Monthly Archives: February 2012

Intelligent loss of sales

No one likes walking away from sales, especially in today’s competitive marketplace. But sometimes it makes sense to walk away from sales that carry a cost that is far higher than the profit from the sale. Certainly we don’t want to disappoint customers. On the other hand, trying to meet every customer need could drive you out of business.

A good example of letting sales go is in managing instock levels in retail locations. We all know that maintaining an instock level of 100% is not only nearly impossible; it’s also very expensive. Buying and stocking enough product to support this level of instock is prohibitively expensive. It also makes little sense from an overall sales perspective, as there is a point where having more inventory doesn’t lead to increased sales. So if we set an instock goal of 99.0%, we are in effect saying that we are willing to be out of stock 1% of the time, and we are willing to give up the sales that might come if we were never out of stock. We are intelligently choosing to lose these sales for the sake of the health of the overall business.

Every business will be slightly different, but every business – from Walmart to the corner deli – needs to understand that every sale carries a cost, and that some sales are more expensive than they can afford. In these cases the right business decision is to walk away from these sales and focus your energy on more profitable sales channels.

Analysis must be action-able

Managing a supply chain successfully requires gathering data to help monitor the performance of the various links in the overall chain. Much of this reporting is routine, such as sku performance, shipping accuracy, on-time delivery and key receiving accuracy. These reports are useful for monitoring, but they often don’t tell us how to improve performance. For this we need more analysis.

In my view all analysis must be designed to support change, that is, it must be action-able in a way that adds value to the process it evaluates. We could also say that all proper analysis always seeks to answer a question: how can I improve this process? Where are the bottlenecks? What players need to know about this so that it can be resolved? There is no need – and rarely time – for analysis that simply restates what we already know.

Out of stock reporting is a good example. That a product is out of stock is not helpful. We need to know why a product ran out. Was it unexpected sales? Incorrect inventory counts? Short-shipments? We can only correct a problem if we know the root cause.

So when you analyzing data, remember that the goal is to envision how to improve a process, and not merely to impress others with elaborate spreadsheets or fancy presentations. Provide value by showing a better way to manage the business.

The value of VMI programs

In a recent issue of a supply chain magazine I read an article which questioned the value of vendor managed inventory (VMI) programs. The basic argument of the article was that the cost and difficulty of managing these vendors outweighed the value. While I understand these points, I can see several advantages to these programs – if they are well-run. These are:

1. Vendors frequently know more about their industry than retailers do. The value here is that for companies that carry many skus, they cannot know the inside story of every supplier’s industry. This is particularly true with industries that deal in commodity items, such as metals, or in industries where raw material costs and availability strongly influence assortments and pricing, such as the candy or coffee industries. Retailers and resellers need to develop strong relationships with these kinds of suppliers in order to benefit from the supplier’s industry knowledge so that they can collaborate in managing assortments, pricing and products effectively.

2. Vendors frequently know their customers and markets better than resellers or retailers do. Customer preferences change as trends and markets change. As an example I learned from a supplier that candy sales tend to drop in a market when companies cut overtime, as people who are not working longer than expected no longer need an extra snack to hold them over until their day ends. In addition some product sell only in specific markets, and placing them elsewhere can be costly. Your suppliers can steer you away from plans that put their products where there is limited opportunity for sales.

3. Vendors know how to price product competitively and how to assort locations correctly. Suppliers know the prices that your competitors charge for their product, and they know what products sell in each market, and when these change. While they can’t share competitive data, they can help you stay current in pricing and assortment.

To get the most value out of a VMI relationship, companies need to treat them as partners in supporting and growing the business. Regular communication of sku performance and inventory data is a minimum requirement. Annual plans with reasonable sales growth goals and quarterly performance reviews are important. And an agreement that specifies the packaging, shipping, placement and return policies helps to prevent nasty surprises once the program is in place.

I believe there is great value in having strong, well-managed VMI programs in your locations. These programs require attention and resources, but in return I believe you get industry and product knowledge that you cannot get on your own. And since every square foot of space in your locations needs to be profitable, it makes sense to include these suppliers and the value they can offer in your programs.

Making the most of product assortments

It’s common knowledge that product assortments need to be tailored to individual locations. What’s strange to me is how few retailers do this well. Obviously there is a cost associated with doing this, as well as a need for analysis to understand when to make changes to an assortment. It’s very easy to find a product, test it for a limited time, and then roll it out to most or all of the locations in a company. Too often, there is little or no follow-up to see if the product truly performs in all these locations. The result is often outdated assortments, stranded inventory, returns and markdowns, and discontinued product sitting on the shelves.

In my experience a large part of the answer here is in a rigorous product life cycle program. As very few products are truly permanent, it pays to know when to get out of an old product – even if it is performing adequately – in favor of a newer product that better serves your customers. There needs to be a plan for getting into a new product, as well as a strategy for getting out of it at the right time. I know of several companies that won’t allow new products to be set up until there is a life cycle plan in place that includes the product’s initial rollout dates and plan, as well as a date and plan for when the item will be phased out.

This kind of planning requires product knowledge, demographic data and product performance data. It also requires a commitment to ongoing monitoring of products and programs throughout the company, together with a willingess to make the hard decisions required to get out of a product before it is dead. This is particularly true with perishable products.

In my experience most of the profit from selling a specific product comes from having it in the correct assortment where the demographics and other skus in the assortment work together to satisfy customer needs. Spreading product evenly around the company rarely produces the kind of results we want.

Evaluate products and programs in your low-volume stores

It’s really tempting to test a new product or program in a flagship store. What we often don’t realize is that even a poor product or program can be successful in a high-volume or high-performing location. Putting products in stores that are already great performers can be very misleading, as the store environment and customer base can distort performance and mislead you as to the real potential of the program or product.

Instead, try out your programs and products in a variety of stores, making sure to include some low-performing stores in the mix. You want to know how the product does when it isn’t always displayed well, when it spends some time being out of stock, and when the foot traffic isn’t high. A product that does well in this environment will probably do very well in better-performing locations. In the end, you may discover that the product or program only does well in locations with a certain minimum level of sales or in specific markets with the right demographics.

The bottom line is to make sure the programs and products are tested in a sample of stores that truly represent the range of volume and sales for the entire company. Setting up pilot programs that are guaranteed to succeed can lead you to choose to put product in stores where there is very little chance of success. This can strand inventory in these stores and cost you the opportunity to use the inventory dollars spent there to build your business in other, potentially more successful locations.

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