I think the best way to internalise new knowledge is to analyse case studies. So instead of just posting insights on this blog, I would like to share a case study with you and some questions to ponder at the end. Of course, the answer is also provided subsequently, but may I suggest that you spend time formulating your response before reading on and understanding Vector’s point of view. A company sells its products (consumer goods) through a number of distributors who, in turn, supply to wholesalers and retailers. They started implementing the 'pull’ based distribution solution about a year ago, and there have been significant challenges due to the company’s legacy of operating through wholesalers. They have invested significant time in streamlining the supply side (The company has no manufacturing facilities; it buys its products from a principal warehouse, or PWH). The inventory is down by about 50%; at the same time, shortages are down significantly. You will look at the company’s PWH and Distributor Buffer Penetration Reports and will be glad to see mostly yellows, with some greens and a few reds and more greens. The promise of high availability at low inventory is coming true!  But the sales implementation is another story, though. The distributors are all on offer and are enjoying high ROI, good inventory turns and increased absolute profits. However, a vast majority of distributors’ sales still come from the wholesalers. The company’s retail reach is not increasing fast enough, and though up from the past, direct sales to retailers account for about 30% of the distributor’s sales. (The other 70% is sold to wholesalers who serve the entire retail population). A review of the numbers reveals a shocker: The company’s total annual sales (in the recession year) have declined by around 9% year on year. They are even more worried because the product mix seems to have suffered. Traditionally, out of the company’s range of around 65 SKUs, about 5 SKUs accounted for nearly 80% of sales. In the last year, even as overall sales have reduced by 9%, the contribution of the top five products has plummeted, and no fewer than nine SKUs now account for 80% of the company’s sales! So, the top five runners must have been the main reason for the company’s sales going down, right? Undeterred by the seemingly bad picture and goaded by our unshakable conviction in ‘push’-based methodology, we must answer the following questions: <ul><li>Why did the sales of the company go down?</li><li>What is the single biggest 'desired effect' that you expect to see for this company? Why should that happen?</li><li>How can the change in product mix be explained, and what is its impact on the 'desired effect; above? </li></ul>Hope your own thinking has been stimulating. Now, the answers:<h2> </h2><h2>1) Why did the sales of the company go down?</h2>The first reaction one would expect is: When you implement replenishment, sales are expected to go down in many environments where the push has been very high. You know the stuff – salespeople have been pushing aggressively in the past, the inventory levels of customers would be high when we fix norms as per the new Replenishment Lead Time (RLT), the stocks of most SKUs would be above the norm, and thus we will not be able to ship material to the customers as we wait for the excess stocks to flush out. So far, so good.Even though this explanation seems logical, I have two problems with it: <ul><li>One full year is not a good enough period to flush out and rebound. Was the sales team so good at pushing that they had pushed more than one year's worth of sales?</li><li>To me, the explanation of high stocks seems to be a justification put forward by a novice (or lazy?) implementation team. </li></ul>This is neither the ethos nor the philosophy that Vector implements in its projects.Remember the sufficient assumption of block 3.1 of the Strategy and Tactics (SnT) tree? “To ensure an outstanding start to a major initiative it is vital that the first substantial actions result in immediate substantial benefits.” <h5>The Vector approach to implementing replenishment model is:</h5>So, while the world expects sales to go down based on the logic you explained in your responses, it is simply not acceptable to us. Vector’s Standard Operating Procedure for trimming that negative is threefold:1) Immediately increase the range that the distributor is holding. (In a primary sales target plus push sales environment, it is well known that the range at the distributors will be extremely limited compared to the entire range that the company sells.) When we release the distributor’s capital (by not pushing him with stocks of items he traditionally buys), we do not let it go astray but redeploy it immediately to other SKUs with potential. This should arrest some losses in primary sales. While this is what most textbook implementations will do (if they are really done by the book!), it may not be enough. We may not be able to block all the capital from all distributors to the extent that primary sales are not affected.   2) Bring distributors on the offer in waves. Select one lot, and while you are waiting for their excess stocks to flush out, the rest of the distributors can be used to recoup the sales (after all, the sales team are experts at pushing, aren’t they?). Then, as sales of the first lot of distributors on offer begin to rise due to replenishment, choose the next lot of distributors for the offer. And so on. In this phased manner, you can bring the entire universe of distributors to the offer without suffering any dip in sales. At any time, there will be one set of distributors enjoying the fruits of replenishment and ever-increasing sales, there will be another set that is still being treated traditionally and the small set currently being rolled out will not punch a big enough hole in primary sales to warrant an official statement to the analysts and stock exchanges! 3) The above may arrest the dip in overall primary sales of the company to a large extent, but it may not result in a big enough increase in the sales of the distributors on replenishment to give comfort to the company and the distributor. we have to find ways to dramatically increase the distributor’s sales in a short period of time. Vector insists that all clients invest time in preparation for the offer rollout. Even before they present the offer, a comprehensive market mapping of the distributor’s area is conducted to compile a detailed list of all retail outlets in the area. It is well known that the distributor’s reach is woefully inadequate under normal circumstances. We will redeploy the released capital of the distributor to immediately increase reach, i.e. cover all potential outlets in the distributor’s area. This will involve hiring dedicated salespeople and creating/expanding delivery infrastructure to cover every outlet that has the potential to stock and sell our product range. The money for this ‘added expense’ comes from released capital, and the virtuous loop of this step is that, as you redeploy the released capital to build sales and delivery infrastructure, your sales rise further and you earn more money!  The combined effect of all the above injections is not only to arrest a decline in primary sales but also to ensure that secondary sales take off on a trajectory leading to high primary sales. A true WIN-WIN. So, the sales of this company declined because it did not expand its reach quickly enough. (Remember that, though the retail reach increased, the company is still selling 70% through wholesalers.) I also suspect that the company suffered a double whammy. When you implement replenishment, and the market gets wind of it, the wholesale segment anticipates that it will be the biggest loser (and rightly so), so they will swiftly start limiting their exposure to the company’s products, thus leading to a precipitous drop in the absolute sales through wholesale. If your retail sales expansion is not fast enough, the combined effect is a drop in the company’s overall sales.   <h2>2) Assuming that the company took no initiative to reduce costs, what two factors could have taken the company from loss to profit?</h2>Two things that led the company from loss to profit: 1. Elimination of discounts/schemes. 2. A higher contribution of ‘slow movers’ to the company’s sales.  Some people got the first reason easily. Not difficult, right? Because you are no longer pushing, you do not need to give discounts and schemes linked to quantity purchases. The company’s throughput increases (as there is no erosion).   The second reason is the topic of the case, which we discuss under Question No. 3 below.   <h2>3) How can a change in Product mix contribution (from the existing portfolio) improve the bottom line of the company?</h2>To answer this question, we have to first grasp the ‘physics’ of business. In a multi-product distribution company, there will be fast and slow movers. The ‘fast movers’ are the high-volume products where the company commands a decent market share, and if you look at your own company (or any other company for that matter), these products traditionally give less throughput than the ‘average throughput’ of the company. The slow movers are actually products with low volumes (the absolute number of units sold in a month or year). Normally in these product categories, one of the competitors is a leader – what is a low-volume product for us is a high-volume product for someone else. There may be exceptions to this, but more or less this phenomenon exists. It is also quite prevalent that these low-volume products enjoy a high throughput (compared to the high-volume ones and also when compared to the average throughput of the portfolio of the company. (By the way, fast mover and slow mover themselves are a myth and I encourage you to read the relevant article posted on the Vector website.) So, when the sales of low throughput items go down, and the sales of high throughput items go up in the same period, the average throughput of the portfolio of products, and also the company’s, improves. Now, whether profits increase or decrease is purely a function of how much the sales of high runners dropped relative to the increase in sales of the low runners. If the total gains are more than the drop, the company will report an improved bottom line. Very few companies are in control of this eclectic mix, indulging mostly in reactive knee-jerk reactions after their bottom line has been hit. Added to this conundrum of low throughput from high runners and high throughput from low runners is the impact of schemes and discounts. Companies do try to use prudent commercial sense and offer discounts only on the slow movers, but no matter how hard they try, they are mostly ‘maneuvered’ into offering schemes on the high runners too by including these products in the scheme/package. It may be quite shocking to know and difficult to digest but the combined effect of quantity discounts, schemes and other trade promotions can lead to a negative throughput on the high runners!  Imagine: the company loses money on every unit of the high runner it sells! You never realise this during the year as a whole, sales team is gung-ho about beating the market and meeting the numbers. Only when the bean counters publish the numbers, the realisation dawns on everyone that they have been working so hard to lose money for the company! Garnish this with the company’s situation: it was literally in the hands of the wholesalers, and now you can understand the dynamics that led to the ‘turnaround’ in the company’s fortunes. So to answer the question: The combined effect of low throughput, high discounts, and schemes was actually hurting the company’s sales of high runners (the five products that accounted for the bulk of the sales), and thus the company reported losses in the previous year. The focus on retail led to wholesale sales declining, and since wholesalers deal mostly with high runners, the company’s sales dropped. The positive effect of replenishment was to remove discounts and schemes, increase the throughput of the high runners and bring it into the positive zone. In addition, due to the rollout of the replenishment in retail, the sales of the slow runners went up. Since the throughput of the low runners was quite high, this not only neutralised the drop in sales of the high runners but also brought the company to profitability. But for the 'pull’-based distribution solution, the company would have continued bleeding by ‘buying’ market share and limiting its range further and further.Saved by the offer!

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Problem: Despite improving availability and cutting inventory by half, the company’s annual sales fell by 9%. Heavy reliance on wholesalers limited retail reach, while discounts and skewed product mix eroded profitability. Solution: The company expanded distributor range, rolled out replenishment in phases, and built retail reach through detailed mapping and infrastructure. Discounts and push schemes were removed, enabling a more balanced and profitable sales model. Benefits: Sales decline was arrested, retail expansion accelerated, and throughput improved through a healthier product mix. The company eliminated discounts, boosted profitability, and created a sustainable growth path.

Key Takeaways

This article presents a case in which a company implemented an innovative distribution solution, yet continued to face challenges because of its legacy dependence on wholesalers.