Learning Outcome:

- Understand the issues involved with transfer pricing in multidivisional companies

- Provide an appreciation of logistics activities and their relationship to supply chain management, other business functions and enterprises.

CASE STUDY

ECR in the UK

Dutchman Paul Polman, now CEO of Unilever, did a stint as General Manager of Procter & Gamble UK and Eire from 1995 to 1999. While admiring the UK's advanced retailing systems, he saw opportunities for all four of the ‘pillars of ECR' - range, new items, promotions and replenishment. The following is extracted from the text of a speech he made to the Institute of Grocery Distribution.

Range

The average store now holds 35 per cent more than five years ago, yet a typical consumer buys just 18 items on a trip. A quarter of these skus sell less than six units a week!

The number of skus offered by manufacturers and stores has become too large andcomplex. My company is equally guilty in this area. No question, we make too manyskus. I can assure you we are working on it. Actually, our overall sku count in laundry isalready down 20 per cent compared to this time last year. What's more, business is up.

Clearly, we have an opportunity to rationalise our ranges. As long as we do this in anECR way - focusing on what consumers want - we will all win. The consumer will see aclearer range. Retailers and manufacturers will carry less inventory and less complexity.

The result will be cost savings across the whole supply chain and stronger margins.

New items
There were 16,000 new skus last year. Yet 80 per cent lasted less than a year. You don't need to be an accountant to imagine the costs associated with this kind of activity. And look how this has changed. Since 1975, the number of new sku introductions has increased eightfold. Yet their life expectancy has shrunk from around five years in 1975 to about nine months now. We can hardly call this progress.

Promotions

In promotions it's the same story. Take laundry detergents. This is a fairly stable market.Yet we're spending 50 per cent more on promotions than two years ago, with Consumers buying nearly 30 per cent more of their volume on promotions. This notonly creates an inefficient supply chain, or in some cases poor in-store availability,but, more importantly, has reduced the value of the category and likely the retailers'profit. We are all aware of the inefficiencies promotions cause in the system, such asproblems in production, inventory and in-store availability. They all create extra costs,which ultimately have to be recouped in price. But there's a higher cost. As promotionsare increasing, they are decreasing customer loyalty to both stores and brandsby 16 per cent during the period of the promotion. We commissioned a report byProfessor Barwise of the London Business School. He called it ‘Taming the Multi-buy

Dragon'. The report shows us that over 70 per cent of laundry promotional investmentgoes on multi-buys. The level of investment on multi-buys has increased by 60per cent over the last three years. There's been a 50 per cent increase behind brandsand a doubling of investment behind own labels. Contrary to what we thought, mostof this volume is not going to a broad base of households. It is going to a small minority.

Seventy-one per cent of all multi-buy volume is bought by just 14 per cent ofhouseholds. Just 2 per cent of multi-buy volume goes to 55 per cent of households.

We really are focusing our spending on influencing and rewarding a very small minorityof people indeed.

Replenishment

Based on the escalating activity I've just [referred to], costs are unnecessarily high. Thereare huge cost savings also here, up to 6 per cent, by removing the non-value-addedskus and inefficient new brand and promotional activity.

Questions
1- Research and discussion as teamwork:

Read pages 8 and 9 of the attached article.

Answer the following questions in the discussion board of your group (your instructor will create a link in the discussion board for each group so you can write and interact):

1- What is the particularity of vanguard method?

2- Why we need this method in logistics?

3- After writing your answer, comment at least one of your classmates answers.

Article - A systems approach for forward and reverse logistics design Maximising value from customer involvement by Ayham A.M. Jaaron and Chris Backhouse