HBR CASE STUDY

A Pain
In the (Supply) Cha in
It's that time again, the end of the quarter, and Exceso is scrambling
to meet wildly ambitious sales goals. The company's aggressive
promotions are pulling in retai lers, but does d isaster loom ?

MONDAY, 10:42 AM
Manufacturing Facility 14,
Exceso Corporation

R. Foley Vinton, CEO of Exceso, shoves
through the heavy plastic strips onto
the factory floor, already wearing his
hard hat and goggles, earplugs draped
by John Butman around his neck, and is relieved to hear
the din of manufacturing. He turns and
holds back the strips so his visitor, ana·
Iyst Andrea Valdini -similarly prepared
for the tour - can step through.
"How many shifts are you running?"
she shouts above the noise.
"Three," replies Foley, not smiling, all
business. "We're essentially running at
full capacity:'
Andrea makes a note on a folded
index card with a tiny pen. "How long
have you been doing that?"
Foley grimaces and decides to dis-
tract her with a partial truth. "Well,
we actually were down last week,n he re-
veals, pointing at a passing auto-
mated material-delivery vehicle.
"Installing some new robotics."
This is, in fact, what took place, but
Foley's desc ription leaves out the cause.
A massive, yet finicky, injection molder
had once again developed a mysterious
inability to create the key piece of Ex-
ceso's flagship product, the ClickZip-
Plus. An image of a line of hiking Cub
Scouts, backed up behind the den's slow-
est member, flashes through Foley's
head; it is the metaphor that illustrates
the effects of manufacturing bottle-
necks, remembered from Eli Goldratt's
book The Goa/.
flSO now we're running flat out to fill
orders." Foley pauses before the molding
machine, whose jaws open as if on cue,
revealing 148 perfect plastic parts in the
distinctive nickel and cobalt colors of
the ClickZ ipPlus. He decides not to
mention that the machine is producing
a yield of 98%, because further ques-
tioning might lead to the admission that
it is running at only 60% of its optimal

HBR's cases, which arejictionai, present common managerial dilemmas

and offer concrete solutions/rom experts.

MAY 2002 31
HBR CASE STUDY· A Pa i n in the (S upply) Cha in
speed. "It all depends on how you define
'essentially full capacity: " Foley thinks.
"Are you going to meet your sales
forecast for the quarter?"
"Our guideline is 9" sales growth.
That's what I told you analysts, and
that's what I've said to my organization."
Foley smiles. "And they generally take
my sales guidelines to heart.'
"How can Exceso acrueve such growth
in trus economic climate? And with the
kind of price pressure you're getting
from retailers?"
R. Foley Vinton, who considers rum-
self a collaborative and progressive CEO,
ponders Andrea's question and can think
of only one thing: the essential, and exas-
perating, difference between customer
orders and consumer sales.
TUESDAY, 1 :38 PM
Midwest Regional Headquarters,
Flemings ValuMart
Alice Dias chuckles to herself as she
swipes her employee ID through the
card reader at the end of the fajita line.
She is late for lunch and hungry because
she's been on the phone with the Ex-
ceso district sales manager for more
than an hour, haggling over purchase
terms for the ClickZipPlus. Alice is de-
lighted to see that Wendell, her brainy
intern from business school, is still
there, engrossed in a worn copy of Com-
petitive Strategy.
"You want to know how to work the
supply chaIn?"she says. "You should talk
tome."
"Get a good deal?"Wendell asks.
"I committed to 3,000 cases of the
four~pack !'
"What?' Wendell is aghast. "Correct
me if I'm wrong, 0 great mentor, but I
seem to recall that we sold only 1,800
cases in the last two quarters combined.'
John Butman ;s a communications con-
sultant, speech writer, and the author of
four business books, including the satire
The Book That's Sweeping America! or
Why I Love Business (John Wiley, 1997).
His first novel, lbwnie, will be published
by the Permanent Press in August.
32
Alice nods. "Correct. But we're buy-
ing at a 6" discount to our standing
price." She sinks her teeth into the fajita.
"Exceso must be a little desperate."
"They're also committing to an in-
crease in co-op dollars for an FSI . And
that's not all." She looks at Wendell as if
challenging him to guess what other
concessions she might have wrangled.
Wendell tries to imagine the most pre-
posterous possibility. "They've agreed to
deliver on Sunday?"
liAs a matter of fact, they have," says
Alice coolly, as if this buying coup were
nothing unusual.
Wendell now turns critical. "Wait a
minute. We don't have warehouse space
for 3,000 cases, so we'll have to pay to
park them somewhere else. Plus, we'll
get whipped for tying up so much capi-
tal. That discount could end up costing
us more than it saves."
"That would be true," Alice nods, "if
I planned to keep the whole shipment.
But I don't.' She leans forward. "The Ex-
ceso rep for the southern region is only
offering a 4%discount, and, because of
their lower volume, the cost of south-
ern's four-pack is already about six cents
higher than ours in the Midwest. I'm
going to ship half of trus order straight
through to them, so they can take ad-
vantage of the discount. Then I'm going
to unload another 500 cases on our di-
verter friends at VXT, at our cost but
with a first option to buy back at a 3"
premium withln 60 days.'
Wendell gasps at the beauty of Alice's
plan. "So we have a handy source of in-
ventory but with no carrying costs. If we
buy back, the price will still be lower
than Exceso's standing price!'
"Leaving us with 1,000 cases for the
quarter, which we can run at a special
promotion. If that doesn't increase vol~
ume by 10%, I would be extremely sur-
prised," Alice says.
Wendell smacks Competitive Strategy
shut. "Do you think Mr. Foley Vinton
knows how his people meet his sales
targets?"
"He knows only too well J" Alice says
and then remembers, "Did I mention
that they also gave me two tickets to the
u.s. Open?"
WEDNESDAY, 7:49 AM
Underground Parking Garage,
Exceso Tower
Martin Wu pulls into the garage, driving
a little too fast, considering that he's run-
ning early for his breakfast mee ting
with a customer. But as Exceso's head of
sales, his driving seems to refl ect his
keen awareness that the pace of every-
thing has acce lerated, including the
speed at wruch sales can turn sluggish.
Martin runs up behlnd a shiny, new
pickup truck with a tidy tonneau cover
and stainless steel step-bars and real-
izes, too late, that Foley Vinton is the
driver. Martin considers driving right on
through the garage so he can avoid the
inevitable question that Foley will ask as
soon as they park but decides instead to
face the issue.
"So, Martin!" Foley calls, waiting for
Martin to lock his car and join him for
the walk to the elevators. "How are we
doing? Are we making OUT number?"
Martin looks Foley in the eye. "No,
Foley. We're not."
Foley retunls Martin's keen gaze. "But
we set the target based on your forecast
data. We all agreed to the plan.'
IIYes. But that was raw data. It con-
tained anomalies."
4< How far off are we?"
"We'll do well to grow sales by 3",'
Foley says nothing, but his face hard-
ens slightly. "I hear this every quarter,"
be thinks. "And every quarter we make
the number. What I need to do is ac-
knowledge Martin's concerns, express
my appreciation for his hard work, ap-
peal to his competitive spirit, challenge
him to exceL"
Martin anticipates Foley's thoughts.
"Welre doing everything we can. We're
offering discounts and flexible terms.
We've got some good display ideas.
We're trying to crack some new ac-
counts. We even agreed to Sunday de-
livery for Flemings:'
Foley nods. "Great. And we've still got
a few weeks."
"Butllook, Foley,"says Martin,almost
plaintively. "Tbere's really only one way
to make the number. And I thought we
had agreed to stop load.ing~
HARVARD BUSINESS REVIEW
 A Pain in the (Supply) Chain· HUH CASE ST UD Y

-=_..0/ _ -

" Exceso's a great company,

but I don't th i nk
they can keep this up
much longer."

MAY 200 2
33
HBR CASE STUDY. A Pain in the (Supply) Chain
'-'---------
"We have agreed -in principle. And
we will, when the timing is right."
"The timing will never be right."
"Yes it wi U," says Foley, mustering
all his well·known calm and rational-
ity. "Anyone of a number of factors
will make the timing better than it is
now. The new-product launch could
give us the window. The share buyback
could. The economy could tum around."
He puts a heavy hand on Martin's shoul-
der. "What we need right now is a lift in
the share price. To get that, we need
some good news. And the best news is
strong sales."
Martin says nothing, but he looks
doubtful.
I'You'1I find a way, Martin. You and
your people always do," Foley says.
"You're masters at the game."
Martin hits the up button, knowing
the discussion is over. As they wait for
the elevator, he gazes blankly at foley's
distant pickup, gleaming in the bluish
light of the luminaire. "Quite the vehi-
cle you've got there, Foley:' he says. "Co-
balt blue:'
Foley squeezes Martin's shoulder.
"Once we have good news, then we can
take the hit and clean things up:'
WEDNESDAY, 9:27 AM
Flemings ValuMart, Near
McKenna, Palash & Zweig Securities
Andrea Valdini - AA batteries and a tin
of mints already in hand - wanders
down the aisle in search of a pack of
tissues. Although she's on a personal
errand, she's always in analyst-data-
coUection mode and can't help but be
diverted from her mission by a glint of
nickel, accented by cobalt. A single four-
pack of ClickZipPlus hangs forlornly
from its peg, surrounded by a grove of
empty pegs where other four-packs and
eight-packs should have been proudly
displayed. A few of the pegs normally re-
served for Exceso products have been
claimed by competing manufacturers,
and the single ClickZipPlus pack looks
besieged.
Andrea finds a manager at the back of
the store."J'm looking for an eight-pack
34
of ClickZipPlus;' she says. "There are
none on display:'
'II know:' replies the manager. "We
have none at all:'
"When will you have them?"
"We'U have plenty of four-packs
Monday;' the manager says helpfully.
"Special price."
"No eight-packs?"
"They're having problems with the
eights:' he reveals." I'll discount a double
four-pack if you want."
'Iyou only have one of them:'
The manager takes on a consultative
tone. "Well, we've got other brands to
" If we go with deeper discounts, we'll move more
product. Duh! But it's not going to sel l through.
It'll end up in their warehouse. We know t hat:'
choose from. The Carlex eight-pack is
a little cheaper, anyway:'
"What about the quality?"
"It's just as good?'
"I'Utry it,"says Andrea.
The manager nods, understandingly.
"Exceso's a great company, but I don't
think they can keep this up much
longer!'
"Can't keep what up much longer?"
Andrea asks, a little annoyed, but not
quite sure why.
The manager wags his hands back
and forth, as if to suggest some kind of
less than desirable behavior.
Is it possible that this store manager
knows more about Exceso than I do, An-
drea wonders, more than Foley Vinton
has told me? "How do you feel about
their stock?" she asks, half seriously.
The manager opens his hands in a
gesture that says, nWho knows?"
THURSDAY, 6:S2 PM
Sales Conference Room,
Exceso Headquarters
Martin Wu is presiding over a boister-
ous meeting of his extended sales tearn,
which includes reps from every region;
staffers from promotion, display, fore-
casting, and key accountsj and assorted
others who've wandered in to offer their
two cents.
"If we go with deeper discounts:' says
a ve teran sales manager, "we'll move
more product. Duh! But it's not going to
sell through. It'U end up in their ware-
house. We know that. And then we'll be
selling refills and dead SKUs and two-
packs and eights for the next two
months."
"Could I just ask a question? Do we
still need to make a profit?" asks Fred,
another manager, with a fine tinge of
sarcasm.I'We used to have this neat
thing called margin. It was really nice.
I'd like to have that agai n:'
Martin almost laughs. "We still make
a margin at the deeper discount."
"Even afrer you figure in the cost of
display and sampling?" asks a younger
manager, with a frown.
"Not sure:' Martin admits. "But we do
before the cost of sales."
"What about manufacturing over-
runs?" asks the veteran."Number14 was
shut down all last week, and now they're
running three shifts:'
"Why are they making so much prod-
uct?" The young salesperson is gen-
uinely concerned.
"They must have believed our fore-
cast:' cracks Fred.
"I think we should just leave the price
where it is, sell what we can) take our hi4
and clean out the shelves:' says the vet-
eran."It's time to send Foley a message."
"Then Foley will send a little message
to us," Fred repHes. I, 'Dear Fred. Thanks
for your many years of valued service.
Now clean out your desk:"
"Alright, listen," says Martin. "Foley
has made a promise to the analysts. The
HARVARD BUSINESS REV I EW
HBR CASE STUDY. A Pain in the (Supply) Chain
--~~~---------------------
analysts have made a promise to the
shareholders. I've made a promise to
Foley. We have to do whatever it takes
to make plan!'
At that moment, Vikas, a key account
manager, saunters casually into the
room. ((Would an order for 40,000 new-
account cases help?"
All eyes turn to Vikas.
"Who's the account?" Martin asks.
"Regency Brands. It's an overseas trad-
ing company. They sell into Eastern Eu-
rope, }iangsu province in China, and
other markets where we have no orga-
nization or trading reps."
uWeird combi nation of territories,"
says the veteran.
The word Udiverter" burns into Mar-
tin's mind. (' What price did you quote?"
he asks, half hoping it will be an offer he
can refuse.
"Deep discount: 9%. If we receive pay-
ment within five days!'
Martin doesn't argue.
UWhat do we know about this com-
pany?" asks the young manager.
Vikas inclines his head as if the ques-
tion were tiresome and possibly irrel-
evant. "We know they're willing to sign
the deal in time for it to count for trus
quarter."
Silence befalls tbe room.
"Well," says Martin, at last. "Let's do
our due diligence on them!'
"The offer is only good until eight
tonight;' Vikas replies. "I suppose J can
make a few calls about them, but they
smell okay to me!'
('How are they going to pay?" asks the
veteran.
"Letter of credit. London bank;' says
Vikas. "That I've already checked out."
Martin Wu looks at the faces of his
team members. Forty thousand cases
would not make the quarter, but it cer-
tainly would help. It would buy time.
Take some pressure off.
"We have to decide;' says Vikas.
('I can hear that old injection molder
running right now:' says the veteran.
"I trunk the folks in Jiangsu province
are going to love the ClickZipPlus;' com-
ments Fred.
Martin nods almost imperceptibly.
Vikas scurries out of the room. Martin
36
doesn't adjourn the meeting, but every-
one knows it's over.
FRIDAY, 10:42 AM
Midwest Regional Headquarters,
Flemings ValuMart
The phone rings. Alice Oias doesn't rec-
ognize the number displayed; it's from
somewhere out of state.
"Alice Dias!'
(4Hello, Ms. Dias;' says an unfamiliar
voice. "I represent Regency Brands."
"Yes?" she replies politely. l'How may
I help you?"
"I am hoping that I can help you;'says
the voice. "We're in a position to offer an
attractive case discount on the Exceso
ClickZipPlus:'
" I believe I already have the lowest
discount available, direct from the man-
ufacturer!'
"I think I can beat it!'
"Well:' says Alice, "I'm listening."
FRIDAY, 11 : 10 AM
Small Conference Room,
McKenna, Palash & Zweig Securities
Andrea Valdini reviews ber notes before
a meeting with her colleagues at wruch
they plan to discuss Exceso and other
current holdings.
"Exceso is a fundamentally sound
company:' she thinks. "They're just
caught in a little whlrJpool created by
slow retail sales, the lull before a new-
product launch, and a sluggish econ-
omy. Foley Vinton has an admirable
track record. ClickZipPlus is still the
market leader, even if the competition
is catching up. Exceso has a strong bal-
ance sheet.
"So why does that empty product di s-
play unnerve me so? It's not like I did an
inventory of every retai I outlet in the
country. My evidence is anecdotal, at
best. If Exceso is loading to make their
numbers, why wouldn't tbe displays be
full? And if sales are off, why would they
be running three shifts to manufacture
product? Their share price hasn't moved
at all in the last six months, but they're
not alone in that. They're due for a rally.
And if they get one, they should be able
to reduce their reliance on loading, if
that's what they're doing. I can't tell
if this is a pivotal moment or just a bit
of a bad patch:'
FRIDAY, 11 :59 PM
Bedroom,
Residence of R. Foley Vinton
Foley Vinton, having turned in early so
as to be fresh for his 7:00 AM tee off, lies
in bed but can't sleep.
"Every business has its tight spots and
difficult moments," he muses. "It's al-
ways a race to close the quarter in this
industry. A leader cannot capitulate to
the concerns, however understandable,
of rus people. He must paint a positive
picture for them. Exhort them to seek
innovative solutions.
"And yet, I didn't like the way my con-
versation with Martin ended. Normally,
we can disagree and finish up with a
laugh. This time seemed different. If I
lose Martin, which is possible, we will
certainly not make our number. He's
right that we agreed to end the trade
loading. But he knows we can't change
just like that. It's almost impossible for
one manufacture r to buck a chronic
industry practice. We can try, but we
have to try at the right time and in the
rigbt way.
C/Besides, there are factors that Mar-
tin's not aware of. We'lJ certainly get
board approval for the capital improve-
ments to manufacturing. That will help
with productivity and, eventually, costs.
We're ready to push the on-Une sales
channel next quarter. That should boost
sales. And, of course, there's the acquisi·
tion. We're very close on that!'
Foley, drowsy at last, lulls himself into
a light sleep, Wnking, "If we can just
get over trus hump, we'lJ have a little
breathing room. Then we can solve this
once and for al l:'
Should Exceso maintain its
aggressive promotion strategy?
Four commentators offer expert advice
beginning on page 38.
HARVAR D BUSINESS REV IEW
"DR CASE COMMENTARY. Shou l d Exceso Maintain Its Aggressive Promotion Strategy?
Hau L. Lee is a professor
of operations} information,
and technology at Stanford
University's Graduate School
of Business ill Stanford,
CaliJomia. He is also the
Kleiner, Perkins, Mayfield,
Sequoia Capital Professor
oj Engineering at Stanford's.
School oj Engineering.
38
The root of Exceso's problems is itsfocus on managing
Wall Street's reactions rather than on its true customers' needs.
E xceso ha s been paralyzed by w hat 's
known as the "bullwhi p effect." That's
when small fluctuations in consu mer
dema nd grow eve r more exaggerat ed as or-
ders trave l up t he supp ly chai n. At the point
when we enter th e story, t he disparity be-
tween what consum ers need and what the
company is making is huge; Exceso's so-ca ll ed
sales orders have nothi ng to do with rea l con-
sumer demand .
What caused this sad situati on? First , Ex-
ceso is not receivi ng any of th e demand sig-
nals its retailers are co llectin g f rom their
point-of-sales data. What particular product
size and brands are se lling well? Exceso's pro-
ductio n-plann ing people do not have that in-
formation, and they don't seem to ca re. Th at's
clearly why they' re manufacturing f ra ntically
while reta il ers' she lves are ba re ofthei r prod-
ucts. A company that does not track actual
demand can never be successfu l. At the end
of the day, what matters is custome r demand.
That's why I urge managers to use the term
"demand cha in management" instead of
"supply chain management:'
Second, Exceso suffe rs from "functional
disinteg rat ion:' Its marketing plans~ product
prices, promotion schemes, discount stru c-
tures, and spec ial trade deals-were made
without an understand ing of the true costs of
all the supply chain activiti es required to sup-
port them. As a result, all the specia l deals the
company has come up with may be increas-
ing revenues, but at the same time they're
putting suc h stress on the supply cha in that
they' ll probably end up destroying margins
and profits.
Moreover, Exceso has not coordin ated its
marketing plans with the retai lers, so it's not
clear whether the products bought through
these specia l deals are reach ing consumers
or are just sitting in someone's warehouses .
Will Exceso eventually happen on the right
price and mix of promotions to produce reli-
able profits? Not unless it bases them on ac-
tual consu mer dema nd. Typica lly, the more
you use errati c marketing plans to push your
products, the bigger will be the d isc repancy
betwee n your production plans and the ac-
tual demand at the end-consume r leveL
Hence, th e bullwhip is a prob lem Exceso has
created fo r itself.
Of course, the root of Exceso's problems is
probably its focus on manag ing Wall Street's
reactions rath er than concentrating on its
tru e custo mers' needs. The company has
tr ied to create value by artificially pushing
product thro ugh t he supply chain in stead
of getting more sat isfied customers. Thi s is
a fundamen tal management problem. And,
unfortunately, it has persisted for a long time;
it is the CEO who is t he one championing this
behav ior.
Since the root of the problem lies in top
management, I th ink the only hope for this
company is to sta rt making changes at the
top, namely, the board. Th is Wall Street men-
ta lity has been a resu lt ofthe way the board
has va lued and rewarded the perfo rmance
oftop executives. Sadly, this means that the
current board needs to go th rough a surg ical
change. The culture of the company must
focus on discove ring custome rs' needs and
using that understandi ng to create new prod-
ucts and new markets. A shift from a push to
a pull supp ly chain perspective will then fol-
low naturally.
Operationa lly, no manufacturer can be ef-
ficient unless it forges tight relationships
with its customers. In a resea rch study of
100 consumer goods manufacturers and re-
tailers, conducted jointly by Stanford Uni-
vers ity and Accenture in 1998, we found that
those com pan ies that shared information ex-
tensively with their supply chain partners en-
joyed higher th an average profit margi ns. Ex-
ceso shou ld recognize that its retailers are
part of its supply chain and that on ly through
the success of the whole supply chain will it,
too, enjoy sustainable success.
HARVARD BUS INE$:S RE VIEW
_ _ _ __ _ _ __ _ S
=-h
= ould Exceso Maintain Its Aggressive Promotion St rat egy? • HBR CASE COMMENTARY
IiCkZiPPlus*maker Exceso is in serious
trouble. It's offering steep off-invoice
(
discounts to its trade customers, but
it's not tying them to any prom ise of perfor-
mance on thei r part. The effect is to encour-
age "forward buying" -essentially, the prac-
tice of stocking up whi le prices are low. And
thi s comes back to haunt Exceso in two ways:
It forgoes the profit margin s it might have
seen o n future sales, and its production effi-
ciency suffers from the crests and troughs it
has created in the order stream . Wo rse still,
after loading up on the product, the retailers
aren't pushing it through to the end con-
sumers; instead, they're diverti ng it to other
regions and even to other distri butors.
The problem is se lf--created, at least in part.
Foley and his salespeople are actually en-
couraging stockpiling and diverting simply
to make the ir number. But self--created or not,
these are problems that packaged-good s
companies have battled throughout th e
19805 and 19 905.
To some indu stry observers, the solution
seems obvious: Replace trade deals with
everyday low pricing (ED LP). My own re-
search, however, suggests that such a move
would be folly. Well-designed trade promo-
tions, it turns Qut, benefit manufacturers at
lea st as much as retailers- if not more.
Well-<1esigned trade promotions allow the
manufacturer to influence retail sa les and
total channel profits. But setting a fixed EDLP
independent of the retailer's sa les volume
affords the manufacturer no control over ei-
ther retail prices or sa les. The retailer finds it
optimal to charge a higher price, earn higher
margins, and se ll a lower unit vo lume. The
manufacturer is left w ith lower unit volume
and no compensating increase in margin.
What's more, trade promotion s are the
on ly incentive reta ilers have to promote a
given product to the end consumer. When
trade promotion is cut, retail ers cut promo-
tion to consumers, and that can really hurt
market share. Witness the con seq uences of
P&G's much-publici zed move to value pric-
ing in the early to mid-1990s. ln a 2001Jour-
nal a/Marketing article, some colleagues and
I reported findings showing that P&G's deep
MAY 2002
cuts in promotion actually decreased the
penetration of its brands among consumers
without improving the loyalty of the cus-
tom ers it retained . Even its sig nificant in-
creases in advertising spe nding did little to
improve penetration or loya lty. As a res ult,
P&G 's market share dropped Significantly
across a broad range of cat egor ies. It is likely,
even probable, that P&G's profits improved
in the short term, mainly because the net
price consumers paid for its brands actually
in crea sed. But clearly, sustaining profit
growth wou ld be difficult in the face of mar-
ket share drops of the kind P&G experienced. Kusum Ailawadi is an
All th is leads me to some very speC ific ad- associate professor at
vice for Exceso. Instead of abolishing t rade Dartmouth's Thck School
pro motions, Exceso should implement pay- 0/ Business in Hanover, New
for-performance trade deals, such as the kind Hampshire. Her research
known as "sca n backs." Tru e, these can be- has/oclIsed on the impact
come "scam backs;~ there have been reports of advertising, promotion,
of retai lers running products through sca n- and store brands on the
ners to receive a discount and then d iverting
interactions between and
relative performance of
or warehousing the goods. To avoid that, my
manufacturers and retailers.
colleagues and I have proposed in a 1999
Sloan Management ,Review article that manu-
facturers should link their price not to the
quantity the retailer buys (or, for that matter,
To get rid of all the trade deals would
befolly, Well-designed trade promotions
benefit manufacturers at least as much
as retailers-if not more,
sells) but to the retail price. Then th ere would
be very little room fo r forward buying and
gray markets.
Ba sica lly, then , Exceso should not overre-
act to its current situation. EDLP is strong
medicine. Excesocan implement sma rt trade
promotions directly linked to featured retail
price or to di splays, advertis ing,or other mer-
chand ising efforts, al l of which le ad to higher
retail sales and channel profits. Good prac-
tices like these can alleviate many of the prob-
lems that EDLP is expected to treat- without
its demand-dep ressi ng side effects.
39
HBR CASE COMMENTARY· Should Exceso Ma i ntain Its Aggressive Promotion Strategy?
Mike Bargmann is a senior
vice president oj distribution
at Wegmans Food Markets,
a 6o-store chain based in
Rochester, New York. He
also leads the company's
e·business initiatives.
42
Exceso and Flemings both are sufferingjrom the same basic and
long-standing problem: a lack ojsupply chain visibility.
~
a n executive with Wegmans Food Mar-
kets, I identify with Flemings's busi-
ness more than Exceso's. But the situ-
ation doesn't look much prettier from this
side ofthe fence. Both companies are suffer-
ing from the same basic and long-sta nding
problem: a lack of supply cha in visib ility. No
one really knows how mu ch product is being
so ld at what price, how much inventory is in
the system, o r where exactly it is.
To make that clear, the two businesses will
have to colla borate, which will require a
healthy measure of trust between them. But
it's d ifficu lt to imagi ne that trust existing,
given that their goals are so mismatched.
Foley's primary goal is to pump up the value
of his company's stock. Fl emings's and Ex-
ceso's customers are focused on extracti ng
whatever price concessions th ey can. Where's
the consumer in al l this?
Irs telling that the one glimpse we get of
a consumer in the case shows her frustrated
by a poorly stocked shelf. Exceso and Flem-
ings probably don't appreciate how much
those empty slots are costing them. Accord-
ing to one famous study, conducted by the
Coca-Cola Retail Council in 1996, the value of
items out of stock at grocery retailers totaled
6.5%of sales. That's terrible for the manufac-
tu rer because a consumer's second choice is
usually a competing brand. But it's terrible
for the retailer, too, because 3,196 of the time,
the study revea led, t he consumer simply
chose to do without, and the sale was com-
pletely lost. Clearly, both parties stand to gain
significantly from a joint effort to keep items
in stock.
With that basic objective in mind, Exceso
and Flemings cou ld start by collaborat ing on
a business plan for the ClickZipPlus, which
would outline shared goa ls for the product
category and their sa les plans on an annua l,
semiannua l, or quarterly basis. They might
even work together to make the sales fore-
casts behind that plan more precise, This is
the essence of the consumer goods industry
initiative known as CPFR (collaborative plan-
ni ng, forecasting, and replenishment), whic h
my organization helped to pilot. They could
cooperate in other ways as wel l. Wal-Mart,
known for its supply cha in excellence, rel ies
heavily on vendor-managed inventory. Its
suppl iers use a Wa l-Martsystem cal led Retail
Link to check inventory levels, and it is their
responsibi lity to rep lenish thei r products ap-
propriately. At Wegmans, too, we're working
on supply chain visibility, envisioning the day
it spans flu idly from demand to consump-
tion - in other words, begi nning and end ing
with the consumer.
All this requires accurate, timely informa-
tion, of course-but that information pays
other dividends, allowing profits to be un-
derstood and managed at the item level.
That's why Alice Dias,despite her formidable
negotiating ski ll s, would never last at Weg-
mans. She's not aware of the true cost impli-
cations of her decisions. What is the t rue cost
of moving all that product around the coun-
try? If Flemi ngs doesn't know the answer to
that, it has no idea how much retail revenue
it needs to make an acceptable profit. And the
same is true for Exceso. When one of Martin's
sa les managers asks how mu ch the margin s
will suffer from all their promotiona l activity,
Martin can only say, "Not sure."
Greater supply chain visibility wil l give
Martin and Alice the answers th ey need. It
will also allow them to collaborate on deals
that ultimately benefit them both. But again,
the process has to begin with a new focus
on the consumer, And that has to start at the
top. Foley and his counterpart at Flemings
need to provide that vision and make sure
that individual incentives are aligned with
it. Thi s industry has a long way to go before
such coope ration is the norm, but we've
made tremendous progress. I look forwa rd
to the day whe n this case reads like pure
ficti on.
HARVARD BUS INESS REVIEW
"BR CASE COMMENTARY· Shou ld Exc eso Maintain Its Aggressive Promotion Strategy?
H
Ow can a company that knows it
has a problem - and even seems to
know the solution to it-be unable
to help itself? I've addressed this question
many t imes with senior management teams.
What becomes clear is that before any solu-
t ion can be put in place, awareness of the
problem and commitment to address it have
to occur on four separate levels.
First, group members have to acknowl-
edge that there is a problem. Sou nds si mple,
even trite, but it's amazing how often people
with in an organization can refuse to see a
problem that looks blatant to outsiders. Sec-
ond, they must agree that the problem is sig-
nificant. Th ird, they need to believe that it is
in their power to fix the situation. And fourth,
they have to believe that there are th ings they
each can do to bring about the change.Once
Jean;e Daniel Duck is a
we recognize that these four levels of denial
senior vice president at the
Boston Consulting Group, exist, it's easy to see how people can blow off
in its Atlanta office. She is a prob lem or a potential solution.
the author o/The Change There is some consensus at Exceso at the
Monster: The Human Forces fi rst level - that a problem exists. But people
That Fue I or Foil Corporate disagree over how significant the problem is
Transformation and Change and whether it can be fixed. Foley believes
(Crown Business, 2001). trade loading is cu rrently the so lution to a
greater problem -making the numbers- and
that he can easily transform the situation
when the ti me is right. Others (the sales staff.
Before anyone at Exceso ever gets serious
about kicking the trade-loading habit, they'll
allfirst have to kick their truth-hedging habit.
for instance) seem resigned to load ing as a
fact of life. But the two sides won't have the
cha nce to come together because the prob-
lem is not even discussible. Any correction
that might have been afloat is dead in the
water wel l before anyone is forced to con-
front that very uncomfortable question of
what each persona lly might do differently.
Before anyone at Exceso ever gets serious
about kicking the trade-loading habit, they'll
all first have to kick thei r truth-hedging habit.
Management can begin by conducting an
44
.-'-"-'-- -- ---
accurate assessment of the problem - one
that's comprehensive enough to uncover all
those nasty second- and third-order effects
that we readers get to observe in the case.
What's the real cost of those empty store
shelves and the manager's lack of hesitation
in steering loyal Exceso customers to com-
petitors' products? And where are those in-
ternationa l (wink, wink) shipments really
wi nding up? It won't be hard to get the facts
once Exceso's executives put their minds to
it. What will be hard is putting th ei r minds
to it-transforming people long practiced in
innuendo and collusion into truth see kers.
Foley can sta rt by taking the concerns of
others seriously. I n the garage, we see Martin
trying to raise a critical issue and Foley im-
med iately discounting it. Foley simply gives
him a verbal pat on the head and moves on.
In the sales meeting, fundamental questions
and potential solutions are raised on ly to be
immed iately swamped by cynicism born of
habitual expediency. Martin, too, falls prey
as he asks for due diligence on the diverter
but then doesn't pus h for it. In a cu lture of
truth seeking, these conversations would
have developed very differently.
Fol ey won't change his organization unti l
he welcomes change himself- and it's clear
he's not ready. H is form of resista nee reminds
me of members of an execut ive team I once
met who were dealing with a similarly per-
sistent probl em. When I asked, "What's going
to change this situation?" they offered any
number of factors: Yen fluctuations cou ld
turn in their favor, their major competitor
cou ld run out of product, the recession could
quickly turn around. The list was long, but, in-
terestingly, none of it was within the ir con-
trol. Now, consider Foley's inner dialogue at
the end of the case, when he rattles off a list
of forces either out of hi s control or not re-
lated to his supply chain problems. When you
hearthis kind oftalk, ifs usually a t ip-off that
someone is trying not to deal with a problem.
My impression is that, even as he's lying in
bed, this guy is stil l lying. el
Reprint R020SA
10 order reprints, sec the lasl page
of Executive Summaries.
H ARVARD BUSINESS REV IEW
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