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Looking back on 2005 and forward to 2006 –Are we ready for category management?



In observation, to date, much of the supplier motivation for participating in the process appeared to be turf protection and the approach – although labeled category management – appeared to apply the same old sales tactics based on greater insight, which has facilitated old-fashioned SKU rationalization.

"Not trying to be harsh, we are not reporting that the effort bore no quantifiable fruit."
Not trying to be harsh, we are not reporting that the effort bore no quantifiable fruit. The IFMA/IFDA President's conference dedicated a whole segment, spotlighting the measurable advancement achieved through the implementation of software as well as the specific success achieved by one foodservice distributor's DC that implemented the software to support its category management process with great results.

Furthermore, we can easily identify a handful of foodservice distributor organizations that "got it," that is, truly embraced what category management could do on their behalf and took control of the process and thus benefited from greater supplier/distributor communication, a more focused salesforce and greater customer communication. Plus, other foodservice distributors that wished to embrace category management tenets did seek suppler partnerships, began to have more forthright communication and did pursue the objectives promised by category management implementation with some impressive results.

IDEOLOGICAL DISCONNECT Nonetheless, something was missing. The EFR definition casting category management as a distributor tool has been taken too literally. There exists an ideological disconnect "upstream," within the supplier's own product assortment. Assessing category management as a great process for their customers to use, many manufacturers have failed to gauge or act on the strategic benefit this process might have for optimizing their own operations.

This lack of upstream housecleaning has always been a speed bump to the supply chain's ability to fully benefit from the efficiencies that category management has to offer. The benefits enumerated by EFR for distributor use hold true for the manufacturer. These motivational factors for implementing the category management process include:

  • Achieving lowest acquisition costs
  • Reducing inventory
  • Improving service levels
  • Attracting targeted customer segments
  • Enhancing supply chain relationships

    In teaching category management to foodservice manufacturers, we have always maintained that to be an effective category management partner, you have to have done your homework within your own operation.

    Sitting in on a recent webcast sponsored by Instill, featuring Dave DeWalt, president of Franklin Foodservice Solutions, it was evident that a solution to enable suppliers to do their homework might be on the horizon. Although, DeWalt did not label the process category management as such, he spoke to this process and indicated that his organization was developing software to support it.

    Based on his 25 years in the business, DeWalt addressed a challenge manufacturers face on an on-going basis – having SKUs in the supply chain that are performing below par and personnel with responsibilities/objectives that potentially predispose the organization to manufacture, inventory and advance non-performing items. This challenge presents itself on the manufacturer's P&L and is felt in the marketplace.

    DeWalt's theme centered on the need for manufacturers to optimize their product assortment. He noted that "sales and marketing do not feel the pain associated with keeping SKUs around or adding them." He noted, "they do not perceive too many products as a problem or appraise the benefits of dropping products."

    DON'T ROCK THE BOAT Sales and marketing are rewarded for their efforts in not rocking the customer boat and for their efforts to obtain greater sales, regardless if the sales are ROI contributors to their organization. Given this dynamic, DeWalt observed "unless you have capacity constraints, it is hard to see the financial case to achieve product line optimization."

    In setting the stage for the rational behind the manufacturer's need to analyze its own internal SKU product performance, DeWalt discussed from strictly a supplier's perspective the long term benefits of embracing this process, which include:

  • Reducing inventory and the carrying costs associated with inventory, (both raw materials and finished goods);
  • Reducing change-over's;
  • Reducing short runs;
  • Reducing waste of scarce resources;
  • Identifying star performers;
  • Sharpening the sales focus on ROI contributors;
  • Opening slots for star performers and
  • The ability to plan as well as, provide reward systems that supports the organization's fiscal growth.

    The process put forth by DeWalt paralleled the internal category management process the community has acknowledged for distributors. According to DeWalt's observations, the key to implementing the process with success is based on marrying quantitative financial, item movement, and customer data with qualitative input from a representation of players, i.e. marketing, sales, finance, operations and IS. DeWalt placed team leadership for the manufacturer's internal efforts in marketing's hands and suggested that all parties "deal" with the same information.

    Acknowledging the hard work of gaining visibility regarding product performance, DeWalt suggests that suppliers begin their initiative by focusing on problem products not the entire operation. Like the internal distributor category management process, he also affirms the importance of having executive commitment and being ready to take action once agreement on the plan has been obtained.

    DeWalt notes the first step, when initiating the process, is to identify candidate products that will make a difference to the organization's bottom line. He notes the company financials using volume and gross profit or variable margin analysis will highlight potential ROI killers and meek performers. He states that input from operations and logistics should be sought, requesting an enumeration of products that they dislike and why. The analysis should also take into account the identification of redundancies within the line, how products are being used by customers and the possible opportunity for product substitutions.

    The process is the first step for manufacturers in truly moving ahead with foodservice category management.
    The data collection should result in a list noting the SKU, product description, and the rationalization behind whether the item is to kept, tolerated, dropped with a substitution or dropped and sacrificed. The plan, including all action steps, should be documented noting all parties that will be effected and the steps that they are to take to make a smooth transition. All parties affected should be informed of the timeline, rationale behind the timeline and actions to be taken. This includes documenting and communicating raw materials on hand, finished goods on hand, cut off dates for additional finished goods, customers to be affected and support available to communicate the organization's actions to those impacted.

    The comments presented by DeWalt were right on the mark, supporting manufacturers' needs to gain visibility to their most profitable items as well as their costly cousins and take action against this information.

    From our perspective, the process he described is the first step for manufacturers in truly moving ahead with foodservice category management, which is a supply chain initiative. Maybe software is the answer…between the Technomic software to support foodservice distributors' category management efforts and the forthcoming DeWalt software to automate internal SKU optimization and planning for manufacturers…maybe 2006 will be the pivotal year for foodservice category management implementation. Certainly the information will be accessible, so are we ready for category management?

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