Efficient Consumer Response and Supplier Performance

Sequenz C 2-5 Efficient Consumer Response and Supplier Performance Daniel Corsten, Universitä t St. Gallen, daniel.corsten@unisg.ch 1 Introduction and Research Question In 1992, U.S. retailers and branded manufacturers in the fast-moving consumer goods industry launched the Efficient Consumer Response (ECR) initiative. They were inspired by the Quick Response movement in the apparel and garment industry that had shown that significant savings could be achieved by streamlining the supply chain (Kahn and MacAlister 1997, Iyer and Bergen 1997). A study by Kurt Salmon (1993), a management consultancy, claimed that by changing from adversarial to collaborative business practices the dry grocery chain could reduce lead time and associated total supply chain inventory from 104 to 61 days from the packing line to the store shelf. Moreover, it estimated that around 10.8% total savings on retail price could be achieved for the whole industry, projected at U.S. $ 30 billion (Kurt Salmon Associates 1993). The manufacturers were calculated to receive 54% and the distributors 46% of these savings. In Europe, a comprehensive value chain analysis revealed a total saving potential of up to 5.7% of retail price, of which 4.8% were savings on operating cost in joint marketing and supply chain activities and 0.9% on total inventory. In currency these savings translated to up to U.S. $ 33 billion (ECR Europe 1997e). Later these estimates were increased to 6.1% and even 7.1% (ECR Europe 1997e, ECR Europe 1998a). According to the Global ECR Scorecard ECR “roadmap” comprises more than a dozen different ECR practices organized in three major areas of collaborative ECR- practices, Demand Side, Supply Side and Enablers and Integrators. Based on these preliminary findings we propose a working definition of ECR-adoption for this study based on the mission of ECR Europe and including the three major areas of ECR-practices. “ECR-adoption is a collaborative strategy whereby retailers and suppliers work together to implement collaborative business practices on the Demand Side, Supply Side and Enablers and Integrators Side that fulfil consumer wishes better, faster and at less cost.” While in the beginning most articles embraced the idea of ECR (Cooke 1993, Sherman 1994), recently they complain that “ECR’s promise is yet fulfilled” (Doherty 1998) and that “the perceived direct benefits of ECR have failed to trickle down through the industry, making ECR still more a matter of promise than performance” (Matthews 1997). Sometimes the trade press even claims that “ECR is dead” (Matthews 1995) or that the “final curtain” for Category Management has fallen (Storey and Benady 2001). Suppliers, in particular, feel that they are not getting as much from ECR as the retailers. They believe that retailers are the primary beneficiaries of ECR-related activities (Matthews 1997). Our field interviews in Europe confirm this view. Many suppliers doubt that they truly benefit from ECR. In summary, a growing skepticism from the field suggests that despite almost ten years of ECR there is still a widespread belief that the benefits of ECR-adoption have not been demonstrated in practice. Moreover, suppliers in particular fear that most benefits of ECR will accrue to retailers. With regards to the growing skepticism of practitioners in the field and in academic research we identified two specific research deficits for the study of ECR-adoption from the supplier’s side: How can ECR-adoption be measured? What are the effects of ECR-adoption on supplier performance? 2 Theory Scholars have argued that firms can generate higher economic performance through effective governance. They have also pointed out that mutual investments into specialized assets, for instance by adoption ECR, are more effective than third-party enforced mechanisms such as annual contracts at both minimizing transaction costs and maximizing value-creation initiatives (Zajac and Olsen 1993, Dyer and Singh 1998). On the one hand, suppliers may achieve an advantage in ECR-relationships by incurring lower transaction cost than competitors to achieve a given level of investments in specialized assets. First, contracting costs are lower because contrary to traditional retailer- supplier-relationships, when trading partners adopt ECR they do not have to specify every detail of the agreement in a contract. Many studies confirm the negative effect of collaborative relationships on contracting, and even direct product and operations cost (Noordewier, John and Nevin 1990, Cannon and Perreault 1999, Cannon and Homburg 2001). Further, ECR-adoption is likely to be more effective than contracts at reducing opportunism because contracts cannot anticipate all forms of cheating that may occur. Second, monitoring costs are reduced because self-enforcement relies on self-monitoring rather than external or third-party monitoring. Third, ECR-adoption lowers the cost associated with adapting to dynamic environments thereby allowing suppliers and retailers to flexibly adjust to market changes. Fourth, ECR-adoption is superior to a contract at minimizing transaction costs over the long run because it is not subject to the time limitations of contracts (Uzzi 1997). On the other hand, suppliers may have incentives for other value creation initiatives, such as making greater investments in specialized assets than their competitors (e.g. replenishment systems), sharing valuable knowledge (e.g. consumer and shopper knowledge), or combining complementary resources (e.g. to develop categories or new solutions-for-consumers), when they are credibly assured that this knowledge will not be readily shared with competitors (Dyer and Singh 1998). When adopting ECR, suppliers and retailers are more likely to engage in these value creating activities because the joint processes serve as economic hostages and credible assurances that they will be rewarded for them. Studies from the automotive industry (Helper 1990, Cusumano and Takeishi 1991, Dyer 1996b) and other industries (Jap 1999) suggest that close vertical ties that are characterized by rich information exchange and long term commitments lead to higher levels of assets specific investments and joint value creation activities which translate into economic performance benefits. Based on this collective evidence, we hypothesize that ECR-adoption has a positive effect on supplier performance. 3 Research Setting As the research setting of this study we used a British retailer. Field and literature research indicated that British Retailers are among the worldwide performance leaders (Seth and Randall 1999) and particularly advanced with respect to ECR-adoption. The unit of analysis of this research is the retailer-supplier-relationship, more specifically the retailer and its suppliers. The data collection took place between September 2000 and March 2001. The retailer provided a list with e-mail addresses of active suppliers. The list included the name of the main contact for the retailer-relationship, typically a key account manager or in the case of smaller firms the sales director or even the owner or chief executive officer. In total, 996 questionnaires were sent out by e-mail. 216 emails failed because the e-mail address was invalid. 4 suppliers were listed twice and 4 suppliers had merged with another supplier on the list, resulting in 772 questionnaires that had effectively reached their destination (see table 4.1). We received responses from 268 suppliers. After subtracting two questionnaires that were not sufficiently filled out, the final sample size consisted of 266 suppliers, for a 34.5% response rate. This response rate is within the range reported for related research. Details of the data collection are listed in table. We evaluated non-response bias using the Armstrong and Overton (1977) procedure. Because no significant differences (p<.10) were found, non-response bias does not seem to be a problem, though a stronger test would have been to contact non- respondents. 4 Measures 2 4.1 Measure of ECR-adoption On the basis of Anderson and Gerbing's (1988) recommendation, we developed measurement models before estimating the structural paths to test the hypothesized relationships between constructs. We developed an ECR-adoption scale based on the Global ECR Scorecard concept and scale (www.globalscorecard.com) in interviews and close interaction with an panel of industry and academic experts. We purified the scale using exploratory factor analysis and eliminating items with an item-to-item correlation higher than .40. We conceptualized ECR-adoption as a third-order model reflected in three second- order factors Demand Side, Supply Side and Enablers and Integrators, which are reflected in three, two and five composite indicators, respectively. These indicators are calculated as the averages of the corresponding lower level items (for a similar procedure see Sujan, Weitz and Kumar 1994). The lower level items had a stem asking suppliers to which extent they had jointly implemented a process to implement the respective collaborative activities. The items were achored on a Likert scale of 1 (nothing planned) to 5 (fully implemented). The results of the measure validation process show that all measures possess adequate unidimensionality, reliability, convergent and discriminant validity. Operationally, this meant that we created the following averages and fixed the following errors: Demand Side Collaboration: Four averaged composite indicators (ū i) - category development (ū 1: 3 items), new product introduction (ū 2: 3 items), consumer value creation (ū 3: 3 items) and solutions-to-consumers (ū 4: 3 items).