Push or Pull? : The ongoing debate
Every sales manager in a consumer goods company faces a moment of truth in the last week of every month – on one hand he has to meet his sales targets but on the other hand the stocks available with him is not exactly what the market wants (either in terms of quantity or range). Faced with this conflict, he uses his “influence” with the distributor to sell volumes more than the immediate requirement. In return, the distributor gets some additional discount/scheme or extra credit period as a sweetener to “deal” with problem of excess stock. This way of managing sales is typically termed as “push sales”. The push sales syndrome is best seen in a skewed sales pattern across the month – the last week is usually more than 50% of the month’s sales. The week beginning next month, the sales dip again as the dealer does not have free cash to buy more. The skew is also reinforced by monthly batches of production, which leads to arrival of range of SKUs towards the second half of the month. The phenomenon of skewed sales is acute and wide spread in consumer goods industry. (The entire logistics industry supplying trucks to consumer goods industry face an overload of requirements in last week of every month.) Many of them tried the trick of converting the month end measure into weekly measures to break the skew. However the “monthly” production planning method comes in the way of breaking the skew as the SKU set arrival gets skewed. But with dealer off take also being skewed, the push pattern is a self-reinforcing cycle. The sales managers know the problems of push based supply chain. They also intuitively understand that if they stop the push strategy and supply only as per pure consumption (or only immediate requirement) they will have a much consistent sales pattern across time periods. Most of them know the advantages of smoothening the sales on receivables and capacity planning.
The know-how of how to implement pull is readily available and is also advocated by many consultants. However most players in consumer goods industry are still operating on the “push mode”. One of prime reasons why most companies do not switch to some form of pull distribution is the fear of sale loss. If they implement a pull system and supply what is immediately required, the fear is that the released working capital will be used by the distributor/retailer to buy more of competition products and hence the sales of company implementing the pull system will be jeopardized. This fear of losing immediate sales is holding back organizations to switch from “push” to “pull” mode of sales.
The Fear: Unfounded?
The Theory of Constraints approach towards implementation of pull distribution combines pull supply chain implementation with a win-win market offer, which has made the implementation of pull systems risk free in the transition phase.
If on one hand the supplier is helping distributors with frequent replenishments only as per consumption (pure pull), the distributor uses the released capital to stock more variety. In many environments the distributors only deal with small sub-set of SKUs (out of the total company portfolio). They restrict the range to reduce risks to capital stuck in non-moving SKUs.
When the supplier company supplies small quantities of new range while releasing capital from the excessively stocked items, a win-win partnership is created and pull system becomes a reality. This has to be coupled with two other enabling supply chain paradigms:
- A production system has to move away from producing large batches as per monthly forecast to production based on consumption from central warehouse.
- 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.
The implementation of pull system provides staggering results both to the supplier and the distributor. TOC pull systems have been successfully implemented in India in many companies in varying environments (auto spare parts, garments, steel, fashion shoes, FMCG). In each case the results were staggering (around 30 to 40% jump in sales in period of implementation) particularly when the implementation was done along with a Win-Win offer with distributors. The ability to use the released capital to extend the range provided the practical approach for companies to implement replenishment with the distributors. The fear of capital flight to competition is prevented while at the same time; the ROI of distributors also improves due to frequent rotation of inventory.
In some environments the risks of the distributors in new range is further 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. This sounds almost like a silver bullet.