Channel Partnerships Streamline Distribution

Interactions between retailers and their suppliers have often been adversarial, with each trying to gain at the expense of the other. But this long-established pattern is rapidly giving way to cooperation, with both sides working together to streamline the distribution channel system. Examples of channel partnerships cover the full spectrum of contemporary retailing. Perhaps most often cited is Wal-Mart and Procter & Gamble’s partnership, initiated in 1985. Lou Pritchard, then sales vice president of P&G, has recounted how he and the late Sam Walton developed the concept of a partnership “built on trust and committed to a shared vision — meeting the customer’s needs while driving out excess costs in the system by changing it.”1 Aided by new information technologies such as electronic data interchange (EDI), the two companies dramatically improved the efficiency of their product flows: P&G’s on-time deliveries to Wal-Mart improved significantly, while inventory turnover increased dramatically. Kmart and other discounters were quick to establish their own partnerships, followed by conventional department stores (such as Mercantile Stores) and specialty chains.

More recently, channel partnerships have become popular in the apparel industry. VF Corporation, Levi Strauss, and other leading manufacturers have formed “quick response” partnerships with both discounters and department stores. By early 1993, VF had some 300 partners in its flow replenishment system and promoted the partnership idea with advertisements in trade publications.

Channel partnerships have been hailed as the embodiment of a new philosophy for buyer-seller relations — one that can be applied well beyond the consumer products marketing arena. The concept uses modern information and communications technologies to lower costs and improve service to the customer. The customer can be a nurse obtaining supplies in a hospital, a factory worker being supplied with a component, or a consumer buying apparel in a department store. A CSC Index Group report on channel partnership, for instance, cites examples of successful partnerships in hospital supply distribution, in marketing of pharmaceuticals to veterinarians, and in retailing.2

In this article, we focus on partnerships between retailers and their suppliers, which are spreading quickly and have potentially enormous impact on marketing efficiency.

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References

1. Index Alliance, “Channel Partnerships: An Investigation” (Cambridge, Massachusetts: CSC Index, Inc., 1991), pp. 28–31.

2. Ibid.

3. R. Johnston and P.R. Lawrence, “Beyond Vertical Integration: The Rise of the Value-Adding Partnership,” Harvard Business Review, July–August 1988, pp. 94–101.

4. J.H. Hammond, “Quick Response in Retail/Manufacturing Channels,” in S.P. Bradley, J.A. Hausman, and R.L. Nolan, Globalization, Technology, and Competition (Boston: Harvard Business School Press, 1993), pp. 185–214.

5. R. Bravmen, “Quick Response — An Introduction,” in Quick Response 93 Proceedings (Pittsburgh, Pennsylvania: Automatic Identification Manufacturers, Inc., 1993), pp. 1–8.

6. S.A. Greyser and J. Teopaco, “Crafted With Pride in the U.S.A. Council” (Boston: Harvard Business School, Case No. 9-587-110, 1987).

7. J.D. Blackburn, “The Quick Response Movement in the Apparel Industry: A Case Study in Time-Compressing Supply Chains,” chapter 11 in J.D. Blackburn, ed., Time-Based Competition (Homewood, Illinois: Richard D. Irwin, 1991).

8. Kurt Salmon Associates, “Efficient Consumer Response: Enhancing Consumer Value in the Grocery Industry” (Washington, D.C.: Food Marketing Institute, 1993).

9. G. Whalen, “Crisis vs. Opportunity,” in Quick Response 91 Proceedings (Pittsburgh, Pennsylvania: Automatic Identification Manufacturers, Inc., 1991), pp. 100–106.

10. Kurt Salmon Associates (1993), p. 1.

11. For a detailed description of one manufacturer’s system, see:

R.D. Buzzell, “Vanity Fair Mills: Market Response System” (Boston: Harvard Business School, Case No. N9-593-111, 1993).

12. The probability of being in stock at the time the next order arrives (the service level) can be set at any desired level below 100 percent. The 95 percent in-stock service level has been adopted in many quick response partnerships.

13. See Hammond (1993).

For an example, see:

J. Hammond, “Dore’ Dore’ ” (Boston: Harvard Business School, Case Number 9-692-028, 1993).

14. For a summary of the early tests, see J. Hammond, “Quick Response in the Apparel Industry” (Boston: Harvard Business School, Case No. 9-690-038, 1990).

15. Kurt Salmon Associates (1993).

16. R.D. Buzzell, J.A. Quelch, and W.J. Salmon, “The Costly Bargain of Trade Promotion,” Harvard Business Review, March–April 1990, pp. 141–149.

17. Index Alliance, “Management-by-Fact: Transforming Decision-Making” (Cambridge, Massachusetts: CSC Index, 1992), pp. 14–17.

18. Kurt Salmon Associates (1993).

19. D.A. Cole, P.H. Kowalczyk, and P.G. Brown, “Supplier to Retailer: Streamlining the Inventory Pipeline” (New York: Presentation to the National Retail Federation Conference, 14 January 1992).

Acknowledgments

This research was supported by the Division of Research, Harvard Business School. The authors are grateful for the assistance of executives in several retail and supplier firms and consultants at Kurt Salmon Associates and CSC Index.