CATEGORY MANAGEMENT IN INDIAN RETAIL BUSINESS

CONTEXT

Category management is a relatively new concept in the retailing business. It is a way of

managing products on the level of a product group, rather than on the level of single
products. There are too many connections between products and therefore, managing a sole
product (as was done by the old-fashioned product manager) would give too much leeway
to the optimisation process in a business. Especially when the optimisation process is seen
as the total optimisation from buying through merchandising cost factors surface, which can
only be managed at product group level, and beyond. Such costs involve logistics, both
physical logistics and paper logistics (ordering, invoicing, etc.). These downstream factors
require an approach, which surpasses the single product. Furthermore, there are factors
upstream which require optimisation at group level, especially when it comes to cross
effects between products: spaghetti and spaghetti sauce, diapers and baby food, certain
actions and promotions etc. In this field too there are many possibilities for further
optimising the sales and merchandising approach.

The introduction of category management has a close connection to development in the field
of supply chain management. When logistics is taken as point of intervention then other cost
factors enter the arena as well, the most important one being stocks in the pipe line. To be
able to reduce these stocks modern management techniques must be installed together with
modern information technology (EDI). The long-term push system (forward buying with
sometimes two months of stock) must be replaced by a pull system: efficient replenishment
on a short-term basis, sometimes as short as 6 hours. This requires a number of interventions
throughout the whole supply chain.

Category management, therefore, is an umbrella concept covering a number of

developments taking place in retailing business. This paper tries to establish the status quo
of category management.

INTRODUCTION

Category management defined in theory

Category management is a management system, merely found in consumer-oriented

companies, that focuses on optimising the marketing and sales effort with regard to the
product portfolio. Where brand management focuses on the optimisation of one single
brand, category management focuses on the optimisation of a group of brands: a category.
Category management is therefore nothing less than an optimisation process. Nielsen (1992)
defines category management loosely as "a process that involves managing product
categories as business units and customising them on a store-by-store basis to satisfy
customer needs" (p. 9). Thus:-
(1) optimisation does not take place on a single product or brand level,
(2) nor on an average market level (macro-marketing),
(3) nor on the level of separate business functions or departments
but instead,
(1) on the level of a cluster of product,
(2) on the level of stores (micro-marketing) and
(3) on the level of integrated functional departments.
This optimisation process is interesting both for manufacturers as well as for retailers and
retail chains. It must be noted that the Nielsen definition is applicable for manufacturers as
well as for retailers.

Brian Harris (1993) describes category management in terms of a three step definition
encompassing a philosophy, a process and an organisational concept: "First, it is a
philosophy for strategically managing a retailer's or a supplier's business that recognises
categories as strategic business units for the purpose of planning and achieving sales and
profit goals. Inherent in this philosophy is the belief that simply managing at the depart-
mental level (grocery, meat, health and beauty care, etc.) does not provide adequate strategic
focus" (p. 5).

Another definition comes from Laureys (1995) who defines category management as "the
process whereby manufacturers and retailers come to higher mutual profitability by co-
operating with a double objective: (1) raising turnover of a category by better tuning in to
the needs of the consumers, (2) reducing inefficiencies by better understanding and better
managing the cost structures".

Van der Ster (1993a) goes further into the specifics of category management when he makes
a distinction between "classical buying" and "category management"

Aspect Classical Buying Category Management

Point of reference Via buying to selling; buy to Via selling to buying; "buy to
buy" and "product push" from sell" and "product pull" from
supply of procurement demand of retail marketer
specialist
Focus Product focus; SKU Productgroup focus; SBU
management management

Core competency Separate buying; negotiations Integral supply chain

on product and/or brand level management; negotiations on
the level product flows

Performance Gross margin; turnover and DPP-targets; turnover and DPC

criteria buying conditions
The aspects discussed above depict an important change in attitude and skills of the buyer.
Where the classical buyer was made responsible for buying only (merely negotiating
discounts and conditions), the category manager is more like a manager. He manages a
group of products as a complete business: buying, merchandising and selling, logistics,
finance and he is made responsible for the profit or loss as the bottom line.

Another way to look at it from the retailers’ perspective, which could be to make a dis-
tinction between the supply side and demand side (Coca Cola Report no. 3, 1992). At the
demand side (the consumers) it is important to improve marketing programmes to maximise
the market performance of each store. One could think of
(1) Marketing (consumer target groups, store layout, category management, competitive
strategies),
(2) Merchandising (the tactical activities of category management including pricing and
assortment made daily and weekly), and
(3) Operations (the daily and weekly operations of the store to meet its goals in
merchandising as well as store operations).
(4) At the supply side it is important to reduce logistical cost where one could think of
Network Planning (the strategic network positioning of plants, suppliers, distribution
centres and cross dock facilities to continuously improve these supply side
processes),
(5) Network Management (the daily matching of store level demand with production,
inventory availability and other network considerations) and
(6) Network Node Management (the daily and weekly operations of the various nodes
in the network, e.g. distribution centres, cross-docks, manufacturing plants)
to ensure they are performing at or above expectation. All the factors will have to be
managed by the category manager. Logistical cost especially introduces an important area of
concern for the category manager. The main developments in this field are labelled ECR
(Efficient Consumer Response, The USA-based term) and SRC (Supplier Retailer
Collaboration, the European-based term), both to be considered as attempts to implement
supply chain management.

The GEA Consulting Group (1994) in their study for Coca Cola (project 4) define:
"Supplier/Retailer Collaboration (SRC) is when both retailers and suppliers share
proprietary internal or external data, and/or share policies and processes used in decision
making with the clear objective of sharing the benefits" (p. 9).

How to define and position categories

Te first step necessary when starting up category management is to define the categories.
Nielsen (1992) gives a number of rules of thumb. First, they advise that information be
gathered from all types of sources: manufacturers, market research bureaux, consumers and
staff. The views of all these parties could differ strongly in which case importance should be
given to the consumer's view. After defining the category the next step is to define sub-
categories. The definition of sub-categories requires that the trends behind the subcategories
are known. What are the trends in shampoos, what are the trends in conditioners, what is the
substitution effect between the two? Understanding the trends in consumer behaviour leads
to a perception how products should be categorised and thus indicating how they should be
shelved. Furthermore, there often is a relationship between sub-categories within one
category and sub-categories within another. For instance, tomato ketchup has a relationship
with spaghetti; the question arises whether or not they belong to one category. This leads to
marketing aspects of defining categories. It is the choice of the retail chains to define their
categories in order to please their customers. Retail chains will differ in their choices; this is
due to different managerial styles and also changes in cultures. Finally, Nielsen also
mentions logistical considerations.

Classification schemes are also important in categorisation of products. Classification

schemes help to define the characteristics of products in the markets. Nielsen (1994)
mentions the following roles:

 specialist (soft drinks, wine, fresh)

 traffic builder (beer, dairy products, canned food)
 service (paper, coffee/tea)
 high margin (snacks, detergents, tobacco, sauces)

These four classes of products and/or product categories require different treatment.
Specialist products require a large assortment, an innovative stance and expertise. Service
products require a limited assortment and competitive pricing. High margin products require
communicative support and good presentation. Finally, traffic builders require considerable
promotional activity with strong focus on competitive pricing. This means that products in
each of the quadrants share a marketing problem and a marketing approach. Therefore it
could be wise to cluster such products in one category. Thus, beer and soft drinks are
(considered to be) traffic generators just like dairy products. The marketing problem is also
the same: all of them are mega losers in the Dutch market place. That is why all these
products could be clustered in one category where the category manager is given the task to
solve the marketing problem.

The category manager has to execute functions that have a depth and width more than a he
can cope with. Therefore, structural changes have to be implemented in order to
accommodate him with his job. The theoretical approach to this is that the both sides i.e.
supplier/retailer must install teams to help the category manager to manage his category.
The supplier will install an account team and the retailer will install a category team.
Sometimes the supplier will install a "category team" next to the account team. The
composition of such a category team is rather vague when it comes to literature. Andriesse
(1994) just mentions that such teams should be composed of all specialists needed to co-
ordinate the flow of goods.

Retailer's category management

How to define a category

Retailers face q huge challenge to cluster products into groups of products (categories)
which give managerial and consumer marketing advantages. Because the number of
products for a retailer is considerably higher than that of a manufacturer the clustering
problem may even be greater. The questions that must be dealt with relate to how to define a
category and on what basis. Furthermore, how do you measure the performance of a
category and how do you measure whether or not the classification of product into a
category was the right one.

Selection of categories on the basis of interrelatedness is more useful therefore detergents,

soap cakes, bath soaps, toilet cleaners, air purifiers are generally stacked together. The
moment of use, the substance it is made of and the way the consumer's consider it as thus
being related. On the other hand, Deepfreeze, fresh produce, greenery's and tinned food do
not form a category since there is too little interrelatedness. With regard to the moment of
use convenience products and impulse products can be one category.

The consumers determine the importance of a category. Consumers do not consider toilet
paper important but may consider groceries, coffee, tea, vegetable and greenery’s as
important. It is very difficult to establish a logical categorisation of products as viewed
by the consumers. An example is ice tea, which is classified as tea in cartons, but it is
classified as soft drink in tins. The positioning as viewed by consumers causes this
classification. Still both sorts are delivered by one supplier. Almond paste cake is
classified in three categories: deep freeze, fresh bakery and prepacked. Orange juice also
poses a number of classification problems: in tins it is assorted on the tin shelf but in
cartons it is a soft drink (in a cooled display when it is cooled and on the shelf when it is
not). The manufacturers try to abuse the classification problem by having the product
classified in as many categories as possible. To dot this they pay a visit to all respective
category managers. One way to solve this problem is to ask the NFI (Nederlands
Frisdranken Industrie) to give their view. In such a way it was decided that PUNICA is a
nectar and not a soft drink.

The Netherlands is one of the few countries with a packaging return system with regard to
bottles. This system is very expensive. Therefore there is some tension between supplier
and retailer in the softdrink and beer industry. Especially this is caused by the U-shape of the
market: discounters on the one hand and specialists on the other. The middle is missing.
When a company finds itself in the middle with beer and soft drinks like Albert Heijn (it is
not a discounter but it is not a specialist either) then it is "stuck in the middle". Soft drinks
and beer are thus mega losers for Albert Heijn. This adds to the tension. Interesting is that
Albert Heijn has now classified these products both as traffic generators but also as mega
losers and now tries to make the category healthy again. That however is a tough job
because it almost requires a total restructuring of the way these products are sold in the
Netherlands, especially the packaging return system needs total overhaul.

Category management is a matter of the retailers, claims interviewee. The suppliers make
use of account managers. These account managers, however, often have too little clout to be
able to negotiate on the proper level with the category managers from the retailer. This is
especially the case for large suppliers where there often is a tall management structure.
When confronted with smaller suppliers there are less problems because then often the
commercial vice president or even the CEO does the negotiating. In fresh produce there are
also less problems because these products require by nature fast decision making. As an
example that suppliers sometimes do strange things serve Carlsberg and Tuborg (premium
A-brands) which were launched through ALDI.

The category managers are measured on the basis of return on investment and market share.
This is done on a yearly basis. Category managers within Albert Heijn are real
entrepreneurs! Another interviewee mentioned that DPP and also activity based costing are
the performance indicators measuring the performance of the category. Thus there is a
difference between measuring the category and measuring the category manager.

Cross selling and cross subsidisation effects are rare, the interviewee says. The
manufacturers claim otherwise: Heineken suggests that beer is a traffic generator and
therefore allows a lower PoS price. Whether or not this is true can be measured using the
PoS sales data. It is very expensive however to calculate these effects because of the long
computer time it requires. Walmart does provide the suppliers with these figures but asks
something in return: better prices and conditions. The suppliers see it as a saving from
buying Nielsen figures.

Another interesting notion from this interviewee was that Albert Heijn and Coca Cola go
together to seminars on category management. It appears that in the relationship (partner-
shipping) there is a large overlap of interests. Interviewee says this overlap is 80% where
20% is contradiction.

INTERGAMMA is the co-ordinating organisation covering the operations of GAMMA

Netherlands and GAMMA Belgium, and KARWEI, all being shops in the DIY sector. In
the discussion GAMMA was focused on. GAMMA has 19 categories: iron, paint, etc. The
classification is based on the perception of the consumer: where does he think a product
must be found. Here again there problems of classification: is kit a glue or should it be
classified as belonging to tiles, or both?

The performance of a category is measured on the basis of turnover and profit. DPP is not
yet available. Cross selling effects can be found in some occasions such as paint and
brushes.

MAKRO is a wholesaling organisation with 6 large shopping centres in Holland and more
than 100 all over the world. MAKRO is in the process of introducing category management.
To this end the two main groups FOOD and NON FOOD are divided in three subgroups:
Hardware (DIY, household, textiles, toys, garden furniture), Soft (confection, hosiery trade),
Electrical (browngood, whitegood, small appliances, PC's, home entertainment, etc.). These
subgroups are responsible for managing the assortment including space management. This
means that buying and merchandising will be managed by the product group manager. The
task of the product group manager is to have the right assortment, the right presentation and
to have an optimal return on investment per meter shelf space.

DYNARETAIL is a retailing organisation covering the activities of DA, DA Attence, STIP

and EURODROGIST. DYNARETAIL discriminates 4 main categories: health, luxury and
beauty, gifts and household, personal care. Within these four main categories there are
subcategories: health is divided in homeopathy, vitamins and supplements, OTC, reform,
etc. The category is measured on the basis of return per meter shelf space and on the
performance of the supplier. That is different from other retailers because DYNARETAIL
has merged with DYNADRO, a wholesaling organisation.

INTRES is a retailing organisation with 2300 shops in Europe. It is based on a franchise

type of co-operation between Headquarters and the shops. The shop-owners are full
entrepreneurs. One of the examples is INTERSPORT with shops in 15 countries.
Headquarters has the responsibility to reach uniformity in the categories, for instance, snow
and ice, racket and ball, hike and bike, etc. Within these categories there are sub-categories
such as, golf, football, soccer, etc. The size of the shop determines whether the assortment is
deep and wide. Are you dominant in your local market, or are you a specialist? The
categories are measured by turnover per product(group), margin and by the rate of products
sold on sale.

Managing categories
Now that the categories are defined, a management structures has to be designed including
management positions, to operate the function of category management. Furthermore, a
number of instruments, mechanisms and techniques must be in place to facilitate the
category managers with carrying out their duties. Just as in the situation of manufacturing,
the principal questions asked during the research were:

 who does the category management?

 how does he/she make a category plan?
 is there a category team assigned?
 on what grounds is the category manager evaluated?
 who manages the portfolio of categories and how is that done?

Albert Heijn has organised its assortment in 27 categories handled by respective category
managers who are headed by 8 unit managers. Each unit manager oversees therefore 3 to 4
categories. The unit managers are headed by the Commercial Director. Headquarters offers
modules from 1 meter up to 20 meters. The local shop (company owned or franchise)
decides which part of the module is actually being shelved. The local shop manager is
responsible for the product portfolio. The optimisation within and between categories is
done in the shop.

The category managers draft a yearly category plan in the form of a three year rolling plan.
This plan is drafted together with the preferred supplier. The preferred supplier is chosen for
each category on the basis of reputation. To stay preferred supplier the interests of the
retailer (and thus also of the competitors of the preferred supplier!) should be taken into
account. The category plan is measured bottom line. Category managers are considered to
be entrepreneurs and they are not bothered by weekly or monthly evaluations. Therefore
only the target (volume and cost, on the basis of activity based costing) are being looked at.
Apart from bottom line targets there are subtargets: market share, fair share, price image,
margin. The unit manager is measured on the basis of margin.

The role of the preferred supplier is interesting. As stated earlier, soft drinks and beer are
mega losers (40 million guilders yearly) for Albert Heijn and thus the category manager is
assigned the task to make the category healthy. To that end Coca Cola is asked to participate
heavily in the restructuring program and to take the lead.

Apart from working together with logistics managers there is no formal category team. The
category manager works alone. There is however a serious amount of expertise available
from staff, such as market research. An interesting situation arises when the classification of
products in a category as seen by the manufacturer does not match with the classification as
seen by the retailer. That would mean that one category manager (account manager) of the
supplier must talk to more than one category manager from the retailer. In such situations
the supplier is kindly asked to change the classification to achieve a better match.

INTERGAMMA has 19 categories managed by 15 assortment managers headed by 3 Head

assortment managers. The three main categories are Decorative, Constructive and
Hardware. These groups (Business Units) are subdivided whereby one assortment manager
can manage more than one subgroup. Assortment managers are assigned assistants. Where
the categories are managed by category managers, the vice president commercial
management is responsible for managing the portfolio. Categories are measured on the basis
of turnover and profit and turnover contribution.

The assortment manager drafts a yearly assortmentplan in close co-operation with the Head
assortment management. The Heads come up with themes based on spring, summer, fall,
etc. Then the assortment managers draft their plan: status quo, position, actions (in broad
terms). Once a year these plans are reviewed. For practical reasons these reviews are spread
all over the year. This also means that the category plans do not really feed the yearly
planning cycle.

The assortment manager together with his assistant could be called a category team. In this
team no logistics is involved. There is no preferred supplier system, although with excellent
suppliers there exists a co-makership type of relationship. Space management plans are
drafted by INTERGAMMA based on input from suppliers. The category manager is
measured on the basis of turnover, profit, realisation of budget, innovation.

MAKRO is in the process of introducing category management. The product group manager
now has to draft yearly commercial plans with P&L per product group and per location.
Each location has its own product group managers. Two types of consultation will surface:
commercial consultation between Head of the Buying Department and the product group
manager and second, product group consultation with product group managers of the
locations. The management technology consists of monthly reporting of actual/planned and
of efficiency projects (space management, turnover/m, etc.). MAKRO does not really have a
system of category captains. They are however willing to include the advice of large parties.

De Boer Winkelbedrijven operates norms per product group in order to measure their
performance. These norms are different for respective shops in their respective situations.
Per product group a product plan is made. It contains a budget per product group, margins,
promotions and actions. There is no real category team other than the category manager
working together with his assistant. There is however much consultation with space
management and logistics on a regular basis.

INTRES is in the process of changing its policies from classical buying into category
management. This means that a number of practices are not yet implemented, for instance
space management. There is a collection plan however for clothing. This plan decides for
what number of percentage points certain products must be carried in the collection. For
existing formulas this collection plan is obligatory for 50% of the collection. New formulas
will be 100% obligatory. The collection plans are written by the buyer. A buying committee
of 6 people decides then on approval. The collection plan mentions buying price, selling
price, colours and sizes.

MAXIS operates 8 large shops: hyper markets and thus it can be compared with MAKRO.
The difference is that MAXIS is not a wholesaling organisation. MAXIS makes intensive
use of category plans. Every buyer (category manager) of every shop discusses biweekly
with his Head the following items:

 assortment
 suppliers
 problems
 advertising policy (how many activities, targets)
 budget
 sales price, margin, turnover

Salesprice becomes more important every day. At this moment it is ranking second
according to interviewee. MAXIS does not make use of category teams. There is extensive
consultation however. Every 4 weeks the respective category managers of all 8 shops have a
meeting. All the heads also meet every 4 weeks.

Category management for DYNARETAIL is different from that of other parties because
they work together (full merger) with a wholesaling organisation. This means that part of the
category management is implemented in the wholesaling organisation. Furthermore, the
shops are shop owned (not company owned and not franchise) which means that the
category management cannot be more than a kind of friendly advice. Still it is interesting to
see how it works. The assortment policy is formulated at the headquarters of
DYNARETAIL. This means that the two functions of Commerce and Communication are
delegated to DYNARETAIL. DYNADRO is responsible for Automation and Logistics. The
category plans are prepared by the 4 product group managers Beauty, Health, Personal care
and Gifts and Household. The category plans contain assortment, space plans, turnover and
ROI. The buying function however is the task of DYNADRO. The field managers are
functionally managed by Operations of DYNARETAIL but they are hierarchically managed
by DYNADRO. DYNADRO is organised into 4 distribution centres and each distribution
centre has 5 retail managers, for each formula one.

Managing the interface between retailer and manufacturer

Just as in the situation of the manufacturer, the introduction of category management with
the retailer has its own consequences for the interface between the retailer and the
manufacturer. The interface could change in a number of ways. The questions asked during
the research were:

1. Does the power balance shift between manufacturer and retailer due to the introduction
of Category Management?
2. Do retailers want to outsource their Category Management to manufacturers; under
what circumstances and up to what extent?
3. What is the link between Category Management and Supply Chain Management?

The matter of dependency versus independency received answers from Albert Heijn. Not all
information was shared. In the first place, Albert Heijn does not like monopolies. Examples
of companies having an (almost) monopoly are Douwe Egberts (coffee, tea), VNU
(publishers) and Olvarit (baby food). Albert Heijn always tries to have at least a duopoly.
Therefore they have their own label coffee and they have searched for a German supplier for
baby food. At the other side of the scale, full competition means that there are a high
number of suppliers and that there is much rivalry which makes life difficult. That requires a
solution. In the case of wines (where there are a large number of chateaux) the solution is
found in rack jobbing where one party is responsible for all wines. Idealistically, Albert
Heijn pursues the situation of an oligopoly where there are a limited number of suppliers,
maybe 3 or 4.

The second observation is that Albert Heijn strives for chain dominance. This means that
most of the distribution is taken care of by Albert Heijn if only to reduce the cost of the total
supply chain. Furthermore, Albert Heijn tries to differentiate in the market, thus creating
loyal consumers. Loyal consumers also present a powerful factor in the supply chain. To
achieve chain dominance Albert Heijn tries to avoid the presence of wholesalers and
distributors and wants to do business directly with the supplier. The wholesaling and
distribution function is taken care of by DC's from Albert Heijn. According to interviewee
both parties, supplier and retailer, want to achieve chain dominance. This means that Albert
Heijn takes a totally different stance from that of Walmart which makes replenishment a
responsibility of the manufacturer. Walmart sells shelf space in the form of distribution
rights and the manufacturers can make the best of it. Out of stock is a matter in the first
place for the supplier. To this end Walmart sells PoS data to suppliers. As must be clear,
Albert Heijn is much more careful with these data. Albert Heijn provides these data on an
aggregate level to support manufacturers in their production planning and in order picking.
Detailed information is kept for its own use, examples being time series analysis, local
geography, market basket analysis (cross effects), the effect of promotions, etc. These types
of information are predicted to be available in due time.
Supplies in the chain must be diminished in the Albert Heijn system. That means an end to
the forward buying system. In the Netherlands the average stock is 14 days with 21 days
term of payment and 60 days and 90 days as opposed to France. Coca Cola and Heineken,
both party in supply chain projects, can deliver within 6 hours to the DC. Within 8 hours the
shops are delivered. To be able to achieve such speed EDI is implemented for all SKU's in
beer and softdrinks. The implementation of EDI also allows paperless information flows.

INTERGAMMA does not work with preferred suppliers, maybe because the situation in the
DIY is not as advanced as in the other retail sectors. Category management however will be
introduced, although it must be an effort from both sides. Supply chain management is also
something that is in the first phase of introduction. Ordering takes place through EDI but
invoicing does not (yet). An important problem in advancing supply chain management is
that not all shops have implemented scanning systems. Furthermore, not all shops are
willing to implement scanning systems and because INTERGAMMA is a franchise
organisation where HQ does not have enough clout to force these developments. Still the
expectation is that all shops will use scanning in due time.

INTRES also knows the problem of scanning. Not all formulas use scanning and some
formulas never will. Especially fashion shops will probably never use scanning, because
scanning requires a stable pattern of products. Still INTRES is in the process of introducing
EDI, with the FLY-shops being the first where ordering through EDI is implemented.
Invoicing through EDI takes place with regard to advanced suppliers such as NIKE.

MAXIS owns 8 shops and one DC at Moerkappelle. Although this size is relatively small
they have installed a number of techniques with regard to supply chain management. First,
their own DC allows MAXIS to choose between direct delivery (e.g. fresh produce),
delivery to DC and cross docking. In practice it appears that own delivery through DC's is
cheaper then delivery through the delivery system of the supplier. Still that must be checked.
To that end the Logistics department of MAXIS sends a quotation to the Buying
department. They compare it with the cost of logistics inflicted by the supplier or the
subcontracted transporter by the supplier and then they come to a decision. Thus it is
possible to operate logistics at minimal cost. The aim is to minimise the visits to the
respective shops. Scanning allows MAXIS to follow item movement every day per SKU.
Therefore, automatic ordering will be implemented shortly followed by automatic invoicing.
The savings will be millions per year. Other advantages of this system are supplier planning
(the supplier is required to arrive at Tuesday between 10 and 12) and to follow the
performance of products: slow movers, margin, etc. The lay out and routing of the shop can
also be tested in test shops. Different routings could lead to higher sales.

The system of DYNARETAIL is interesting for its supply chain consequences.

DYNARETAIL is the retailing organisation (DA, DA Attence, STIP and Eurodrogist) and
DYNADRO is the wholesaling organisation. The responsibility is strictly divided between
formula/assortment and warehousing/logistics. The procedure is as follows. The assortment
manager of DYNARETAIL specifies the wanted products based on advice from
DYNADRO and other sources. Then the buyer from DYNADRO negotiates with suppliers.
When the assortment manager agrees the product is adopted on the shelf and a promotion
plan is made. This means that retail marketing specifications plus warehousing
specifications total up to supplier specifications. The system van be compared with
SCHUITEMA. This is a warehousing organisation which delivers to a/o C-1000. The
advantages of this system are the separated core capabilities, easier decision making and
being a profit centre. The result is according to interviewee that Schuitema makes a 2% net
profit and Albert Heijn only 1%. Another difference is hat Schuitema works only with
franchisers where Albert Heijn works partly with franchisers. The Volkskrant of August 26
1997 published that the performance of the franchise shops of Albert Heijn is better than
those of the company owned shops. Thus it could mean that the difference in performance
between Schuitema and Albert Heijn is partly caused by the franchise system which
happens to work well.

MAKRO does not work yet with EDI but they are planning to implement it because it
would allow automatic ordering. At the moment MAKRO uses computer assisted ordering.
The computer comes up with a proposition which products to order and after an intervention
of the product group manager the products are ordered. Because MAKRO is a large
wholesaling organisation without DC's all products are delivered directly. Building a DC
would also not present savings because of the large size of the shops. Only products from
the Far East are first assembled in a separate warehouse.

Another interesting contribution comes from ACF, a company which delivers

pharmaceuticals to pharmacists. The distribution in pharmacy is intensive with a 3 hour
delivery in portions of fl 1000,- where the total market is 1.4 billion guilders. ACF operated
as to date 6 DC's and according to the EIS system (Everything Is Speed). Now they are
cutting back to 2 DC's and they are also cutting back on the EIS-system, because only 40%
is speed and the remaining 60% is simple re-ordering. To be able to implement this new
system an EDI strategy was devised. The aim is to reduce the cost of the chain considerably
by lowering the stocks in the chain, the transportation cost and the cost of communication.
To that end suppliers, warehouses and pharmacists must work together. Therefore they have
chosen transparent EDI-platforms with selected VAN's (Value Added Networks) where the
respective parties can easily connect to. It also means that investments must be made, for
instance the implementation of bar codes. Now automatic ordering is being introduced but
automatic invoicing not yet. A problem is that scanning is not yet widespread in that
business.
SUPER MARKET NAME

Commodity SHOPRITE BIG HAIKO DMART SHOPPER PANTALOON

name BAZAR STOP
FOOD 42.68 20.73 13.50 18.74 ------------ 16.65
NON FOOD 46.39 23.95 12.39 36.16 1.87 21.03
ELECTRICAL 1.06 1.41 4.34 1.75 ------------ 2.16
STATIONARY 4.98 1.01 3.23 6.73 ------------ 1.58
GIFT 1.16 4.34 7.77 2.19 1.87 -----------------
LETHER 1.49 3.23 12.76 4.53 14.98 1.62
ITEMS
GARMENTS ------------ ---------- --------- -------- ------------ -----------------
MEN ------------ 14.98 10.54 9.22 23.22 22.30
WOMEN ------------ 12.23 3.23 3.66 19.66 15.57
KIDS & TOYS ------------ 6.62 8.04 5.27 18.72 6.72
JWELLERY ------------ 1.04 4.44 2.48 4.68 1.89
WATCHES ------------ 0.97 --------- ---------- 1.87 0.13
OPTICALS ------------ 1.13 --------- ---------- 1.87 1.30
SPORTS ------------ ---------- 7.49 1.31 3.74 0.54
MEDICINE 1.29 1.48 4.81 4.39 ------------- ------------------
MISC 0.92 6.82 7.40 3.51 7.49 8.44

". As a matter of fact, Terbeek states that category management will fail due to 5 omitments:

1. CM (Category Management) ignores the total shopping experience; the total shopping
experience is not achieved by category managers; it is a blend of impressions
2. CM concentrates on individual categories rather than groups of complementary and
competitive categories
3. it reflects the old product distribution mentality: how does one brand perform versus the
other
4. it focuses on headquarters and the whole chain, rather than the market performance of
individual stores
it measures performance by gross margin or sales increase instead of direct margin
dollars per square foot and consumer loyalty

Creating a nice shopping experience requires that categories are defined in a more
interesting manner than is the case in an average store, because today's stores are often
organised around the way retailers buy and manufacturers sell, but not the way
consumers think. Terbeek proposes shops to be organised by complementary categories.
For example, in one area of store, you might find an "Italian meal solution centre" with
bread, salad, wine and maybe even appropriate desserts. There could also be "idea
centres" organised by the time it takes to prepare a meal: a 5-minute special and 15-
minute miracles. The counter-effect of this to category management is twofold. First, in-
store logistics might become complicated and second, a distinction must be made
between an administrative category and a shelf category. In the example given, wine
could be found at three different areas in the shop. This means that wine must be
managed at the level of the shelf (what is the performance of wine in each of the three
areas/categories), but also what is the performance of wine in the shop (or chain) as a
whole and how do we manage suppliers? Again we find the split in upstream (or demand
side) and downstream (or supply side). The shelf category is defined and managed from
demand side (merely marketing and merchandising) and the administrative category is
managed from supply side (merely procurement and logistics). This, however, does make
category management extra complicated because it requires the definition of categories at
two levels.