Dilemma of Supply Chain Planning in an Allotment scenario - 3
One very interesting aspect in an Allotment scenario is that of Price increases and decreases. In the last two blogs we saw the interesting phenomena of how Allotment situation works in a supply chain scenario. Price change is essentially done in two ways - one possible way is by informing the retailer in advance of an eminent price change at a pre-destined date. The other is by doing a mass inventory revaluation of the stock-on-hand that the retailer is carrying at that point in time- and then making a price adjustment of the existing stock across the board both in the books of retailer and that of the CPG organization. This might result in an accounts payable or receivable to/from the retailer to the CPG organization. The former is mostly done for price increases, while the latter for price reductions.
When the price increase is announced ahead of time, the retailer does a forward buy of stock. This has an interesting effect in the supply chain specifically in context of available-to-promise functionality. If the product is on allocation, the retailer essentially does this forward-buy with a receiving pattern pegged to a range of dates. Example if today is say 1st of Dec and the retailer has been told that there will be a price increase starting coming 1st Jan, then the retailer is very likely to place an order worth next six months with receiving dates ranging all the way until mid of next-year. This is like taking a forward position in the financial market. Note that the retailer does not want to sit on the stock worth next six months, however they want to lock on to the price for next six months - this phenomena can be related with the derivative instrument called Futures in financial market.
The net result is that if the product is on allotment, usually there are allotment limits made based on goods-issue date and NOT on ordering dates. So forward-buy gets processed since the goods-issue dates range all the way until mid of next year. Note that Pricing is usually carried out at the time of Order entry. The tool used for allocation technically can only be set up with either the goods-issue date or the ordering date for evaluating allotment limits. This results in a very challenging siutation thus which cannot be mapped very easily in the allocation tool.
One of the solution proposed was to do a price revaluation at the time of goods-issue and provide the better of the two prices - one that exists at the time of ordering and the other at the time of goods-issuing. This solution that we are finally proposing as part of Pricing, would thus help us alleviate the distortionary supply chain effects that the retailers otherwise would have had.
We will talk of one more interesting pheniomena in context of Allotment and Supply Chain in the next blog.
