The unentertaining game of Chinese Whispers in the world of consumer products supply chain- Part 2: Measures to effectively channel demand variability
In the previous post we discussed how small variations in demand at the consumer end get amplified as the retailers and manufacturers play the game of ‘Chinese Whispers’. In this post we will discuss some of the steps that the retailers and manufacturers are taking to counter the behavior. While some of these measures require simple changes in policies, others require significant investments in processes.
1. Hi-Lo pricing can be replaced by Every Day Low Pricing (EDLP) where applicable
A consistent price offered by EDLP strategy helps in keeping a demand steady and consistent, thus taking away any incentive for the consumer to forward buy or postpone their purchase. EDLP works best for products that demonstrate one or more of the following characteristics
· steady demand irrespective of season
· Are fast moving and are repeat purchased
· Consumers place little value in waiting for deals
· Retailer is able to sustain a low price competitive position through a cost advantage
· Suppliers are willing to provide Just In Time delivery
Wal-Mart is a great example of a company that has adopted EDLP strategy with a remarkable degree of success.
It is important to time and price the promotion to ensure that the sales increase comes from increased consumption or stealing market share from competitor and not from forward buying. If more proportion of sales increase is obtained from forward buying, then it would lead to lumpy and variable demand.
Also, promotions have to be planned collaboratively by the manufacturer and the retailer over a longer time horizon. That would help in designing promotions that increase overall retailer and manufacturer profits and make the demand changes induced through promotions more predictable.Out of stock at the shelf
3. Choose replenishment strategies that reduce shelf out of stock
Direct Store Delivery strategy helps the manufacturer obtain direct visibility to the consumption pattern and ability to proactively manage the shelf availability. It is especially suitable for fast moving, short life cycle products demonstrating a high degree of impulse purchase. The higher cost of shelf replenishment is easily offset by the additional sale generated due to impulse purchase. Examples of products that can be replenished through DSD are salty snacks, bottled beverages and magazines.
In a Vendor Management Inventory strategy the retailer shares information with the manufacturer on the sales and inventory information, based on which the supplier determines if an order is needed. Better forecasts result from having a more forecastable demand because the orders created more closely match the true demand in the marketplace.Usage of cross docking for short life cycle products ensure longer shelf life in the store, thus avoiding out of stock due to expired product on the shelf.
4. Fill gaps in sales based on sales before and sales after the gapWhen out of stocks cannot be avoided, especially due to defined service level objectives, retailers can develop algorithms to identify such gaps in the history and bridge them in a manner that mimics the true demand. This will deter the forecasting algorithms from mistaking the gaps for a true demand pattern.
Order batching and forward buys
5. Usage of CAO and EDI will reduce the ordering costCost of ordering can be reduced through implementing Computer Assisted Ordering (CAO) for purchase orders and usage of EDI transactions to communicate the orders to the manufacturer.
6. Usage of 3PLs and mixed truckloadsEngaging third party logistics (3PL) service providers for transportation. The manufacturer does not have to worry about having to fill full truck loads and thus eliminate providing any incentives to order products more than required to meet truck load requirements.
When a manufacturer supplies multiple product lines to a retailer, planning a mixed truck load can eliminate the need to mandate order rounding rules to the retailers.Shortage gaming
7. Avoid placing false orders
Retailers should avoid placing false orders. Instead, retailer and the manufacturer should collaboratively share demand and capacity information. Manufacturers should allocate products in a manner that discourages retailers from indulging on shortage gaming practices (discussed below)Lack of communication with the manufacturer
8. Bridge the information gap using CPFRThe root cause of demand variability lies in information disconnect among the trading entities. Establishing a formal communication between the retailer and the manufacturer would be a good starting point to bridge the information gap. When the retailer and the manufacturer share information on the demand and supply and take measures to make their supply chain truly demand driven, then the demand variability can be either eliminated or made predictable. Voluntary Inter-industry Commerce Solutions (VICS) lays out detailed guidelines and framework for Collaborative Planning, Forecasting and Replenishment (CPFR) among the trading partners.
Countering demand variability induced through manufacturer actionsSales incentives contributing to demand variability
9. Rationalize sales incentive plansThe manufacturers should ensure that the sales incentives are based on targets that are achieved over shorter intervals. Typically, shorter measurement periods result in smoothing of the demand.
Independent forecasting of demand10. Upstream forecasting processes that integrates information from downstream entities
Availability of point of sales information to the manufacturer will help in obtaining visibility to the store sales. This information can then be used for calculating the customer distribution requirements, thus eliminating the need to forecast the near term requirements. Alternatively, the POS information can be supplemented with the manufacturer shipment history as input to sophisticated forecasting algorithms in order to develop forecasts that account for the demand latency gap.11. Collaboration between trading partners on promotions, new product introductions, product discontinuation, having common metrics
A common reason for demand variability is un-forecasted sales promotions. When retailers undertake activities such as promotions or plan-o-gram changes without the awareness of the manufacturer, they create ripples throughout the supply chain, leading to high costs.To avoid these situations, manufacturers can implement collaborative planning processes wherein they can plan promotions, plan-o-gram changes, new product introductions and product discontinuations collaboratively with their retail partners.
Handling of supply issues12. In short supply, manufacturers should allocate units based on past sales
During short supply situations, manufacturers can discourage retailers from indulging in shortage gaming by allocating products based on the retailer’s past sales instead of basing it on their current orders. Even during non short supply situations, manufacturers should analyze and eliminate any orders that get subsequently cancelled. These false orders are extremely harmful and can play havoc on the system if not curbed.To summarize, we discussed various factors that cause demand variability to be created and propagated through the supply chain. We also discussed some of the policy and process measures that can be applied by the retailer and the manufacturer to curb the creation or transmission of the demand variability. However, it is to be noted that the demand variability cannot be completely eliminated. When dealing with the problem of demand variability, the objective should be to first make it predictable. A predictable demand pattern, when forecasted using the right models, can yield a more accurate forecast that can lead to both topline as well as bottomline benefits for a company in the longer term.
