Implementing Pull Systems In Mom-n-Pop Store Formats

ETretail.com, August 26, 2014, Mumbai

The last week of the month is the most stressful for sales managers of consumer goods companies as they fight to conquer sales targets (not to mention the stress on the despatch people and the channel partners). How do they meet their numbers, especially when time’s running out? They heap the stocks on the distributors even if the items aren’t what the market wants. Though primary sale is achieved; the stocks merely move from one warehouse to another. This is called “push sales”.

Managers are well aware of the pitfalls of “stage-managing” sales in this manner. Apart from causing the skew in production, it also cripples the distributors’ ability to keep sales consistent throughout the month. The distributors, who are billed huge amounts in the last week of the month for items that may not sell immediately or in the immediate future, are all out of funds by the first week of the following month. Cash-strapped, they are unable to buy those relevant items that are ebing demanded immediately by retailers. Consequently, the sales take a hit. This phenomenon is widespread in the consumer industry.

Managers are also well aware of the advantages of supplying relevant stocks – items which are in demand and are being consumed – to the distributors. This is termed “pull sales”. As distributors “buy” stocks as per consumption, they are able to free up capital, help retailers fill up their shelves with a variety of SKUs. Consequently, sales go up.

Most Sales managers are well aware about the merits of consumption-driven sales. Yet, they do not make the shift from “push” to “pull” mode. A major fear is that distributors would invest the newly-freed up capital in competitor’s products, and this would lead to loss of sales (apart from the loss of control issue that would prevent the sales people to push material to them to fulfill their targets).

Facing the fear of capital flight

It is believed that, during the period that the company transitions from push mode to pull mode, sales would suffer. This needn’t be true. The Theory of Constraints (ToC) approach – supply chain solution combined with market offer – ensures that the shift is smooth and risk-free.

As is quite obvious. distributors tend to restrict range and deal with only a few fast-moving SKUs to protect their capital from being locked upin slow-movers. This behaviour can change when the distributors are offered small quantities. Their capital is released, and they have funds to buy more range. Due to the small quantities involved, the fear of money locked in case of slowmovers is also eliminated. This creates a win-win partnership between the company and the distributor. It also paves the way for implementation of pull system. In addition to this,

1. The production system has to refrain from manufacturing large batches dictated by monthly forecasts and shift to production that is based on consumption

2. The central warehouse, from being a flow-through warehouse, has to become an aggregator of inventory. Inventory at central warehouse should always be higher than that at the downstream locations.

Several companies in India have turned to the pull system and made huge gains. Companies making auto spare parts, garments, steel, FMCG have all reported significant jump in sales of 30% to 40% in the period of implementation. Distributors have seen an impressive hike in ROI and inventory turns. These results have rendered the fear of capital flight baseless.

The challenge of data collection

The true test for the pull system is presented at the retailer level where sales fluctuations and forecast inaccuracies are higher than that at aggregated points such as the distributor or the company’s central warehouse. Bringing in the new discipline among retailers is daunting for

companies because their reach to these stocking points is limited. For this system to work smoothly, companies need to receive frequent data on sales. This will enable them to align distribution with daily sales. This alignment is one of the fundamental blocks of the pull system. However, gathering daily sales data from the millions and millions of retailers spread across the country is a more than a challenge. Active wholesalers, who sell huge volumes to the highest bidders, cloud the view of the landscape. These factors have deterred many companies from taking the “pull-sales” route.

Going the whole distance

In the first phase of implementation at the distributor level, the gain in sales is significant enough to ease the pressure of targets. This easy phase could continue till all large distributors are on board. As sales go up, targets are raised. At the same time, enthused by the sales jump in the “honeymoon” period, companies could make the mistake of continuing to exclude the vast mass of retailers from the new system. This decision could hamper sales growth, come in the way of new targets being met. Soon, companies could find themselves back where they started – pushing goods to distributors to meet sales targets. Left with little room for experimenting, distributors go back to restricting range and reach. Companies taking the pull-sales route have to travel the whole distance. Both distributors and retailers have to be made part of the process if companies want to keep pressure of targets at bay and continue to achieve growth in sales.

The Good Enough Approach

Getting data daily from the infinite number of mom and pop stores spread across the country is impossible without IT systems. They may not want to attempt it. Instead, companies can settle for collecting data once a week. This would be significantly better than getting information just once a month (or spoeadically, or not at all!). The salesmen visiting retail outlets to collect orders can double up as data collectors. These distributor sales representatives (DSRs), appointed by the distributor, should, during their frequent visits to outlets also define requirement based on the difference between stock levels and the norm.

The DSR is an important cog. He or she should

• Ensure quantities ordered do not exceed norm

• Make frequent visits to retailer so he is assured of regular replenishment

A retailer may not necessarily understand how each category of products in his portfolio contributes to his business. The DSR should be able to talk to the retailer about how his buying decisions impact ROI on each SKU. Companies need to invest in training DSRs to be effective at multiple tasks, most importantly securing the retailer’s buy-in and making him part of the solution.
Source : ETRetail.com

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