ABM TREATISE

Eliminating wasteful costs and establishing more efficient methods to deliver product to the shelf are major goals of Efficient Consumer Response. But understanding the true costs of doing business, especially in areas involving indirect and nonvalue-added expenses, and deciding who should pay for them, remain thorny issues.To that end, leading ECR practitioners are now actively embracing the use

Eliminating wasteful costs and establishing more efficient methods to deliver product to the shelf are major goals of Efficient Consumer Response. But understanding the true costs of doing business, especially in areas involving indirect and nonvalue-added expenses, and deciding who should pay for them, remain thorny issues.

To that end, leading ECR practitioners are now actively embracing the use of activity-based management principles as a solution to these issues.

While some critics may consider ABM as just another accounting system, it involves fundamental changes in the way companies do business and interact with each other to achieve optimal efficiency and profitability for both sides.

The idea of assigning costs to specific supply chain activities may not be new. What is new is putting ABM to work in the business decision-making process, said Anne Woods, director of sales, finance and technology at Nestle, Glendale, Calif.

Woods is a co-chairwoman of the ABM process-improvement group that's charged with industry education and communication, including sharing challenges, techniques and applications. The group is committed to getting the word out about the true benefits of embracing ABM.

"Basically, the group felt that while there is a lot of information out there on what ABM is, such as how you get a project going and what a pilot looks like, there isn't a lot about how you take that information and change management decisions," Woods noted. "In our estimation, that's where a lot of people are struggling -- with applying this information to improve the decision-making process."

Tom Christal, president and chief executive officer of Christal Cos., a food marketing and brokerage firm in San Antonio, is also a co-chairman of the ABM process-improvement group. He said he believes one of the obstacles to achieving industrywide implementation of ECR is the lack of a common incentive, which ABM helps companies address.

"We're all struggling with what's the return on investment," he explained, noting that ECR is expected to result in some $30 billion of savings across the industry. "I think ABM begins to offer answers to that question."

Franklin Krum, president of the Golden Cat division of Ralston Purina Co., St. Louis, agrees that the industry needs to find new measurement systems to keep pace with "facilitating systems," such as electronic data interchange and continuous replenishment.

"The vast majority of the benefits of ECR are below the gross margin line," he said. "But it's a fact of life that you tend to pay attention to those things that you can measure."

Krum, who is a member of the ECR executive committee, said he believes ABM is "a measurement tool whose time is here" because the industry now understands the importance of measuring the cost of specific activities, rather than making standard cost allocations.

"ABM is a very important enabler, and it allows you to keep score better," he added.

Christal noted that ABM, to some extent, has been met with apprehension on the part of certain companies because of another recent industry measure that was greeted with high expectations -- direct product profitability -- which was largely unsuccessful.

Unlike DPP, which failed to measure some service costs associated with a product, ABM is "much more inclusive and, therefore, a lot more powerful," Christal said.

"It's really a business process," he added. "In fact, I would say there are only two business practices that have come out of ECR. One is category management, and the other is activity-based management. This shouldn't be a surprise, because those are the only two terms in the ECR dictionary that have the term 'management' hanging off them. Everything else in ECR is just an enabler."

The ABM process-improvement group has taken a two-pronged approach to helping companies understand and implement the strategy.

One of the first steps was to establish and publish a common language for trading partners in a "Value Chain Dictionary," which includes definitions for some 125 terms and activities.

"We think the activity dictionary will allow people to create a virtual corporation and use ABM as a virtual income statement," Christal explained. "Then, as you begin to partner, you can look at it as a business enterprise and discuss what each side is investing."

In addition, the process-improvement group developed a 2-by-4-foot wall chart depicting the supply chain and oversaw case studies focusing on menu pricing in a wholesaler/retailer environment, re-engineering the reset process and achieving "true" gross margin.

The wall chart, which depicts each step in the supply chain, could come into play in the future as companies move into joint new-item development, which Christal said is "on a lot of radar screens."

Whereas new-product development has been a manufacturer's responsibility, ABM would allow the costs to be shared by supplier and distributor in the case of joint development.

In the gross-margin study, one of the findings was that 84% to 86% of nonproduct costs reside at the store level, compared with 3% to 4% at the corporate level and 10% to 11% at the warehouse/division level.

"All the ECR work we've done so far has been at the headquarters and warehouse level," Christal noted. "There is a huge opportunity in the stores, which speaks to all kinds of activities like stocking and building displays. Some of this has been addressed, in terms of prepack displays and pallet modules, but I think that's barely skimming the surface."

Another result of the gross-margin study, Woods said, is that it "sets aside once and for all" the merits of DPP. "Direct product profitability was a good concept, but it failed to look at some of the true costs of handling product all the way through the supply chain. And it tried to allocate costs."

Another case study the ABM process-improvement group conducted involved a food broker and retailer team re-engineering the store reset process, which represents one of the highest costs for brokers.

The study found that retailers often drive resets through their category management efforts. A sophisticated retailer with 240 categories could have thousands of resets across the entire chain every time a category is shuffled.

"The hard financial costs of those resets are not borne by the retailer," Christal said. "Because none of those costs are on their books, where's the incentive for them to streamline?"

The solution, according to the study, is to create reset teams and bring in some level of oversight from the retailer to manage the process.

Christal said he hopes an increasing number of retailers will embrace ABM and begin sharing their findings on product profitability.

"I think a lot of people have mastered the various disciplines of ECR and the various components, but when you begin to put it all together, it just almost automatically leads you to activity-based management," he pointed out. "It's almost a common-sense next step."