Episode 31

End-to-End pull distribution: Managing the challenges of transformation

Category :  Sales & Distribution

The pandemic brought a totally new level of uncertainty in the business of distribution companies. Detailed plans and forecasts went haywire for many companies. But there were still that stood out from their counterparts in the industry who had unique supply chains designed for agility. These companies had re-designed their end to end supply chain, much before the pandemic, to react rapidly to vagaries of demand.

While agile or rapid reaction end to end supply chains is the need of the hour, the implementation of these concepts is not easy. Let us understand the difficulties and challenges of creating such agile supply or distribution chains.

Transcript
Shubham Agarwal : Hello, and welcome to yet another episode on the Counterpoint Podcast. I’m Shubham Agarwal. The pandemic and the associated lockdowns introduced significant uncertainty in the business of distribution companies. Detailed plans and forecasts went haywire for many companies. But the ones that stood out from their counterparts in industry had unique supply chains designed for agility. These companies had re-designed their end to end supply chain to react rapidly to vagaries of demand. Their execution was never sensitive to the needs of accuracy of forecast. These companies stood out in terms of performance and captured market share while others faltered. While agile or rapid reaction end to end supply chains are the need of the hour but implementation of the concepts are not easy. We have with us Sumeet, with more than 10 years of experience in transforming distribution companies from a rigid forecast based model to highly agile, pull based model. Let us understand the difficulties and challenges of creating such highly agile supply or distribution chains for companies. What it takes to implement
Sumit Sharma : I Shubham. I’m good. How about you?
Shubham Agarwal : I’m great. And it’s great to have a discussion with you on the podcast, having been discussing this for so long now.
Sumit Sharma : Same here, same here. Finally, we have finally we have come to a situation where we are now translating it into a podcast.
Shubham Agarwal : Yeah. Great. So Sumit we’ll go straight to the topic. And like I was saying in the introduction, we want to dedicate it to understand why the implementation process is challenging. And why is it so difficult? So before we before we go there, let’s let’s first address the question that why is implementing pull based replenishment solutions, so difficult, so to say, because unless it was not difficult, everyone would have you know, implemented it. So why is it so difficult?
Sumit Sharma : Yeah, so. So Shubham, if you see actually, converting from push to pull is very simple. But you know, that what is simple is not easy. It is a big change, not only for the people and the processes inside the company, but also the participants in the market, you know, like distributors, retailers, and some way the influencers and the customers as well.
Shubham Agarwal : Why don’t we define paradigm quickly?
Sumit Sharma : Yeah, so if, you know, paradigms are basically our mental models, right? About how things are and how things work. It is our mindset. And, you know, the biggest challenge is changing mindsets, right.
Shubham Agarwal : Ok – so help our listeners understand the paradigm changes of different entities and why it is difficult to change them.
Sumit Sharma : So if you look at the top management, or say, the middle management of a company, what what is essentially their goal, their goal is to achieve a number in terms of sales or profits, you know, all this and that to within a certain timeframe. Now, if you see how do they do it, they do it in a push model, by delegating that number and the timeline to the people below. Basically, they delegate the accountability of achieving the number to the team, right? And by doing this, they actually feel that they are in control of the outcome. And the same thing continues to happen from this level of the NSM to the RMs to the area managers right finally it reaches the frontline salespeople. But, but essentially the number that finally happens is the result of a combination of many factors. And that is where a Pandora’s box gets, you know of excuses gets opened from bottom to top in case the targets are missed. Moreover, if you see targets are like a self fulfilling prophecy, right, it is this mindset of you know, giving targets by giving targets one can control the outcome that gets challenged when changing from push to pull.
Shubham Agarwal : I think you are refering to primary sales target here. The stock movememt between company and the distributer. Can you elaborate why is managing using a sales target comes in the way of implementing a pull system
Sumit Sharma : Yeah, essentially, in a pull model, what we are saying is, that we are trying to subordinate to the last link in the chain, where the consumption is happening, and, you know, capturing the consumption there and trying to increase the goal. So, instead of you telling somebody that the number that he needs to achieve, it is the consumption which is driving the number. Now, the difficult part here is that it is very contradictory in a way to believe that without giving a number somebody can do a number which is more than the target you would have given right, if you try if you would implement the right tactics, in terms of subordinating to the consumption and trying to increase the consumption.
Shubham Agarwal : So your point is giving a primary sales target makes sales team focus on the immediate link rather than working on the last link to improve consumption. Can we then move to having targets for secondary sales – to the retailer
Sumit Sharma : Now, if you say, let us consider, say the frontline salespeople right now, finally, the number comes to them, and they cannot delegate it any further. Right. Now, in a push mode, the frontline salespeople are always pressing for higher orders from the channel right? And the only way they they know how to do it is through discounts and schemes. Right? This happens at the distributors all the time at the retailer level. In fact, this translates into a paradigm where the salesperson starts believing “ ki jabtak usko gale tak nahi bharoge tabtak vo apka maal khulke nahi bechega “ right? So they believe in creating a retailer neck deep in his company’s talks, via you know, that will make him promote the brand more. What they can’t comprehend is unlike distributor, the retailer’s inventory is driven by what is demanded by these customers, right? More than the choice of the brand that he will sell this paradigm makes them push higher quantities of few SKUs all the time. And in fact, this leads to lower sales for the company as well as for the retailer in the long term.
Shubham Agarwal : So you are saying even targets for secondary sales does not help. On the contrary they reduce the sales. Can you expand on it
Sumit Sharma : See, when when you are trying to push higher quantities of stock, obviously, the range gets compromised. So the number of SKUs that could have been sold from the counters, the retailers doesn’t choose all of them and keeps only a selected few fast movers according to him. Right? Right. And because of that, the the addressable market for the retailer himself also goes down, because he’s not catering to many customers who might be asking for other ranges. At the same time, a retailer is now you know, is now also not carrying lot many other brands, which he should have been carrying, because his customer base is asking for it. So essentially, the customer base of the retailer goes down. And since our capacity to push more has gone down because of the excess quantity that we have supplied to him, the sales for the compan hes also go down.
Shubham Agarwal : Okay, I understand managing by targets is a paradigm of sales team and top management which is needs to change for a pull system. But what about distributors? So what kind of paradigm shift is reflected or is seen at the distributors end how does their way of business change
Sumit Sharma : Yeah, so, distributors, you know, are always, always worried about their stocks, right in a push system, they know that they will have to carry excess talk. And you know, they’ll still suffer stock outs from time to time. But they still feel that it’s the the in their inventory is in their control, as they’re the ones who are placing the orders, right. They used this leverage at the month or the quarter end, and extract more credit or get more additional discounts in lieu of purchasing more stocks. When when we ship the distributors to a pull system. This so called control is lost, right now, as they must accept whatever they have sold once as the system is going to shift to auto replenishment. This gives them a feeling of losing control over their inventory and the associated leverage that they have for any kind of bargains.
Shubham Agarwal : Right. All right. But, uh, at this point, I mean, for the distributors, what I’m guessing is and and we have seen that as well. The biggest contention is that schemes and discounts are a big return for them, because that’s, that’s one big way how they make money on the money they have invested. And with the pull model, all these schemes are sort of out of the picture. Right? So it might impact their ROI negatively than positively. Isn’t that a question? And how do we tackle that?
Sumit Sharma : Yeah, so it’s a very valid question, Shubham. See, if you look at it, that is a fallacy that, you know, that the distributors if they get some extra discount from the company, they are increasing their margin. In fact, you know, if if a distributor is given any kind of extra margin, he ends up giving it into the market to the retailers just to make sure that the associated stock or associated extra stock that he is, you know, pushed for that, in lieu of that discount is liquidity, right. And, in fact, what happens is that there are more than one distributors operating in any area. So if one distributor starts, you know, undercutting and starts giving that discount in the market, the other distributors are forced to do it. So he always thinks that he is going to get more margin by getting that extra discount from the company. But in fact, the pressure of push is so much, plus this problem of undercutting starts happening so fast, that he ends up actually sacrificing the entire margin by passing it on to the market.
Shubham Agarwal : Right. Hmm. So it actually works. It is just his fallacy that he is he thinking the schemes and discounts are helping him while all the time it is not really.
Sumit Sharma : I can understand the mind-set changes that is required at distributer level to accept the pull model.But model also delivers results and we human beings adopt big changes when results are good and risk free. Why would not people accept the new reality
Shubham Agarwal : I think these are all positive paradigm shifts for everyone in the link, you know, if you tell a sales guy “kalse koi sales target nahi hoga”, it’s, it’s like a dream come true. For a distributor, if you tell him “ki your ROI is going to get better” for retailers, if you tell them your working capital block is going to go down and still you’re going to make more profits. It’s like a new world. It’s a parallel universe that you’re talking about, right? But then if it is so great, why doesn’t it happen? Why why do companies find a challenge doing this?
Sumit Sharma : Yeah, so, so, there is a process to it right? So, the you know, if you need to go about implementing this, you have to go in a stepwise manner. And the first step to this change is an agreement on the problem, right? First, the first thing that the system has to agree system, when I say system, I mean, the company, the distributor, the retailer, what we need to go and get an agreement with them is that the current situation is problematic, that the status quo is no more acceptable, right? And then we agree on a direction of solution and discuss it and agree on it. And this is what we call in our panelists (14:20) as the logical buy in over the solution. Right? So this is the first step where where the where the solution is conceptually agreed and explained and agreed to every every person in the in the value chain.
Shubham Agarwal : Okay. Right. So the logical buy in makes sense, I think and it’s very understandable because it’s such a paradigm shift. It’s a big shift in the thinking process in how we approach the problems from here on. The buy in makes sense. But Sumit I think what I’ve seen and also you know, heard that whenever we take a new implementation, we do a small pilot after the logical buy in has happened. So, what does this pilot really entail? Why do we do it? What is the importance of this?
Sumit Sharma : Yeah, so, see when we are instituting a change of such high order, the logical buy in is not sufficient, right. Since the nature of the proposed solution is so, radical people must believe that the logic behind the solution also really works, right. So, this is kind of a proof of concept that we need to make sure that you know, we deliver before we take we before we go further. So, for this, we need to implement the solution in a controlled environment and see the results right
Sumit Sharma : For this, we need to implement the solution in a controlled environment and see the result. Now, the success achieved in the pilot leads to what we call as an emotional buy in of the solution.
Shubham Agarwal : right, okay. So, before before again, we go ahead, you used the term controlled environment. Now, once again, this could mean different things for different people, what do you really mean by a controlled environment for this kind of an implementation?
Sumit Sharma : Yeah. So, so, you very rightly caught the you know, caught the important word here when I said that we went when we do a pilot, we do it in a controlled environment. The fundamental here is something like you know, what you see the automobile companies telling you when they tell you about the mileage of a car or a bike saying that under test conditions right. So, so, the similar thing is done here, because here the intention is to prove the concept first right. So, when we have to prove the concept, what we do is, we pick up an area and we create or you know, we create situations where there are no excuses in terms of availability, we, we remove the schemes and you know, we we rationalize the pricing, you know, we we take care of the ROI of the distributors, and even if we have to, even if we have to make an extra, you know, provision for it, but the essential idea is that whatever is the crux of the solution, it is implemented in an environment as it is on a small scale, so, that we can show that okay, if things are done the solution works, right.
Shubham Agarwal : Alright. Okay. So, I understand the controlled environmwnt now, right. Yeah. So, we we implement this in a controlled environment, we do a pilot in in a small area, so to say, and how does this pilot then help us? So, what does this really do for us or the company that is implementing it?
Sumit Sharma : So, yeah, so that so, as I said, that the first first step to a buy in is a logical buy in toward the direction of solution and the you know, and the and that the solution works, the second step to the buy in is what we call it the emotional buy in, emotional buy in is when the when the stakeholders are so high. So the is that this is this is very important, right? Basically, what happens is many times, we ourselves are convinced about so many things conceptually. Right. But we still have some iota of doubt in our mind, whether they will really work on the ground. Yeah. So that is where what we call what we call this buy in as an emotional buy in. When somebody has done the emotional buy in, then we can safely assume that, you know, his conviction on the solution is now much more than what was there only in the, to the logical buy in
Shubham Agarwal : Okay, you are saying good and unbelievable results emanating from clear actions leads to an emotional commitment to the change program. I guess the best analogy is when someone gets into a new regime of fitness after a logical buy-in, the initial results on either the weighing scale or the looks, creates an emotional buy-in.
Sumit Sharma : Yeah, absolutely. When all stakeholders see results or a win for them beyond their wild expectations – they all get charged up for making the change. Since all win in the pilot, all are willing to collaborate. It becomes a formidable force. Infact this excitement itself becomes a big problem for a structured scale up. The pressure for speed can come in the way of effectiveness, if one is not careful.
Shubham Agarwal : So, do we go on to the full scale up implementation from there or how, how does that work?
Sumit Sharma : Yeah. So, see, as we said in the start, the the push to pull journey is about paradigm shifts right. So as of now, we have not yet reached that level. So the real paradigm shifts happens when we scale up this solution in a real world environment to the to the entire country or all the markets where the where the company operates
Shubham Agarwal : Okay, so my obvious next question would be What are the challenges that we then face now that the logical buy in has happened, people have seen a small proof of concept in a company. They’ve also they now have an emotional buy in, like we said, and we ready to go the whole hog and implement it full scale. What are the challenges that we face there now? At that poin
Sumit Sharma : Yeah, so you have touched the, you know, touched a very sensitive cord here, emotional buy in to scale up, and scale up itself has a humungous amount of challenges that, you know, that we need to overcome. Right? And that’s a that’s a that’s a separate ballgame altogether. Right.
Shubham Agarwal : So I sense that you’re saying it is a completely new topic, and we should not touch the we should not awaken the Dragon right now.
Sumit Sharma : You can say like that, in fact, it deserves it deserves an episode of its own.
Shubham Agarwal : Right, is what I was understanding from your, your, your statement. So great. I think this is a logical point where we can leave the discussion and probably come back in the next episode, and take the journey from the pilot to the full scale up stage and discuss the challenges like you said, our new different and humungous what are those? And how do we tackle them? Step by step? Yeah.
Sumit Sharma : Absolutely.
Shubham Agarwal : Great Sumit. Thanks a lot for giving us time today. I’m sure the listeners would love it. For all the listeners. If you have any questions or doubts until this point of the discussion. You can please write to us on our social media handles so you can write to us on our website as well. The link is in the details. Until next time, we’ll come back and discuss on the next stage like we have promised, and see how does the full scale implementation happen? Thank you. This is Shubham signing off. Bye-Bye. Thank you
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