Adoption of Category Management by the Australian Grocery Industry

Adoption of Category Management by the Australian Grocery Industry

Sherah Kurnia, Robert B. Johnston

Department of Information Systems

The University Of Melbourne

Victoria 3010, Australia

Abstract

The importance of inter-organisational system (IOS) adoption to improve the efficiency of supply chains has been increasingly recognised. IOS adoption, however, has proved to be difficult because of its nature that transcends organisational boundaries. Theory that can capture the richness and complexity of IOS adoption is still under development. Based on the existing theory of IOS that suggests the need for a multi-level of analysis, this study analyses the results of a multiple case study on the adoption of Category Management (CM) by the Australian grocery industry. By viewing CM adoption from the perspectives of single organisations, the industry-group, and within the constraints imposed by the external environment, the findings of this study offer some insights into the slow uptake of CM. Because of the limited number of CM adoption studies at this stage, the findings of this study further contribute to the understanding of IOS adoption in general and to the IOS theory development.

Keywords: inter-organisational system, adoption, case study

1. Introduction

Adoption of inter-organisational systems (IOS), particularly those enabled by Electronic Commerce (EC) technologies, is becoming increasingly important for organisations to stay competitive in this era of globalisation (Simchi-Levi et al. 2000). Many organisations within a supply chain have made a joint effort and are working towards establishing programs such as Just-in Time, Efficient Consumer Response, and Quick Response, to improve the efficiency of product and information flow within the entire supply chain. This will in turn enable organisations to be responsive to the need of the consumers, who are becoming more demanding in terms of prices and quality of products (Johnston and Lee 1997; Manhattan Associates 1998; Doherty and King 1998).

Unlike technology adoption within an organisation, IOS adoption has proved to be very difficult because it transcends organisational boundaries (Damsgaard and Lyytinen 1998; Johnston and Gregor 2000). IOS cannot be adopted by individual organisations in isolation from other trading partners as it requires the concerted effort of participants in the same supply chains and other organisations within the industry such as standard bodies or regulators. In addition, multiple decision-making units, which normally have different and conflicting interests and objectives, are involved in IOS adoption. Furthermore, IOS adoption involves significant changes to an organisation's culture, structure, business relationships and working practices over time (Boon et al. 1994; Crook and Kumar 1998; Kurnia and Johnston 2000).

In response to these unique characteristics of IOS, a number of authors (see for example, (Damsgaard 1996; Lyytinen and Damsgaard 1998; Johnston and Gregor 1999; Gregor and Johnston 2000; Kurnia and Johnston 2000)) have recently realised the limitations of applying traditional technology adoption theories to IOS adoption. They have suggested that IOS cannot be understood at the level of single organisations or by using the popular factors models based on the Technology Acceptance Model (TAM) and Diffusion of Innovation Theory alone. Instead, IOS adoption must be analysed at multiple levels of analysis, including the organisational, industry-group and external environment levels, employing separate theoretical notions that are appropriate to each level.

The purpose of this paper is to apply such a multi-level analysis to explain the results of a multiple case study of a particular IOS, namely Category Management (CM). CM is one of the two main programs of Efficient Consumer Response (ECR), but has received less attention of researchers than the Continuous Replenishment Program (CRP), the other main program of ECR (Jabbonsky 1993; Mathews 1994; Mathews 1995; Thayer 1995; Clark 1996). A multiple case study within two supply chains of the Australian industry was conducted in order to explore the experience of the participating companies in adopting CM. This study demonstrates that by viewing the adoption variously from the perspective of single organisations, the perspective of industry-group interaction and in terms of constraints imposed by the larger environment, useful insights have been obtained into the reasons of the slow uptake of CM despite its many potential benefits to the Australian grocery industry.

The next section discusses the theoretical framework underlying this study. A brief description of the CM program and of the research methodology employed is then presented. Then the findings of the case study and their analysis using the proposed theoretical framework are outlined. Finally, a discussion of the implications of the findings to the existing theory of IOS adoption are discussed and conclusions are drawn.

2. Theoretical Framework

Building upon the work of Lyytinen and Damsgaard (1998) and Gregor and Johnston (2001), three levels of views in understanding IOS adoption are formulated, as depicted in Figure 1. At the first level, factors related to the characteristics of IOS, the level of management support, and the level of readiness of individual organisations in terms of financial resources and technological capability, are examined. At this level, other factors related to the supply chain and the industry, are treated as external factors that are beyond the control of individual organisations. Most previous studies view adoption at this level and employ diffusion of innovation theory and theory of change (Prekumar and Ramamurthy 1995; Chau and Tan 1997). The second level is concerned with joint actions and coordination of activities among participants of the supply chain or the industry. Political (power and trust), normative (best practice, promulgation of standards) and rational (negotiations) issues are involved at this level and they play out over time and space as organisations interact with each other during the dynamic process of adoption. These interactions are very much dependent on the structure of the supply chain and industry, which links all members in a set of relationships, such as power, economic, communication, geographical, and so on. Theories underlying this view include the critical mass theory (Oliver et al. 1985; Bouchard 1993), Structuration theory (Walsham and Han 1991; Rose 1999; Johnston and Gregor 2000) and theory of political actions (Pfeffer 1982; Smeltzer 1997; Allen et al. 1999). The observations at both levels should complement each other, as shown by a two-way arrow in Figure 1.

Finally, the view at the third level is concerned with external environment forces (such as national and global competition, economy condition, advances in technologies, and government regulations), which impose constraints upon actions at the other two levels, but which are not themselves significantly shaped by actions at the other levels. This is demonstrated in Figure 1 by a one-way arrow between the view at this level and each of the other two levels. Institutional theory is commonly used at this level (Damsgaard 1996). Table 1 summarises the key issues and the underlying theories for each of the three levels. Many previous studies (see for example, (Grover 1993; Chau and Tan 1997; Hart and Saunders 1997; Prekumar et al. 1997; Allen et al. 1999; de Berranger and Tucker 2000) view the IOS adoption at one or two levels and fail to recognise interlinks between the views at these three levels. Consequently, inconsistencies and incompleteness can be discovered in their findings.

Figure 1. Three Levels of Views in Understanding IOS Adoption (adapted from (Gregor and Johnston 2001))

Key Issues / Underlying Theories
Level 1: Organisation / Organisation’s readiness (financial resources and technological capability), management support, characteristics of IOS, external forces (including the ones related to supply chain or industry) / Diffusion of innovation, theory of change
Level 2: Industry-Group / Joint action and coordination of activities (political, normative and rational) and structure of the industry / supply chain / Critical mass theory, theory of political action, Structuration theory
Level 3: External Environment / Global and national competition, economy condition, government regulations, etc. / Institutional theory

Table 1. Key Issues and the Underlying Theories at Each Level

3. Category Management

CM is an interactive business process of retailers and manufacturers in which they work together in mutual cooperation to manage categories as strategic business units (Information Advantage 1996; ECR Europe 1997). It is one of the two main programs of Efficient Consumer Response (ECR), a grocery industry supply chain management strategy, which is related to the consumer requirement or demand side of the supply chain. CM is the most intangible aspect of ECR but plays an important role as it supports the efficient promotion, efficient product introduction and efficient store assortment initiatives of ECR (Abcede 1996). In addition, CM supports Continuous Replenishment Program (CRP), another main program of ECR, which aims at maximising the efficiency of product replenishment. Like CRP, CM is enabled by a number of technologies that are mainly electronic commerce. All components of ECR and their relationships are summarised in Figure 2.

Figure 2. ECR Components and Their Relationships (Kurnia et al. 1998)

CM requires manufacturers and retailers to work together in managing categories to respond to consumer demand and ensure that the right products are available on the shelves at the right time and in the right combination (Leggett 1996). It treats each individual category as a business unit and customises it according to consumer demands in order to increase sales and profits within a category (Nielsen 1996; Lewis 1998). A category is a distinct, manageable group of products/services that can be substituted for one another by a consumer (Advantage 1996; Friedman 1996; Lewis 1998). Categories may include paper products, dairy and frozen foods, fresh fruit and vegetables, health and beauty care products, soft drinks, and so on (Harris 1996; Smith 1996).

CM promotes a new business practice to eliminate inefficiencies of the traditional approach to handling categories. In the traditional shelf management approach, for example, categories are not well described. Category names do not show consumer needs (Information Advantage 1996; McAuley 1996; ECR Europe 1997). In addition, in the traditional approach, categories are managed in a fragmented manner across departments, reducing the ability of the retailer to understand the consumer’s needs in each category. Furthermore, sales are often traded-off between departments due to low levels of coordination of business activities. Thus, the old principle of managing categories is a brand-oriented (rather than category-oriented) and market-driven process (rather than consumer-oriented) in which categories are organised around aisles, vendors or functions (McAuley 1996; ECR Europe 1997).

CM relies heavily on accurate point-of-sale (POS) data captured at the retailer check-out counters and the ability of participants within a supply chain to share information efficiently using an electronic medium (Thayer 1997). POS data are then used jointly by manufacturers and retailers to evaluate sales and to identify brand-loyal consumers, high volume shoppers, and their preferences (Adams 1995; Nielsen 1996). This way, better decisions on which categories to grow and which to delete, which products to promote and in which stores, and how much stock-keeping-units should be held by each store, can be made in such a way that profits can be enhanced for the benefits of all participants of the supply chain. This, in turn, will lead to a reduction in inventory levels across the supply chain. Thus, CM will offer significant strategic advantage and competitive edge to all participants of supply chains (Ozols 1993; Adams 1995).

4. Research Methodology

For the purpose of this study, a multiple case study was chosen to compare and contrast the experiences of organisations with different CM implementation levels and different situational factors. This research method is appropriate since this study is not intended to make any statistical generalisation. Rather, its intention is to undertake a deep analysis of a small number of companies involved in CM using the three levels of views framework, in order to discover some analytical principles explaining the slow uptake of CM, in addition to obtaining an understanding of the CM practice in Australia.

The multiple case study was conducted with one leading manufacturer (company A) and two leading retailers (companies B and C) in Australia. A brief profile of the case study participants can be found in the Appendix. Both participating retailers manage their own distribution function. Since the participating manufacturer supplies both retailers, this study was concerned with two supply chains of the Australian grocery industry. The unit of analysis is individual organisations and the interactions with their trading partners.

The data collection techniques employed were semi-structured interviews and a review of relevant documents. A total of six face-to-face Interviews were conducted with the ECR Manager and Customer Development Manager of company A (manufacturer), the National Supply Chain Manager and the Logistics Manager of company B (retailer) and the Business Manager of company C (retailer). Each interview lasted for one to one and a half hours. Follow-ups were mostly conducted through electronic mail or telephone.

A number of questions were prepared in the case study protocol, but the interview was conducted in a more open-ended fashion to enable a deep exploration of the experience of the case study participants with the CM adoption. At end of each interview, the information obtained was checked against the prepared questions to ensure that all questions had been answered. Interview data were tape-recorded and later transcribed as a written-up field note, as suggested by (Miles and Huberman 1994). ‘Within-case’ analysis for each individual company was conducted in order to identify the requirements for adoption, the driving forces, the barriers, and the consequences of adoption. Data across cases were then analysed, in order to identify the relationships between various cases. Finally, an ‘interim case summary’ for the CM adoption was then produced to synthesise the data analysis. Refer to (Kurnia 2000) for a more detailed description of the data analysis process.

5. The Multiple Case Study

Interviews with various managers of the participating companies revealed that company A (manufacturer) has been practising CM with companies B and C (retailers) for several years. Due to changes in socio-economic conditions, in which inflation occurred, interest rates dropped, and consumer spending power decreased, company B started practising CM to improve market share six years ago. CM was perceived by company B as a good vehicle to change the culture of the organisation. Company C established its CM team in 1996, but began experimenting with the program about two years ago. For both companies B and C, most information about CM and other concepts of ECR was obtained from suppliers who frequently travel to the United States.

In terms of product assortment, which is one of the ECR initiatives supported by CM, the National Supply Chain Manager of company B believes that the Australian grocery industry needs to increase its product range and, therefore, the product range of company B has grown by 100% over the last three years. This idea contradicts the original concept of the efficient product assortment initiative of ECR to decrease product range:

We are against the idea of efficient store assortment to reduce range. We believe we need to keep increasing our product ranges because of the multiculturalism of Australia, the spread of the population and the lack of population. Thus, to deal with this kind of demographics, we need to tailor our range to suit all different people in Australia (National Supply Chain Manager).

For effective information sharing, the program requires trust and cooperation between manufacturers, distributors and retailers. According to the Customer Development Manager of company A, in the past, both retailers (companies B and C) used to be very non-cooperative in terms of information sharing with manufacturers. However, the attitude has changed over time as the result of a better understanding of CM. All case study participants are now engaged in buyer/supplier exchange programs that are concerned with exchanging staff between trading partners for a certain period of time. Some representatives from company A (manufacturer) work at company B’s and company C’s site (retailers) for a few months and, likewise, some representatives of companies B and C work at company A for sometime. The purpose of such programs is to enhance understanding of what trading partners within a supply chain are doing in order to improve cooperation and trust between trading partners. Although these programs are still at the early stage, they work well in both the supply chains being studied. As a result, the participants are now developing a better understanding of CM and working together to set clear key performance indicators for a number of categories to achieve common goals. Pursuing common goals for each category, by manufacturers and retailers, is crucial for the success of CM practice. Company B (retailer) has now become very cooperative and more open to company A (manufacturer). Company B provides company A with point-of-sale (POS) data for all categories supplied by company A on a weekly basis, allowing company A to sort their products and evaluate promotions and new product introduction efficiently. Company C has also become very cooperative and committed, but less focused on setting up priorities, resulting in slow progress in CM practice. With independent retailers, however, trust and cooperation are still very difficult to obtain, as revealed in the following excerpt:

At this point in time, there are very few companies involved in Category Management …. {Company B} has become very collaborative and open … {Company C} has become very committed and lots of cooperative work have been done … however, there is no way to cooperate with independent {retailers} since they only have a narrow focus of buying and selling (Customer Development Manager, Company A).

CM also requires willingness to change business culture and work practices. Trading partners need to change from adversarial to more collaborative and cooperative relationships. Both retailers in the case studies have changed their culture in terms of partnering with manufacturers as discussed above, but this is not the case for other retailers in general. In addition, company A has been restructuring its business functions. It now has a customer group for each major retailer in Australia to work closely together with each customer as a team. Both the Customer Development Manager of company A and the National Supply Chain Manager of company B believe that, due to the magnitude of changes introduced by CM program, top management support and commitment is crucial.