The pull system comes into play the moment manufacturing companies / suppliers start with small quantity supplies of new range of SKUs releasing the capital of the distributor. However, to make this reality there are two important paradigms of supply chain that needs to be addressed
1. A production system has to move away from producing large batches as per monthly forecast to production based on consumption from central warehouse.
2. The central warehouse should move away from being a flow-through warehouse (or a trans-shipment point) to being an aggregator of inventory. This implies that the inventory at central warehouse is higher than that with the distributors.
When the capital of a distributor is released and the distributor starts enjoying higher ROI due to higher rotation, at the same time, he has to be consciously guided to deploy his released capital in increasing reach and range. First jump of sales increase as an effect of good availability also pushes the sales targets of the companies to next level. This can be achieved only when the retail base is increased. In the old paradigm, most distributors restrict themselves to limited counters to have limited exposure towards collection costs and follow-ups.
It is impossible to know when and where a customer will step in to buy a merchandise / product. The basic premise of increasing Range and Reach can be bought in, is by reaching out to maximum potential retailers with a wider range as it provides the maximum opportunity for a potential sale. This implies that the DSO (Distributor Sales Officer) has to reach every potential counter in the assigned geography.
Reaching out to all potential retail counters is the most critical and difficult leg, as the sales organization of a company has to undergo a complete culture change.
What is the recipe to change?
The starting point – The sales teams buy-in is the key enabler towards the success of the initiative. While the sales team realizes the fact that increasing Reach and Range will bring immense growth in sales, the foremost conflict that has to be resolved is the measurements on primary sales versus secondary sales. Once, the work towards increasing Range and Reach begins, if the sales team is burdened with measures based on primary, the experiment starts with a disaster. Secondly, it is important to empower the sales team to do preparations to start the activity. The preparations entail limit billing to wholesalers, consolidation of distribution and take measures at company level to bring in uniform pricing. While uniform pricing is a necessary condition, limiting the billing of large quantities to wholesale entities is the sufficiency required – the idea is to prevent wholesaling and not curtail the selling to wholesalers.
Moving forward, the distributor has to be convinced to put in efforts and resources to bring changes in his selling methodology. One of the requirements which cannot be compromised from a distributor is to have an exclusive DSO (Distributor Sales Officer) to visit outlets in his assigned geography on a predefined frequency. Secondly, he needs to add range to his buying in, in order to service full range to the retail and most importantly the coverage has to be done for all counters (relevant for the range distributor is carrying). The distributor starts scratching his head when such a mandate is expressed to him. The initial reactions – “I am covering all good counters in my market. My salesman or myself personally visit all these counters. The retailers I am not servicing buy very insignificant quantities and some are very bad on payments and it is practically difficult for me to collect payment from all. In addition, my market is bad – nobody pays me before 45 days.”
The philosophy of “Bad Counter” is a misnomer in most of the cases. Firstly, when the company creates price hygiene by limiting supplies to wholesalers on a quantity discount, multiple sources of availability is curtailed. Assuming the brand has good pull, the retailer is left with no choice than to procure it from the only source (i.e., the distributor) available to him. Secondly, when small quantities are sold on a regular frequency, the payment liability to the distributor is small. The retailer’s investment is not blocked for a very long time and he enjoys good return on investment on the company’s range of products. Realizations are faster. Higher Frequency of visits also provides ease on collection efforts. The question now is the cost of servicing a small retail point where the quantities that can be placed is limited. The problem is calculating the cost of servicing on the single delivery to the retail point. It has to be considered on the overall sales. Secondly, the fixed cost of a DSO is almost fixed and covering additional counters in the same market doesn’t increase any costs and owing to the higher frequency of visits the overall time that has to be spent doesn’t get compromised.
The second challenge is placing the not so popular range at retail points. The fear here is that if the sales conversion for such SKUs does not happen, the retailers’ capital gets blocked and he may delay the payments. In such cases the risks of the distributors to add new range at retail point is alleviated by an option of “return back” if the inventory of new range does not move beyond a specific time. Such a radical approach helps distributors in trying out new range in the market thus increasing the chances of new range hitting the shelve space. Starting with small quantities of the new range further minimizes the risk. It is worthwhile having some BTL (below the line) activities done during this time. One more sweetener is that many tail products fetch relatively larger margin than the SKUs lying in the head zone.
The third challenge is rewarding retailers with higher sales. The common practice is providing larger discounts to retailers buying large quantities. This creates an opportunity for price disparity discouraging small retailers to buy and sell the company’s products. This can be handled in 2 ways. One, the difference of margin to a large versus small retailer can be predefined based on inputs from the sales team and a tipping point (acceptable differential) can be defined. Secondly, the reward can be spread over a larger period with benefit linked to every SKU (complete range) and not on a single SKU. For larger retailers there can be a long-term bonding program which entitles them for more qualitative benefits – this also addresses the “ego” of a large retailer.
The most important challenge is securing larger shelf space of a retailer in a scenario where competition is aggressively pursuing retailers with instant and spot schemes. What has to be understood here is that instant and spot schemes are run normally for any single and safe / hit SKU where the retailer has less fear of SKU getting stuck. And it also comes with a quantity rider. While the retailer has obvious benefits of increased ROI for the category of business, since each category of products in his portfolio occupies a small percentage of his overall business, he has a poor intuition of ROI at category level. So in this case, each retailer has to be explained how his buying decisions impact his ROI at a category level. Secondly, conscious efforts have to be put by the sales team to occupy the shelf space with a wider variety. The “return back” offer with a specific time line comes in handy here.
One of the assumptions during the sales implementation is that the distributor and the sales team is fully equipped to drive the implementation and scale it up once the buy in is complete – This implies that the discipline of attempting to orders from each and every outlet on a fixed frequency even if the order quantities are small and all the obstacles will be effectively handled by the DSO with limited training. However, the steam is soon lost when the field force is confronted with reservations from retailers.
Hence, it is always advisable to start such an initiative with a continuous hand holding process for the distributor and the sales team. This is essential to bring in a change in thinking process of the distributor as well as the retailer. Every distributor has to undergo this rigorous training supported by the sales team. The efforts are huge – Once the commitment from the distributor and the sales organization is demonstrated, the retailers gain confidence and this goes a long way in stabilizing the entire process.
Once scale up starts, the number of touch points for the Sales person also multiplies. Sooner or later there are chances of compromises. This could sometimes lead to even a case of rework and can drain significant capacity. Hence, it is critical to have a weekly review locally and execution of all action plans decided during the review has to be monitored by a senior level sales personnel.
The above steps necessarily bring in following shifts:
1. The ROI of the retailer is improved
2. The base is now larger – better reach
3. Shelf share for the company goes up – wider range
4. The higher frequency of service also ensures faster collection bringing down the follow up efforts – reduced payment cycles
5. Improvement in margins – as discounting is minimized
The role of the organization in subordination to this activity by Marketing, Human Resources, Commercial and IT to enable the activity is equally crucial.
The initiative necessitates a focused management attention and time and bringing in the above paradigm shifts are not easy. It is not difficult either provided the greed for success outweighs the fear of failure.