Saturday, May 14, 2005

Managing Using Point of Sale Data

Next generation consumer goods supply chains will be driven by end consumer demand. AMR Research refers to these as Demand Driven Supply Networks. Today most consumer goods supply chains are being driven by forecasts of shipments to retailers based on shipment history data to retailers. The sales metrics of many companies are based on shipments to retailers rather than sales to end consumers. These two lead consumer goods manufacturers to end up with stuffed channels - which happens when manufacturers ship more to the retailer than what the retailer is selling to end consumer.

Channel stuffing is bad from the consumer goods manufacturer for several reasons.

  1. The excess inventory in the channel ties up capital. Retailers do not pay for the products till long after the consumer pays the retailer for those products.
  2. In consumer electronics, the price of goods drop at the rate of 25 % per year. Let us assume that there are 10 weeks of excess channel inventory. That is an immediate impact on the margin of approximately 1 to 2 % of revenue. That could make the difference between a profitable product and an unprofitable product.
  3. The channels, if they have too much inventory of the phased out item, will demand a lower price for the new product to account for the loss on the phased out product. A quote from an executive from US sales company of a multi-national consumer electronics manufacturer - “Our End-Of- Life markdown costs are much higher than what the books show – Sales teams are using other sales & marketing budgets to discount inventory in the channel.”
  4. When, early in a product's life cycle, the channels are stuffed by higher shipments than warranted by sales to end consumer, the wrong demand picture goes upstream. Manufacturing tries to produce more of that item thinking that the product is a hot-seller when it could be just a medium seller. This again leads to excess inventory.
  5. When there is a hot-product, channel stuffing in one channel, causes some other channel to be starved. So one channel has excess of material while other channel can not meet consumer demand because of lack of inventory. In many cases, faced with lack of inventory in a particular channel, end consumers switch to a competitor's product.

The retailer does not care, in many instances, because they are protected from any price drops and usually do not pay for the goods long after the consumer pays the retailer for those products.

Key to the transformation to a Demand Driven Supply Network is a better understanding of end consumer demand through rigorous analysis of Point of Sale (POS) data. Availability of cleaner POS data on a more frequent basis are changing the way POS data is used in forecasting and demand management. Leading edge companies are changing their demand management processes and implementing Vendor Managed Inventory replenishments and reaping benefits by becoming more demand driven through better use of POS data.

What do you think?

Karthik Mani

No comments:

Post a Comment