Managing products at the shelf level enables retailers to get closer to consumers
By Sweeni Ponoth and Mohit Juneja
Driven by tough economic conditions, heightened competition and pressures up and down their supply chains, world-class retailers and branded manufacturers are adopting a proven and logical strategy.
They're getting even closer to consumers.
Retail organizations have traditionally worked closely with branded manufacturers, third-party logistics firms and other partners on broad business issues and to tackle specific distribution challenges. But in today's difficult retail environment, astute managers are taking collaboration to a new, more focused and more effective level.
Shelf-centered collaboration is the next wave in retail optimization (“Partners at the Point of Sale,” strategy+business, August 29, 2007). To catch it, retailers must recognize the need for close shelf-oriented cooperation, and they must understand the integrated capabilities required to deploy and manage a shelf-centered collaboration program. Here, we offer a primer on the rationale, requirements and advantages of shelf-centered collaboration.
Why focus on the shelf?
Manufacturers and sellers are focusing more intently on how they manage product flow at the retail shelf level, driven by a number of powerful market trends including the rise of discounters like Wal-Mart, higher consumer price sensitivity in the current economic environment, increased commoditization of products and a corresponding decrease in brand loyalty, particularly in North American and European markets.
There are two moments of truth for any consumer: the purchase of a product and the use of that product. For a commodity product, the consumer expects instant gratification in the purchase process—so shelf availability and price positioning is critical. The goal of the manufacturer and retailer should be efficient, low-cost fulfillment of this consumer demand. It has also been observed that, in the new world of marketing complexity, more consumers hold off their final purchase decision until they're in a store ("The consumer decision journey," McKinsey Quarterly, June 2009) Up to 40 percent of them change their minds because of something they see, learn or do in the store—for example, packaging, placement, or interactions with salespeople.
The answer for many market-leading organizations is a tightly integrated collaborative effort focused intently on the retail shelf. Shelf-centered collaboration analyzes shelf-level data to drive product availability and joint marketing programs. It utilizes customized assortments based on customer demographics, store types, events and periodicity, and leverages a wider variety of supply chain fulfillment modes. By leveraging analytics and alerts, shelf-centered collaboration supports a faster and more effective supply chain response. Also, by analyzing fast-changing consumer trends, branded manufacturers are able to provide a rapid product response.
This closer and more collaborative shelf-level approach enables branded manufacturers and retailers to improve their performance, ensuring they produce and deliver the right product at the right place, price and time.
Collaboration-based evolution
Shelf-centered collaboration represents a logical next step in the evolution of supply chain integration. Driven by consumer expectations and business requirements, the collaborative partnership between manufacturer and retailers has advanced through successive levels of maturity, with each of those progressive advances yielding more granular and integrated performance.
A review of this collaboration-based evolution underscores the need for and requirements of shelf-centered collaboration.
Account-level Collaboration. Manufacturers first began collaborating with retailers at the account level, where sell-in data (into the retailer's enterprise) was used for forecasting and replenishment. At the request of vendors, some retailers started sharing aggregated sales data for refining the forecast. Account-level collaboration spurred the advent of Collaborative Planning, Forecasting and Replenishment (CPFR®), a concept that supports a joint system of shared information among retailers and suppliers.
Distribution-center Collaboration. Having more tightly integrated at the account level, the industry next focused on closer collaboration at the retail distribution-center level. DC-level collaboration leveraged point-of-sale (POS) data for forecasting and replenishment and shared promotional calendars and price moves. This approach took collaborative efficiencies an important step closer to the consumer by enhancing vendor-managed inventory (VMI) and co-managed inventory practices at the retail distribution center.
Store-level Collaboration. Since retailers were now freely sharing store-level POS data, the next logical step was to leverage this information to drive an optimal replenishment plan and in many cases, "direct-to-store" delivery. In addition to store POS data, analysis such as store grading, wave planning, presentation stock planning and product ranging would influence this collaboration.
Shelf-centered Collaboration. The next and currently emerging stage of retail supply chain integration is shelf-centered collaboration. As its name suggests, this approach extends the power and efficiencies of supply chain collaboration to the retail shelf. This process starts at the pre-season stage—before the product even makes it to the shelf. Using demographics, store traits (e.g. square footage, location, shelf space) and product attributes, the vendor will work with the retailer to customize the nationwide portfolio of products specifically for that store (i.e. the store planogram) and also determine the quantity of presentation units to hold at that store. Once in-season, ideally, store displays and shelf mixes would change during the week to accommodate the varying schedules of commuters, stay-at-home parents, young adults and weekend shoppers.
At a minimum, product profitability should be constantly monitored and, in the event of unsatisfactory trends, the product must be de-ranged from the selected stores. Presentation stock information (in addition to information on backstock) should be regularly shared with the vendor to ensure that key products are replenished as quickly as possible. Forward-looking retailers and branded manufacturers are now beginning to use shelf-centered collaboration to improve supply chain performance, to respond more quickly to consumer trends and to open new revenue and profit opportunities.
Basket-based Collaboration. Looking into the future, the next logical step in retail integration will focus on collaboration at the level of the consumer basket, or the shopping cart. Basket-based collaboration will require the capture and analysis of data from consumer loyalty programs, which collect information on consumer shopping patterns. A collaborative approach based on basket information can enable retailers to more quickly and accurately identify and understand consumer shopping patterns, and to accordingly adjust store layouts, product assortments, store marketing programs and supply chain distribution activities in conjunction with branded manufacturers.
Enabling shelf-centered collaboration
Retail organizations and branded manufacturers can now deploy a range of proven tools to build and support a shelf-centered collaboration program. Figure 1 highlights the shelf-centered collaboration capabilities that are required to successfully manage a product through its lifecycle in the retail channel.
Understanding POS is important. Translating the insights gained through POS analytics is even more critical to determining changes in forecast, making adjustments due to promotional activity and performing a quick root-cause analysis of why sales are trending up or trending down. Driving intelligent replenishment on the basis of what happens at the shelf is critical. Store monitoring and exception reporting systems can give manufacturers and their retail partners precise and highly granular analysis of their shelf-focused collaborative efforts. Those tracking and reporting tools provide insights into item and store segmentations, inventory policies and rebalancing, in-stock exceptions, weeks of supply at the store and root causes.
On-demand analytics can provide both high-level roll-up and granular drill-down capabilities for POS inventory and sell-through, as well as retailer forecasting. Supply and demand analytics can provide business-specific insights, including reports on POS activity and error rates, seasonality, forecasting, promotions effectiveness, purchase planning, inventory positions, fill rates and collaborative replenishment. Syndicated data for category sales, price positions and demographics can help fine-tune ranging and pricing.
Of course, the ability of organizations to collaborate at the shelf level depends heavily on the timeliness, granularity and quality of available data. In many situations, POS and inventory data represent the best information available on the status and flow of products across a given shelf.
While POS and inventory data are by definition store-level information, retailers and vendors are using high-level analytics, alerts and other methods to deduce shelf-level realities. Based on those POS-based insights, retail partners are able to formulate more precise shelf-level collaborative strategies and tactics.
Studies show that today some 25 percent of fast-moving consumer goods are delivered to retail shelves via the direct store delivery (DSD) mode. Under the DSD approach, retailers assign specific shelf space to a vendor, who is responsible for monitoring and replenishing those shelves as needed. The vendor sends personnel to the store on a regular basis to gather shelf-level data on the movement and sale of those products.
In a DSD model, a technology partner might provide forecasting, distribution management and other support at a distribution center (DC) or a mixing center. In a variation on traditional VMI, the vendor then manages the heavy manual aspects of gathering shelf-level data, formulating specific promotional plans and handling replenishment in a DSD model.
Figure 1: Retail organizations can apply shelf-centered collaboration throughout the product lifecycle.
Strategic dashboards enable organizations to compare various metrics, such as POS by category or retailer, product performance versus forecast or other key performance indicators. A robust solution will allow any and all of these reports to be exported into Excel, PDF, HTML and other formats for convenient offline viewing.
Cross-industry implications
Shelf-centered collaboration delivers capabilities, for both vendors and retailers across key retail segments, to help alleviate the financial impact of industry-specific challenges. Figure 3 highlights the relative magnitude of some key challenges by industry. Companies facing key challenges that are at undesirable levels can achieve measurable benefits with shelf-centered collaboration.
Challenges/Industry |
Consumer Electronics |
Apparel and Footwear |
Fast-moving Consumer Goods |
Product Lifecycle |
SHORT |
MEDIUM |
LONG |
Price Erosion |
SEVERE |
NORMAL |
NORMAL |
Product Proliferation |
MEDIUM |
HIGH |
HIGH |
Competition from Private Label (Relative) |
MEDIUM |
LOW |
HIGH |
Brand loyalty |
LOW |
HIGH |
MEDIUM |
Reliance on Promotions |
HIGH |
LOW |
MEDIUM |
Figure 2: The relative financial impact of common challenges by industry.
As an example, let’s considering the challenge related to heavy use of promotions in the consumer electronics industry. If not properly supported, promotions can cause premature stockouts, leading to lost sales or excess inventory in the wrong place, which can then translate into high price protection and/or high markdown expenses. This is undesirable, but characteristic of the industry. These problems can be mitigated by the use of key elements of shelf-centered collaboration, such as POS-based forecasting, promotion analysis, continuous use of back-stock analysis, store performance monitoring and inventory rebalancing tied together with frequent collaboration
Branded manufacturers and retailers can leverage shelf-centered collaboration to more efficiently manage replenishment at the store level, to segment stores for more logical assortment grouping and to shape demand at and below the store level. Retailers can use shelf-centered collaboration to better manage seasonal products and promotions. Retail organizations can use it to identify appropriate product bundles, to link service levels to appropriate product types and to manage store and shelf layouts and cross-vendor promotions.
Retailers and their suppliers can use the shelf-centered collaboration approach to manage inventories and to analyze the rate of sale during product launches and end-of-life activities. It also allows organizations in these industry sectors to utilize the most effective mode of replenishment, including DSD, VMI and sell-in.
The financial impact of shelf-centered collaboration
Shelf-centered collaboration can directly impact revenue, margin and free cash flow, as seen in Figure 3, which is based on a customer case study. Consider a manufacturer selling a $1,000 product with annual sales of 500,000 units. The product lifecycle is associated with two price drops of 10 percent each and an end-of-life markdown of 15 percent. The cost of capital is 8 percent. Shelf-centered collaboration increased in-stock availability from 85 percent to 95 percent and drove down the inventory needed in the channel from 12 weeks to 4 weeks. The impact of price drops is significantly lower due to a focus on understanding shelf-level demand.
Figure 3: How shelf-centered collaboration can directly impact revenue, margin and free cash flow.
What's next?
As previously noted, successful retailers constantly seek more refined and effective ways to manage their supply chains, stores and shelves. The next logical step in that progression is market basket-based collaboration, and best-in-class companies are now working to understand and position themselves to utilize this emerging approach.
Market basket analysis uses a number of sophisticated tools that enable retailers and their partners to better predict consumer demand. Affinity analysis can be used to better understand the impact of market promotions. By identifying driver items, fast-moving consumer goods companies and other retailers can categorize items for higher service levels and formulate and analyze localized marketing campaigns.
Retailers can use market basket analysis to design better replenishment strategies, including ones that indicate when to stock particular items, especially those with short shelf lives. Market basket analysis can also be used to design more intelligent store assortments and planograms, using affinity analysis to more closely group logical items within the store, and using store-to-store basket-level comparisons to create store-appropriate assortments.
While shelf-centered collaboration tends to be reactive in nature and uses shelf-level data, analytics and alerts, retailers can wield market basket collaboration to take a more proactive approach to shaping future sales—maximizing the impact of marketing spend and more quickly and effectively meeting consumer demand.
Leveraging shelf-centered collaboration
Organizations across the retail spectrum can benefit from shelf-centered collaboration.
By applying advanced analytics at the point of sale, shelf-centered collaboration increases in-stocks, thus improving customer satisfaction and brand image. Retailers can leverage this approach to shape demand, generating consumer interest, enthusiasm and willingness to spend.
Shelf-centered collaboration enables retailers to optimize product mix, thereby reducing the need for markdowns and price protection. Better monitoring reduces the opportunity for lost sales, supporting stronger growth in both market share and revenue. A streamlined inventory distribution system improves cash flow and profit margins.
Shelf-centered collaboration forces retailers, manufacturers and their supply chain partners to focus on the critical nexus between buyer and seller—the retail shelf. Companies should think of shelf-centered collaboration as a prescription for getting closer to consumers. In today's tough business environment, it may be just what the doctor ordered.
Sweeni Ponoth is director, services at i2. Mohit Juneja is
senior manager, i2 consulting.
