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Collaborative Category Management for 2006



That's how Bob Goldin, Chicago-based Technomic's executive vice president, described the exercise that should include not only manufacturers and distributors but also operators. Moreover, he and other speakers pointed out, that inasmuch as operators are an obvious essential component of this mutual effort, the supply chain must be up to date on consumer trends, likes and dislikes.

"Manufacturers and distributors should broaden their field of vision to include operators in their category management equation and to adopt a collaborative business model." – Bob Goldin, Technomic
In order to take advantage of the "biggest win" of category management, Goldin suggested, "Manufacturers and distributors should broaden their field of vision to include operators in their category management equation and to adopt a collaborative business model. In fact, I strongly suggest that operators be put front and center of category management programs."

Bill Bailey, director of business planning, Ventura Foods, LLC, Brea, CA, also alluded to this business triumvirate by relating that his company's go-to-market strategy fosters a "consultative selling culture."

"To grow, we must inevitably help our customers sell more menu items containing our products," said Bailey.

Bailey described Ventura's entrance into category management as a "journey without end" because it is a new business discipline that enables trading partners to add value and profit to their businesses.

"Ventura's journey into category management has been about the transforming activity of developing shared business goals with the distributor. I sincerely appreciate the support we have received from these distributor partners, and a select group of fellow suppliers, in developing this process and believe that all involved will receive substantial future benefit from the relationships it has fostered," Bailey said.

'SKUMOCRACY' IS THE NAME OF THE GAME AT U.S. FOODSERVICE Barry Friends, president of the Minneapolis branch of U.S. Foodservice, Columbia, MD, added to this formula the concept of paying attention to the needs of a distributorship's internal customer – the sales staff, pointing out that the ultimate customer is actually situated "three or four" levels deeper. The territory managers' staff of the second largest distributor designated its category management process as "SKUmocracy" – a term which, Friends said, captures the spirit and imagination of its sales staff, the company's first-line customers.

"Ventura's journey into category management has been about the transforming activity of developing shared business goals with the distributor." – Bill Bailey, Ventura Foods
"Unlike the supermarket business where category managers study and respond to consumer purchase behaviors, a foodservice model needs to account for the fact that the end consumer is usually two or three layers removed from the actual product purchase decision. This isn't to say that consumers don't influence a buyer's choice; they just don't have their usual clout," Friends told his industry colleagues.

Distributors, manufacturers, researchers and marketing groups have been analyzing and espousing the benefits of category management for some time and ID Access has presented their convincing opinions in numerous articles. The experts have pointed out that collaborative category management, an inclusive process that involves input from suppliers, distributors, operator-customers and consumers, can be implemented beneficially by large, medium and small distributors.

Goldin spoke to the wide range of companies that should transform their operations into category managers when he examined the procedure's in-house benefits.

"Many companies are trying to figure out 'what's in it for me' or may even feel threatened by category management. This is a perfectly normal response to any new way of doing business. I encourage these companies to learn more about the process, successes and failures, and tools available to make category management a reality," he said.

Until now, distributors and their supplier-partners have been reaching for the low-hanging fruit of category management, Goldin said, indicating that they have been cooperating to improve assortment efficiency by rationalizing unprofitable and unproductive SKUs and vendors based on an understanding of true product economics and demand patterns.

Goldin believes that this activity is sorely needed and should continue and evolve to be a major focus of manufacturer and distributor trading partnerships. However, greater results can be achieved when the supply chain takes the process to the next level by involving customers, he urged.

HOW TO STRATEGICALLY MANAGE CATEGORIES "In its essence, category management is about strategically managing categories to achieve greater and more profitable growth for all trading partners. Given where we are as an industry, now is the time to increase, not decrease focus on growth. To achieve the ultimate objective of category management, suppliers have to look at the real and significant opportunities that exist to help operators optimize their menu mix, pricing strategies, promotion and merchandising plans and tactics, consumer insights, and sourcing," Goldin said.

The industry pundit emphasized that the key ingredient of the process is supplier-distributor cooperation, without which the effort could be futile. Data sharing, a topic that has been discussed at numerous industry forums, would trigger result-producing collaboration, he suggested, and "enable the 'build for growth' platform implicit in category management to reach its full potential."

"The foodservice model needs to account for the fact that the end consumer is usually two or three layers removed from the actual product purchase decision." – Barry Friends, U.S. Foodservice
"But it is more than just data sharing. As we all know, data for the sake of data is of no value to anyone. The data have to be analyzed, shed new light, put in appropriate context, and lead to actionable recommendations that create measurable positive results. Understanding consumer attitudes and behavior is of paramount importance, especially in light of the changing demographics and psychographics with which we are faced. This is exactly what Ventura is doing with its integrated program. It is the right thing to do. It is what foodservice category management is all about," Goldin elaborated.

In the course of this year, ID Access has written about a few strong examples of data sharing between manufacturers and distributors that go beyond exchanging reams of statistics. Harkers' "Power Four" process comes to mind. Goldin noted that not all data-sharing exercises encompass an active role of all parties in the development and implementation of category and business development plans.

"Think about manufacturers directly negotiating with key operators without regard for distributors' supply chain considerations or pricing practices or distributors deliberately substituting customer requested brands. We need to buy into the inherent value of collaboration," he said.

ABILITY TO IDENTIFY, CAPITALIZE ON UNIUQE STRENGTHS Goldin argued that the significance of a well-executed category management relationship is in its ability to identify and capitalize on each partner's unique strengths. He said distributors have customer intimacy and access, local market knowledge, and sourcing and logistics skills. Manufacturers, he continued, have a wealth of market intelligence, consumer and category insights, and extensive product development skills.

"The breakthrough will come in aligning and leveraging these complementary capabilities and in cooperating for the benefit of all, especially strategic customers. It will put some real teeth into category captaincy, lead to improved trading relationships, create energy around growth acceleration, and advance and optimize our category management initiative," he noted.

U.S. Foodservice's Friends emphasized the importance of soliciting an "objective partner" for the distributorship, without which the latter will endure a great deal of frustration.

"Second, and just as important, is integrity. The nakedness of data sharing and 'deep dark secret' disclosure requires that the chosen mate be completely trustworthy, discreet, and respectful. Third, we need intelligence, both in the form of smart partners and their stash of information," Friends indicated.

Friends advised that distributors include in this course of action vendors' marketing and category management specialists rather than regional or local sales people, who have "little or no appetite for ideas that suggest peaceful co-existence with competitors."

"In its essence, category management is about strategically managing categories to achieve greater and more profitable growth for all trading partners." – Bob Goldin, Technomic
"For the most part, our results with SKUmocracy have been gratifying, both quantitatively and qualitatively. On categories where we've fully deployed the model, meaning that we've partnered with a captain, dissected the category, made the agreed-upon changes, re-trained our sales force, and executed a marketing plan, we have experienced a growth rate three to four times greater than average, often with a nice shift toward value-added items. And what makes this even more impressive is the fact that those results have occurred with fewer SKUs, typically a 15-20% reduction. Contribution margins are substantially better thanks to fewer SKUs generating more sales and gross margins with lower Activity Based Costs," Friends explained.

As other distributor category management specialists have testified, for the process to deliver the expected results, a great deal of time, effort and inclusion is required. However, Friends reaffirmed, the distributors' internal customers, the sales staff, do not have the time or patience to participate in the entire process.

Consequently, Friends continued, "This affords us (the specialists) the time to sort through the many categories and sub-categories to identify those with the greatest improvement potential, as well as allowing us to be opportunistic in our selections of category captains. In fact, we find ourselves choosing to pursue some categories more because we've identified an excellent collaborator, than the fact that the category's economics indicate needed repair."

Friends said satisfaction comes when the process is performed correctly.

"The category results are stunning. Sales per SKU go up. Margins go up. ROI skyrockets. Customer satisfaction improves. And more often than not, precious warehouse slots are freed up to be reloaded with new products and greater variety, creating opportunities at every link in the supply chain," he stressed.

Ventura's Bailey said the first category meeting between a vendor and distributor should include its president, vice presidents of merchandising, operations, finance, and other top personnel.

INITIAL MEETING WITH TOP-LEVEL PERSONNEL "At this meeting, we introduce the concept and develop some guiding principles that we can continually rely upon throughout the project. The data collection is discussed in some detail, accompanied by the necessary non-disclosure agreements. Ventura's approach is that only my team sees the data that is shared," he said, making a point to say that its sales force and brokers are not included.

Bailey also said collecting data, though a cumbersome effort, is needed and becomes easier when distributorships are forthcoming with their intelligence.

"The nakedness of data sharing and 'deep dark secret' disclosure requires that the chosen mate be completely trustworthy, discreet, and respectful. – Barry Friends, U.S. Foodservice
"Data is then run through a tool or model, which is key to making the process more formal and objective, and also for making it easier to navigate. The model gives us a look at true profitability by SKU. At that point, SKU level recommendations can be made using the guiding principles agreed to as well as trade-area data with the goal of improving the effectiveness and efficiency of the product category," Bailey said.

The final chapter involves implementing an execution plan, he said, echoing other speakers' observations that the operator's input is critical.

"To realize the entire benefit of category management, the execution plan is critical. The execution plan allows us to target operators purchasing the ineffective SKUs and make conversions to mutually acceptable alternatives. This is why it is so important to have built the proper category assortment and the right products, in the right tiers, in the right flavor profiles, etc. Our sales personnel and the distributor's sales force now engage with the process. They must be trained appropriately to execute on these conversions with the operator's needs in mind," Bailey detailed.

Bailey further cautioned that while SKU reduction and supply chain efficiency are very important to the industry, in the final analysis, the business development effort takes the process to the ultimate level.

In order to begin their journey in category management, Bailey advised supply chain partners to learn the process by talking with successful practitioners, attending industry forums and speaking with their operator-customers.

DEVISE TOOLS TO HELP IMPLEMENTATION OF CATEGORY MANAGEMENT "You will also need a tool or model to help manage the process. All of us have been doing these types of projects for 10 years now, manually grinding through SKU velocities with our distributor and supplier partners and making recommendations for change. The differences now we are using a foundation of Activity Based Costing data to make more-informed recommendations. Also, we are using more complex consumer and menu trend data to help drive growth in the proper areas. While these differences add complexity, a good solid model is extremely helpful to streamlining and formalizing the process, putting all of the pertinent data in a concise format," he said.

"To realize the entire benefit of category management, the execution plan is critical. The execution plan allows us to target operators purchasing the ineffective SKUs and make conversions to mutually acceptable alternatives." – Bill Bailey, Ventura Foods
Mark Allen, president and ceo of the International Foodservice Distributors Association (IFDA), Falls Church, VA, urged the industry to take advantage of its strengths and improve its weaknesses. He said if the foodservice industry is to succeed in driving all of its partners' businesses it must operate as a supply chain rather than as isolated practitioners.

Allen listed among its strengths:
  • Ability to provide complex and ethnic flavors, convenience and fun;
  • Usage of menus to engage patrons;
  • Offering customizable selections;
  • Fresher products, more convenience, ambience;
  • Curbside delivery.

    In the areas that needed improvements, he included:
  • Take out;
  • Family and healthful occasions;
  • QSR quality;
  • Identifying the consumer needs and innovate products;
  • Ensuring quality from plant through consumption.

    Today's consumers, who are evolving and changing their approach to foodservice, are demanding innovation and quality of the industry, Allen said. Successful foodservice products should satisfy multiple uses as well as takeout quality and packaging requirements. Along with these, Allen continued, the supply chain should improve operator partnerships and enhance touch points with its customers.

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