Demand, Supply and Inventory Execution
Effective demand, supply and inventory execution is essential to achieve and maintain high levels of service from point of origin through to the retail shelf.
Most companies are content delivering to pre-agreed S&OP volumes to their distributors, regardless of actual, day to day, market demands. Through this approach, service levels to distributors may be as high as 98%, but the distributors’ service levels into their retail customers may be as low as 70%. Fundamentally, the right inventory ends up sitting at the wrong distributor.
The situation is then exacerbated by inaccurate forecasts, excessive demand fluctuations (the bull-whip effect), poor event planning, and short term ‘meddling’ by management.
This results in continual out-of-stocks in retail shops – opening the door to competitors by failing to have the product available for otherwise loyal consumers. The missed sales might be a one-off loss, or it could represent the loss of the consumer for life.
A leading FMCG manufacturer in Indonesia.
The client neglected the importance of proper demand, supply and inventory execution. They constantly experienced supply problems due to very low forecast accuracy and inferior replenishment strategies, which collectively resulted in over-stocking of some distributors while other distributors were experiencing stock-outs. (This was at a SKU-by-SKU level – so it was not necessarily transparent in the ‘noisy’ environment of the distribution network.)
A vicious cycle had kicked-in. Under pressure to meet targets, the sales department focused on ‘selling in’ to distributors before month-end cut-offs. This impacted the quality of planning outputs, created disruptive activity peaks and distracted both manufacturer and distributor resources away from the key task of driving retail off-take.
Policies were established to standardise distributor replenishment practices and control distributor inventory levels (ie, by distributor, by SKU). The control of distributor inventory was managed automatically by the system and no longer by the sales department to optimise and have better control of distributor inventory.
The steps in this process were:
- Defining the service level requirement for each SKU
- Defining the replenishment frequency for each distributor – and thus the required inventory holdings
- Defining replenishment rules (e.g. safety stock, re-order point, re-order quantity, order up to level or re-order quantity replenishment strategy, MOQs, LOQs, truck size, schedule, etc.)
- Providing a simple ‘replenishment calculator’ tool capable of balancing replenishment volumes with vehicles/container capacities
- Launching the new strategy and enforce disciplines to achieve clockwork operations
- Rapidly lifted product availability (to retailer) – over 95%
- Created an environment where exceptions were identified and handled on a daily basis
- Released sales department and distributor resources to focus on driving retail sales or consumer off-take.