Shortages & Surpluses - Consumer Products - I

 

Executive Summary:

Consumers (people) behave in a fashion that cannot be anticipated with forecasting (especially not with forecasts done many months before a selling season starts). Retailers do know that there will be ‘avalanches of demand’ for specific products and that most avalanches will be small while really big ones are more rare. The retailer knows this, but will never know in advance, which products will experience an avalanche of demand? Three possible strategic responses to shortages and surpluses in a retail supply chain are to respond by a) using the immediate past to decide what shops should hold ‘tomorrow’; b) holding the maximum possible centrally for immediate distribution to locations where demand for the product exists now; and c) producing as little as possible before the season and as much as possible during it – when we have fresh, much more accurate knowledge of these avalanches of demand.

Being able to respond quickly and reliably seems to be the best direction retailers have to significantly reduce both surpluses and shortages and significantly boost their bottom line. {If a retailers purchase costs are 45% of the expected full price sales, then halving surpluses and adding 10% to sales due to less shortages should result return on sales increases from currently 5% to over 15%. If transportation expense were to remain constant return on sales would increase to over 20%.}

We probably will never be able to forecast what will be the hot item(s) next season; but we can build a highly reactive supply chain that can respond very quickly as actual demand becomes clear – even given long lead-times from Asian suppliers. We can build this highly reactive supply chain without ‘breaking the bank’.

Would such a supply chain result in a decisive competitive edge in the market?

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Technorati Tags: Availability, Continual Improvement, Cost, Cost Accounting, Costing, Distribution, Efficiency, Goldratt, Inventory, Inventory Management, KPI, Make to Stock, MTS, Shareholder Value Add, Strategy and Tactics, Supply Chain, SVA, Theory of Constraints, TOC, Replenishment

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I wish I could still ski like this!!