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(originally published by Booz & Company)


The Collaboration Game

Although an elusive goal, cooperative relationships between retailers and suppliers can be wildly profitable.

Retailers have historically maintained an adversarial relationship with consumer packaged goods (CPG) companies, their primary suppliers. Negotiations over price, promotional support, and marketing budgets, among other areas of persistent disagreement, often end in damaged relationships and minor gains — only to be renegotiated again the following year. For some buyers, this annual wrangling is seen as an important part of the job — and even as fun. To them, facing down suppliers is a kind of sport.

But if their goal is to work off their competitive juices by mixing it up with suppliers, buyers would be wise to take up tennis instead. As satisfying as old-fashioned haggling may feel, it generally results in very little good as retailers and suppliers overlook the many ways that they could gain from their partnership.

Changing these old habits is not a particularly new aspiration. For more than a decade, retailers and suppliers have tried to learn to collaborate more and to move beyond the old zero-sum games. These initiatives have included assigning “captains” from each side to work with one another on driving category growth and forming industry groups that seek supply chain optimization, such as Efficient Consumer Response or Collaborative Planning, Forecasting, and Replenishment. Yet despite all the hard work, only partial success has been achieved. A recent Booz & Company survey of European retailers and manufacturers found that fewer than 20 percent of respondents were “very satisfied” with the results from their current collaborative initiatives.

Retailer–supplier partnerships have failed primarily because buyers tend to view their value in a limited way: purely as a means to extract lower prices or extra promotional dollars from CPG suppliers in their yearly negotiations. All too often, buyers walk away from a negotiation feeling successful, unaware that their victory may well have been compromised by their failure to address issues that could have much more impact on retailer and supplier profits, such as in-store availability. The shelves still won’t be fully stocked and what seemed like a highly profitable day’s work is actually only a slightly larger share of a smaller pie.

By contrast, building holistic relationships with selected suppliers across the value chain that can drive both higher revenue and lower costs than the old haggling habits requires collaboration and cross-functional participation. This can be as simple as linking the supplier’s consumer insight to the retailer’s promotional capabilities. For example, Migros Türk Ticaret AS, one of Turkey’s largest supermarket chains, worked with Unilever PLC to use consumer response and store layout data to increase sales of hair conditioner. Beginning with a survey conducted at an interactive in-store coupon kiosk, Unilever and Migros Türk discovered that shoppers were not buying conditioner for a variety of reasons, for example, because they simply felt they didn’t need to (18 percent) or they believed that it was too expensive (12 percent). With that knowledge in hand, Migros Türk and Unilever tweaked their sales program, increasing price promotions and reallocating shelf space so that conditioner and shampoo were sold together in hopes that conditioner would be established as a necessity in the shoppers’ minds. As a result of this campaign, Migros Türk’s overall conditioner revenue increased by 25 percent and the chain’s sales of Unilever conditioner grew by 36 percent.

In addition, there is a wide range of supplier-related processes that can be improved by more collaborative retailer–supplier relationships, including the way promotions are planned and executed, demand forecasting, and stock replenishment. One of the best sources of information for improving these processes is the retailer’s point of sale (POS) data. For instance, by examining POS data to identify purchasing patterns at certain Tesco PLC supermarkets, Kellogg Company found that most of its out-of-stocks at the U.K. retailer occurred midweek, in the afternoon. Consequently, Kellogg adjusted its shipping schedules and, in the process, helped Tesco to recapture more than £2 million (US$3.4 million) in lost sales and to improve customer satisfaction. In a similar initiative, Kraft Foods Inc. used U.K. food retailer Sainsbury’s Supermarkets Ltd.’s POS data to improve in-store availability of cheeses during promotional periods. The accuracy of forecasted returns from promotions increased by 20 percent, reducing the risk of both under- and overstocking.

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  1. Gerry Greenleaf, Dennis Donelon, and John Jensen, “Supply Chain Management: An Investigation of Collaboration in the Grocery Industry” (PDF), Grocery Manufacturers Association white paper, 2003: Survey of retailers and manufacturers in the food industry reveals the extent of collaboration and the roadblocks on the path to achieving it.
  2. Richard Kauffeld, Johan Sauer, and Sara Bergson, “Partners at the Point of Sale,” s+b, Autumn 2007: Offers an approach for manufacturers and retailers to put the right product on the right shelf at the right time for the right consumer.
  3. Richard Kauffeld, Matthew Egol, and Elisabeth Hartley, “Creating Value through Customization: Winning through Shelf-Centered Collaboration” (PDF), Grocery Manufacturers Assotication and Booz Allen Hamilton, September 2006: The potential of shelf-centered collaboration as revealed through existing retailer and manufacturer customization initiatives, especially in consumer packaged goods companies.
  4. Edward Landry and Jaya Pandrangi, “Getting the Most from the ‘Feet on the Street,’” s+b, Fall 2005: Describes how manufacturers can configure an optimal sales force mix for their particular retail channels.
  5. Melissa Master Cavanaugh and Catharine P. Taylor, eds., Moments of Choice: Driving Profitable Growth with Shelf-Centered Collaboration (strategy+business Books, 2007): Lays out the components and relationships of a shelf-centered collaboration in an extended enterprise.
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