May 2, 2005, 12:00 AM

It`s in the cards

Germany’s METRO shows how collaboration changesthe supply chain game

When dealing with suppliers like Kimberly-Clark, Colgate-Palmolive and Procter & Gamble, even a large retailer like Germany`s METRO Group must know how to play a good game of retail industry poker to get the best terms in price, product and delivery. "We`re trying to buy as low as possible and suppliers are trying to sell as high as possible," says Axel Hopp, METRO Group`s head of corporate information management.

But in developing web-based systems of sharing sales forecast and production information, METRO is setting the negotiating table for a more open back-and-forth that helps to change the rules of the game. "Changing people`s attitudes and mindsets is our main challenge," Hopp says. "But once people see the potential to get more involved in collaboration and get more positive about it, buyers and account managers can play a friendlier game of poker."

Right products, right stores

Over the past three years, Dusseldorf-based METRO has leveraged collaborative planning, forecasting and replenishment, or CPFR, as a central part of multiple web-based processes with its trading partners to improve its record of meeting one of the long-time goals of all retailers: getting the right products into the right stores when customers are most likely to buy them.

Retailers move much of their products around planned promotions, but they often miss opportunities to sell large volumes at the best price because of ineffective communications with suppliers that result in insufficient, untimely or missed deliveries. At METRO, CPFR is proving to be a key ingredient in its efforts to get sufficient amounts of promoted products into the METRO Cash and Carry chain of wholesale grocery stores so as not to disappoint customers, Hopp says. The chain`s suppliers that participate in CPFR have shown a 99% delivery rate of planned shipments, compared to 97.5% for non-CPFR partners, he notes.

Although the difference of 1.5 percentage points may not seem like much, it makes a big difference in overall sales, profit margins and in customer satisfaction levels, Hopp says, adding that Cash and Carry`s professional wholesale customers tend to be more demanding than retail shoppers. "Cash and Carry customers get angry if they go to a store to buy promotions and the products aren`t there," he says.

Increases in delivery rates usually coincide with a reduction in out-of-stocks, resulting in increased sales. "If an item that a customer wants to buy is not on the shelf, we can assume that the 50-50 rule applies--50% of customers will buy a different item, but 50% will shop for it in a different store," Hopp says. By increasing the delivery rate by 1.5 percentage points, METRO is able to recoup the 0.75% of items that would have been lost to other stores. Because the recouped sales don`t come with additional costs like marketing, he adds, they contribute more to profit margins. And because promotions are expected to generate store traffic, METRO expects the increased in-stock levels to keep more customers in the store making additional purchases. "There are a lot of soft benefits," Hopp says.

Bringing in other chains

By the end of 2006, METRO expects to have rolled out the benefits of CPFR to its other retail chains, where partner collaboration will play a crucial role in assuring adequate production and delivery of products whose demand among consumers can be extremely volatile based on promotions.

CPFR has long been touted as a potential boon for retailers, who stand to gain sales, profit margins and happier customers while reducing sourcing costs and improving relationships with suppliers, experts say. But while no one argues with the value of those benefits, few companies have made CPFR a reality. "A lot of people talk CPFR, but not a lot of people do it," says Paula Rosenblum, director of retail research for Aberdeen Group Inc.

Moreover, many retailers that say they`re practicing CPFR are utilizing only the most basic parts of it, leaving much of CPFR`s value still far from reach. The preliminary results of an Aberdeen study on the use of CPFR among retailers found that 50% of 30 respondents across several retail segments and company sizes were using CPFR to collaborate with suppliers. But nearly half of the respondents said they were collaborating only on a transactional basis--by electronically sharing purchase orders, advance ship notices and invoices--leaving them outside the true benefits of collaboration.

"The object of the game is to go from being transactional to being strategic," Rosenblum says. "You have to move forward from a transactional basis to where the retailer and its suppliers are working together to assure they`ll meet customer demand."

As METRO and its suppliers have found, going beyond sharing transactional data to also share sales forecasts and production schedules can provide the kind of visibility that CPFR promises for lining up the right amount of products to suit each planned merchandise roll-out and promotion.

Tiered system

METRO is known as a progressive company, operating at the head of the curve with cutting-edge technology and methods. Last fall, for instance, it started using an RFID supply chain with 20 suppliers as part of the METRO Group Future Store Initiative. That system lets managers track over the web the shipment status of pallets marked with RFID tags. METRO expects to have another 80 suppliers on board with the system this year, then 300 by January.

But even METRO did not dive completely into CPFR all at once or overstate its capability and benefits. Instead, it has deployed CPFR as a key part of a multi-faceted and tiered system of collaboration that provides for different levels of collaboration with suppliers based on their standing with any particular product.

Its tiered system is designed to both make participation by its universe of suppliers more democratic and provide METRO with a broader range of sourcing alternatives in case of unexpected disruptions in the flow of goods into its distribution centers and stores.

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