Chapter 3

Collaboration in
the retail supply
chain
Richard Bell and Richard Cuthbertson
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Vertically integrated retail chains are not new phenomena. UK retailer Boots the
Chemist, for example, has operated as a vertical chain since the nineteenth century.
However, the notion of collaboration within the supply chain has developed as a sub-
ject in its own right with the emergence of powerful retail chains that have changed
the balance of power vis-à-vis producers. The nature of collaboration is influenced by
a variety of factors. The type of retail store, the nature of the products sold and the
ownership of the intellectual property of the products are amongst the more import-
ant determining factors. Information technology has allowed independent commercial
entities to behave as if they are part of a vertically integrated chain. This chapter
examines the contribution of those factors that shape the construction of individual
supply chains. It begins by examining the principles of supply chain efficiency and
identifying the requirements necessary to introduce a consumer-responsive supply
chain. It goes on to address the operational and financial implications of introducing
a ‘consumer pull’ chain, identify the industry-wide programmes of collaboration that
exist and explain the relevance of collaboration in the context of increasing retail
concentration. Finally, it discusses how the structure of the supply chain is shaped
by the pattern of retail shops, the type of products involved and the requirement to
also deliver direct to the consumer. The chapter argues that collaboration between
suppliers and retailers is now essential if aggregate efficiency is to be achieved.

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 Collaboration in the retail supply chain 53

Principles of supply chain efficiency

Producer push
The traditional supply chain is based on the source of production. Manufactur-
ers procure the raw materials necessary to manufacture a product that had been
designed to meet a perceived consumer need. The driving force of manufacturing
was production efficiency. Such factories are engineered for low-unit-cost produc-
tion and usually embrace the concept of long production runs and minimal product
changes. It is this philosophy that inspired Henry Ford to offer the Model ‘T’ in
‘any colour, so long as it’s black’. His goal was to simplify the product, maximize
production efficiency, minimize the cost and stimulate consumer sales and profits.
Such a philosophy focuses on the efficient use of fixed assets such as plant and
equipment, and undervalues current assets such as inventory and other working
capital. The philosophy also assumes that price rather than variety is the primary
consumer motivation. As disposable incomes rise, consumers place an increas-
ing value on variety and self-personalization, and although Ford’s Model ‘T’ held
a virtual monopoly in private motoring in the US for several years, eventually
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customers wanted greater choice.
In a production oriented supply chain, production determines availability and
usually equals sales. Typically, the manufacturer sells to wholesalers, who in turn
supply independent retailers. This is illustrated in Figure 3.1. The manufacturers
base their production schedules on previous sales rates to the wholesaler. Manu-
facturers are unaware of the stock levels in the wholesaler, the sales rates of the
wholesaler, the stock levels in the retailer and generally the level of consumer sales.
In essence each component in the supply chain operates in isolation. Table 3.1
shows an example of the effect on stock and subsequently production volumes of
a manufacturer attempting to increase output without understanding consumer
sales. In this situation, retailers are unable to influence consumers to increase their
purchases.
Table 3.1 examines the situation of just one product moving down the supply
chain. However, retailers do not sell just one product; they sell a wide range of
product lines, and stock availability at wholesalers across the product range will

Product flow
Manufacturer Wholesaler Retailer
Consumer
Information flow

1. Forecast
2. Make
Push 3. Deliver

Figure 3.1 A push supply chain

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 54 Retail Strategy

Table 3.1 Example of an inventory replenishment in a push system

Manufacturer Wholesaler Retailer

Consumer Overstock
as a
Production Overstock Received Remaining Ordered Unsold Bought percentage
of sales (%)
500 500 500 500
0 0 0 0
550 550 550 500
0 0 50 10
650 650 500 500
0 150 50 40
800 350 450 500
450 50 0 100

influence total retailer sales. Variable product availability at the wholesaler will
constrain retail sales on some lines while excess stock on other lines will not neces-
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sarily increase sales unless discounted in price. A retailer therefore seeks balanced
stock availability across each of the product lines they choose to sell.
A push supply chain controlled by the manufacturer is often characterized by
large fluctuations in stock levels, erratic changes to production schedules and the
use of time as a buffer as consumers order product that is not available at the retailer
and return at a later date to collect it. Production-led chains do not necessarily lead
to production efficiency due to unplanned changes to production schedules. The
cost of current assets is high as stock is often used to buffer each stage in the chain.
Retailers often fail to maximize sales because of variable product availability, and
consumer satisfaction may be low.

Consumer pull
The lessons from a producer push supply chain are that:
retail sales can be maximized if there is available stock across the entire product range,
production can be increased if consumer sales are maximized, and inventory can be
reduced if production and deliveries are aligned to the level of retail sales.
The contemporary supply chain is thus focused on consumption, rather than pro-
duction, with the volume of consumer purchases used as a surrogate measure of
consumption. Consumer purchases equate with retail sales and these can be meas-
ured using store census data, which measures sales of each product line from each
store for a given time period. Consumption may differ from consumer purchases
since households carry some stock, particularly of grocery items, and household
stock levels can fluctuate. Consumption can only be measured by sample data,
which is usually insufficiently accurate to drive the supply chain. This is discussed
in more detail later in this chapter. The chosen period of replenishment time will

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