Distribution & Supply Chain, as Taught by Eli Goldratt · Lesson 6 of 7
Shops, slow movers and seasons
Points of sale bring their own considerations: display, and suppliers who prefer to push. Then a marketing opportunity hidden in “customer tolerance time” that turns slow movers into made-to-order, and what fast replenishment does to promotions, seasons and new product launches.
Points of sale are different
At the shop, a few more things must be considered when setting targets.
Proper visual display. For many products, showing large quantities increases sales (“better buy the one they have lots of”). In some rare cases, display needs justify holding more than the formula says.
“Push is better.” Some suppliers prefer to push large quantities into shops. Their reasons: once the shop is stuck with the stock, it must sell it; it ties up the shop’s cash, so it can buy less from competitors; and more stock may win more display space, since what isn’t displayed isn’t sold. Hence minimum orders and “2% off for every hundred units”.
Pause and think: what does pushing big quantities into shops do to the supplier itself?
- Nothing: the shop carries the risk of the stock once it has bought it
- It sours the relationship, and makes its own demand far more variable
- It reduces the supplier’s inventory permanently
Shops resent it, and when they find a better alternative, it backfires. And in most environments, the harm of the extra variability outweighs the benefit of the extra sales, though most suppliers are blind to it.
A better alternative:
- Get the shop’s daily sales data and replenish frequently to match. Shortages fall (sales rise) and the shop’s inventory falls (cash released).
- In exchange for that much better service, the shop guarantees a certain shelf space.
- Price reductions are given by quantity bought per period, not per order.
A marketing opportunity: slow movers
Most companies have a few high runners and many slow movers. Sales people fight to widen the range (“I lost twenty sales because you don’t make this model in white”). Operations people, seeing the slow movers as a lot of hassle for almost nothing, fight to restrict it. Almost everywhere, the compromise satisfies nobody.
The key is a deeper understanding of customer tolerance time. Tolerance time depends mainly on what the customer expects about availability. People expect standard products to be available immediately, and are willing to wait for unusual ones. So the less popular the product, the longer the customer’s natural tolerance should be. “For this special one, I’m willing to wait even two weeks. But two months?”
Why, then, do distribution systems act as if tolerance were zero even for slow movers? Because when the lead time exceeds the customer’s natural tolerance, tolerance drops to zero.
The distribution solution cuts replenishment time drastically. For many slow movers, the new replenishment time is shorter than the customer’s natural tolerance, so they can be offered without holding stock. Moreover, with the plant warehouse protecting the high runners, the plant can give customer orders top priority, cutting response times further. The shops still display the slow movers (even a proper display), but take orders for them instead of selling from stock, fulfilled by the same system that serves the high runners.
Freed from holding stock of slow movers, the system can offer a much wider range of products.
Promotions and seasons
Today a plant prepares for a promotion or a season by forecast. If demand turns out higher, sales are lost; if lower, surpluses pile up.
With the distribution solution, replenishment from the plant warehouse is much shorter than a season, and often shorter than a promotion. So the plant can replenish large amounts during the season itself.
Amount to produce ahead of the season = the optimistic forecast − what can be replenished within the season.
In most environments that is less than even the pessimistic forecast, which reduces the risk of lost sales or surplus to almost nothing.
The optimistic forecast for a summer fan is 50,000 units; the pessimistic, 30,000. During the season the plant can replenish 25,000. How much should be made in advance?
- 50,000
- 30,000
- 25,000
50,000 − 25,000 = 25,000, less than the pessimistic forecast. If demand is low, little is left over; if it’s high, the rest is made during the season.
New product launches work the same way. Under the conventional mode, deciding how much stock to push into the system at launch is a big bet. With the distribution solution, the initial inventory can be cut to about a fifth, and replenished as real demand appears.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. The better alternative to pushing stock into shops includes…
- Frequent replenishment from daily sales, in exchange for shelf space
- Bigger minimum orders
- Deeper per-order discounts for shops that buy a full assortment
- Consignment only
Discounts by quantity per period, not per order.
2. Customer tolerance time drops to zero when…
- The product is cheap
- The customer is in a hurry and won’t wait for anything
- The shop is busy
- The lead time exceeds the customer’s natural tolerance
Shorten the lead time and tolerance comes back.
3. With short replenishment, slow movers can be…
- Dropped
- Displayed but sold to order, without holding stock
- Stocked everywhere
- Discounted
A much wider range becomes possible.
4. The amount to produce before a season is…
- The optimistic forecast
- The pessimistic forecast, to avoid any surplus at the end
- The optimistic forecast minus what can be replenished in season
- Last year’s sales
Usually less than the pessimistic forecast.
5. Initial inventory for a new product launch can be cut to about…
- A fifth
- Half
- Double
- Nothing
Then replenish to real demand.