Month end skew
In the first episode, we present to you the ubiquitous Month-End Skew in sales. In distribution companies the usual sales pattern is 10:20:30:40 over the four weeks of a month. This sales pattern is popularly described as the “Hockey Stick” sales syndrome and is accepted as a normal industry phenomenon. It is not often realized that this hockey stick does huge damage in terms of lost sales and prevents faster growth of sales. For more details on this topic, you can check out the article at https://www.vectorconsulting.in/research-publications/consumer-industry-insights/straightening-the-hockey-stick-in-sales-and-distribution/
Hello & Welcome to the first episode of the TOC Podcast, brought to you by Vector Consulting Group, Asia’s largest TOC consulting firm. The Vector podcasts explain how Systems thinking and Theory of Constraints principles can be combined to design breakthrough solutions for complex business challenges.
I recently met a friend after relentlessly trying to setup a meeting with him. He was so bogged down with work that he couldn’t find the time to meet me because it was towards the end of the month and he works in sales. But that’s how it has been with him on month ends. You plan anything on month ends with him and it is bound to cancel or re-schedule. And not just him but all my friends who are in sales. Month ends are always super stressful for them and they are always short on targets trying to lump it up in the last few days of the month. Most of the sales in distribution companies, about 40%, happens in the last few days. This sales pattern is popularly described as the “Hockey Stick” syndrome. We at Vector have always believed this hockey stick is not just stressful, it is also hugely damaging for the whole company. So, in this episode, I am going to try and explain why we think hockey sticks are injurious to health of the companies and find a solution for this chronic problem.
The usual sales pattern in a typical consumer goods company into distribution is 10:20:30:40 over the four weeks of the month .The ratios may vary from company to company but the hockey stick pattern is more or less generic. So accepted is this practice that the internal processes and measurements in operations, distribution and sales are aligned to accommodate and reinforce this hockey stick! The only damage companies see with this syndrome is the high level of stocks the company is forced to carry. Else, it is fine with them.
We believe that the hockey stick is hugely damaging in terms of lost sales and prevents faster growth of sales (even if the opportunity exists). Let me explain why.
- Usually companies have a monthly sales plan and an aligned production plan. Because about 40% of the sales happen in the last week, the production has to ensure that such a huge quantity is available in the regional warehouses or CFAs before the last week. This results in production happening in large batches. As the production batches increase, the lead time to produce any additional quantity also increases. So if the sales is more than forecasted for a distributor or a regional warehouse, it is next to impossible to supply the additional quantity to him as the plant is busy with its fixed production schedule. This inflexibility and resultant unavailability leads to huge lost sales in the market.
- When the regional warehouse has unavailability and sales teams still have to meet targets, they push whatever is available to the distributors. This increases inventory of some items (of the distributor) well above the quantity planned. So, the distributor’s capital is now blocked for more than a month. Resultantly the capital available for buying fresh stock in the next month decreases, so he buys less (due to company credit limits) resulting in further lost sales. Sometimes, sales, also urge the company to relax the credit limit and in order to let them sell some more to a distributor in credit lock. However, this is a loss to the company; the company cannot keep doing this.
- As the capital gets blocked, the capital available with the distributor for providing credit to the market decreases, and the distributor starts to restrict his supplies to only those retailers who are regular in payment. This results in unavailability at some shops leading to the customer switching to competitors brands. With usage and satisfaction, word spreads of how the competitor brand is good or even better. Thus distributor loses business and the company its market share in a geographic area, rapidly.
- Unfortunately the distributor is blamed for this loss of market share, and not the company policies. These distributors are considered incapable and underperforming and we tend to appoint others, without realising that we ourselves are the reason for his underperformance.
- To ensure that all the products are available throughout the month and not just after the last week of the month, distributors have to hoard at least 45-60 days of stocks. In this scenario, they are unable to accommodate, at short notice, any new products that the company might introduce. To protect its interests, the company has to aid distributors in liquidating current stock with discounts. If the company doesn’t stretch out a helping hand, distributors themselves have to take a hit and offer the discounts or else he end ups with obsolete or near-dead stock.
- As mentioned earlier, the hockey stick syndrome dictates that production happens in large batches. This means large quantities of raw material have to be procured; WIP on the floor is also high. The regional warehouses too end up hoarding stocks. Thus, the plant, along with the distribution points, has to store more than 45-60 days of stock.
It is clear that the month end skew is really damaging and needs to be eliminated. For this the first step is to understand the root cause. Truly, no sales person wants the stress and risk of selling 40% of his target in the last week, neither does the final consumer consume the items in this skewed pattern. So what are the causes for this month end spike and why does it not go away? Let us explore
- Distributors buy huge stocks in the last two weeks of the month and these are sold over the next 3 to 4 weeks. If the payment is expected in advance or on delivery, the distributors needs to have the cash to pay for the stock he wants to buy. This cash is accumulated as he sells the goods over the first 3 weeks of the month. Hence this habit of buying of huge stocks at the end of the month. Even if the companies have credit periods, over a period of time with this practice, the distributors are always near the credit limits. Unless the credit limit is cleared, fresh supply is not allowed. So even with credit period, the money is blocked till the last week.
- Knowing well that nearly 40% is sold in the last week, the production also plans for the material to be produced and dispatched accordingly. As a matter of fact, distribution is measured on placement efficiency (per week) aligned with the sales trends. This cycle continues every month. How do we solve this? It is well now understood now that the consumption at the retail does not happen in this pattern and the hockey stick is only because of the reasons I mentioned. Using this
as the premise, we can Break this cycle!
First step is –Do not push stocks onto the supply chain partners. Hold back stocks and replenish frequently only what is sold. The distributors can provide daily sales reports to the regional warehouses for this. With a judicious location of warehouses to ensure that about 90 per cent distributors are not more than 3 days away from any such a warehouse, and frequent replenishment, distributors can have 100 per cent availability at about 10 days of ‘correct’ inventory. For a distributor whose current stock levels are at 30-45 days, this means tripling his inventory turns. As availability increases sales, the return on capital employed will increase to near 100 per cent! With capital released from inventory and fantastic ROI, the company can with the help of distributors, undertake further initiatives like loyalty programs to increase sales. This first step of shifting from a push method of sales to replenishment method not only ensures great sales growth for the company, it also means that stock will move out fairly evenly through the month to the market- so no sales skew. Hurrah! But how will production be able cope? How will they manufacture to match this kind of offtake? This is why Step 2 of having a central warehouse or a plant warehouse to cater to regional warehouses is critical. When there is a central warehouse, the plant only has to produce for what is dispatched forward on a daily basis from the warehouse. Not only does the load on the plant even out, this also ensures near 100 per cent availability, even if there is fluctuating requirement from regional warehouses or distributors. This is possible as not all distributor sales will peak at the same time. Additionally, by the principle of aggregation, the inventory required at the central warehouse (or supplying warehouses) is nearly half of the total required at the consuming warehouses. However, when demand fluctuates, it can lead to shortages and surpluses in the supply chain. This can be avoided by a mechanism that can dynamically adjust the level of inventory at the distributors to match with the demand. So. when demand goes up, the inventory goes up. When the demand comes down the inventory too does so.
Adopting such a pull based manufacturing and distribution system requires companies to change the way they do sales, distribution, production and procurement. However, by breaking the vicious cycle of the month end skew, companies can spark a virtuous cycle of continuous growth and sustained harmony in the entire supply chain. The entire distribution network can also say good bye to the hockey stick for good and not just sales teams but entire supply chains can breathe normally in the month ends. Thank you for listening. If you have any questions or comments about what you heard in this episode, please leave a reply with your contact details in the box below or write to us. In case you would like more information and insights on this topic you can visit our website or follow us on our social media handles. Links to all these and our email id is given in the details. Until next time
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