Long before the advent of the Web, Procter & Gamble (PG ) and Wal-Mart (WMT ) forged a groundbreaking partnership. Beginning in 1987, the consumer-products manufacturer and the retailer worked hand-in-hand to make their supply chain operate more smoothly and cost-effectively.
As a result, the discount chain's in-stock rates improved, and inventory fell. Wal-Mart was able to pass on those cost savings in the form of lower prices to its shoppers. Despite industry skepticism, the relationship was a success. "It really changed things from an adversarial price negotiation to a win-win situation. We turned the whole thing around," says Ralph Drayer, chairman of trade publication Supply Chain Insight and former chief of logistics at Procter & Gamble.
In the years since, the retailing industry has embraced technological innovation. In the 1990s, retailers and suppliers began working more closely together, forming more partnerships and creating standard practices. Efforts such as marketplace exchanges that retailers formed to interact better with suppliers, have fallen short, but a collaborative spirit remains. Led by discounters Wal-Mart and Target (TGT ), the industry has developed intricate supply-chain systems. Software to help avoid excess stock and data-mining technologies to gather information about customers' purchasing habits have made retailers more nimble than ever.
Now, merchants of all sizes are looking to the Internet to help take them to the next level of cost savings. "The back end is going through a terrific revolution," says Tom Friedman, president of MoonWatch Media, a retail-technology research organization. "Every retailer is trying to figure out how to use the Internet for supply-chain management. This is where the money is either made or lost."
Just how much money is hard to figure. But Friedman figures that retailers will see a cost savings of billions across the entire supply chain this year, and he expects that figure to soar as the industry increases its efficiency.
Whatever the number, Internet-based tools can make a huge difference. Scott Smith, department manager of inventory at Ace Hardware, based in the Chicago area, says since the company installed a Web-enabled collaborative-commerce program made by JDA Software Group in 1999, its cost of picking goods off its warehouse shelves has fallen about 18%, and receiving costs are down by 20%.
"The big thing we look at is saving dollars with a higher [rate of completed orders] to retailers in [the Ace cooperative]," Smith says. Manufacturers can dial into Ace's computer system to collaborate on sales forecasts and promotions. And the Web allows even small suppliers to plug in, whereas earlier systems would have required expensive hardware to allow them to communicate electronically with big retailers.
The 23 manufacturers that use Ace's Web-based program include giants L.R. Nelson and Master Lock, but also many small businesses. "It's a solution that's scalable," Smith says. "You don't have to be Black & Decker to be on this [system]." The next step for Ace, he says, is to introduce software that will automatically feed forecasts directly into manufacturers' production schedules. The technology is gradually being rolled out now.
Retailers make more money when they can keep popular items on the shelves
Variations on such systems are fast becoming the norm. "Retailers are trying to move into the next phase, not just of passing transactions, but what the timing will be," says Kathryn Cullen, principal at Kurt Salmon Associates, an Atlanta-based retail-industry consultancy. Tools such as Syncra Systems' Web-based software alert suppliers in real-time when a discrepancy shows up between their production forecasts and retailers' buying forecasts, allowing all players to plan more effectively.
Syncra CEO Jeff Stamen figures the software saves clients such as Kimberly-Clarke and Pfizer substantial money. He says it lowers clients' out-of-stock levels from as high as 10% to well under 1% and improves inventory turns -- the rate at which goods move off store shelves -- by 10% or more. Retailers make more money when they can lessen the frequency of running out of popular products and increase the speed at which a product sells.
The country's largest home-improvement retailer, Home Depot (HD ), has joined the band of companies that share information with suppliers over the Internet. "We're giving vendors an increasing view of our inventories," says Brad Albers, director of information systems at Home Depot.
It recently announced a deal to use IBM's WebSphere software, which can handle tasks including inventory tracking, goods ordering, and internal-office functions like personnel management. Albers says Home Depot chose this software for its breadth of functions and its ability to accommodate variations in transaction volume. "This technology is designed to scale, it can flex with demand, and that's very important to us," he says.
Or take Office Depot (ODP ), which orders 7 billion to 8 billion items annually. To better manage the flow of transaction information and reduce administrative costs, it uses an extranet, or private Web-based network, to communicate with suppliers. Eventually, says Chief Financial Officer Charlie Brown, the office-product retailer aims to use the network to do collaborative forecasting with suppliers and provide more comprehensive information, such as product descriptions and pictures.
It's difficult to quantify the savings from Office Depot's various Web tools, Brown says, but he adds that a lot less paper is moving around, and employees spend their time more efficiently. "The Web absolutely pays off for us," he says. "It saves us a lot of time, money, and inventory -- and ensures that we don't make mistakes."
Moving transactions to the Web can cut their costs in half
Retailers are also shifting to Web-based electronic transactions, which are less expensive and faster than on proprietary networks. Existing electronic data interchange (EDI) transactions are widely used, but their cost can be huge for small companies that often can't afford to be on a network. Bill Bass, Land's End's senior vice-president for e-commerce and international, says the Internet and catalog clothing retailer is using EDI with most of its vendors. But its priority is to shift as many transactions as possible to the Internet.
Such a move cuts the cost of transactions by about half, says Mike Cassidy, CEO and founder of Internet Commerce, which makes software for Internet-based EDI. "The infrastructure cost is lower. There's no lease line to support," he says. One of his clients, bookseller Barnes & Noble, uses Internet Commerce's Web-based EDI to deal with around 1,200 of its 30,000 suppliers of various sizes. "We allow [B&N] to do more EDI with big guys like Random House and small publishers that don't get enough orders to do [traditional] EDI," Cassidy says.
Even the smallest retailers are trying to set up Web-based systems to deal with suppliers. "We're looking at creating a Web portal for our suppliers to interact with us and give us more visibility," says Christopher Cunningham, chief information officer at RedEnvelope. The privately held Web and catalog gift retailer aims to build such a site as soon as possible to make communicating with its mostly small suppliers more efficient.
Improvements in customer service are harder to measure on the bottom line. However, better information sharing that the Web allows between suppliers and retailers enhances customer satisfaction. Having more accurate, real-time data keeps shelves stocked with the best assortment of products. And though they haven't replaced phone centers, retailers' Web sites have done a lot to get questions answered and problems solved. Many sites offer order-tracking updates and real-time inventory status. Both Land's End and RedEnvelope provide live customer service via online chatting.
In the future, the Web will do even more to help retailers control costs. MoonWatch Media's Friedman envisions it allowing manufacturers to respond more nimbly in product development, for instance. And though apparel retailers now typically examine patterns in person, Friedman foresees digititized patterns being sent to prospective buyers who could print them onto cloth.
Above all, a more efficient and collaborative retail industry could "result in lower costs of products throughout the world...[and] an increase in profit margins," Friedman says. That would be the ultimate win-win scenario for the industry and for consumers.
By Amy Tsao in New York