Monday, November 03, 2008

ECR (Efficient Customer Response) or Collaborative Channel Marketing Applied to Tech Marketing

ECR or "Efficient Customer Response" came to the forefront of the consumer channel model in 1992 / 1993. The pioneers of this collaborative supplier / channel approach were the consumer package goods companies and the grocery stores. The idea was that by working together, suppliers and retailers (but more broadly, any type of distribution channel partner could fill in here) could improve total customer satisfaction. An early prospective study by Kurt Salmon Associates in 1993 estimated that savings from a fully implemented ECR approach industrywide would lead to value amounting to 10.8% of the retail price.

More and more, this model is infiltrating technology marketing. OEMs have come to realize that the next big efficiency and effectiveness step will be through true collaboration with partners. This goes beyond "silver," "gold" and "platinum" tier levels, and using 1.5% of COGS for MDF, and goes to system integration, cross-firm teams making collaborative marketing decisions, and a far more integrated supply chain. Companies are doing this today. I don't think they're calling it ECR, but that's what they're doing.

There are three main elements of ECR:
  1. Demand side management. This is basically a lot of what MarketBridge has been doing for the past several years in the high tech / channel model. OEMs and partners work together on marketing strategies. This can bring up all kinds of potential conflicts, but also can generate much higher profits by optimizing the 4 Ps across both OEM and channel.

  2. Supply side management. This is basically streamlining the supply chain and logistics. Not really an expert here.

  3. Information technology. In the early 1990s it was EDI, and now it's gotten a lot more sophisticated. While OEMs and partners definitely don't totally trust each other, they understand how much power is to be gained by merging data--particularly around customer and promotion insight.

The classic case example of ECR is Wal-Mart. Wal-Mart has vertically integrated with its suppliers across all three of the above elements. On the demand side, brands contribute monies for marketing and conduct marketing optimization (mix) with the distribution channel in mind. Wal-Mart has a seat at the table on this as well. Much of Wal-Mart's circular expenses (or all, probably) are funded by the suppliers.

The supply chain story (2) is well known. Wal-Mart works with suppliers to minimize inventory costs and ensure the matching--in near real-time--of demand with supply on the shelves. To enable this, Wal-Mart's ERP systems are tied to their main suppliers, cutting down on inventory and shipping expenses. Wal-Mart has mandated this. These systems are the third element--total information collaboration up and down the supply chain.

The Wal-Mart example also brings up a major concern for ECR, which is that instead of creating a federated model with relatively equal power distributed between supplier and distributor, most of the power has ended up with the increasingly consolidated retailers.

So has ECR worked? Should technology marketers embrace it wholeheartedly? What are the implications for partner consolidation in tech? The best study on this was Corsten and Kumar (Journal of Marketing, 2005, Do Suppliers Benefit from Collaborative Relationships with Large Retailers? An Empirical Investigation of Efficient Customer Response Adoption.)

First, I think it's worth re-creating the model they develop for assessing performance, because it makes sense on its face and should be used as a reference guideposts for tech OEMs or Partners trying to assess whether ECR is a good model for them. It's the picture at the top of the post. Without going through all the arrows, which represent hypotheses, it basically says that suppliers have to have three things to play:

  • Transaction-specific investments (investment specific to the collaborative relationship)
  • Cross-functional teams (teams to specifically support the collaborative relationship from across the business, including finance, marketing, design, etc.)
  • Incentive systems (putting money on the line with members of the above cross-functional team to make the collaborative relationship successful.)

This leads to ECR adoption. At this point, Trust makes the relationship even better, as does choosing to work with retailers that have Good Capabilities. There is an interaction effect here too, where trust and capabilities both impact ECR adoption's impact on success, and impact results directly.

ECR's success is evaluated with three factors--Economic Performance (e.g. are we selling more stuff more efficiently vs. before) Perceived Equity (do both parties feel that the collaboration is fair and no one is "hogging the value) and Capability Development (is the collaborative relationship helping both companies become better marketers.)

After they loaded all their data into this model (read the paper to find out how they got the data, etc.), the basic findings were:
  • There is a lot of cyncism and mistrust still floating around between suppliers and retailers.
  • Suppliers have definitely achieved much greater economic performance due to ECR. This is true across a broad range of suppliers.
  • Suppliers should favor / target retailers that are trusted and smart. These types of relationships have much better outcomes for both parties.
  • It is critical to manage perceptions and reality around fairneness. "Negative inequity" can severely damage the supplier / partner relationship.

The implications for tech marketers, on both the OEM and Partner side, are clear--ECR is a great tool and it should be adopted quickly, while using real caution around the points above. Two things I do think are interesting are (1) the fragmentation of the partner industry in tech vs. retail and (2) the significant barriers to entry on the manufacturer / OEM side vs. CPG retail. This, in my mind, will make fairness less of an issue in tech vs. retail. We certainly won't see a "bullying" relationship in tech like we see with Wal-Mart.

One other thing tech needs to figure out is how to implement ECR with the tens of thousands of smaller, less capable partners that serve important niche markets throughout SMB. These partners shouldn't be ignored, so is there a "lite" or "semi-custom" ECR approach for dealing with these smaller partners. This obviously demands significant technology investment and automation of core marketing processes. Of course, I think the answer is yes... We've started down this path already at MarketBridge with our DemandStream approach.

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