April 2011

Retailing 360 : Facilitating Freshness

Arvind Singh Rana – Senior Consultant, Vector Consulting Group, explains how application of the Theory of Constraints in replenishment solutions can help to improve the freshness of products

With growing consumer awareness, companies in the perishable goods industry are finding it increasingly difficult to cope with the problem of diminishing freshness of stocks at the Point Of Sale (POS). Companies in the pharmaceutical, and food and beverage sectors are facing significant bottom-line erosion due to the heavy discounting they must periodically resort to, in order to get rid of near-expiry stocks, as well as writing-off expired stocks. Through this article, we will evaluate the impact of freshness-related problems on a company’s business, the root causes of these problems and the reason why actions taken by most companies fail to solve them. More importantly, we will also determine whether there is a one-stop solution to this omnipresent challenge.

Why Old Isn’t Always Gold
The following reasons reflect the considerable impact the freshness of products has on a company’s business:

Loss of Sale/Customers: A 2010 study by Asian Food Information Centre (AFIC) found that 67 percent of Indian consumers actively consider the expiry date when purchasing perishable goods. It is, therefore, very likely that when the stocks on shelf are nearing their expiry date, the customer will either postpone buying the product or switch to a rival brand. If this is experienced multiple times, the company stands a high change of losing the customer forever.

Loss of Profit: As the stock ages beyond the internal threshold determined by the company, actions are taken to push the sales of these products. Distributors and retailers fear being burdened by large volumes of nearexpiry stocks and hence, purchase stocks only at a highly discount rate. This, in turn, erodes the company’s chances of gaining profit. The stocks that could not be pushed need to be written-off, thereby contributing to a further erosion of profitability.

Impediment to the Launch of New Products: As forecasting errors are higher in the case of new product launches, there is a higher likelihood of distributors/retailers ending up with large stocks of products that fail to connect with, and therefore generate interest in, the target audience. That is why, retailers are much more cautious when accepting stocks of new products, which, in turn, slows down the launch. This is why a number of products are deemed as ‘failures’ even before they are adequately tested at the POS.

The write-offs due to obsolescence in the industry vary from one percent to five percent of the Net Sales Value. Add to this the impact of discounting and the cost of delay in launching new products, and the resultant profit erosion becomes a significant value. Conservative estimates peg the erosion at about 10 percent of sales for most companies. Hence, it is increasingly important for manufacturers to examine the roots of the problem.

The Freshness Fact File
Freshness deteriorates when a Stock Keeping Unit (SKU) is not sold to the end consumer for a period that is close to its shelf life. This period can be divided into two parts:

• The time taken for the SKU to reach the POS after production
• The duration for which the SKU waits at the POS

Companies tend to attribute the loss of freshness to the latter, pointing fingers at various factors such as brand pull, seller motivation, consumer preference etc. However, the Vector Consulting Group has found (through its own experience) that if the first part of the problem is taken care of and there is a non-zero sale rate for the product, the issue of freshness can be resolved.

A Closer Look
Consider a company that sells products with shelf life of nine months. Theoretically, the time taken for a SKU to reach a POS anywhere in India should not be more than 15–20 days. Interestingly, however, some stocks fail to reach the POS even after four to five months after production.

The time taken for a SKU to reach the POS is sum of the transit time and the waiting time at the various stocking locations. The waiting time is equivalent to the number of days of inventory in the supply chain for that SKU. And so, the question that arises here is that if high inventory in the supply chain is leading to a loss of freshness, why are companies not controlling the inventory?

Today, the industry is snared in an age-old conflict between freshness and availability. If players try to improve freshness (by closely monitoring inventory ageing and rationing stocks), there is an increase in stock outs leading to loss of sale. If they try to increase availability, there is a need for greater safety stocks, leading to loss of freshness. And so, there is a constant battle between the supply chain management team (fighting for freshness) and sales team (fighting for availability). The result is a dynamic compromise.

Problem Magnifiers
In addition to the core problem of inventory management, there are a number of other influencing factors that make managing freshness a difficult task for companies.

Scale: Dabur in India, for example, has close to 50 Cost and Freight Agents (CFA) and more than 750 distributors, each supplying to more than 100 retailers. Multiply the above with the number of SKU’s (~100) and the outcome is an intimidating 7.5 million decision points every single day. This makes it very difficult to have forecasting and logistics planning at an SKU-level granularity.

Growing awareness: Owing to higher literacy rates and initiatives such as ‘Jago Grahak Jago’, retailers and consumers prefer to buy the freshest stocks available, unless they are provided substantial incentives to purchase otherwise. This makes purging out old stocks very difficult.

Inertia to pull back: Since pull back means negative primary sale, there is a heavy inertia towards the same. Thus companies are unable to correct the mismatch of stocks lower down in the supply chain before it is too late.

Source : Retailing 360

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