Supply chain organizations are often forced to work harder because sales force targets and bonuses are not well thought out. And when the CEO pressures the sales force to meet the quarterly revenue number he has promised Wall Street, watch out! In these scenarios, the CEO often gives the sales force the power to provide unusually deep discounts to customers. The result is increased overtime in factories and warehouses; machines and equipment that are overworked; increased quality issues and, consequently, more returns; and a higher incidence of late or short shipments. Supply chain folks sometimes get blamed for these problems when the fault really lies with the way the firm is conducting business.
I recently read The New Supply Chain Agenda by Reuben Slone, Paul Dittmann, and John Mentzer. The book contains the following story that illustrates this issue nicely.
Take the case of a large manufacturer of consumer products whose quarterly demand from many retailers followed a three-month sales pattern of low, low, high. In a meeting with the CEO, the head of supply chain management pointed out the extreme costs and supply disruptions for the disposable diapers product created by a quarterly cycle consisting of overcapacity and inventory buildup for two months, followed by rush production and delivery in the third month.
The CEO doubted that anything could be done about it. After all, wasn’t that the natural demand pattern? … The supply chain leader diplomatically told the CEO that the underlying true demand was stable, and fluctuations were caused entirely by his pushing the company to surge at the end of the quarter. By accepting and managing to the quarterly sales numbers, the CEO subtly signaled to retailers that, when the company was falling short of its quarterly target, it would offer deep price discounts to make the numbers. Thus, retail customers regularly bought a three-month supply in the third month of each quarter…”
As the CEO put it, “This was a real revelation for me. Babies pee at a constant rate, but our demand was fluctuating wildly. We trained our retail ‘partners’ to take advantage of us and order only in the third month of each quarter, when we were trying to meet our numbers.” The company subsequently offered consistent price and delivery terms each month, saving tens of millions of dollars in supply chain costs… The company shared its savings in supply chain costs with the retail partners, effectively netting them better prices than they’d enjoyed under the old, high-cost, urge-to-surge supply chain game.
The retailer’s supply chains would benefit from this too. They would have lower inventory carrying costs and less storage pressure in their warehouses.
Every large consumer goods manufacturer should have a Sales and Operations Planning process. If the CEO participates in the executive meeting at the end of the monthly process, he would be well aware of this problem. But stuffing the channel is still all too common.
