Technology Hurdle
In the business press, we see articles on radio frequency identification (RFID) nearly everyday. Major retailers are setting technical and business process requirements and deadlines for their suppliers. No one doubts that RFID will be an absolute requirement in the future; the issue is not if, but when. However, RFID is just one element of a continuing process on the part of the retailers to drive cost out of the supply chain. Other elements have included electronic document interchange (EDI) and more recently, UCCNet, a global repository where enterprises register item data and share standardized, synchronized supply chain information. Together, these technology driven requirements represent an ever-higher technology hurdle that must be cleared by manufacturers if they want to participate in the sales success of the retailer.
Wal-Mart's drive toward "every day low prices" is not new and it has clearly paid major dividend's making Wal-Mart the largest company in the world. It continues this quest, leveraging both its size and technology to drive cost out of its supply chain. If a manufacturer wants to do business with Wal-Mart, it has to provide more than just product. It absolutely must meet Wal-Mart's technology requirements.
Wal-Mart is not an isolated example; it is just the one we hear about most often. Mandates exist from Marks & Spencer, Tesco, Target, Albertsons, Best Buy, and other major names. Often, a mandate is for the same technology, but with individual twist. Meeting Wal-Mart's RFID requirements is not the same as meeting Tesco's or Target's. The manufacturer needs both the ability to meet the technology requirement and to tailor its response to the demands of the individual retailer.
A mid-sized food company recently had an introductory meeting with buyers from a major retailer. A key part of the meeting was the retailer's probing into the food company's ability to meet the retailer's technical needs. It was clear, if the food company could not jump over the retailer's technology hurdle, no second meeting was necessary.
A food processor tells us that each year, the percentage of business coming from its four largest accounts continues to rise. One of its executives described it as, "The small are getting both fewer and smaller while the large are getting fewer and bigger." The company has organized its business around the four major accounts plus "other accounts" reflecting the concentration of their business.
Consolidation means fewer decision makers with more power. Each controls a greater volume and market coverage. More importantly, a "no thank you" from one of the major retailers eliminates the manufacturer from a large segment of the business leaving only decreasing options to make up the lost opportunity and volume.
Large manufacturers can afford to invest in technology and continue to meet the demands of the retailers. Due to their scale, they can afford to be on the leading edge in working with retailers to develop technology and business processes. The ability of large manufacturers to work closely with large retailers will result in more of the business going to the large manufacturers, pushing out smaller, less well-funded manufacturers.
However, brand still counts. Will Wal-Mart or Albertsons not stock Campbell's or Quaker Oats products? The retailer controls access to the consumer, but the brands help bring consumers into the store, so brands will continue to count. That means that manufacturers with strong brands will continue to get their share of the category. However, the maintenance of the relationship with the retailers will mean that manufacturers still have to meet the technology demands of the retailers, in most cases.
Small and mid-sized manufacturers without a strong brand, face a difficult future. Without significant investment, they cannot jump over the technology hurdle as demanded by major retailers. Without a strong brand or unique product, they cannot expect an exception from the retailers' technology demands. How do these manufacturers compete for a share of the business controlled by the large retailers?
If the small and mid-sized manufacturer chooses to jump the technology hurdle, they can either throw money at their existing systems or replace the aging systems and start fresh with a foundation that will increase their ability and flexibility in both the short and long term.
Working with a foundation of an old system can lead to meeting the requirements of the technology hurdle but with greater cost, less flexibility and an increased risk of compliance. Either add-on technology or custom work will be required calling for both an investment and increased on-going cost. However, starting from the base of the old system can lead to meeting the requirements of the technology hurdle.
Changing from an older system to a new one resets the technology base for the manufacturer. While expensive and time consuming, it should provide for some of the demands that make up the technology hurdle. More importantly, it enables to manufacturer to react more quickly and cost efficiently in meeting the remaining demands and those that will be present in the future.