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6/28/2002
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Shopping For Savings

Retailers and their suppliers could cut costs by $40 billion a year with better collaboration. Here's why they aren't counting their savings yet.

One of the most significant steps toward a long-awaited collaborative revolution among the makers and sellers of consumer goods could sound more like a dull thud than a thunderclap of E-business efficiency. The WorldWide Retail Exchange and Transora--two of the industry's major online trading platforms--recently agreed to use the services of UCCnet, a standards body whose goal is to provide a central registry of information to retailers and wholesalers about products ranging from Tootsie Rolls to televisions.

Don't fall asleep just yet. While the adoption of industry standards usually isn't enough to get anyone but the deepest insiders excited, the UCCnet deal could turn an entire industry on its head--and save $40 billion a year in the process.

For companies such as Best Buy, Michelin, Procter & Gamble, and Sears, the road to a more collaborative approach to business has been anything but the dash to the Internet predicted two years ago. A few retailers, such as Target and Wal-Mart, have had the will and cash to create extremely successful, proprietary supply-chain information systems and the clout to force suppliers to adopt them. But for most of the industry, the adoption of E-business tools by consumer-goods manufacturers, wholesalers, and retailers to manage the supply chain collaboratively has been a long and frustrating journey.

The UCCnet Global Registry is a listing that includes 62 pieces of product data, such as manufacturer, part number, and package size. Used by 91 manufacturers and 10 retailers, it provides a common language for companies to talk about an item. Given the staggering number of consumer goods it includes, there's likely no other industry in which the adoption of a standardized format has the potential for such enormous impact.

Milan Turk Jr., Procter & Gamble's director of customer E-business, considers it nothing short of an historic breakthrough. P&G makes about 60,000 items. And in the consumer-goods business, identification numbers and product configurations change so often that manufacturers and retailers, using paper, phone, and fax, have an extremely difficult time keeping product information up to date. "If a customer makes a one-digit error in the code for a product, they may repeatedly place orders for that product to be replenished and not receive it until they get on the phone, or we do, and straighten that out," Turk says.

Such problems cost the consumer-goods industry $40 billion annually, according to a report released last month by A.T. Kearney. At any given time, 30% of the information in the catalogs that retailers use to order products from manufacturers is incorrect, the management consulting firm says. That's a massive problem given that there are hundreds of thousands of manufacturers, hundreds of thousands of retailers, and millions of consumer products. One result of such errors is that 10% to 15% of products aren't available to consumers when they want them, says C.J. "Jake" Barr, associate director of supply chain at P&G. It requires an average of four weeks for manufacturers and retailers to manage the paperwork required to introduce a product, according to A.T. Kearney. The UCCnet registry could help retailers slash that time to a few days, perhaps hours, if manufacturers and retailers integrate their operations sufficiently.

Don Mowery, director of E-business for Nestle Purina. Photo by Cathy Lander-Goldberg.

The UCCnet registry has proved its value, says Mowery, director of E-business at Nestlé Purina. It automates ordering and lets suppliers and customers coordinate inventory almost in real time
The UCCnet registry has already shown its value to pet-food maker Nestlé Purina Pet Care Co. in St. Louis and Wegman's Food Markets Inc., a grocery chain in Rochester, N.Y. Both companies are testing the registry and a UCCnet service that automatically synchronizes Nestlé Purina product data with the data stored by the grocer's procurement and inventory systems. Don Mowery, director of E-business for Nestlé Purina, says the UCCnet registry is proving especially useful for introducing products.

When Nestlé Purina launches an item, it typically takes weeks for product information to be printed and sent to retailers. Grocers may need an additional week or more before the data is typed into their procurement systems. It also needs to be entered into the warehouse and inventory systems so stock handlers can accept a shipment when it arrives, and into the point-of-sale system so the retailer can price, stock, sell, and reorder the product. If a product arrives before the grocer has all that information in its systems, the delivery typically sits on a loading dock until Nestlé Purina and the retailer work through the problem. Sometimes, the product just gets sent back. "When this happens, the first response we get from a customer is, 'Gee, this manufacturer shipped something we don't want,'" Mowery says. That forces Nestlé Purina to go back to the buyer who placed the order and fix the problem manually--an expensive, time-consuming effort. With UCCnet, the process of entering data into retailers' systems can be automated, so when new information is logged on UCCnet, it's added almost in real time to retailer systems.

In a truly collaborative world, using a supply-chain model called vendor-managed inventory, manufacturers would get information on what's selling so they'd know when they needed to put more product on retail shelves. Retailers and manufacturers also would work together to develop forecasts, which manufacturers would build to in a model called collaborative planning, forecasting, and replenishment. If sales outpaced the forecast, manufacturers would know that, too. But while retailers and manufacturers have touted the glories of vendor-managed inventory and collaborative planning, forecasting, and replenishment for years, they haven't been able to realize the dream, in part because of a lack of a common product-description language. That's about to change.

The decision by the WorldWide Retail Exchange and Transora to use the UCCnet registry creates a single point of truth for the basic product information in online marketplaces. The WorldWide Retail Exchange serves 62 of the largest retailers, which have combined annual spending exceeding $400 billion. Transora, a manufacturer-founded exchange, serves more than 60 of the largest consumer products makers. The GlobalNetXchange, an exchange sponsored by retailers that also handles exchange-to-exchange routing of retailers' purchase orders and other information, also plans to begin using the UCCnet registry in the near future, as does CPG Market.com. But the lack of a common product language has limited the success of these exchanges, leading companies to stick with conventional buying methods or build proprietary networks for E-commerce. "The registry might not seem earth-shattering, but it's a very big deal," AMR Research analyst Kara Romanow says.

P&G recently completed data verification for a 16,000-item product catalog hosted on the Transora network that eventually will contain 60,000 items. The UCCnet links the information located on the registry to the Transora catalog to facilitate collaborative ordering, shipping, receiving, stocking, and inventory management. P&G's catalog, like others on the exchange, will include pricing information, as well as downloadable advertising graphics, promotional information, and a wide range of other details that manufacturers now send to retailers using fax, courier, and mail services.

A manufacturer can link its catalogs to E-procurement applications on industry exchanges or behind its firewall so retailers can order products using the Internet, a virtual private network, or EDI. Catalogs also can be linked to collaborative-planning, inventory-management, and order-management tools. Many retailers plan to expose their inventory to the single-item level and provide daily or weekly sales information at the regional, local, and even single-store levels. That way manufacturers can help them plan for demand and manage inventory in stores. The WorldWide Retail Exchange and Transora also offer services to synchronize UCCnet registry information with manufacturers' product catalogs maintained on those exchanges. Retailers and manufacturers that don't use the exchanges will be able to use the registry to synchronize product information and to work together on replenishment and planning.

These kinds of capabilities have been a long time coming. When the three industry exchanges were unveiled two years ago, with dot-com exuberance at its peak, analysts predicted they would handle more than $1 trillion in transactions annually. An AMR Research survey at that time said half of manufacturers and retailers expected to collaborate in real time by the end of 2002, and 70% of retailers and 79% of manufacturers planned to use online exchanges.

That hasn't happened. Since 1999, manufacturers and retailers have spent about $1 billion on IT to make the supply chain more collaborative, but there have been few positive results, according to the A.T. Kearney report. "Right away people expected a silver bullet. There was an initial rush, euphoria, a feeling that this is going to be great," says Hank Steermann, senior manager of supply chain for Sears, who's leading a project with tire manufacturer Michelin to use the GlobalNetXchange for automated replenishment (see sidebar story, "Sears, Michelin Test Supply Chain").

Collaborative Product Planning And Replenishment

Instead, retailers and manufacturers still have trouble keeping their own houses in order. Many have no single source for up-to-date product information, because the manufacturing operation maintains some of that data, marketing some, and sales some. With data so fragmented, it's often been the responsibility of salespeople to pull all the pieces together, and manufacturers have found it difficult to get accurate information about products out to retailers.

In the past two years, manufacturers have made some progress. P&G used to have more than 60 databases around the world, and none of them correctly listed all product information, says Steve David, CIO and business-to-business officer for P&G. By building a single data warehouse, the company readied itself for future collaborative efforts and also expects to save $25 million a year. It has already saved as much as $5 million in staff costs by cutting the time required to collect product data and $10 million by reducing inventory. And it's reduced out-of-stocks at retailers by 10%.

For Wegman's, the UCCnet registry is the next step in an aggressive plan to move to a vendor-managed inventory system and a collaborative planning, forecasting, and replenishment strategy. Wegman's is testing ways to feed sales results of an item such as Dog Chow from its stores to Nestlé Purina, which could then track inventory and replenish shelves in time to keep it from going out of stock. The registry is the basis for replenishment planning with Nestlé Purina. "We now have the same data in our back-office systems they have in theirs, and there are no surprises between us," says Marianne Timmons, Wegman's business-to-business manager. "We don't have to second-guess the data quality."

Pfizer Consumer Health Care, a $5.5 billion-a-year division of New York pharmaceutical company Pfizer Inc., expects to finish posting its product data to the UCCnet registry this month. Pfizer's IT staff is using Haht Commerce Inc.'s Quick Connect for UCCnet, which gathers product information from disparate databases, aggregates it into a single record, and standardizes, verifies, and publishes it in the registry. In early testing, Pfizer found it gets new-product information to retailers in a day, rather than in the six weeks needed to complete the process manually.

Clare Knight, director of B-to-B information systems, says a lack of consistent, complete information about Pfizer's products has been a barrier to collaboration. "In an electronic world, you have to make sure you provide all that data and be consistent about what you do," he says, "and that has been a challenge." Once the UCCnet project is complete, Knight says, the company will be able to get more value out of the collaborative supply-chain tests it's running with retailers on the WorldWide Retail Exchange.

Dial Corp. is in the midst of a major customer-service and supply-chain initiative intended to help it collaborate with retailers on replenishment. A key part of the plan is building connections between Dial's demand-planning tools and the UCCnet registry. The Scottsdale, Ariz., soap and detergent maker is implementing demand-planning software tools from Prescient Systems Inc., which will collect information on sales of Dial products from private networks that retailers such as Target and Wal-Mart run. Ginger Beauchamp, Dial's project director for sales and operations planning, says her company is in the first stages of developing its Internet strategy, but she knows the Excel spreadsheets it has been using just won't cut it. "We're taking baby steps to learn the business processes we need to develop for automated replenishment, and we're working toward syncing up with customers," she says. Dial has selected enterprise application integration tools from SeeBeyond Technology Corp. to integrate its planning system with the UCCnet registry and to provide connectivity to more retailers and wholesalers.

Many in the industry blame the bankruptcy of Kmart Corp. in large measure on the company's failure to match the supply-chain management standard set by Wal-Mart and Target, which decided years ago that they couldn't wait for industry exchanges, standards bodies, and manufacturers to build the systems they need to do business electronically.

Wal-Mart, arguably the largest company in the world with more than 2,700 stores and $217 billion in revenue last year, gets a major competitive advantage from the efficiency of its electronic product information, ordering, supply-chain management, and delivery systems. Of course, Wal-Mart has the clout to get manufacturers into collaborative E-business, because it can represent 5% to 30% of a manufacturer's total business. Wal-Mart requires every manufacturer to manage its own in-store inventory and use EDI networks and its private collaborative trading hub, SupplierLink, to consolidate global purchasing. It brings 10,000 suppliers online to bid on contracts and communicate sales and inventory data. Wal-Mart also uses its networks to manage its supply chain and logistics.

West Marine Inc. thinks of itself as a mini Wal-Mart where collaborative supply chain is concerned. The $508 million marine-supplies retailer in Watsonville, Calif., manages more than 50,000 items from 500 vendors using an online procurement and supply-chain exchange hosted by SPS Commerce Inc., which connects to the UCCnet registry. Before it used SPS, West Marine would mail out 100,000 purchase orders each year. But the company could only match about half of its purchase orders to supplier invoices using manual methods. It couldn't catch a supplier that padded its bill by shipping items West Marine hadn't ordered, CIO David Schenk says. With the SPS system integrated with West Marine's replenishment and supply-chain planning tools from JDA Software Group Inc., the company automatically matches 93% of invoices to purchase orders. "And we're getting better," Schenk says.

Best Buy, in Eden Prairie, Minn., also hasn't waited for someone else to build the connectivity it needs to keep products on the shelves. "If you come to the store and it's not there twice, you're gone and you won't come back," says Richard Hartmann, IS leader for multichannel fulfillment systems. The electronics and music retailer requires suppliers to do business electronically, using either EDI or a private supplier portal. The portal, outsourced to eB2B Commerce Inc., handles XML transactions and lets suppliers use a browser to figure out what products need replenishing. Best Buy is in the final stages of deploying a system from merchandising software vendor Retek Inc. that will track products as they move from the company's 20 distribution centers to its 400 retail stores, monitor prices, and provide near-real-time updates on what's selling where. Sales information from the Retek apps feeds forecasting and replenishment tools from JDA Software and i2 Technologies Inc. Best Buy gives the sales and forecasting information to its suppliers.

Once its internal replenishment systems are in order, Best Buy plans to integrate with the WorldWide Retail Exchange, which it will use for its catalogs of manufacturers' products and to connect to the UCCnet registry. "Really cool stuff will come out of the exchange, and we want to take advantage of that," Hartmann says. "But our replenishment operation is so important to us that we need to own it internally and make it a major differentiator for us."

West Marine and Best Buy, like their cousins Wal-Mart and Target, realize that automating their supply chains is a necessity. Many think other manufacturers and retailers will soon do the same, thanks to advances such as the UCCnet registry. Wal-Mart's success--and Kmart's bankruptcy filing--show that for some companies, it might be a matter of survival.

Illustration by Joyce Hesselberth
Photo by Cathy Lander-Goldberg

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