ANTECEDENTS
By the late 90’s, initiatives to improve service levels (the fulfillment of client orders of Fill Rate) from the manufacturer to the Modern Channel were a scarcely relevant issue for companies. A large part of the discussion was based on perception—vis-à-vis a problem of significant shortages at the Point of Sale, the client would file a complaint and the manufacturer would explain; in fact there was no service management process in place.
Today, that is an issue of great relevance, because the Modern Channel applies economic penalties to the manufacturer if the latter falls short of the level of fulfillment (Fill Rate) established by the channel, and in view of the disagreement between manufacturers and the Modern Channel about the justice (or injustice) of these penalties, there is a possibility that legislation will be enacted in this regard.
Here are the positions of the parties:
VISION OF THE MODERN CHANNEL:
• Has the most power in the relationship.
• Sales are lost due to deficient deliveries by the manufacturer:
–Deficient deliveries by the manufacturer directly affect shortages at sales racks.
–There’s an incentive to deliver (to not lose sales) even though the shipment causes higher costs.
• If a competitor has the product, customer loyalty is lost: this is the highest priority when product shortages occur.
VISION OF THE MANUFACTURERS:
• Not willing to pay up.
• The supermarket fails to honor cost-efficiency agreements on full trucks, pallets or layers and it isn’t penalized.
• Product shortages on the racks involve reasons that can be attributed to the supermarket, and the manufacturer loses sales:
–Incorrect orders (volume, timelines).
–Untimely deliveries from the X-Dock to the stores and racks.
• Errors in deliveries aren’t exclusively the responsibility of the manufacturer—for example:
–Products that are no longer in the catalog, but the Modern Channel is still placing orders for them.
–Deficient reception capabilities at the X-Dock hamper timely deliveries.
Penalties for deficient fill rates are an unfair practice by the Modern Channel, if such practice isn’t parallel to a management process that sets forth the responsibilities (and penalties) of each of the parties in making products available at the selling rack.
Management of product availability at the selling rack has evolved significantly. In this regard, we can identify 3 stages of evolution:
PHASE I – STRUCTURAL ENHANCEMENTS AND SERVICE- LEVEL METRICS
As efforts to increase product availability at the point of sale and as a restriction to decrease working capital, the following initiatives were
implemented:
• The Modern Channel initiated the operation of Cross-Docks. The logic is very simple—it’s more efficient for manufacturers to make deliveries at a single point rather than do them at each of the stores; and for the client it’s more efficient to receive at its location fewer trucks carrying larger volumes. The cost of distributing to stores is paid for by the manufacturer via logistical savings. Exceptions remained that they would keep delivering to the stores: most beverages, snacks, and refrigerated products, given the logistical structure of the manufacturers that makes it possible to deliver products to the racks at enhanced cost efficiency and with the required features (freshness, volume and frequency).
• The Modern Channel and manufacturers designed delivery management systems; manufacturers and clients separately developed their metrics. In most cases Fill Rate mas measured by the manufacturer was higher than the rate reported by the Modern Channel (largely because the manufacturer did not consider the catalog that the channel had in its records), although the truth is that information was scarcely managed between the parties and the result was that some improvements were achieved.
PHASE II – COLLABORATIVE MANAGEMENT
Given the intense competition among the participants in the Modern Channel, it became essential to ensure product availability at the points of sale, for which purpose supermarket and department store chains shared detailed information on the inventory situation at their points of sale, on ways to place orders with the vendors, and on how to measure service levels. This resulted in two initiatives:
1.Harmonization of Measurement Systems. Vendors harmonize the way they measure service to the systems used by their clients, because in conversations regarding service managements it was common for clients and vendors to have indicators with differing parameters, a fact that makes it more difficult to determine operational enhancements. This harmonization effort represents a series of ways to measure service, for which the supplier needs to adapt its management system:
a) Same Catalog: Very often clients have an active catalog including products that the vendor is no longer delivering; this can represent up to 5 percentile points difference between the levels of service that the supplier and the clients are recording.
b) Units of sale and of purchase: The sales units of the supplier (boxes/ kg) must be harmonized with the purchase or sale units managed by the client (boxes, kg, counts).
c) Time periods: Differences can also be identified in time periods, whether time periods are measured vs. order date or delivery dates for the purchase. Discrepancies can also occur regarding the start date of measurement periods (for instance in many cases a period may start on a day other than the 1st of the month and end on a day other than the 30th or 31st).
d) Formulas: The calculation method may involve discrepancies in regards to certain considerations. Is it a % of units delivered vs. units ordered? Or, must the numerator contain the variable for on- time deliveries? Or, should measurement of per-SKU service be also included? Or should an average of per-SKU service be computed? Or, is it a weighted average?
This harmonization is the starting point to have available the same information, and be able to establish improvements on the basis of being on the same page.
2.Penalties for failure to perform. As it’s common that deficient service on the part of the vendor are due to efficiency criteria (the volume is less-than-truckload or less than route quotas, or it’s more profitable to manufacture SKU B rather than item A), clients “incentivize” the vendor by threatening costs for failure to deliver at the agreed levels of service.
3.However, these penalties—as discussed in the introduction—are unfair when the channel fails to meet the following responsibilities:
a) Provide accurate forecasts of significant changes in demand.
b) generate orders with the adequate products and volumes to ensure their availability.
c) Honor efficiency agreements with the vendor; consistent use of truckloads, pallets, layers or any other logistical unit.
d) On-time receipts and on-time delivery at stores.
PHASE III – FOCUS ON THE CONSUMER/SHOPPER
At this stage, the Modern Channel and the manufacturers have recently focused their efforts on ensuring on-rack availability (the factor that really matters), and for this they must take into consideration the following elements:
• One single organization for rack replenishment. Planning and replenishment should be placed under one single area of responsibility that takes into account the targets set as relates to sales racks (shortages and working capital), capacity restrictions, and delivery costs (spaces, distribution, inventories, manufacture, and availability of raw materials).
• Management system. Establish goals for the channel and for manufacturers, as well as for their internal areas consistent with their responsibility in ensuring the availability of products on the rack; they should be specific in terms of review frequency and the nature of actions to implement. Such reviews must be inter-area and inter- company, as well as at the highest level.
• Information integration. Needed technological steps must be invested to eliminate the times required to process information and to increase the creation of scenarios and the making of decisions.
COLLABORATIVE MANAGEMENT MODEL FOR THE MODERN CHANNEL AND VENDORS
“Collaborative management ensures on-rack product availability and consumer preference.”
The collaborative management model (Modern Channel – vendors) to ensure product availability at the racks must begin with the segmentation of each point of sale in order to define product portfolios and allocate spaces to each of the products, and it must involve the three elements below:
1.Allocate responsibilities and indicators for the following relevant processes, which in turn may involve various activities:
a) Catalog maintenance
b) generation of, and consensus on, forecasts c. Supply chain planning
d) Purchase order generation
e) Product delivery at the racks
2.Coordinate the process via a unique entity or areas with members from the Modern Channel and the suppliers, generating working instructions for all areas involved, taking into account targets for shortages and inventories at the points of sale and supply restrictions and costs.
3.Manage the process at the level of commercial and operations executives of the Modern Channel and the suppliers, on a quarterly basis, via the review of indicators, identification of discrepancies, and allocation of improvement tasks for the responsible areas.
The largest value-generation opportunities for the Modern Channel and for vendors lie in earning the preference of the shopper. To focus on penalizing failures to deliver is a partial solution to the problems involved in ensuring product availability at the sales racks, and diverts joint efforts to achieve that goal. How much time and resources do the Modern Channel and the vendors invest in these discussions? The focus should be on ensuring availability of products at the racks.
About Sintec
Sintec is the leading consulting firm focused on generating profitable growth and developing competitive advantages through the design and execution of holistic and innovative Customer and Operations Strategies. Sintec provides a thorough and unique methodology for the development of organizational competencies, based on three key elements: Organization, Processes and IT. Furthermore, Sintec has successfully carried out more than 300 projects on Commercial Strategies, Operations and IT issues with more than 100 companies in 14 countries throughout Latin America. Our track record of more than 25 years makes Sintec the most experienced consulting firm in this area of expertise in the region.
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