PLANO, Texas -- To fix what's wrong with the supermarket industry and cut costs substantially, retailers must begin with their own corporate structure.
The ability to boost efficiency hinges first and foremost on retailers getting their own house in order, according to two executives at EDS here.
"Departments within supermarkets are for the most part concentrating on functions specific to those departments," said Greg Granello, vice president of sales at EDS. "They don't work together, and their current systems don't work together."
"Everybody is trying to drive cost out of the system, but what really must happen is a basic change in the way retailers approach their business," said Terry Skodack, an EDS consultant.
EDS is working with Smith's Food & Drug, Salt Lake City, and other major supermarket chains to eradicate inefficient "stovepipe" organizational structures.
According to the EDS officials, business process re-engineering can be the internal corporate blueprint that will allow supermarkets to overcome those obstacles and move toward Efficient Consumer Response.
"We have to ignore the stovepipe orientation of the company and deal with core processes," Skodack said. "And we start with the top of the corporation."
EDS advises supermarket chief executives to get the ball rolling through the formation of cross-functional teams.
"The CEO has to say 'I'm building a cross-functional team. Do you want to be on it?,' " Granello said.
Cross-functional teams pool representatives from various departments to brainstorm about improving efficiencies across departments on specific tasks. A team that aims to improve warehouse management, for instance, might include people responsible for procurement, distribution and MIS, among others.
"Cross-functional teams happen almost as a side-effect of re-engineering," Skodack said. "The re-engineering process is by definition cross-functional."
Granello said upper management must support the cooperative initiatives by removing the incentives that have conditioned individual departments to focus solely on what's best for them rather than for the company as a whole.
"Supermarkets have to get rid of incentive plans that go against what you want to do," he said. "They have to change the way they manage, they have to change incentives, and they have to change the way they train their people. Supermarkets must move toward horizontal business practices."
Forward-buying is probably the most often cited example of a incentive gone awry. Buyers get pats on the back for purchasing goods at the lowest-available prices, but storing those goods often becomes a logistical nightmare for distribution center managers.
"Misguided incentives are very common," Skodack said. "Buyers are still being incented on how much promotional money they can acquire rather than on sales and profitability. Our methodology ferrets out misguided incentives. We want to incent people to do what's good for the company as a whole."
EDS officials say an in-depth evaluation of how a supermarket company currently conducts its business is necessary before efficient, cost-cutting changes can be implemented.
"We have an offering that focuses on ECR," Skodack said. "It takes us about 45 days to inventory the way they are doing business now."
"We measure the output of their departments to tell them where their efficiencies are," Granello added.
"Out of that inventory comes a set of recommendations for change," Skodack said. "They are then prioritized according to the company's needs, and since there are costs and benefits associated with them, we try to formalize activity-based costing methods for clients. Then we focus on the recommendations the supermarket will get the quickest benefits from," Skodack said.
Sales initiatives take first priority.
"We feel very strongly that the early benefits for retailers come from better selling and category management," Skodack said. "We want to support moves by retailers to become selling organizations rather than buying organizations."
He said category management, shelf-space management, point-of-sale scan data analysis and computerized direct store delivery are some of the ways retailers can improve efficiency quickly.
"We want the retailers to be very aggressive in terms of determining assortment," Granello said. "We're concerned that the delayed benefits people speak of in conjunction with ECR will make retailers not move toward it aggressively."
Analyzing scan data is the foundation the other initiatives depend upon. "Retailers have to analyze that data to see what items sell under what circumstances," Skodack said. "They have to use it to evaluate promotions to see which are effective."
Skodack said the eventual goal of strong POS data analysis is to predict sales to make better replenishment decisions while maintaining the ability to react quickly if predictions are off.
"Predictability is the eventual goal," he said, "and being able to react to changing situations."
Skodack calls DSD "a paperwork jungle" where manufacturers are king. He said retailers who understand what's selling and why can better manage their shelves.
"The store shelf is still controlled by the DSD guy," he said. "But retailers are going to move to take control of item selection and the layout of the shelf."
"If retailers really knew what their margins were on products going out the door, they'd make very different shelf assortments and make sure they don't leave those decisions to brand managers," Granello said.
But getting one's arms around the data necessary to back up category management, space management and promotion analysis decisions can be tough -- especially for retailers with aging computer systems and software.
"Retailers have disinvested in technology," Granello exlained. "There has been very little investment in systems in recent years, so there is pent-up demand."
But new systems are expensive. Consequently, EDS officials said retailers would be wise to put their business practices under the microscope to make sure any investment in technology will support sound decision-making structures.
"Systems integration, business modeling and legacy systems are big problems," Skodack said. "To make these ideas reality, we need a client-server based open-systems operation."
Skodack said the benefits in faster inventory movement will make the investment in systems worthwhile.
"Retailers have too much money tied up in assets in their distribution centers," he said. "There's a huge tug-of-war in ECR. Sure, there's a lot of money dealt to retailers in forebuy and deals, but it's sitting in their DCs in the form of inventory."
EDS said some retailers are saving money and generating better turns by limiting the number of deals they agree to. Independents, however, may not be able to take advantage of efficient practices as readily as chains.
"The equation changes for the retailer who is a captive of a wholesaler," Skodack said. "The wholesalers have relied too much on forward buying."
EDS, however, said that if wholesalers re-engineer the way they do business, independents will benefit.
"Wholesalers will have to bring more value to the table," Skodack said. "The days of setting yourself apart by offering products to retailers at a lower cost than competing wholesalers are gone. Wholesalers are all buying at the same cost now.
"Now, wholesalers will have to show retailers that they are bringing other kinds of value to the table, like help with shelf-space management and good promotional programs. Creative planogramming is cost prohibitive for 12-store chains."
Granello and Skodack said retailers could hurt their businesses irreparably if they don't realign operations in the near future.
"Retailers have an eight- to 24-month window to get up to speed on ECR-related practices," Skodack said.