Submission—Report Of The Retail Supply Chain Industry Innovation

Behind every product a consumer purchases is a team of three million Canadians who are working to ensure that the customer gets the right product at the right price at the right time. Innovation in the retail supply chain industry is essential to meet the demands of Canadian consumers.

Introduction & Background

The retail supply chain industry panel was established to contribute the perspective of the industry to Canada's Innovation Strategy. The federal Ministers of Industry and Human Resources Development launched the strategy in February 2002. The panel, comprised of senior executives from retail and supply chain companies, met for its initial discussion on Wednesday, July 10. Following that initial meeting there was extensive discussion of the issues among the members of the panel and within the industry. The panel met a second time on Thursday, October 3, at which time it invited additional representatives from other sectors that also have an important relationship with the supply chain. The additional representatives from product suppliers, transportation, technology, and education provided their perspective on a draft of this report and the issues confronting the industry. This discussion led to substantial changes to the final report, and the panel is grateful for the contribution of the other sectors. The list of panel members and the additional representatives is appended to this report.

The retail supply chain industry plays a vital role in the Canadian economy, providing Canadians with the goods they need to live their lives. It is also a huge economic force in its own right. There can be no question that innovation in this industry is crucially important to improving the standard of living of all Canadians and the competitiveness of our economy.

The people and companies in the retail supply chain industry sell roughly $300 billion of merchandise to Canadians every year. Doing this sustains almost 3 million jobs - one sixth of the labour force. Being a customer-driven industry means that companies' motivation to innovate is driven primarily by the need to enhance service to customers.

The industry is marked by the presence of a small number of very large firms and a very large number of small companies. Companies from both size groups compete with each other. More importantly, large and small companies located throughout the country must work together to serve the customer. This presents significant challenges to the advancement of innovation.

When it comes to innovation, the central challenge for the industry is to apply information technology in new ways to the supply chain. The newsmagazine The Economist, captured the strategic importance of this in a recent article: "…the networked computer has put technology at the heart of strategy and vice versa … Retailers live and die by the design of their inventory management systems and their skill in "mining" customer information. The IT platform no longer simply serves the firm: it has become the business" (The Economist August 3rd -9th, 2002, "Goodbye Monday", pp 50-1)

General Observations

The panel identified a number of general observations about innovation in the retail supply chain industry that underlie this report:

• Innovation is an Industry Responsibility - The essential steps to improve innovation must come from the industry.
• Innovation is Diffusion - Many of the innovations will bring limited benefits - even for the companies implementing them - unless the innovations are widely and quickly adopted within the industry.
• Innovation is Advanced Through Cooperation - There is considerable potential for cooperative industry efforts to improve the diffusion of innovation.
• Innovation is New Business Practices - The key innovations in this industry relate to new and improved business practices.
• Innovation is New People and Skills - Progress on innovation demands more entrants to the industry who have industry-relevant skills, and upgraded skills among current employees.

In consideration of the four challenges identified by the Minister, the panel identified three key areas.

Part II

Creating Knowledge & Bringing it to Market

1. Challenges

• The greatest benefits for consumers and the industry will come from accelerating the diffusion and implementation of innovative technology and business practices in the supply chain.
  
  
• Currently the industry's innovation status is mixed:
  
  
  1. The industry is leading edge in some mission-critical aspects, up to the bar in other aspects and behind (sometimes seriously) on others.
     
     
  2. While some companies are world-class, on average the industry is seriously behind the U.S., the key point of comparison.
     
     
  3. Small firms in particular are not up to the mark.
     
     
• Innovation does not spread quickly through the industry:
  
  
  1. Small and mid-sized companies, and those in smaller centres lag behind.
     
     
  2. There are few mechanisms for diffusing innovations.
     
     
  3. Without widespread application some of the benefits of innovations are lost
     
     
• The Canadian Retail Technology Survey, released by Retail Council of Canada in conjunction with J.C. Williams Group in October 2001, concluded, "Their [Canadian retailers] IT budgets are still relatively low when compared to other global retailers and especially when compared to other industries … They have many challenges ahead in terms of technically supporting a multi-channel strategy. They are shying away from major opportunities like outsourcing. And only the larger retailers are focusing on vendor collaboration."
  
  
• The report noted that Canadian retailers planned to increase 2001 IT budgets by 45% over 2000, but that this projected level of spending still lagged the international average. The report concluded, "… Canadian retailers, especially the larger ones, are technically disadvantaged with their continued lower investments in technology." A copy of the report is appended as Appendix "A".
  
  
• The industry needs to develop the means to disseminate and implement innovative technology and business practices more quickly and more widely. The benefits of these innovations will be seriously limited unless they quickly become industry standards. The changes of greatest importance to the future success of the industry are those that will speed the flow of information and merchandise through the supply chain at lower cost.
  
  
• The industry needs to identify and work co-operatively on the areas of innovation that are non-competitive - where a common initiative will benefit all or most members of the industry.
  
  
• The panel identified the ECCnet initiative of the Electronic Commerce Council of Canada as a good example of cooperative work among companies within the supply chain. This is an industry-sponsored electronic product registry providing a valuable link among vendors, brokers, distributors, and retailers. ECCnet has also benefited from the financial support of the Federal Government. Organizations of all sizes can benefit from the data standardization and synchronization that results from ECCnet implementation. ECCnet is currently operating with the support of grocery, foodservice and retail pharmaceutical leaders. It has plans to expand to the general merchandise, health and agricultural sectors. The vision for the initiative is for it to become the central electronic repository for information about all products sold in Canada. This registry will provide all firms in the supply chain with more complete and accurate product information, available rapidly and readily, and presented in a consistent format.
  
  
• The industry increasingly will have to integrate its practices into those being developed internationally. This will require the development and widespread implementation of standards that mesh with international standards for leading-edge practices and processes.

2. Vision

• The panel members envisioned a retail supply chain industry that actively supports industry-wide work to develop and adopt innovative technologies, applications, and practices.

3. Action

• The industry is customer-driven, and as a result innovation is driven primarily by the need to enhance service to customers. The panel recognizes that the primary responsibility for enhancing the innovation performance of the industry rests with the industry and its individual members.
  
  
• The industry must identify areas of innovation where progress can be made co-operatively. Two key areas appear to be:
  
  
  1. Inefficiencies at all the nodes in the supply chain where products move between modes of transportation, between the shipper and carrier, or between the carrier and the customer. At these critical points there is a need for IT solutions that support and facilitate the smooth movement of goods. There is also a need for investment and innovation in the physical infrastructure to raise efficiency.
     
     
  2. Development and promotion of industry standards for supply chain functions, in particular standardization of EDI transactions and specifically message sets, and functions related to the exchange of inventory information among all the partners in the supply chain.
     
     
• The industry must integrate Canadian standards and practices with international initiatives. In particular members were concerned that Canadian companies (especially smaller companies) move rapidly to comply with the 2005 sunrise date for the Global Trading Identification Number (GTIN).
  
  
• The industry must establish benchmarks for best practices in selected critical business operations. This work must be integrated with similar work being done in other countries, especially the U.S., and the benchmarks should be set to ensure that they will lead Canadian companies to practices that are internationally competitive.
  
  
• The industry must cooperate on the development of the ideas and concepts that lead to the development of best practices. Companies should compete in the application and execution of these within their operations.
  
  
• The industry must find ways of encouraging the adoption of these common steps broadly throughout the industry, and in particular to get smaller firms to participate. The Panel recommends the formation of a coalition of industry associations including the Canadian Association of Supply Chain and Logistics Management, Electronic Commerce Council of Canada, Retail Council of Canada, and other retail and supply chain-related associations. The coalition would be tasked with:
  
  
  • Developing a set of benchmarks for best practices,
    
    
  • Developing and implementing a strategy for diffusing innovations throughout the industry,
    
    
  • Linking to international organizations working in this field,
    
    
  • Promoting and facilitating adoption of the GTIN.
    
    
  • Trade associations that service companies in the industry are already running programs to promote the exchange of information and to accelerate the adoption of common best practices. Retail Council of Canada, in cooperation with the Electronic Commerce Council of Canada is holding a CIO Summit on October 18. See Appendix "B"
    
    
• The Government should provide through the tax system additional financial incentives to companies to invest in adopting innovative processes and standards. These could include:
  • Incentives to encourage e-commerce vs. paper-based;
    
  • Incentives for in-house supply chain related innovation in systems/processes and for the related development of human resources (See recommendations in section on 'Developing Skills').

Part III

Developing Skills

1. Challenges

• One of the main means by which knowledge and innovation are spread is by the "trickle down" that occurs when individuals leave one company and move with their skills to another. The panel considers this to be a completely inadequate means of adopting innovations.
  
  
• It is difficult to attract people to the industry generally. This leads to a lot of internal mobility, thereby spreading innovation, but it does not bring the industry the resources it needs.
  
  
• Companies in the industry have had to do a lot of in-house development and training because the base of educational institutions and courses oriented to the industry is very small.
  
  
• Companies see a significant movement of talent to the United States. While this is a complement to the industry (in fact Canada acts as a training site for some multi-national corporations) it means that an already small pool of people loses many of its "stars". At the same time the industry is also overly dependent on U.S. executives as a source of innovation.
  
  
• There is a serious lack of courses and programs to prepare students for a career in retailing.
  
  
• The retail industry has only recently begun to develop standards and training programs for positions in the industry, and there is a need for considerably more effort and more support.
  
  
• There is a need to develop existing and new training programs that lead to certification of individuals who have completed the course of study and achieved a recognized level of knowledge and expertise. Good examples of the programs that should be supported and grown include the certification programs run by Retail Council of Canada for sales associates and first line managers, and the P. Log certification provided by the Logistics Institute.
  
  
• It is very difficult to share information across companies or across industries. The panel saw scope for educational institutions to assist through the offering of professional development courses taught by people from the industry, and drawing learners from the industry.
  
  
• The panel acknowledged that there is a disconnect between executive-level support for industry education and development and the weaker support manifested at the operational level in the form of limited participation and support. As a result some schools have struggled to attract candidates to their course offerings. The panel recognized that there is heavy competition in the business education field, including from U.S. educational institutions.
  
  
• The panel was very concerned about the current emphasis in government support for innovation. They saw strong support for pure and applied research, but a serious lack of attention to development and diffusion of innovation. They emphasised that Canada will get far greater benefits from investments in applying and spreading innovation. Too often, basic advances made in Canada have been exploited in other countries that have paid more attention to development, application and the spread of knowledge.

2. Vision

• The panel members envisioned positions in the retail supply chain industry becoming a career of choice.

3. Action

• The industry must work with educational institutions to build retail and supply chain-oriented courses and to promote careers in the industry. This initiative must lead toward the establishment of a continuum of training and development elements that enable individuals and smaller companies to move up the curve. The elements that must be integrated together include courses at educational institutions, company training and development, and industry forums and seminars. All of these elements should focus on best practices and how to comply with industry standards.

• The industry, as a starting point should prepare a report to the Association of Universities and Colleges of Canada and the deans of business and engineering schools highlighting the need for new curriculum that fills the gaps in current retail and logistics course offerings. This should include a review of the programs operating in the U.S.
  
  
• The industry must show support by participating in and supporting the academic programs and especially by hiring and promoting the graduates.
  
  
• The industry should support and actively participate in job fairs, the dissemination of information about career opportunities to selected target markets, and support for web sites providing information on retail/logistics careers.
  
  
• One important source of employees for the industry is new immigrants to Canada. Both the industry and the Government should look at ways to communicate the job opportunities in the industry to new Canadians.
  
  
• The industry should consider the establishment of internships through which an employee of a small or mid-sized company could participate in an innovation project at a large non-competing company.
  
  
• The industry should explore the potential for staff exchanges between supply chain partners to promote cross learning and the spread of knowledge.
  
  
• The Government, in its support for post secondary education should ensure that adequate funds flow to colleges as well as universities, and to schools of business as well as to engineering and sciences. This is necessary to balance the perceived current over-emphasis on research and lack of support for development and diffusion.
  
  
• The Government should consider a program of support for the internships program that reduces the cost for the company accepting the intern, but also is structured to encourage the intern to return to his/her original employer at the end of the internship.
  
  
• The Government must support the development of a formal education structure and the teaching content for industry education/training. This may have to take the form of support that is contingent on industry support and involvement and is aimed directly at the specific industry-supported courses and programs. The panel acknowledged that the Federal Government has already provided some funding for retail training. This support should be extended to include incentives for standardized apprenticeship/placement and co-op education programs and financial support for individuals and/or companies to invest in education/training.
  
  
• The Government must play a more active role in enhancing Canada as a place to build a rewarding career. This may require changes in personal income taxes to keep Canada competitive with the United States.

Part IV

Setting the Environment

1. Challenges

• Companies in the industry face several challenges as a result of the nature of the domestic market:
  
  
  1. A small domestic market spread out across the continent raises the cost of implementing innovations, but does provide a smaller more manageable format within which to implement innovation.
     
     
  2. The need to operate east-west:
     
     
  • conflicts with natural north-south geographic and
    demographic patterns,
    
    
  • imposes additional costs, and
    
    
  • inhibits the dissemination and adoption of
    innovation.
    
    
• The industry is already deeply integrated on a global scale, and the interconnections continue to grow. However, government requirements and inefficiencies at the border and in Canada's ports prevent the application of innovative practices.
  
  
• The panel believed that governments do not think and operate in a global context. This represents a serious disconnect between the approach of governments to issues and the way businesses operate and information flows. The Government's failure to recognize the importance of harmonizing with Canada's trading partners is a major source of many of the barriers to the free flow of innovative ideas, processes and products into Canada.
  
  
• The heightened need for security at the border identified by both Canada and the U.S. makes the failure to recognize the larger context more serious. If Canada does not harmonize and streamline its requirements with those of our major trading partners, business will pay a heavy price in lost efficiency and higher costs.
  
  
• The panel identified two sets of concerns related to movement across Canada's borders. Companies focused on hard lines identified problems with respect to the operation of ports receiving shipments from off-shore. Companies focused on soft lines identified problems at the Canada- U.S. border.
  
  
• Hardlines companies identified Canadian ports as a point of serious inefficiency and cost in the supply chain. This stems from poor business practices, a lack of application of modern IT to support the physical movement of goods, government requirements that are not harmonized with either international or business best practices, and a lack of investment in infrastructure.
  
  
• Softlines companies identified differences between Canada and the U.S. in the interpretation and application of the provisions of the NAFTA on issues such as country of origin rules as a barrier to the flow of goods and innovation.
  
  
• The panel noted that the industry is heavily dependent on truck transportation for the movement of goods within North America and accounts for a significant portion of the eleven billion border crossings made by trucks each year. They saw a need for additional investment in infrastructure at the border to facilitate the integration of the supply chain north-south.
  
  
• The panel also recognized that pressure to integrate north-south helps speed the application of innovations, but does pull decisions and head office functions south.
  
  
• The overwhelming majority of companies in the industry -- retailer, supply chain, product supplier -- are small businesses. For reasons of cost, time and talent, it is becoming increasingly difficult for them to stay current and competitive in key aspects of their business:
  
  1. B2B e-commerce
  2. Quality standards
  3. Cost reduction
  4. Tech costs that arise in the change process
  5. JIT standards
     
     
• The panel was concerned about what it saw as two premature conclusions in the Innovation Strategy discussion paper:
  
  
  1. A bias toward product R&D and away from process innovations and their diffusion; and
     
  2. A preference for government-funded subsidy programs.
     

2. Vision

• The panel members envisioned the retail supply chain industry providing leadership for other industries with respect to innovative practices.

3. Action

• The industry should establish a standard requiring foreign suppliers to provide information about the content of their shipments to Canada Customs and certify its accuracy before the shipment arrives in Canada so that the shipment can be imported into Canada quickly. There is a role for the Government in cooperating with industry in the development of such a standard and then adopting procedures to speed the clearance of shipments that comply with it.
  
  
• The customer-driven nature of the industry means there is a role for government along the following lines:
  
  
  1. The Government minimizes its burden:
     
     • Standardize tariffs, regulation and paperwork to facilitate the movement of goods through Canadian ports and across the Canada - U.S. border.,
     • Avoid regulation that fragments the domestic market (e.g. slightly different requirements for stuffed and upholstered goods across Canada),
     • Minimize the burden of compliance,
     • Reduce barriers to accessing innovations, people, and new products available outside Canada.
       
       
  2. The Government must make greater efforts to harmonize its requirements with the U.S. across a broad range of activities. In particular the Government must become involved in U.S. Government decisions affecting its border at an early stage of the decision-making process and must aggressively intervene to represent Canadian interests well before decisions are made. The Government should seek allies among U.S. global companies that have operations in Canada as they can add their support and influence on these border issues.
     
     
  3. The Government upgrades its practices for making services and compliance requirements available on-line. This must be done in a manner that reflects the interests of the company using the service or seeking to comply with the requirement. This will require the gathering and structuring of all the relevant information around business activities such as moving products across provincial boundaries or securing regulatory approval for a new product. Interactive forms should be available on-line so that a firm can complete them in this way.
     
     
  4. The Government acts like a responsive, service-oriented player within the retail supply chain (work with partners to design the systems and practices to accomplish the objectives).
     
     
  5. The Government must move away from a compliance/penalty approach and toward the design of systems that facilitate integration. An example of the former is the proposed Administrative Monetary Penalty System of CCRA that focuses on collecting penalties from companies that have trouble complying with paperwork requirements. Instead CCRA should look for ways to facilitate electronic integration of private sector information streams into the public service information system.
     
     
• The panel was supportive of initiatives to extend the government services available on line. However, there is a need to re-think the approach used.
  
  
  1. Government services and requirements should be organized and made available in a way that reflects the needs of the clients rather than the organization of federal departments, and presented in a one-stop format. For example, all the services and requirements related to the importation of goods should be accessible from one integrated web site.
     
     
  2. The Government should move beyond simply making information and forms available on line to develop open system software into which clients could connect their systems so that compliance could become automatic.
     
     
• The panel recognized that the Government has a role to play in supporting and encouraging Canadian industry and innovation but it was concerned that this support not reduce the competitive pressure on firms to innovate and keep up with the global mainstream. The panel noted that government support such as protection via import quotas reduced positive pressures for innovation and discouraged Canadian firms from connecting more closely into global markets and international best practices.
  
  
• The panel did not support additional government funding for R&D subsidy programs. This only replaces business judgement from within the private sector with government judgement that is not connected to the industry or its customers.
  
  
• The Government should review the structure of the Corporation Income Tax system with a view to ensuring two objectives essential to the exploitation of innovation:
  
  
  1. Leaving companies with sufficient earnings to translate an innovation into reality; and
     
     
  2. Rewarding the translation of innovations into application and marketable products and processes.

Part V

Strengthening Communities

1. Challenges

• Much of the innovation in the retail supply chain industry occurs in the major urban centres where the industry clusters. However, the relatively small size of the Canadian market means that these clusters are smaller than those in which U.S. and European competitors are located. As a result even large Canadian companies must look outside Canada for innovative ideas and new developments.
  
  
• Small and mid-sized companies in the retail supply chain comprise a significant part of the business community in smaller centres. However, most of these companies lag their larger competitors and partners in their adoption and application of innovation.
  
  
• As the industry becomes more integrated throughout the continent, and more international, companies in smaller centres face location and cost disadvantages when trying to keep up with the pace of innovation.
  
  
• Nonetheless, the demands of customers will require these companies to measure up to current standards or new competitors will emerge. This means that retail supply chain industry firms can be a resource and a link for smaller communities through which they can become better connected to innovations in the areas of technology and business practises.

2. Vision

• The panel members envisioned retail and supply chain companies playing a leadership role in helping smaller communities to keep up with the pace of change and to apply innovative advances to the circumstances of the community.

3. Action

• The industry, its associations, and other cooperative structures must ensure that new technologies, business practices, standards, etc. are communicated widely throughout the industry. (See recommendations under Creating Knowledge and Bringing it to Market)
  
  
• The Government must recognize that innovation flourishes where there is a cluster of talent, companies, and supporting institutions. Along with encouraging the diffusion of innovation, support must flow to the locations and organizations that are leading it.
  
  
• Governments must remove internal barriers that fragment the domestic market and inhibit the growth of companies beyond their local markets. Good examples of these harmful policies are provincial variations in legislation regarding the transportation of dangerous goods and the labelling of stuffed and upholstered articles.
  
  
• The Government must support business and engineering schools across Canada so that businesses, especially small and medium-sized enterprises, have ready access to training, information and graduates.

Participants of the Innovation Panel

Wayne Sales
President & CEO, Canadian Tire

Patrick Bradley
President & General Manager, Rubbermaid Cdn. Inc.

Ron Tepper
President & CEO, Consolidated FastFrate Inc.

Eileen MacDonald
VP, Mktg., Comm. & Government Relations, ECCC

Arthur Smith
President & CEO, ECCC

Donna Smith
Director, School of Retail Mgmt., Ryerson

David Cardin
President, Maersk Sealand

Tim Penner
President, Procter & Gamble Inc.

Frank Cartella
VP, Logistics, Winners Merchants Inc.

Patrick Sinnott
SVP, Supply Chain, Canadian Tire

Dan Einwechter
President, Challenger Motor Freight Inc.

John Lee
General Manager, Canada Post Corporation

Stuart Wood
VP, IT, Winners Merchants Inc.

Andrew Wnek
SVP, IT, Canadian Tire

Joe Alberga
Manager, Lumber, Home Depot Canada

Violet Konkle
SVP, Distribution & Supply Chain Mgmt., Loblaws

James Tomajko
Director, IT, Supply Chain Management

Tom Gibson
Director, Business Development, Progistix-Solutions Inc.

Ron Cuthbertson
EVP, Merchandising & Supply Chain, Best Buy

Paul Kirkpatrick
General Manager, Logistics, Sony Canada

David Long
President, Cdn. Assoc. of Supply Chain & Logistics Mgmt.

David Poirier
EVP & CIO, Hudson's Bay Company

Ravi Srinivasan
Director, Sales, JDA

Willy Kruh
National Industry Leader, Consumer Markets, KPMG

Patrick Cain
VP, Business Development, Progistix-Solutions Inc.

John Seaner
VP, Product Management & Product Marketing, QRS

Gerald Brown
President, The Assoc. of Canadian Community Colleges

Peter Woolford
VP, Policy Development & Research, RCC

Diane J. Brisebois
President & CEO, RCC

Bill Yetman
SVP, Strategic Comm. & Marketing, RCC