The Importance of Third Parties’ Involvement in ECR Adoption
Alexandra Dare and Sherah Kurnia
Department of Information Systems
The University of Melbourne
111 Barry St, Carlton, VIC 3010 Australia
Ph: 61-3-8344 1534
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Abstract
Efficient Consumer Response (ECR) is a grocery industry supply chain management strategy, designed to make the industry more responsive to consumers’ needs. Despite the many benefits of ECR, its adoption has been slow in many regions. Previous studies indicate that one of the major impediments to ECR adoption is the unequal distribution of costs, benefits and risks among supply chain participants. Therefore, it is difficult to obtain cooperation and partnership among trading partners, which are required in ECR adoption. This study aims to explore the involvement of third party organizations to assist in ECR adoption and to identify strategies to mitigate the mutuality barrier. The findings of the multiple case study demonstrate that third parties have an important position within the Australian grocery industry to foster the growth of ECR.
Keywords: Efficient Consumer Response, technology adoption, inter-organizational system
Introduction
Industries are increasingly facing intensifying global competition, rapid technology advances, and increasingly more demanding customer expectations (Vokurka et al 2002). The dynamic marketplace is encouraging managerial and technological restructuring in company business models to accommodate changes. In order to contend rivals, organizations must emulate with product innovations and process improvements. Supply Chain Management (SCM) empowers organizations to improve their market position. Through integrating information systems and processes, organizations can adapt their supply chain networks to more customer-focused strategies (Simchi-Levi et al. 2003).
Efficient Consumer Response (ECR) is a SCM strategy designed for the Grocery Industry to eliminate supply chain waste and inefficiencies associated with moving products in order to provide maximum customer satisfaction (Kurt Salmon Associates 1998). Despite the many benefits promised by ECR, adoption has been slow in many regions. The slow uptake of ECR can be attributed to dissatisfaction with the program, the lack of cases of successful ECR implementation and the inter-organizational system (IOS) nature of ECR which requires complex coordination of activities among trading partners (Kurnia and Johnston 2000, Johnston and Gregor 2000). In addition, other fundamental barriers to successful implementation include social and cultural factors, resistance to change among people in the industry, lack of trust among companies and the potential inequity in the allocation of the benefits and costs of ECR (Hoban 1993, Brockman and Morgan 1999).
Previous studies (see for example Kurnia and Johnston 2000; 2001) in the adoption of ECR in Australia indicate that one of the main barriers to ECR adoption is the mutuality problem as it was found that the benefits, costs, and risks involved in adopting ECR initiatives are not equally distributed among manufacturers, distributors and retailers. This leads to complex negotiations between trading partners in adopting ECR. The study also suggests that more empirical study should be carried out to assess how the grocery industry as a whole can achieve the mutuality in ECR adoption and that third party organizations such as trade associations and standard bodies may have an important influence to overcome the mutuality barrier.
In this paper, we explore the involvement of third party organizations by identifying their tasks and activities in relation to ECR adoption and to identify possible strategies in addressing the unequal distribution of costs, benefits and risks. For the purpose of this paper, we use the data from the multiple case study with a number of third party organizations in Australia that was undertaken in August 2004. The findings suggest that third parties’ involvement in ECR adoption is manifested in various tasks and activities including standardisation, maintaining global score card, training and education, communication and ongoing commitment. Educating organizations within the Grocery Industry of the ECR benefits and assisting them in understanding their own cost structure, so that the mutuality barrier can be mitigated appear to be the most important tasks. The findings complement the previously discussed roles of third parties in ECR adoption (see Kurnia and Dare 2005, Kurnia et al. 2006), based on the same multiple case study.
Little research has been undertaken to assess the specific issue of ‘unequal distribution of costs and risks’ as a barrier to adoption, in particular to address the involvement of third parties in assisting ECR adoption. Therefore, contributions to both theory and practice are expected from this research. This research contributes to theory by complementing and enriching the existing literature on Inter-Organizational System adoption. It also contributes to practice because it offers a better understanding of the involvement of third parties in assisting the uptake of ECR initiatives by the Grocery Industry participants. In addition, the strategies explored addressing the issue of mutuality in this study are useful for the industry to foster wider adoptions of ECR initiatives.
In the next section, a literature of ECR adoption and an overview of the Australian grocery industry are presented. Then a brief description of the multiple case study and the participants is discussed. Then the study findings are presented comprehensively. Finally, conclusions are drawn and future research is outlined.
Adoption of Efficient Consumer Response
ECR is a grocery industry supply chain management strategy that encourages manufacturers, distributors and retailers to work together to eliminate non-value-added costs across the industry by reducing operating costs and increasing efficiencies. ECR is designed to re-engineer the industry away from a push system, in which manufacturers push products into retail stores, towards a pull system, in which products are pulled by consumer demand information captured at the retailers’ check-out counters. Its ultimate goal is to allow the industry to offer greater value to grocery consumers through the provision of better prices, better store assortment, better service, greater convenience and better quality products (Kurt Salmon Associates 1993).
Efficient Consumer Response (ECR) was developed in the US due to the competitive pressure from alternative store formats. Store formats included discount stores, 24 hour convenience stores, deep discount drug stores, super-centres and category killers who were taking sales from the grocery industry (Synder, 1994). After these store formats began to take market share from the supermarket, the US Grocery Industry commissioned Kurt Salmon Associates to analyse the opportunities in supermarket supply chains.
ECR promises to produce efficiencies in the four core business processes: store assortment, replenishment, promotions and product introductions (Kurt Salmon Associates 1993). Efficient store assortment aims to optimise inventory productivity and shelf space, while efficient replenishment is concerned with timely and cost effective replenishment of stock. Efficient promotion aims to maximise the total system efficiency of trade and consumer promotion and efficient product introduction aims to maximise the effectiveness of new product development and introduction activities. Two programs namely Category Management (CM) and Continuous Replenishment Program (CRP) support the four principle strategies and various technologies such as Electronic Data Interchange (EDI), Automatic Identification, Standardised Product Number, Activity-Based Costing (ABC) and Computer Aided Ordering are, in turn, used to support the CM and CRP programs.
ECR adoption has proved to be extremely difficult since they span organizational boundaries. Its adoption by an organization involves complex and dynamic interactions with other entities (such as trading partners, regulators and third parties) that normally have different and conflicting interests. In addition, adoption of such systems involves significant changes to organizations’ culture, structure, business relationships and working practices over time and space (Allen et al. 1999; Kurnia and Johnston 1999). In particular, unequal distributions of costs, benefits and risks of ECR among supply chain participants were identified in previous study conducted by Kurnia and Johnston 2000, which create a further barrier to ECR adoption.
Satisfactory division of costs, benefits and risks, can only be attained through supply chain-wide negotiation if cooperation and trust exist between trading partners. However, without an equal distribution of these benefits, costs and risks, it is difficult to obtain the required cooperation and trust since ECR adoption involves separate corporate entities along various supply chains and each organization normally has its own individual self-interest activities. The problem of establishing cooperation and trust is further magnified when dealing with companies coming from a laissez-faire, free market, competitive environment, since cooperation and trust are at odds with the underlying assumptions of the free market economy (Kurnia and Johnston 2000). In such a situation, the involvement of third party organizations can offer valuable assistance in ECR adoption.
The Australian Grocery Industry
The Grocery Industry includes all participants providing value to the end grocery customers. This includes multi-store chains, regional firms, independent supermarkets, manufacturers, distributors and wholesalers. A distinctive characteristic of the Grocery Industry is the high volumes of output and low profit margins. The intense competition among food retailers for the consumer dollar is best demonstrated by profit margins that continue to be about one cent on each dollar of sales (Food Marketing Institute, 2001). A traditional supermarket employs a push-based strategy where inventory at the warehouses and stores is based on a forecast. The Grocery Industry is characterized by a low level of demand uncertainty for many products and high economies of scale in transportation costs (Simchi-Levi 2003).
Australia is a multi-cultural society which the Grocery Industry must accommodate for. High product variety adds complexity to Supply Chains and forecasting. Forecasting becomes more difficult as all products are competing for the same customers and higher inventory levels must be maintained to ensure a good service level (Simchi-Levi et al 2003). Manufacturing costs also increase with the multitude of products with smaller lot sizes.
Figure 1 shows a map of Australia outlining the major cities. Australia’s land area is over 7.5 million square kilometres (About Ltd 2004) and the population is over 20 million people (ABS 2004). The wide geographic population spread and lack of population in Australia affects the Australian Grocery industry. Isolation of cities and low demand density creates disaggregated demand, which makes demand forecasting difficult and increases distribution costs.
Figure 1. A Map of Australia
The Australian Grocery Industry has two major retailers who account for around 80% of the total sales. With the characteristics of the dynamic grocery marketplace, the Australian Grocery Industry business models are being reengineered to sustain a competitive landscape. With an increased emphasis on time-based competition and inter-company cooperation, the Australian Grocery Industry is also turning to ECR to improve their supply chains’ efficiency and effectiveness.
Various parties have been established to assist the Grocery Industry participants with different issues. They are typically not part of the supply chains in the industry. They include Standard Bodies (such as EAN Australia, Automatic Data Capture Association, Tradegate), Trade Associations (such as ECR Australasia, Australian Food and Grocery Council, Australian Retailers Association) and other third parties (such as IBM Australia, Commerce Association, Pricewaterhouse Coopers). This study assesses the involvement of third party organizations in assisting organizations within the Australian grocery industry to adopt ECR.
The Multiple Case Study and the Participants
As described in the Introduction section, this study makes use of the data collected from the same multiple case study in previous publications (Kurnia and Dare 2005a; 2005b; Kurnia et al. 2006). For brevity, we do not include the details of the multiple case study and the participants, since they are available from those previously published papers. Data analysis is also discussed in the previous publications. A summary of the participants is provided in Table 1. In total, seven organizations participated in this study and nine individuals were interviewed. These are made up of a variety of players who are involved directly and indirectly in the Australian Grocery Industry. In this paper, we summarize the study findings in terms of the tasks and activities of third parties in relation to ECR adoption and strategies to overcome the mutuality barriers.
Company / Organization type / Interviewees / Distinguishing AttributesTA1 / Trade Association / Deputy Chief Executive / Organization represents food manufacturers
TA2 / Trade Association / Board Director / Representation of both retailers and manufacturers to promote ECR
TA3 / Trade Association / Board Member / Responsible for the Global ECR Scorecard
SB1 / Standard Body / Chief Operating Officer (COO),
Executive Quality Systems Manager, Education & Support Development Manger / Enforces barcoding standards and educates and trains in SCM
C1 / Business & IT Consultants / Head of Consulting / International Organization
C2 / Business Consultants / Consultant / International Organization
C3 / Business & IT Consultants / Head of Consulting / International Organization
Table 1 - Overview of the Multiple Case Study Participants
The Study Findings
The Australian Grocery Industry has close ties with Trade Associations and Standard Bodies. The boards and steering committees of the Trade Associations and Standard Bodies include people currently actively involved in the Grocery Industry. Figure 2 shows the overlapping of the Grocery Industry, Trade Associations and Standard Bodies. Mostly these people are executives who deal with organizations’ strategy. Since these people are actively working with the grocery industry, they are expected to be knowledgeable of ECR adoption.
In contrast, consultants do not hold any direct ties with the Grocery Industry. Although consultants conduct research for the Grocery Industry, their organizational structure is not made up of the industry itself.
Figure 2 - Third Party Relationships with the Grocery Industry
The close ties among the supply chain participants and third parties allow them to develop strong relationships. The strong relationships encourage information sharing and trust. Trust is important in these relationships because for organizations like Trade Associations and Standard Bodies to advise, negotiate and remain reputable, they must have the trust and knowledge of the Grocery Industry. This confirms Knill’s (1997) view f the importance on information sharing and trust in ECR adoption.
Furthermore, third parties need to be seen as mutual to ensure trust and their reputation in the industry. TA2 is a representation of both manufacturers and retailers. In comparison to TA1 which represents only manufacturers, TA2 can really only address non-competitive issues and non-price sensitive issues, such as loss prevention, data synchronisation and standards for RFID. The independent role of third parties is regarded as a valuable role from the industry perspective by the Head of Consulting at C1. Their independent nature builds trust with the industry to deliver industry information that is not biased. This external perspective helps build trust in ECR and encourage adoption.
However, the business goals of third parties may affect their solutions for ECR. Additionally, evidence in the study showed that the third parties may not be as mutual and independent as perceived. The boards of SB1, TA1 and TA2 contain retail representatives. In fact, retailers actually dominate the board of SB1. With the major retailers on the board it is therefore dubious if this third party is really mutual and independent.
Tasks and Activities of Third Party Related to ECR Adoption
The involvement of third party organizations in ECR adoption was explored in this study by identifying main tasks and activities that were carried out by the participating organizations to assist organizations within the industry in ECR adoption. They are discussed below.
1. Standardisation
SB1 governs and implements international barcoding standards. Third parties such as SB1 have an advantage to regulate international standards as an independent party. Their placement of staying mutual in the market place gives them a good position to enforce the standards. Generally, third parties assist in standardisation by promoting standards, communicating and educating the benefits and analysis on return on investment.
As globalisation increases, the Australian Grocery Industry must stay in harmony with international business practices, as revealed below:
“The industry is much more global in its opposition these days …Australian retailers are importing significant amount of products and Australian manufacturers are importing from plants that they might have in other countries”. (Director, TA2)
Likewise, TA1 recognises the need for global standards and understand that they are the way of the future.
A lack of small manufacturers’ membership in Trade Associations and Standard Bodies shows they are not adopting the international standards. Through the interviews with SB1 it was found that that there is a pressure for manufacturers / suppliers to adopt the standards used by the two major retailers. Retailers are now choosing which suppliers they want to work with. In a recent seminar, a major retailer expressed the plan to eliminate some product lines and to push their own home brand products. The retailers also stated that they would be trading electronically with over two thousand of their suppliers in eighteen months. Thus, if suppliers want to continue dealing with the major retailers then they will need to cooperate and align their business practices with the retailers.
Some of the international standards are not applicable in Australia. The Trade Associations and Standard Bodies are responsible for developing a workable application of the standards in the Australian circumstances. For example, global specifications standards are being developed for Radio Frequency Identification (RFID) at present by SB1. The project is being commissioned by the government and proof-of-concept cases are being developed in volunteer organizations.