Advertisement
10/01/2011

Counting on Collaboration

From left: Clorox Co. CEO Don Knauss, Schnuck Markets CEO Scott Schnuck, and Hy-Vee president Randy Edeker offered insights about collaboration at the 2011 GMA Executive Conference.

Collaboration was the dominant theme at the recent Grocery Manufacturers Association Executive Conference at the Broadmoor Hotel in Colorado. In the words of Pam Bailey, GMA president and chief executive officer, the conference would focus on collaboration and partnerships, and the agenda would emphasize "innovation and efficiency among retailers, manufacturers and suppliers to meet consumer needs."

Absolutely timely and worthy goals. And a topic that has seen many iterations during the past 20 years:

  • Partnering
  • TQM (Total Quality Management)
  • Strategic alliances
  • Select suppliers
  • Open innovation
  • Scorecarding

These practices were inconsistent when measured by the success and failure of improving collaboration. So how has the industry advanced to arrive at a better execution of collaboration between retailers and manufacturers? McKinsey & Co. moderated a panel discussion with three industry experts who discussed the shifting relationships and operation methods changing the future of their businesses: Don Knauss, chairman and CEO of The Clorox Co., manufacturer of food and nonfood products; Scott Schnuck, chairman and CEO of Schnuck Markets, with 106 stores; and Randy Edeker, president of Hy-Vee, a retail cooperative that operates more than 225 stores. Here's a look at some of the insights they shared.

Collaboration by the numbers

Kari Alldredge, senior expert at McKinsey and panel moderator, provided an overview of a major research report about collaboration. The key results suggested that although 83 percent of companies are engaged in collaboration, only 20 percent of collaborations are high impact and get significant results. The primary reason for the disconnect is that retailers and manufacturers maintain different operating patterns in their core business structures.

RetailersManufacturers
Category growthBrand penetration
Buying incomeProduct margin
Hundreds of categoriesA few categories
Efficiency imperativeSales growth imperative
Retailers focus more on driving category growth and operational efficiencies in their collaboration efforts. In contrast, manufacturers seek partnerships that can help them boost sales, strengthen brand appeal, and increase market penetration in specific categories. Conflicting incentives, such as buying income for retailers and product margin for manufacturers, often cause collaboration efforts to stall.

The 'What' of collaboration

Schnuck: "What's frightening is how worldwide population growth and the need for raw materials, as well as America's political system, are going to change how the world does business. These could be barriers to impede growth. Collaboration is critical because the economy is bad, the recession affected spending, operating costs have increased. We need to improve ways of working together."

Edeker: "We've had to adapt and change to be a good collaborative partner. The world today is different. We're adjusting an 85-year-old culture to fit today's times."

Knauss: "We've talked to dozens of retailers about collaboration, and they tell us to grow the overall category…bring us things that are exciting, something different from competition…take waste out of our stores, and make us more efficient."

FROM
TO
Collaborating in response to deficiencies
Collaborating in areas where your house is in order
Choosing only win-win opportunities
Turning win-lose to winwin through benefit/costsharing models

The 'Who' of collaboration

Knauss: "We look at 30 to 50 major retailers. It starts with capabilities in the areas of focus, alignment and discipline. Are they truly objective to improving the category? Is this a sustained program? Most importantly, can we count on integrity and candor in the relationship?"

Edeker: "We look for strategic alignments. Who can help us improve deficiencies? A track record counts. Some companies over-promise and can't deliver. We agree that it is critical to be totally open and candid with manufacturers about what needs work and improvement."

Schnuck: "We're always trying to get our house in order, and would ask the manufacturer to get its house in order in getting strategically aligned. Specifically, who we collaborate with depends on our consumer strategy by defined customer groups and categories."

FROM
TO
Selecting partners mostly based on size
Selecting partners based on size and strategic alignment
Planning top-to-top without aligning frontline
Aligning incentives and engaging top-to-bottom

The 'How' of collaboration

Edeker: "We stress collaboration around three or four highly focused categories. We want a win-win program and process. So, we establish multi-level relationships, remain in constant contact to overcome problems and obstacles as they arise. We're always looking for ways to track and measure the numbers and efficiency. Trust and transparency are the keys."

Knauss: "Retailers have great consumer data, and we have more brand data. We put these together. Then we devise a joint business plan to create growth through innovation. We perceive innovation to be greater than the product or the package. It should establish pre-purchase preference, and take-home performance. We jointly measure the impact. Collaboration is making sure all this works."

Schnuck: "We conduct ongoing business meetings with manufacturers at GMA and FMI activities. Because of our size, we don't have as many manufacturers calling on us as we would like. We are actually reaching out to more manufacturers to learn about their new products."

FROM
TO
Adding initiatives to already fragmented resources
Investing in dedicated infrastructure and people
Giving up or declaring victory too quickly
Committing to long-term actions and jointly measuring impact

A $10 billion opportunity

Schnuck Markets, Hy-Vee and The Clorox Co. are examples of companies that are practicing the changing art of collaboration. But what about the rest of the industry, and what about all those past attempts at collaboration?

McKinsey & Co.'s research shows that actual collaboration between retailers and manufacturers translates to more than $10 billion in value. The most important factors in successful collaboration are trust and transparency, but they are also the most problematic. Here are the most formidable challenges to collaboration:

  • Lack of management support
  • Limited resources
  • Unclear responsibility assignments
  • Resistance to change
  • Non-compatible cultures
  • Unclear direction and focus
  • Lack of openness and trust

And here are several key ingredients for success:

  • Asset investment
  • Integrated technology
  • Tracking and feedback mechanism
  • Formal review committee
  • Risk/opportunity sharing
  • Strategic plan access
  • Mutual openness and trust

The final question is: Will collaboration really be practiced to its fullest potential, or will it be just the latest rendition of past exercises?

Billions of dollars depend on the answer.

 

Area

Impact

Revenue growth
Cost reduction
Category assortment and promotion strategiesUp to 3% sales improvement*
Merchandising and in-store layoutUp to 4% sales improvement
Product development and packaging innovations10-20% sales lift for new product introductions, up to 5% savings on raw materials and packaging
Demand planning and fulfillment20% savings on inventory, 30% obsolescence reduction
Collaborative sourcingUp to 6% savings in procurement and packaging
Flow and handling efficiencySavings of 10-25% in warehouse, 20-30% in inventory, and up to 35% in shelving labor
* Estimate tied to category expansion opportunities