PARTNER OR PERISH
TOUGH TIMES AT RETAIL AND NEW CONSUMER POWER ARE ACCELERATING THE NEED FOR STRATEGIC ALLIANCES.
Byline: Robin Lewis
NEW YORK — Manufacturers and retailers agree on the need for strategic alliances, yet they cite a slow pace in getting there.
In a recent survey conducted for Infotracs, executives said they had travelled just 10 to 30 percent of the way on their road toward strategic alliances. This sluggish performance is measured against a start time of about 20 years ago, when retail-vendor partnerships were first discussed.
Although alliances are difficult to form and sustain, the slow pace is giving way to a sense of urgency. Decelerating growth, consolidation and increasing business failures have sparked a new understanding of alliances as a necessity rather than just an esoteric concept.
Essentially, it now takes the entire supply chain working as a team to serve the consumers’ mounting demands. In the past, better and cheaper products were enough to make the sale. Now, consumers demand quicker delivery, convenience, a fun experience and availability, anytime, all the time. Not one manufacturer or retailer operating alone can provide those demands. It takes the power of the entire supply chain integrated through total ownership, control or through alliances, to deliver this kind of total value.
Obviously, ownership or control of the supply chain is most desirable. The Gap and Wal-Mart are examples. They control their value equation, and do not have to deal with compromise. This explains the increase in suppliers moving into retailing, and retailers doing their own sourcing.
Those remaining will form alliances. Any business that does not own or control, or does not partner in a supply chain, will merely be a controlled resource.
So, as the painful forces of a mature, shrinking and consolidating industry continue to bestow more power on the consumer, three strategic requirements will become obvious:
1) Survival will require a total focus on giving the consumer what they want.
2) To provide this will require the teamwork of the entire supply chain.
3) To be a real winner requires the executional excellence of both.
Thus, the speed to perfecting partnerships will accelerate.
Is It a “One-Way Retail Street?”
Nobody argues the need for the idealized alliance. However, many manufacturers, particularly the smaller ones, scoff at the notion that true partnerships are possible. They point to the tremendous power held by major retailers, and that to partner with them becomes a lopsided affair. In short, the retailers increasingly place a larger part of the marketing, servicing and cost burdens on the manufacturer.
While the giant manufacturers can more easily absorb these costs, the smaller suppliers cannot. The large are also strong enough, through their brands and links to the consumer, to negotiate and move closer to an alliance and a longer-term shared vision. The small cannot, and therefore have three options:
1) They must find a product or market niche that is minimally being serviced, and for which they have superior skills for creating a differentiated product.
2) They must pursue relationships with smaller retailers.
3) They can integrate forward and open their own retail business.
The criticisms aimed at the large retailers are not new. However, these large retailers will counter by pointing to the pressure for higher profits, greater productivity and growth. They will add that to achieve these goals requires strategies that typically can be serviced only by equally large vendors.
Thus, in the department store tier, the renowned “matrix” system was born. As a result, and with disdain, they will also admit to a growing lack of fashion and newness. The recent designer brand phenomenon in the department stores has been fortuitous, but the longer-term challenge of pursuing the two opposing strategies of maximum productivity and reduced risk, versus fashion, will continue. This situation is not as critical in the lower tiers, which are mainly driven by more-basic and replenishable apparel. However, because they are volume-driven businesses, they too must pursue relationships with giant suppliers.
All of this does not mean that alliances are only for the big. The consumer is just as demanding of large and small merchants and vendors. Therefore, both supply chains will have to be equally integrated or allied.
However, the execution of the big and small supply chains will be different. The large will require more sophisticated technology, systems and processes for delivering large volumes continuously and efficiently. The small will be more intimately involved with the consumer, mostly on a local level, and provide a more differentiated and fashionable product.
From Consumer Power To Consumer Partner
To form successful alliances, either big or small, first requires a change in mind-set. The consumer has traditionally been placed both at the end and outside the supply chain. They wield their power of choice, in an oversaturated market, and elect the winners and losers.
To gain equivalent power, the supplier/retail partners must move the consumer from outside of the supply chain and make them a third partner on the inside. To succeed in the future, the consumer will be considered and consulted on all activities, from product creation to delivery. Consumer power will be redefined as consumer partner.
The alliance becomes a triumvirate, with the retailer and supplier partnering to reduce costs and time, and to add value for the third partner — the consumer. In turn, the consumer, now involved in all those decisions, acts as a good partner by purchasing more.
One of our survey findings among retailers and manufacturers seems to conflict with this suggestion for increasing focus on the consumer. When asked for their primary reasons for entering into alliances, retailers ranked the creation of marketing synergism to the consumer third, while manufacturers ranked it fifth.
Balanced Sharing Of Resources, Capabilities and Risks
While changing the perception of consumer power to consumer partner is a major mind-set change, a second major departure from the traditional supply chain is the notion of a balanced sharing of resources, capabilities and risks. The word balanced is important to highlight the fact that each partners’ role will not be equal in all activities. Each will have different capabilities and resources that should be complementary. They will also take on different risks.
Understanding this balanced sharing is critical to a successful alliance. Winning companies know their strengths and will capitalize on them. Conversely, they are open to the idea of letting partners take on tasks they have traditionally done, but which they believe the partner can do better. They will choose partners whose strengths and weaknesses are complementary and that can help them create a relationship that results in better consumer value.
Trust Is Imperative
Inherent in sharing is trust. Without it, alliances cannot exist. Yet, it is one of the most difficult aspects of forming these partnerships, requiring one of the biggest changes from the adversarial, isolated and closely guarded traditional relationships. Now, retailers must be willing to relinquish information they used to keep to themselves, as well as control over some of their operations. Vendors must be willing to accept more responsibility for the distribution and management of their products all the way through the point of sale.
Only by sharing information can they both know what their consumer partner wants. And only by sharing control, allowing each to do what they do best, can they deliver what their consumer partner wants. This requires a deep level of trust on both sides.
How Does It Work?
Alliances start with a commitment at the very top of each organization to shared goals and strategies. To achieve these, a mutual trust is implicit, along with the sharing of information, responsibility and control.
Periodic meetings are scheduled for the management teams of each to review progress, adjust tactical issues and make sure the plans set down are still on track. These are usually quarterly meetings, attended by teams consisting of merchandise, operations, MIS and marketing people.
Once a year, the top managements, including ceo’s, get together to review their longer-term vision, goals and strategies. Short-term or tactical issues will only be discussed if they effect the strategic goals. A major departure from traditional relationships is a commitment to shared growth and profit goals, which also drives a longer-term merchandise commitment from the retailer to the supplier. This eliminates the season-to-season risks, provides continuity and paves the way for a constant flow of fresh merchandise.
Some of the key activities that will be jointly planned and executed are:
Demand flow versus forecasting: The consumer partner triggers all the activities in the chain by purchasing something. The demand flow process then develops the exact product, or one like it, for immediate replacement. This concept replaces the old forecasting method of guessing what and how much consumers want next season, making it, warehousing it and hoping it will sell. It provides a seasonless and seamless flow of goods, based on consumer takeout and demand, not forecasting.
Consumer research and tracking: This will be done on a continuous basis at the micro level and will drive continual merchandising and mix planning by door.
Continuous cycles: Product development cycles will be shorter and closer to seasons, with smaller, fresher, more updated lines delivered sooner and more frequently.
Dynamic model stock mix: There will be a joint agreement to continually review and adjust a “model stock mix,” thus making it dynamic, changing as consumers take out and demand change. This will involve consumer take-out tracking systems, as well as real consumer testing of the newer or more fashion-driven parts of the mix.
Flexible manufacturing: Systems such as “modular manufacturing” are able to change immediately to adapt to demand.
Information systems: Information systems such as EDI will trigger immediate replenishment of goods and provide intelligence for developing future lines. Smaller businesses will accomplish the same thing, manually, if necessary.
Seamless distribution: There will be agreement on a distribution process that will move product from point of origination to consumption in the most efficient, quickest and continuous manner. This suggests that goods should be delivered from the plant to the selling floor.
Mutual sales and profitability goals: As stated, this is a major change in retailers and suppliers doing business together. It means they set these goals and agree to review them periodically for adjustments. This eliminates the idea that suppliers must “guarantee” a retailer’s profits.
“The War Is in the Store:” A major focus will be placed on the activities of in-store product presentation and information. The consumer has less time, is smarter and more demanding. There are more products. There is less sales help. Therefore, each product must scream out to the consumer that it is there and why the consumer should buy it. The label, packaging and tagging must be superior. Sales training must be continuous. Shelf appearance, housekeeping, displays and product information must be clear and exciting. Entertainment and in-store shops are competitive advantages.
Positioning and image creation: Higher profits, differentiation and customer loyalty can be achieved through proper positioning and image creation. Therefore, the partners will agree to share in the planning and execution of each of their parts to make this happen. With the glut of brands, it’s imperative to create a distinctive image and niche in the consumer’s mind. This provides an emotional benefit as well as the real benefits of credible value, quality and reduced shopping and choice time.
Traditional versus New Alliance Characteristics
Individual goals (internal).
Independently defined roles.
Sequential processes and activities.
Activities performed by individual companies.
Rewards competed for.
Penalties absorbed by supplier.
Short-term buy/sell process.
Buy decisions based on price.
Information is proprietary.
Shared common goals (consumer).
Joint performance tracking.
Supply chain definitions.
Partner with core competency performs the activity.
Penalties or losses shared.
Long-term strategic commitments.
Buy decision based on mutual goals.
Few select suppliers.
Information is shared.