Efficient Consumer Response (ECR) Strategy
Efficient Consumer Response (ECR)
Efficient Consumer Response (ECR) aims to improve channel efficiency through process simplification, standardization, and streamlining, as well as reducing costs and sharing information between retailers and their suppliers.
ECR Definitions
There are several definitions for ECR. Various authors have described ECR as:
- A management innovation
- A management or business strategy
- A process
- A tool
- A practice
- A management philosophy
ECR Strategies
ECR involves technologies, methods, and processes optimized through four key strategies:
- Efficient Product Replenishment
- Efficient Product Assortment
- Efficient Product Promotion
- Efficient Product Introduction
These strategies are supported by two key processes:
- Category Management
- Continuous Product Replenishment
They also utilize technologies and methods such as bar codes/scanners, electronic data interchange (EDI), computer-aided ordering (CAO), cross-docking, direct store delivery, and activity-based costing.
ECR in Supermarkets
ECR is a strategy used mainly in supermarkets where distributors and suppliers collaborate to provide greater consumer value. It’s a voluntary movement based on change and continuous improvement, affecting the entire production and distribution chain of mass-consumption products.
It aims to establish a consistent flow of information and products, including bidirectional logistics in the supply chain, while maintaining low costs and adequate supplies.
ECR Origins and Integration
ECR emerged in the U.S. in the early 1990s as a business strategy where suppliers and distributors/retailers work integratively to improve the efficiency (productivity) of the logistics chain, delivering products with higher added value to the final consumer.
The central idea is to integrate all processes along the chain to respond to real consumer demand.
ECR Key Points
ECR is founded on these key points:
- Efficient replacements
- Continuous goods (Efficient Replenishment – ER)
It’s a tool aiming for quick and adequate product replenishment on shelves.
ECR and Information Flow
Consumer purchasing information, collected by bar code readers at check-outs, is organized and passed to other chain elements through EDI (Electronic Data Interchange).
EDI, along with bar codes, optical readers, computers, and information systems, forms the basis for other ECR components.
ECR Cost Management
Another component involves managing costs using ABC (Activity Based Costing). This tool analyzes the costs of each operation, both internal and those interfacing with suppliers. ABC identifies the exact cost of activities, enabling cost reduction or elimination of non-value-adding activities.
If a company doesn’t know its costs, how will it know where it earns?
ECR and Category Management (CM)
Category Management (CM) is a collaborative process between manufacturers and distributors to manage common product categories as strategic business units. CM is responsible for integral decisions about product mix, inventory levels, store space allocation, promotions, and purchasing.
ECR Strategies
Efficient Product Replenishment
This strategy optimizes the time and cost of replenishment through automation. Continuous replenishment and Category Management are fundamental processes. Information management (obtained from product barcodes), CAO (Computer Aided Application) for automatic order generation, EDI for data transmission, and ABC for cost allocation are also necessary.
With this strategy, final product prices reach retail shelves 4.1% cheaper for the final consumer due to cost reduction.
Efficient Product Assortment
This strategy optimizes inventory and store space, increasing sales volume and inventory turnover. Category Management is the main process, optimizing store and shelf space, improving sales per square meter.
Adopting efficient assortment is estimated to reduce costs, resulting in a 1.5% reduction in final consumer product prices.
Efficient Product Promotion
This strategy maximizes system efficiency in promoting sales to dealers and customers by redirecting promotions from providers and providing subsidies to retailers for sales activities directly linked to consumer purchasing behavior.
Simplified promotional agreements negotiate a continuous discount. Efficient product promotion is estimated to reduce product prices on retail shelves by 4.3% due to inventory reduction and improved efficiency in storage, transport, production, and administration costs.
Efficient Product Introduction
This strategy maximizes the efficiency of new product development and introduction. It optimizes investments in research, development, and product launch, reducing the possibility of new product failure and improving the performance of introduced products.
This strategy is estimated to result in a 0.9% reduction in product prices for the final consumer.
ECR Processes
Category Management (CM)
CM involves close communication and collaboration between industry and retail for better definition of the product mix of a particular category in a supermarket gondola. The goal is to limit and simplify product range (limited range) while maintaining an excellent assortment. Retailers replace many products of the same category with fewer, higher-demand products.
A significant aspect of ECR is the provider’s role in assisting retailers with category management, considering predefined goals and market trends. The efficiency of this management is directly linked to customer satisfaction—customers easily find desired products, benefiting both the customer and the retailer.
Continuous Replenishment Program (CRP)
Working with commercial allies, CRP operates based on information from actual sales compared to previously agreed-upon forecast demand to make service more efficient, cheaper, and faster. It can be coordinated by the industry or the retailer.
Benefits include:
- Increased product availability
- Decreased inventories
- Reduced logistics and administrative transport costs
- Reduced product handling, errors, and rework
- Reduced order management costs and freed time for buyers and sellers to focus on higher value-added activities
ECR Technologies and Methods
Barcode/Scanner
Barcodes provide important product and inventory information, assisting administrators in defining orders (what and how much to buy).
Electronic Data Interchange (EDI)
EDI is an internationally established term for the document exchange process between different companies’ information systems. EDI enables companies to exchange data on ordering products, advising on receipt of goods, sending invoices electronically, informing inventory positions, listing payments due, etc.
Computer-Aided Ordering (CAO)
CAO is a distributor-operated system that automatically generates orders when sales reach a predetermined stock level, agreed upon in advance between retailers and suppliers.
Direct Store Delivery (DSD)
DSD is a distribution method where goods are delivered directly to stores without going through retailer or wholesaler warehouses. Even networks with distribution centers use DSD for products with high temporal specificity (perishable, high-turnover, delicate products, or specific promotions).
Cross-Docking
Similar to DSD, but goods pass through the retailer or wholesaler’s central distribution. Goods are not stored; they are simply redirected to retail stores from the distribution center.
Activity-Based Costing (ABC)
ABC is a costing method that reduces distortions caused by arbitrary indirect cost allocation. It assists in decision-making by identifying the costs of each activity, enabling cost reduction or elimination of non-value-adding activities.
Distribution Channels
Distribution Channel Concepts
Inbound logistics (supply) refers to the manufacturing process of supplying raw materials and components. Outbound logistics (physical distribution) refers to the segment of product logistics that moves and controls the finished product from manufacture to the final consumer. These concepts are economically important and associated with new industrial unit installations.
Distribution Channel Endpoint
The endpoint of physical distribution is the retail store. In some cases, goods are delivered directly to the consumer. Those responsible for operating physical distribution use predominantly material elements: warehouses, transport vehicles, inventories, loading/unloading equipment, etc.
Marketing and Sales Perspective
Marketing and sales focus on the supply chain’s commercialization aspects. Most retail products reach consumers through intermediaries: the manufacturer, wholesaler or distributor, retailer, and possibly other intermediaries.
Distribution Channel Definition
A distribution channel represents the sequence of organizations transferring product possession from manufacturer to final consumer. It constitutes a set of interdependent organizations involved in making a product or service available for use or consumption.
Physical Distribution and Channels
There’s a close relationship between physical product distribution and distribution channels. A company first defines its distribution channel, then defines its physical product distribution.
Channel Stability
Once established, distribution channels are difficult to change because they involve other companies, agents, and trade agreements.
Evolution of Distribution Forms
Why are there intermediaries in product commercialization? Could retailers produce the products they sell? Retailers offer consumers a broad market variety. Dedications to a large variety of product production would require exceptional financial resources and force companies to act outside their core competence. A common approach is for large retailers to commission the manufacture of products with their own brands and specifications.
Why isn’t the manufacturing company responsible for all distribution channel functions, including retail sales? If the manufacturer were responsible, it would not be economically productive to achieve sales volume to justify premises and sales teams. The company would be forced to market competitors’ products, and would need smaller stores offering only its own products—not viable and not in consumers’ interests.
Industry gains efficiency by concentrating on its core competence. Each business type achieves higher returns when concentrating investments in its main activity. The use of intermediaries in the supply chain is justified by its greater efficiency in placing products on the market.
Changes in Distribution Channel Structures
Companies’ distribution channel structures have changed substantially in recent decades due to increased market competition, greater consumer focus, increased information technology use, greater demand diversification, and faster, more reliable physical distribution.
Typical Distribution Channels
Typical distribution channels include:
- Manufacturer directly supplies retail stores.
- Manufacturer supplies its own warehouses/distribution centers, then supplies retail stores.
- Manufacturer supplies retailer distribution centers, which then supply stores.
- Manufacturer supplies wholesaler/distributor warehouses, which then supply stores.
- Manufacturer distributes to logistics operator distribution centers, which then deliver to retail stores.
- Manufacturer delivers directly to the final consumer household using mail or courier service (internet, phone, fax, catalog sales).
Distribution Channel Purposes
Distribution channels ensure quick product availability in priority market segments, maximize product sales potential, and seek cooperation among supply chain participants regarding distribution-related factors. They ensure predetermined logistics service levels, fast information flow, and integrated, permanent cost reduction through partnerships.
Distribution Channel Functions
Distribution channel functions include:
- Generating or inducing demand for products and services.
- Marketing products and services to meet demand.
- Providing/assisting with after-sales services.
- Sharing information along the chain, including consumer feedback valuable to manufacturers and retailers.
Distribution Channel Length
This relates to the number of intermediate levels from manufacturing to the final consumer. Companies selling “door-to-door” (manufacturer to seller) have a zero-level channel (e.g., Avon). Large retailers buying directly from manufacturers have a one-level channel. When sales go through retail outlets and wholesalers, it’s a two-level channel.
Trends in Distribution Channels
The roles of some supply chain intermediaries (wholesalers and distributors) are being reviewed. Their participation is threatened in many commerce types. New channel forms are emerging, and indirect channels are becoming shorter. Changes aim to increase final consumer value, leveraging technological and market changes. Consumer information helps determine the best distribution channel. The focus is on distribution channel functions, not intermediaries themselves.
Choosing a distribution channel is not done at the end of business planning; it’s part of the firm’s competitive strategy. Supplier relationship management is key.