Making a Business Case for a PIM to the Consumer Goods Industry - Scott Deutsch, Vice President Marketing
Analysis of a large pharmaceutical company's consumer goods business unit showed a projected saving of $6.0 million over a three year period
Background
In late 90's at the bequest of a core group of retailers and vendors, a committee was formed through the Uniformed Code Council (UCC) in conjunction with the European Article Number association (EAN), to agree upon an accepted set of standards for product attributes that could be applied and used on a global basis, so that every retailer and vendor throughout the world would eventually subscribe to. This committee eventually became known as the Global Standards Manufacturing Process (GSMP) and as we stand today these standards are commonly accepted by almost every country, vendor and retailer throughout the worldwide consumer products community. One of the first endorsements of the GSMP was to form a global registry of products where product information (attributes) could be housed, so that both retailers and vendors could electronically subscribe to exchange product attribute data. This global registry was also designed to avoid the potential conflict of a product having the same attributes in different parts of the world, as each product would be assigned its own unique "Global Trade Identification Number" (GTIN) and Global Product Identification Code (GPIC).
Companies such as UCCnet, Transora (now combined into 1SYNC) and WWRE, were formed soon after the adoption of the global registry (these are known as data pools), as both retailers and vendors needed a communication vehicle or engine, to synchronize their attribute data from their legacy systems through to the global registry in a standardized format and language (XML).
Product Information Management (PIM) solutions started to appear in 2002 (either home grown or off the shelf), as a direct result of both retailers and vendors requiring a central repository to house product data from their legacy systems and to act as the one communication point to the industry data pools. Most retailers and vendors have numerous legacy systems with conflicting attribute data that is often redundant and not conforming to global standards. The industry term for this is "unclean data".
Although Item Synchronization is a worldwide initiative, it is currently a hot topic in the North American market due to retailer mandates and is expected to follow into Europe within 18 months and into the Pacific Asia rim within the next two years. Although Item Synchronization in the North American market is a retailer mandate, it does provide an effective business case through multiple retailer adoption and the improvements obtained with improved internal business processes.
Business Rational for a PIM
A product information management (PIM) solution will act as the centralized repository for all your SKUs and their associated product attributes. This solution will enable your pharmaceutical company to:
- Provide a seamless interface to the multiple legacy applications and aggregate and cleanse their conflicting and out of date item attribute data.
- Improve and support your internal cross-functional item data management business processes.
- Provide a standards-compliant XML messaging platform for communicating to the Global Registry via WWRE.
- Support the internal XML messaging needed to continuously communicate from the centralized PIM repository and WWRE/Global Registry (UCCnet).
- Support future growth of collaborative business opportunities.
- Improve business processes between different operating units and across competing functional disciplines.
- Provide a single location of product information that can be trusted throughout and across the global organization.
- Support all future RFID initiatives through retail data alignment.
The FullTilt Enterprise PIM will sit behind the customers firewall as follows:
Retailer Mandates Drive Immediate Value
Key retail trading partners announced sunrise dates to be compliant for Item Synchronization:
- Walgreens
- Wal*Mart
- Wegmans
- Albertsons
- SuperValu
- Safeway
- Sam's Club
- Ahold
Many of these retailers have also announced penalties and trading blocks for non-compliance:
Wal*Mart - Wal*Mart issued a mandatory sunrise date with their top 100 suppliers to synchronize their data. Failure to be compliant by this date is expected to harm you as follows:
- Your sales team will face increased compliance pressure from buyers
- New SKU introduction will be delayed by six weeks due to manual intervention
The delaying of product introductions by six weeks in Wal*Mart will have a definable negative impact on sales and profits for your business unit. Most large pharmaceutical companies have more than 50 planned launches of new SKU’s for 2005 and if you take the conservative projection of $30,000 per delayed SKU, you would expect to see lost sales of $1.50M. Therefore using a net profit calculation of 33 cents on the dollar, this would equate to $495K in loss of profit.
Walgreens - Walgreens have advised that failure to be compliant with Item Synchronization will see fines imposed of $1,000 per purchase order and a requirement that their sales contact will have to enter all new introduction SKU’s and SKU changes through a manual web portal. If we estimated about 150 PO’s a year, you will see fines imposed of up to $150K in 2005. Also, Walgreens is requiring each SKU to have 102 detailed product attribute values to be entered through their portal, which they estimate will take your sales team 4-6 hours to complete for each SKU. If you launched just 10 new SKU’s per month to Walgreens, you would have to allocate 50 hours of dedicated sales time each and every month to support Walgreens new product sales activities.
CVS - CVS have advised that failure to be compliant with Item Synchronization will delay speed to market by up to 8 weeks of all new SKU introductions, as a manual process will have to be followed.
More and more retailers are adopting mandatory requirements for Item Synchronization, therefore, you can expect more (and increasing) punitive fines and penalties from your trading partners to be announced.
Loss of Sales and Profit
Despite the fact that Item Synchronization is a retailer mandate, there are some real world examples of where a PIM would have assisted companies in gaining extra sales and profit:
- A company was unable to send product information into the CVS database. The product sat on the dock for 8 weeks until the documentation could be found and loaded resulting in an estimated loss of just over $3.0 MM in sales. The FullTilt Enterprise PIM would have automated the synchronization of the attributes and the data would have seamlessly fed into the CVS database.
- A company had 600 SKU’s listed with Safeway, but was only selling 150 to them. Under their system, a store reached out to the DC for product that was represented by a parent/child product relationship (standard pack versus bonus or substitute pack) and if the parent or the child was not ordered or not available, then there will be no substitute for available product due to lack of system updates. The FullTilt Enterprise PIM would support the syncing of data automatically updating the Safeway system and to ensure that correct product information was sent.
- A company had the similar situation as Safeway, but with Wal*Mart. They had over 500 SKU’s listed, but were only selling 180 SKU’s to them. The FullTilt Enterprise PIM solution would synchronize data automatically updating the Wal*mart system.
- In another example, Walgreens was unable to order an updated product replacement, as their system stated they were listed for the older version. The company was showing $500,000 in back order store sales from their stores which equated to $109,000 in lost sales or $36,000 in net profit. They also had difficulty substituting parent/child product relationships for another product which resulted in back order store sales of $628,000 with estimated lost $122,000 in sales and a projected $40,000 in net profit.
Long Term Business Case
There are long term business benefits once scale has been reached for all retailers adopting Item Synchronization internally and externally:
- One company indicated that 34% of their deductions under $100 were just written-off and could be directly attributed to Item Synchronization reasons. This equated to over $400,000 in 2003 alone.
- One company found a potential to eliminate $500,000 in deductions over $100 based on 2003 that could be directly attributed to item Synchronization reasons.
One company found that by eliminating research time on Item Synchronization deductions, they could redeploy one FTE in the customer supply department saving on Outside Contractor Services of $52,800 budgeted for 2004.
Potential Project Savings
There are many significant business process improvements gained with the introduction of an application such as the FullTilt Enterprise PIM solution, with both hard and soft business costs. A financial cost benefit analysis of a large pharmaceutical company’s consumer goods business unit showed a projected saving of 6.0MM over a three year period achieving 90% scale and 70% usability by 2007. By 2008 it is estimated that 100% of their customers will adopt Item Synchronization with an end state realized net profit gain in 2008 and beyond of just under $3.5MM per year.
| Item Synchronization Planned Benefits | |||||||
| 2005 | 2006 | 2007 | Total | 2008 | |||
| Hard Benefits | |||||||
| Customer Cost Avoidance | $150,000 | $150,000 | $150,000 | $450,000 | $150,000 | ||
| Eliminate Outside Service | $50,000 | $50,000 | $50,000 | $150,000 | $50,000 | ||
| Total | $200,000 | $200,000 | $200,000 | $200,000 | $600,000 | ||
| Roll Out Timing | |||||||
| %Customer Sales Rolled Out | 65% | 80% | 90% | 100% | |||
| % of End State Benefit | 30% | 50% | 70% | 100% | |||
| Soft Benefits (Time Phased) | |||||||
| Increased Profits | $600,000 | $1,000,000 | $1,400,000 | $3,000,000 | $2,000,000 | ||
| Deduction Elimination | $270,000 | $450,000 | $630,000 | $1,350,000 | $900,000 | ||
| Soft Benefits | |||||||
| Key Customer Revenue Protection | $560,000 | $560,000 | $560,000 | $1,350,000 | $560,000 | ||
| Total | $1,430,000 | $2,010,000 | $2,590,000 | $6,030,000 | $3,460,000 | ||