CHANGE IN CONTINUITY?

Continuous replenishment programs, nearly all of which are managed by vendors today, may eventually be driven by retailers.Most CRPs today use vendor-generated orders based on retailer-supplied warehouse withdrawal data. That trend will continue in the near term because vendors are still in a good position to perform the key forecasting function, retailers and industry observers agree.But as CRP flourishes

Continuous replenishment programs, nearly all of which are managed by vendors today, may eventually be driven by retailers.

Most CRPs today use vendor-generated orders based on retailer-supplied warehouse withdrawal data. That trend will continue in the near term because vendors are still in a good position to perform the key forecasting function, retailers and industry observers agree.

But as CRP flourishes -- pilot programs and case volume are expected to more than double in the next year -- some distributors will take on a larger role in managing the process.

Those likely to lead the march are progressive retailers who already use sales data to better understand and respond to customer needs through initiatives like electronic marketing and computer-assisted ordering.

Shaw's Supermarkets, East Bridgewater, Mass., for one, whose experience with computer-assisted ordering dates back some 20 years, recently began using the data for warehouse replenishment, said James Sheehan, director of logistics.

"Computer-aided ordering systems at the store level puts us directly in tune with what the customer wants, and we built our replenishment system off that, back to our warehouse, back to our suppliers," he said.

Fewer than 20% of retailers use computer-assisted ordering today, but the technology is expected to become more widespread. Forty-eight percent of self-distributing chains surveyed by Kurt Salmon Associates, New York, recently indicated they would test computer-assisted ordering in the year ahead.

As the practice becomes more prevalent, retailers will take more command of continuous replenishment, said Peter Harding, vice president at Kurt Salmon.

"I think the vendor-managed [CRP] has a lot of advantages as a way of getting started," he said. "However, if we think of continuous replenishment in practice now, it is continuous 'warehouse' replenishment and the best practices part of ECR focuses first on the link between the manufacturers and warehouse through CRP, and then secondly, between the warehouse and store through computer-assisted ordering."

In the longer term, he said, the industry will move to a totally integrated flow-through distribution system from manufacturer to store. "And once you get to that level of detail, I think it's the retailer's [computer-assisted ordering] system that will generate a lot of the information that's going to be necessary to manage all of the inbound logistics."

Sheehan agreed. "From our perspective, to create a cost-effective internal distribution network, you must control the inbound."

There are already signs that the nature of continuous replenishment programs and vendor-retailer relationships are evolving.

"It appears that roles are somewhat changing," he added. "I've noticed some vendors have expanded their concept of CRP to include not only vendor-managed inventory but now retailer-managed inventory."

One retailer planning a head-to-head comparison of vendor-managed and self-managed CRPs told SN that chains should want to manage their own continuous replenishment programs: "I don't think a manufacturer should be capable of doing anything in terms of moving product that we couldn't do ourselves.

"For goodness sakes, we're merchants, we're retailers. We're supposed to be experts at bringing product to market, doing it at the lowest possible cost," said the retail logistics executive, who requested anonymity.

"How can [manufacturers] do this better than us?" he asked.

To put that question to the test, the retailer will compare the results of 10 vendor-managed CRPs to be launched this summer with that of its own self-managed CRP, to begin in January.

The stakes are high and so are the company's expectations for this CRP, the executive acknowledged, noting that the cost of buying system enhancements, including sales forecasting modules, could approach $2 million.

"So that means I've got to substantially reduce my inventory to pay for the upgrade, a dramatic decrease to the tune of -- and I know this is going to sound bizarre -- a minimum of 50% to make all this worthwhile."

In addition to monitoring inventory levels, the retailer will compare the service level impact of both the vendor-managed CRPs and its own retailer-managed effort.

Nick Ciaccio, vice president of logistics at Dominick's Finer Foods, Northlake, Ill., said some retailers may believe they can do a better job managing their own CRP inventories, but that's not the strategy for his company.

"Our CRP inventories are managed by the vendor," he told SN. "We believe that is the best way to do it, but certainly with a lot of interaction and communication. We don't just say, 'Here it is' and let them go."

Dominick's vendor-managed CRPs have, in fact, led to more open communications with manufacturers than ever before and freed up category managers to concentrate on building sales, Ciaccio said.

"I don't see what advantages there are to [retailer-managed CRP], other than if the retailer doesn't want to share the movement information with manufacturers," he added.

Vendor-managed CRPs like Dominick's will most likely be the industry model for some time.

"It's very logical to rely on the supply side for CRP," said David Jenkins, the guiding force behind the Efficient Consumer Response movement. "But as retailers get comfortable with the process, some will want to do it themselves because they can understand their own situation, the nuances, better than the supplier.

"It takes experience and comfort with what the whole [CRP] idea is about," said Jenkins, who is a director at J. Sainsbury, London, and retired president and chief executive officer at Shaw's Supermarkets, East Bridgewater, Mass.

He noted that suppliers' strong forecasting systems serve them well in managing continuous replenishment. Retailers, on the other hand, cushioned by massive inventories, traditionally haven't required forecasting capabilities -- but that will change.

"In the longer run, the more sophisticated distributors will use their own forecasting process to get their inventories in better condition," he said.

At Giant Food, Landover, Md., testing of replenishment strategies is ongoing. Although the chain's inventory is vendor-managed with two suppliers, the retailer maintains more control than that of a conventional CRP.

"It's a very complex process, and with complexity comes the inability to get results right away," said Dave Herriman, vice president of grocery operations. "So that's the reason we're taking a wait-and-see approach before we go out and advertise the fact that this is the direction we'd like to go."

By its very nature, CRP should not be complicated, but it is becoming increasingly so, according to Rich Sherman, president of R.J. Sherman & Co., a Naperville, Ill., management consulting firm. As more suppliers create more CRP pipelines to more retailers, the issue for manufacturers becomes, "How many different pipelines can I manage before I start springing leaks?"

Manufacturers need to reach critical mass on CRP before enjoying the benefits of smooth production cycles and reduced transportation costs, yet taking on numerous CRP partners means more complexity and cost.

"That's why a lot of people are beginning to believe [CRP is] going to have to be retailer-managed in the future . . . because of all the complicating factors that are now arising around CRP and because the retailer has to manage his own assets," Sherman added.

Steve Keener, a partner with Computer Sciences Corp., Cleveland, said, "The thought is eventually we'll head to retailer-managed because they're closer to the end customer."

"It makes more sense because they're going to be more closely attuned to what their specific objectives are, what their specific consumers require," he added.

"To date, [CRP has] mostly gone to vendor-managed because they have less SKUs to worry about. It's easier for them to do. But as [inventory management] tools improve, we'll start to see the shift back to retailers."

Added Sherman, "Once people figure out it's all about logistics, improved demand planning and forecasting, then the recognition will come to the retailer that, 'Hey, we can do this. We have the information. We have the tools. It's not as expensive as it looks."