CHICAGO -- Activity-based costing at the manufacturer and distributor levels could reduce the price of goods by 30%, according to an executive of Spartan Stores, Grand Rapids, Mich.
"We see a 30% reduction in the cost of goods as manufacturers and distributors are able to take fees out of their cost structures by operating more efficiently" and implementing Efficient Consumer Response technologies, said William E. May Jr., Spartan's senior vice president of distribution and management information services.
"Using a concept that has a variety of names -- including 'Efficient Consumer Response pricing' or 'bottom-up pricing' -- manufacturers are determining the actual cost of goods, including the cost of manufacturing and the return on assets the producer wants, as well as markup and freight costs.
"After that, the cost will depend on distributors and whether they use electronic data interchange, electronic funds transfer, full pallet loads, delivery schedules at certain times of day and point-of-sale data from continuous replenishment, all of which affect the cost of goods."
May discussed the costing approach and its role in Spartan's re-engineering strategy during a seminar at the Food Marketing Institute's convention here this month.
"Over time, we anticipate reducing our costs of acquisition, and Spartan will pass those savings on to our customers," he added.
According to May, most manufacturers are still clinging to old pricing programs while reviewing new approaches. But he said he expects manufacturers to begin phasing in new structures over the next 18 to 24 months.
May told SN Spartan will test ECR pricing early this summer, "and, based on examples we've seen, we anticipate product cost reductions of up to 30% through the use of efficient business practices," he told the seminar.
"We're not interested in collecting fees but in becoming more efficient to provide goods at a cheaper price to our customers and to the ultimate consumer," he added.
In pilot tests using vendor-managed inventories and based on warehouse withdrawals, "Spartan has seen inventory levels drop 30% to 40% and seen savings in inventory levels on hand," May said, "and we expect more significant changes once point-of-sale data becomes available."
Sharing the podium with May was Marv Imus, owner of Paw Paw Shopping Center, a single-store Spartan customer based in Paw Paw, Mich., who discussed the effect of fee structures on the cost of goods.
"The actual cost of goods has been buried in the costs of doing business for a long time, but now that we're able to determine what they are, we can address the issue of fee structures," Imus said. "Fees are a hard pill for retailers to swallow, but if we don't break the costs out, we can't address these issues."
May said full disclosure is necessary to eliminate areas of distrust between distributors and manufacturers. "But now the question of how the cost of goods got to be what it is can be answered by tracking back so customers can understand why they pay what they do," he said.
Cost structures, along with such practices as street money, forward buying and diverting, fuel mistrust, "but activity-based costing is changing all that," he said.
"The level of trust and the amount of disclosure taking place are exploding, driven by competitive pressures," May said.
"Spartan is helping its retailers develop strategic business plans based on an amount of information provided by the retailers that we've never had before."
Another seminar participant, Mark Feldpausch, vice president of administration at G&R Felpausch, Hastings, Mich., said the need to share information is essential "if we're serious about cleaning up the distribution process, because until we can move information back and forth, we won't be able to pull the dead wood out.
"And that's something we must do to benefit ourselves and our consumers," he added.
Feldpausch said one result of ECR "has been to create a different level of trust between retailers and their wholesale suppliers. It has forced us to challenge each other on a higher level for pure business reasons, and at this point, on a scale of one to 10, I'd say the level of trust is past eight and moving to nine."
According to May, cooperation with wholesalers is essential for independents to survive.
"Survival is not a question of the size of a retail operation but whether a retailer is willing to partner with his wholesaler and work hand-in-hand on business issues," he said.
As Spartan developed its re-engineering program over the last five years, "the retailer was by our side through all decisions, because it's easier to trust and believe people when you allow them to be in on the planning and decision-making process so they don't feel decisions are being foisted on them later."
May said Spartan's major challenge is convincing customers to get involved in ECR efforts despite their success with select projects.
"We have a lot of retailers who are successful within their own niches who aren't facing much new competition, and it's hard to convince them to change because their success makes them feel they have no reason to change," he said.
"But as new competition expands, we're getting close to the midnight hour, and those who don't start now will be dead, even though they may not fall over for a while. The challenge to Spartan is to convince customers that they must embrace ECR technologies now."
Large manufacturers are meeting with Spartan on a regular basis to discuss ECR programs, May said, "but some smaller manufacturers are intensifying their street money and their forward-buy programs at the retail level to go around us, and that confuses our customers."