” discounts) versus the true loyalty of hospitality and airlines. Demand Signal Repository (DSR) holds some of the most promising ROI as it is a robust centralized database that stores, harmonizes, and normalizes large volumes of demand data, including POS, wholesale distribution information, inventory movement, promotional demographics, market demographics, third-party content and customer loyalty data, to support better decisions in the area of category management, joint value creation, VMI, trade promotion management, supply chain management and promotion management.

Rather than focusing upon third-party entities to ease supply chain, or really “supply networks” costs, a DSR can address the end-to-end challenges across the entire ecosystem.

M. Jericho Banks PhD
M. Jericho Banks PhD
10 years 13 days ago
My goodness, here comes the hoary old “partnering” discussion involving CPG retailers and CPG suppliers. I’m surprised that Gene Hoffman, a widely recognized and rightfully-respected expert on this topic, didn’t issue the standard, boilerplate response: The objectives of retailers and suppliers in their dealings with each other are diametrically opposed. Retailers want to squeeze as much support money (co-op funds) out of manufacturers as possible and then have them take full responsibility for failed products through full-cost returns. (Most chains take more supplier dollars to the bottom line each year than profit dollars from selling stuff.) Suppliers, on the other hand, endeavor to push as much product into stores as possible with minimum financial allowances and then pull it through using advertising and coupons so they don’t have as much expense in co-op funds and returns. As far as “sourcing intermediaries” are concerned for the grocery business, does anyone remember diverters? They were “sourcing intermediaries” in the 90s who took advantage of the different wholesale prices offered across the country by manufacturers. Through conspiring supermarket… Read more »

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