Archive for April 2009

Advance Warnings

I recently wrote a piece called “The Reset Economy” where I argued that for various macroeconomic reasons, demand may not bounce all the way back after the recession ends.  Consequently, many manufacturers may end up with more capacity than they need.  I believe this is the biggest supply chain problem many companies will confront over the next few years.  

If that is the case, then companies need to conduct some strategic planning and scenario analyses -e.g., if demand does not fully bounce back, which factories should I shut?  I have been asking myself another question lately:  How much advance warning can companies get about demand patterns once the economy rebounds? 

I came across an article by the Infosys supply chain consulting team where they made the following statement:  “Economic data such as wage inflation and price inflation should be leveraged in econometric forecast models particularly for CPG, Hi-Tech and Automobile sectors.”  

This motivated me to go out and look for firms that can help companies incorporate econometric models into industry, or company specific, demand plans.  It turns out that there are consulting firms made up of economists that do this kind of work.  One of the biggest is IHS Global Insight, and they published an article called “Selecting a Marketing Mix Strategy: Why the Economy Matters,” where the authors (Antonia Prlic and Hemant Sangwan) make the following points:

  • Consumer goods manufacturers and retailers regularly make critical decisions about pricing, product, distribution, and promotion (the “marketing mix”).  During a recession, consumers become more cost conscious, buying lower priced store brands, for example.  If a manufacturer’s product is priced lower that competing products, they should highlight this point in their promotions.  They should also promote large product packages, which have lower unit prices, more extensively than smaller packaged items. 
  • Manufacturers and retailers should keep track of key economic indicators (e.g., consumer confidence, fuel prices, disposable income, etc.) and take into account overall macroeconomic conditions when developing their marketing mix strategy.
  • Tracking some of these macroeconomic indicators can provide advance warnings into a category’s sales! 

For example, the authors provide a chart in the article that shows the historical change in gross domestic product, along with their forecast for coming quarters, and a second chart that shows the percentage change in consumer spending on furniture and food categories based on GDP.  The correlation between the two charts is impressive.

Econometric models can be far more complex, taking into account things like discretionary versus nondiscretionary spending, consumer spending, household income, tax rates, employment rates, and other variables.  Most companies would probably need help developing the initial models, but afterwards  they could track the statistical correlation to the various variables themselves, as well as make the appropriate changes to their demand models. 

From the perspective of longer term demand-supply balancing, these models are only helpful if the longer term forecast of the underlying macroeconomic  variables, like GDP, are reasonably accurate.  We certainly know that economists have not been very good at forecasting recessions.  Still, I’m intrigued by this.  I’d love to hear from you.  Are any of you using econometric forecasts effectively at your companies?

Yesterday, I talked about how I’m a fan of the “moment of truth” concept, and I highlighted how we have gone through three phases in trying to solve the “out of stock” problem, but that a new phase is emerging.  This new phase, which has begun only recently at some leading manufacturers, includes making a better link between merchandising and supply chain operations. 

Merchandising involves maximizing sales using product design, packaging, pricing, and displays in a way that stimulates consumers to spend more.  Merchandizing services can be performed by a third party that visits retail stores to determine whether a manufacturer’s products are in stock and on the shelves; whether they have the agreed upon facings; and whether promotional displays have been built and stocked correctly.

In yesterday’s posting, I also mentioned that many manufacturers have only recently begun to realize how their ability to achieve good in-stock and on-shelf performance is being hampered by inaccurate store-level inventory data and poor in-store execution of promotions.  These problems are starting to get addressed with fancy new math and better analytics.  Companies like Retail Solutions (RSi) and TrueDemand use advanced math to calculate what should be selling at the SKU/store level and compares it to what is actually selling.  If you are running a promotion and a particular store is not selling anything, while the other stores are selling great quantities of the promoted item, it suggests that either the data coming from the store is wrong or store employees are not pulling the promoted items from the back room to the front of the store. 

These solutions also provide analytics to determine why a SKU is not selling – for example, incorrect store-level inventory, failure to move inventory from the backroom to the shelf, or replenishment failure from the retailer’s DC.  TrueDemand can then trigger execution tasks for the retail account team or in-store merchandising team.  Despite several attempts, I have not been able to talk to a manufacturer that is using this new math, so I can’t verify how effective it is at detecting phantom inventory.

However, I did talk to one of Retail Solutions’ manufacturing clients that is using the analytics from the RSi Demand Signal Repository (DSR).  In this particular case, a key retailer has installed a DSR from RSi and the manufacturer pays RSi for POS and inventory data by store/by product/by week, and for daily promotional item data.  

This manufacturer also uses over 250 people from third party merchandiser Acosta to visit this retailer’s stores.  The merchandisers check for out of stocks, make sure the end caps are up, and perform other merchandising activities.  This manufacturer can now query things like:  Which stores have not sold any of product X in the last 12 weeks?  Which stores have more than 20 pieces of any item?  They then feed this information to Acosta which uses it to determine which stores to visit.  In short, if you have the merchandising analytics, and run the right queries, the advanced math may be unnecessary.

I also talked to a second RSi manufacturing customer that recently began paying for DSR data from a large retail customer.  They anticipate that the data will allow them to better phase in and phase out products.  With this particular retailer, they pay 50 percent of the base product cost to the retailer once the phase out date has passed.  If the product costs $2, they pay the retailer $1 for the effort involved in pulling the product off the shelf and disposing of it or returning it to the manufacturer.  This manufacturer can now start monitoring the inventory positions at the stores six months prior to the phase out, and take steps to reduce costs for both the merchandising and the supply chain organizations.

In the supply chain, we have typically viewed marketing, and their ongoing promotions that disrupt the supply chain, as the enemy.  But they don’t have to be.  Rumor has it that for a very large retailer, better merchandising analytsics was a key impetus for their “green” initiative.  This retailer tracks its shelf space data using a metric that is dollars/square inch/time period.  In order to improve this metric, the merchandising teams at some manufacturers are developing concentrated products, like detergents, that have the same potency, but contains much less water, thus enabling more units to fit in the same space.  This also results in less packaging and more efficient transportation.  In short, it was better merchandising decisions that led to a “greener” and more efficient supply chain.

I’ve always been a fan of Procter & Gamble CEO A.G. Lafley’s two moments of truth concept.  The first moment of truth is what a consumer sees on the store shelf; the second is what the consumer experiences after they have bought the product.  Today, I want to focus on the first moment of truth, on what consumers see on the store shelf, assuming there’s even a product there for them to see.  It strikes me that we have gone through three phases in trying to solve the “out of stock” problem.

In the first phase, we mostly assumed that if a product was out of stock, it was the supplier’s fault-i.e., if only the manufacturer could forecast better, the problem would largely disappear.  Or we thought, if only our supply chain was more nimble, if we did not have such long manufacturing runs and planning cycles, we could do a better job of replenishment. 

In the second phase, many manufacturers came to the realization that they could not forecast accurately without more timely and granular data from retailers.  Companies like WalMart and Target custom built what are now called Demand Signal Repositories (DSRs) to provide suppliers with near-real time granular data, such as POS sales by SKU by store, that made their historical forecast data less lumpy and less prone to the bullwhip effect

This phase is still taking place.  However, now instead of the retailer spending tens or even hundreds of millions of dollars to build these DSRs, companies like Retail Solutions (RSi) build the DSR for retailers like CVS and Walgreens for “free”.  Suppliers who want access to the retailer’s sales and inventory data then pay RSI for it.  There seems to be a tradeoff between the proprietary DSRs offered by WalMart and Target, and the off-the-shelf solutions offered by the RSI retailers.  WalMart and Target make this data available to their suppliers for “free,” but they also have very high expectations regarding replenishment performance, and they are more likely to apply charge backs for “poor” performance.  In contrast, Walgreens appears to have less demanding replenishment performance expectations, at least for now, but their suppliers have to buy the data.

In the third phase, we came to realize just how inaccurate in-store inventory systems are.  At many retailers, in-store inventory accuracy is only about 65 percent.  We also came to realize that poor in-store execution is a huge problem in achieving on-shelf availability, particularly for promotional items.  Very often the inventory is present in the store, but not stocked on the shelves or end-of-aisle displays.  RFID was supposed to solve this problem, but it hasn’t for a variety of reasons.  It has, however, made this problem more visible.

The next phase, which is just beginning at some leading manufacturers, will include a better link between merchandising and supply chain operations.  That phase will be the subject of tomorrow’s posting.

History has a bad habit of repeating itself, and over the past few days, an ever-present supply chain risk reemerged: the outbreak of a new infectious disease.  In this case, swine influenza appears to have started in Mexico and is quickly spreading to other places around the world, including the United States, which formally declared a public health emergency yesterday (see Department of Homeland Security press briefing).

And the impact on supply chains has already begun: Russia is banning all meat imports from Mexico and the southern United States, and China is banning meat from Mexico, California, Texas, and Kansas.  Considering that Mexico is the United States’ second largest trading partner, I expect this outbreak to affect many other products and supply chains if the situation in Mexico worsens.  When Severe Acute Respiratory Syndrome (SARS) struck Asia in 2003, many supply chains were significantly affected, especially in the high-tech industry.  Motorola, for example, shut down its plant in Singapore when one of its employees became infected.  If an employee at one of your suppliers or customers in Mexico becomes infected, what do you think will happen?

Simply stated, if your supply chain team is not holding an emergency meeting this morning (or held one this weekend) to analyze this risk and its potential impact on your company and trading partners, you are setting yourself up for potential hardships in the days and weeks ahead.

Then again, if you didn’t learn your lesson after 9/11, the SARS outbreak of 2003, the Bird Flu, and Hurricane Katrina, and you haven’t developed risk management and business continuity plans by now, there’s probably little you can do to mitigate the potential impact of swine flu.  Developing a “resilient enterprise” does not occur overnight, as Yoffi Sheffi made clear in his 2005 book, “The Resilient Enterprise.”

In the book, Sheffi writes that “businesses should assume that governments are likely to ‘over-react’ and take strong measures in case of high profile public disruptions, such as another terrorist attack, SARS epidemic, or other anxiety-producing disruptions.”  The actions taken by Russia and China are just the tip of the iceberg; you can bet other countries will take similar actions this week.

If supply chains hate uncertainty, then there’s probably nothing worse than an infectious disease outbreak to raise uncertainty to a whole new level.  “There are some things that [are] important [for] people [to] understand: Flu viruses are extremely unpredictable and variable,” is what Dr. Richard Besser, Acting Director, Centers for Disease Control and Prevention, said at yesterday’s press conference.  “And so over time, what we say about this and what we learn will change.”

What should you do in the days ahead?  Stay informed of the actions being taken by countries around the world in response to this outbreak.  Stay in constant contact with your trading partners, especially those in the countries already affected, to coordinate your activities and develop contingency plans.

This morning I reviewed the search engine keywords that bring people to the Logistics Viewpoints website.  Not surprising, “logistics viewpoints” is the number one search phrase directing traffic to our site.  But number four on the list was a bit surprising: “shippers needing carriers.”

If the search phrase was “carriers needing shippers,” then it would make more sense, based on the financial results being reported by carriers and logistics service providers these days  (see the new “News Roundup” section at Logistics Viewpoints for this week’s press releases).  A few months ago, I spoke to a shipper who had just concluded a procurement engagement.  He told me that one of the carriers that didn’t get the business on a certain lane called him afterwards and offered to drop the price significantly.  The shipper was tempted, but he declined, telling the carrier “I need you to stay in business” (there are only so many flatbed carriers left in the market).

And it’s not like a few years ago, when capacity was extremely tight.  I remember being at a conference back then and someone asked a logistics executive from Frito-Lay about his transportation procurement strategy.  He laughed and said, “These days, I just pray that any carrier shows up at my dock.”

Then again, more than 3,000 carriers have gone out of business in the past year, so maybe some shippers are looking for carriers.

I must admit that the phrase “shippers needing carriers” sounds like a personal classified ad to me.  Which makes me think: Maybe we should add a classified section to Logistics Viewpoints, where shippers and carriers can make a love connection.  A sample shipper ad might look like this…

“High-volume shipper with attractive freight and lanes seeking long-term relationship with reliable carrier that values time as much as we do, likes to get paid on time, is a good communicator, and enjoys scenic drives.  We’re a bit unpredictable at times, especially during the holidays, so we’re looking for a carrier that is responsive to change.  We’re going ‘green’ in a big way, and since you’d be part of our carbon footprint, we’re looking for a partner with a similar commitment to preserving the environment.  Like what you hear?  Let’s plan a shipment together and see how far we can go!”

Okay, so today’s posting is a bit silly, but it raises some important questions: Why are people searching for “shippers needing carriers?”  What exactly do shippers “need” from carriers?  And if you turn it around, what do carriers need from shippers?  If you were writing a classified ad, as a shipper or a carrier, what would it say?  Go ahead, be creative, and post your ad below.

Categories : Just for Fun, Transportation
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