Vrije Universiteit Amsterdam Efficient Consumer Response
     
Home
------
Teaching
------
Publications

Main

ECR
Contents
Summary
Introduction
Category management
Product replenishment
Enabling technologies
Conclusion
Bibliography

------
Photos
------
OBP Research Group
     
     
previous Category Management next

Introduction

Prior to discussing Category Management, it is helpful to position Category Management in the context of several opportunities facing the industry.

Category Management represents a method for managing increasingly complex consumer demographics. Consumer lifestyles have changed dramatically over the past decades. Consumers are getting more demanding and want to choose from a great assortment of products. Furthermore consumer satisfaction is a great advantage in a competitive business environment.

Given these challenges, many distributors and suppliers are intensifying their efforts to understand and meet the changing consumer needs. For example, many have a growing interest in understanding the composition of their "loyal consumer base" and in defining the purchase behavior associated with these consumers.

Awareness is growing that failure to recognize and appreciate consumer loyalty can be costly. For retailers, research consistently shows that the loyal consumer represents a fraction (20 to 30 percent) of consumer traffic yet results in the majority of sales and profits (70 to 80 percent) [van Goor, 1996b].

By providing better consumer value through Category Management, both distributors and suppliers can become more productive, especially in the key areas of new product introductions. But suppliers are faced with significant competitive pressures as well. In addition to the intense competition among manufacturers in increasingly mature categories, the emergence of high quality distributor brands has further pressured the market share of national or regional brands. Concurrently, many suppliers are experiencing unprecedented new product failures.

It was estimated that 95 percent of more than 17.000 new items introduced in 1993 would fail within 12 months of introduction [Partnering Group, 1995]. As a result, like retailers who are over-stored, many segments of the industry exceed their capacity, especially in the utilization of production facilities.

All these and other changes have triggered many within the industry to do more with current resources and to refocus on the basics of meeting consumer needs for value, variety and service. This is where Category Management can be a powerful tool for meeting these consumer needs in a marketplace sharply and more competitive.

What is Category Management?

The purpose of Category Management is improving the operating results of the company by focusing on the consumer. Consumers are getting more demanding and want to choose from a large assortment of products. Furthermore consumer satisfaction is a great advantage in a competitive business environment. In this view products are more than goods, which are just being sold; products also play a strategic role.

In practice one treats a group of specific products as a business unit, which is called a category. A category is defined as a distinct, manageable group of products that consumers perceive to be interrelated or substitutable in meeting consumer needs. In this setting Category Management is defined as follows by the ECR Category Management Subcommittee [ECR Board, 1995]:

Category Management is the process between parts in the logistic chain, where categories are being managed as strategic business units, producing enhanced business results by focusing on delivering consumer value.

Looking carefully at this definition reveals a few key points of Category Management:

  • Category Management is a process and involves series of interrelated activities.
  • Category Management is comprised of many distinctly different distributor and supplier components. Therefore, this process should not be done alone by either.
  • The aim of Category Management is improved business results, but also (considering the previous key points) an improved relationship between trading partners.
  • The underlying foundation for these improved results is ultimately based upon understanding and meeting consumer needs more effectively in the products offered.

Thus a basis for good Category Management is formed by good cooperation, where the retailer takes the initiative. In order to analyze and adopt a good strategy for Category Management, several focus areas can be identified. Category Management has the following three focus areas [Coopers & Lybrand, 1996]:

  • Efficient Product Introduction,
  • Efficient Product Promotion, and
  • Efficient Store Assortment.

Efficient Product Introduction

Efficient Product Introduction deals with efficient and effective developing and introductions of new products or services based on consumer needs. The primary goal is to reduce the number of failures of product introductions and the costs associated with them. The secondary goal is to react more dynamically by means of better information structure throughout the logistic chain. The profit due to this will be that the consumer will have a clear product overview. Moreover only value adding products will be on the shelves in the stores.

Product introductions can be classified in many ways. One aspect is the measure of innovation. The simplest introduction is the introduction of a product, which is an improvement of an existing product. One also has expansion of the assortment, for example introducing soap for dry skin, while normal soap already exists. Introducing a product, which is completely new, is called a product innovation.

A second aspect of product introductions is time. Some products are added to the assortment in a specific period of the year, which is crucial for the sale of that product. One can think of charcoal for barbecues in a supermarket or orange custard during the Dutch Champions League football. The following matrix sums up the possibilities when we combine both aspects for classification.

Time depending existing products also have to be introduced efficiently. Non-existing products have properties, which are clearly different from existing products, these products are relatively easy to introduce, when compared to existing products. Therefore, retailers have to add something extra to existing products when introduced. The example below illustrates this concept.

Measure of Innovation
Time dependent
Time independent
Existing product
Charcoal
Product improvement
NS Reisplanner
Improved detergent
Assortment expansion
Orange custard
Coca Cola Light
Innovation
Compact Disc

In each class costs can be reduced and the chance on successful product introductions can be increased by working together. For example, a manufacturer can obtain more insight in consumer needs, when he can get hold of information on sales from a retailer. This can result in availability of time dependent products when needed. By discussing the development of a product with other parts in the logistic chain, the chance on wrong decisions can be reduced.

The butcher's shop at Albert Heijn

An example of efficient product introduction in practice is the butcher's shop at Albert Heijn. Albert Heijn sells barbecue-meat-packets, which is a product in the class of time dependent existing products. Meat normally can be bought at a butcher's shop, but Albert Heijn made an agreement with a butcher to provide meat-packets completely with spices and sauces. It is this extra refinement, which made this product special.

To provide enough packets Albert Heijn also made an agreement to internally distribute the meat between manufacturer and warehouse by means of a conveyor-belt. This construction minimized the number of steps from manufacturer and distribution, which resulted in greater flexibility and supply of barbecue-packets [FoodManagement, 13/10].

Efficient Product Promotion

Efficient Product Promotion deals with efficient and effective promotion strategies, which affects all parts in the logistic chain. Three techniques of product promotion can be identified [Gaither, 1994], these are:

  • Consumer advertising,
  • Consumer promotion, and
  • Trade promotion.

The goal of Efficient Product Promotion is using these three techniques throughout the logistic chain efficiently and effectively in order to improve the application of the promotion-budget and to form a clear overview of products for the consumer. The next figure displays the three techniques in relation with the logistic chain.

Efficient Product Promotion

The first technique of promotion is consumer advertising, which concerns promotion between retailer, manufacturer and consumer. Traditional means of consumer promotion are advertisements on radio, television and advertisements in newspapers and magazines. But with new technologies such as CD-ROM, CD-I and the Internet, one can place consumer specific advertisements.

A special application of this technology is electronic consumer-cards, which make it possible to track and analyze consumer behavior. This analysis can be used to send advertisements by E-mail to consumers. This technology also makes it possible to show a specific advertisement on a LCD screen, when a consumer walks in the store, based on his consumer behavior. In this way the retailer can stimulate a consumer to buy specific products. This approach has great advantages, however certain privacy issues must be dealt with first.

The second technique of promotion is consumer promotion. This technique forms an important part of promotion strategy. It concerns promotion between the manufacturer, retailer and the consumer. One must think of special offers or premiums (little gifts, which come with the product). Traditional means are coupons and savings-stamps. The differences between these two are that coupons create product-loyalty, whereas savings-stamps create store-loyalty.

The special offers and saving methods can now be implemented more efficiently by using electronic cards, which replace the savings-stamps and can be used to acquire a discount. Again it is technology that makes this possible.

The last technique is called trade promotion, which only affects the first three parts in the logistic chain. This type of promotion only concerns transactions between companies and does not affect consumers. The promotion often concerns special offers and discounts. Traditional means are letters and folders, which are being sent between the parties involved.

This type of promotion can also be done more efficiently by using Electronic Data Interchange (EDI). This technology makes it possible to send and receive information very fast and allows better coordination of promotion, which can serve consumer needs better.

The following matrix summarizes the discussed techniques in traditional form and in the more efficient form, which can be applied to serve the consumer.

Promotion
Traditional
ECR
Consumer Advertising
Advertisement by regular media
Consumer specific advertisement by new media
Consumer Promotion
Discount coupons and savings-stamps
Electronic cards
Trade Promotion
Communication by paper, slow response
Communication by EDI, quick response

 

AirMiles

Consumer promotion in the Netherlands is quite advanced. Electronic cards are frequently used for special offers or discounts. The most well known application is the AirMiles card. This card enables a consumer to save points in order to travel by airplane freely or with a great discount. This card enables one to analyze consumer behavior. Individual advertisements, which flow from this analysis, are part of consumer advertisements [Distrifood, 12/21].

Other similar electronic cards are the Co-op-Club Card, the Edah Card and the Superklanten card. However the information, which is revealed by these cards, is not used for sending advertisements by mail. This is too costly and not effective. To gain more insight in consumer behavior certain coupons, with the consumer's name, are printed at the cashier. These coupons have a barcode to speed up the administration-process and to measure the response of the consumer to the special offer on the coupon [Distrifood, 12/12].

Efficient Store Assortment

Efficient Store Assortment deals with composing an assortment of products and services, which is complete and profitable, and also satisfies consumer needs. The aim is to use the space in the store efficiently and the advantages are higher profits, better clientele and less frequent out-of-stock sales. Efficient Store Assortment, from the point of view of the consumer, means a better and flexible assortment and also less frequent out-of-stock sales.

When optimizing the existing space and assortment in the store, the value of the product, which accounts for the profit gained, must be taken in consideration. The preferences of consumers can be studied with the help of information on the actual sales, which are gathered by the cash registers and by information revealed by market research. This enables one to adjust the assortment to the consumer's needs.

Determining the profit of a product per cubic meter can also be helpful to assortment planning. However one must not forget to take into account the needs of the consumer. There is a strain between the value a consumer assigns to a product and the value, which the product generates when it is sold.

Two methods, which can help in the above analysis, are Direct Product Profitability (DPP) and Direct Product Costing (DPC). Both methods are variants of Activity Based Costing (ABC). Activity Based Costing is a method, which relates costs and profits with activities. This results in better understanding and insight in costs and profits, which enables one to make decisions about those products [van Goor, 1996b].

There are several important issues, which have to be taken into account when planning Efficient Store Assortment. Firstly, the cooperation between parts in the chain is of crucial importance. When several trading partners combine information about products and sales, a good overview of the market can be formed. This makes Efficient Store Assortment possible with great success.

Secondly the space must be allocated on basis of correct data. Allocation space is an important key point in Efficient Store Assortment and this space is directly related to the profit per cubic meter. Therefore this allocation must be based on information retrieved from:

  • Correct scanning at the cash registers,
  • Historical data of sales,
  • Database with products in the store, and
  • Demographically oriented data.

Efficient Store Assortment is a difficult process. That is why it is important to monitor the results of the current assortment and the results due to changes in the assortment. This enables one to response quickly to product introductions or special offers.


previous If you have any suggestions, comments, or links related to any of my subjects, please send E-mail to: S.Bhulai@few.vu.nl. next