Shortages & Surpluses - Consumer Products - IV

 

3. So what can a Consumer Goods Company do?

With long lead-times from Asia retailers have no chance of determining, in advance, which products will be successful and which will not. There is only one response that can be successful – the ability to react quickly when the consumer has started to tell us what he really wants to buy. We want to catch the avalanche as it starts. How can we do that?

Purchases for the season have already been made:

The business has decided what will be in its stores and warehouses before the start of a new season. To a very large extent such a business has committed itself and accordingly will benefit (or suffer) from the consumers’ actual demand. From the supply side the die is largely cast. However …

Even if fashion crazes tend to be global there are many smaller avalanches that are likely to be much more localized. Regions around the country, continent or World will have different avalanches involving different products. Demand is not likely to be uniform across a big enough region. We could react to the differences in demand by making sure regions of high demand for specific articles get what they really need while the other regions that have less demand get less (they will stock other products more heavily – those that sell well in their area).

What this means is 3 things:

• Maintain as much stock as possible in a central warehouse that can respond very quickly when regions show their cards – when the consumer has spoken. (An alternative is cross shipments between stores – which is probably more expensive and slower).
• Replenish each store according to what it has just sold – as close as possible to whatever was sold just yesterday! Only with such rapid response are we truly close to the consumer. The longer we wait the greater the chance the consumer has changed his mind again – which means the retailer should change with him. Effectively this says that what was sold just yesterday is the best possible forecast for tomorrow.
• Return the poor sellers to the warehouse and redistribute them to locations with real demand for them. Don’t block your valuable shelf space with ‘dogs’. If at the start of a season all products are equally represented then very soon – as the hot items are sold out – the dogs will take over the majority of your shelf space. At the same time these same dogs will take more and more of your sales peoples’ time. Instead of selling as much as possible of the popular items efforts are spent getting rid of the dogs, to find substitutes for missing items and, in the end, to sell the remaining slow movers for deep discounts.

Clearly a good salesperson will offer an alternative whenever a desired article is out of stock – and will be successful some of the time. However, substitutions are often disappointments (I did not get what I really wanted). Substitutions take more effort from a salesperson – will they try to sell a substitute when it is clear the store still has stock of the hot product and it is just as clear that a potential substitute is not so popular? Substitution probably takes place only when the ‘hot’ item is sold out. What happens to store traffic when consumers realize a hot item is no longer available?

Substitution is a valid tactic, but better still would be the ability to resort to it as little as possible.

What is the threat if someone finds the solution of how to do the above? What is your benefit if you find it?

Replenish stocks (from suppliers) during the season!

Why buy everything before the season? Why not buy during the season and, as market knowledge becomes available, adjust purchases to whatever is truly selling well. Re-order from suppliers when you can see the avalanche starting!

In many (if not most) industries production lead-times do not need to be many weeks. In fact, many times, the actual ‘touch time’ (the time it takes to physically make an article without considering any waiting time) is very short (measured in minutes?). With TOC (Theory of Constraints) methods it is usually possible to get a production unit to respond within very short lead-times – short enough to react very quickly.

BUT, there is still transportation time from Asia. Shipping is something like 6 weeks – a long time for a season of only 6 months. This transportation lead-time is a fact of life and can be dealt with only by more expensive transport (flying) or by sourcing from low cost regions closer to Europe.

The question is – what will be the impact of such a tactic on revenues and margin, and what will be the added cost of air shipments (or new suppliers)? The result of having to discount much less (we don’t buy so much of the slow movers) and selling considerably more of our hot items must have a much larger impact than the expense of air shipments (that should only be needed at the start of each season) and more frequent smaller shipments by sea – if our greater flexibility is to have a positive impact on our bottom line.

Lets look at a scenario. Instead of buying the forecasted sales for the entire season our retailer buys ‘only’ 2 months of stock delivered in time for the start of the selling period (suppliers that want to sell in huge batches are an obstacle, but technically small batches are possible with little, if any, penalty). Once sales start, the retailer immediately (and then every week) reorders what has been sold from his shops during the week just past. The following will begin to happen (the diagram can be used to help understand the effects):

1. If the retailers initial purchases were a good estimate of demand, then inventory levels will decline towards 2-weeks of supply and stabilize there. That is the point where new orders and deliveries will approximately balance.
2. ‘Hot’ items will deplete stock (much) more quickly. To avoid a stock-out some air shipments will be necessary. By increasing stock levels of these hot items the retailer will eventually also have a 2-weeks supply with weekly replenishments.
3. Since ‘hot’ items are being replenished (rapidly) they will sell much more – increasing sales for both the retailer and his supplier.
4. After the first few weeks some items will be clearly identified as ‘dogs’ or slow movers. These will not be replenished until they reach 2-weeks of stock, or they will not be replenished at all if they are that poor! Stock levels of slow movers will be one third of ‘current’ stocks at the start of a season so there will be many fewer surpluses. Season’s end discounting and outlet sales will be much lower (and maybe at higher prices!).
5. Since there is less discounting, greater sales (of all the hot items that are always in stock) the retailer’s margins must soar. There will be less pressure on supplier prices and margins – much better relationships will be possible. The solution can be fine tuned for even greater benefits for both partners.
6. How much more will a retailer sell? If hot items are sold out within the first 2-months (shops and warehouses) then it looks like as much as tripling sales is possible. Shoppers quickly become aware which shops always have the hot items in stock – traffic increases and even more sales can be made.

If a retailer’s purchase costs are 45% of expected full price sales, then halving surpluses and adding just 10% to sales due to less shortage then return on sales increases from currently 5% to 15%. (In the model fixed costs are 30% of base sales and discounted sales are 40% of base sales volume. Discounts during season end sales are 50%). Should a retailer consider some transportation cost penalty for such an improvement – especially if increases of 30% in sales are possible?  The financial example in the endnotes (in a following post) shows the impact of having the right inventory in stock – Key is being able to respond to actual current signals from the markets. I recommend you create your own model and assumptions.

A book recommendation: "Isn't It Obvious" by Eli Goldratt. Goldratt develops the solution starting from an emergency in 1 store of a retail chain - one that replenishes from the far east. Written as a novel, but it describes the solution and the possible results very well.

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