Managing distribution chain: Is there a better way than gazing the crystal ball?

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Living with the chronic problem and associated conflicts

Managing the supply chain of a distribution company (like a consumer goods company or a retail chain or a spare parts distribution for automotive/industrial applications) is extremely challenging. The challenge isinherent in the frequent conflicts that the managers face in handling the day to day decisions for the supply chain. For example the chronic conflict between sales and logistics about inventory while sales always want higher inventory for protecting sales, logistics and finance want to limit inventory to control costs. Sales is more than willing to start a discount scheme and push out inventories or counter competition, while finance is wary of such drops in product margins. Production wants schedules (based on forecasts) to remain stable, while marketing would want production to be more flexible to the changes in market requirements. Sales would want more budgets allocated for marketing and advertising expenses while others may insist on growth of sales to fund the extra allocation for marketing and advertising expenses.

These conflicts manifest in seemingly contradictory supply chain issues like having significant stockouts despite having high overall inventory (inventory turns of around 3 or 4) OR price pressure from the supply chain intermediaries while the price to the end consumer is not affected OR new products introduced when the old ones still clog the pipeline. The problem is further aggravated for hightech products, where the total inventory in pipeline for most companies is usually much more than the life cycle of the product itself – this leads to significant price discounts and subsequent negative impact on profitability of companies. The same problem with fashion products – too many SKUs and all the SKUs need to be available much before the fashion season. During the season, there are stockouts on about 20 to 30% of the items (those that sell well) after few initial weeks of the long fashion season. Towards close of the season, there are many slow movers which have to move to the “factory outlet” for discount sales.

The ramifications of dealing with such supply chains are significant for the end retail shop. A retail shop is always constrained on cash and/or space. Most of the shop inventory is skewed towards the slow movers. Since the slow movers block cash and space, the sales efforts and space are allocated more towards the slow movers. This in turn takes the opportunity away to clock more profitable sales from the fast movers. At the same time shortages occur, and usually of the fast runners. With too much cash tied up in inventory, the ROI for retail shop is less than what is desired.

With such chronic conflicts, significant growth in sales (about 30% over previous year) is never targeted in the annual business plan because many believe such rapid growth in sales will invariably come at cost of very high growth in expenses, lower margins or high inventory. The targets are grudgingly set at less than 10% growth over last year in many distribution organizations. Is there a way out? As an answer, a manager of a large distribution company once remarked, “We can set and meet any ambitious target, if we are able to be 100% accurate on the sales forecasts. An accurate forecast will ensure we make all the right SKUs, and distribute it to the right location of demand and do not feel the pressure to drop prices as inventory matches the forecast.” Direction of solution which isn’t! An accurate forecast! This looks like a good direction of solution. No doubt many of the distribution companies are struggling hard to improve the accuracy of their forecasts.

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