The idea of increasing collaboration between retailers and suppliers is not new, and most agree that working together is a good thing. The benefits can be substantial: successful collaboration efforts typically reduce inventory throughout the supply chain, lessen its environmental impact, and eliminate 2 to 3 percent of total end-to-end costs.
According to recent industry reports, approximately 80 percent of retailers and suppliers believe that collaboration has grown in the past three years. Despite this growth, however, the practice is not widespread, and the benefits achieved are often incremental rather than transformational. As a result, it’s still not unusual to find duplicate inventory holdings within the same network, underused truck fleets, backlogs of fast-moving stock languishing in retailer warehouses, and low on-shelf availability of some products—especially promotional items.
According to analysis by The Boston Consulting Group, moving products from factories to shelves is a costly part of the total value chain, representing 9 to 17 percent of end-to-end costs. Collaboration efforts aim to reduce those costs and streamline inventory through better forecasting, faster order fulfillment, the use of joint warehouses or consolidation centers, and practices such as backhauling, which involves picking up goods from suppliers on return trips after making deliveries to stores.
The unfortunate reality is that even today’s most mature markets have margin-sapping inefficiencies across their supply chains. Inventory levels are far higher than they need to be, and more than 80 percent of retailers’ trucks still return empty after making store deliveries. Too often, collaboration efforts lose momentum when suppliers insist on maintaining control of the supply chain, or retailers and suppliers independently forecast demand instead of sharing real-time data. In those situations, collaboration fails to deliver the promised results.
The experience of a major European retailer is typical. Several years ago, the company planned to establish flow-through operations for its grocery items to minimize inventory levels, maintain fresher stock on shelves, and reduce operating costs. To enable daily deliveries to its distribution centers without increasing inbound costs, the retailer encouraged suppliers to set up joint warehouses to consolidate merchandise. The initiative soon ran into problems, however. Some suppliers resisted the changes because they felt that joint warehouses were unnecessary and had a negative impact on their distribution costs. Operating with no inventory buffer in its distribution centers and hampered by unreliable service from suppliers, the retailer had a difficult time maintaining sufficient on-shelf availability. Now, almost 10 years later, less than 15 percent of the retailer’s grocery volume is handled as flow through.