Consumer products manufacturers and retailers face a perfect storm of global economic disruption. Companies across the board are reducing headcount, experiencing unprecedented price, brand, and market share erosion, and dealing with excess capacity and double-digit decreases in sales, all of which have resulted in retailer and supplier bankruptcies.
Consumer electronics manufacturers whose market dynamics are volatile in the best of times are facing a severe nosedive. According to AMR Research's 2009 Consumer Products Market Outlook, "The consumer confidence index, which reached an all-time low of 38 in December 2008, has all but frozen consumer spending in electronics. To combat this trend, CE companies are taking price and promotion activities and devaluing inventories that are not moving."
On March 2, 2009, Gartner forecasted that worldwide personal computer sales will fall almost 12 percent this year, to 257 million units, as the industry faces extraordinary conditions due to weakening global economy, users stretching PC lifetimes and PC buyers growing increasingly cautious.
Winning Channel Management Strategies
Successful strategies of the recent pastsuch as using collaborative planning, forecasting, and replenishment to achieve 98 per cent in-stock levels or 10-plus weeks of target inventoryare no longer guarantees against steeply declining sales, market share and margins. Monitoring retailer scorecards and point-of-sale (POS) data are also no longer enough to achieve success. Manufacturers and retailers alike must reset expectations and develop a methodology for dealing with the performance disruptions that occur daily. The following four strategies can help channel managers through these challenging economic times:
1. Leverage POS data to fine-tune channel inventory
Many retailers expect consumer electronics (CE) brand owners to carry 6-8 weeks of supply (WOS) of safety stock, causing manufacturers to jump through hoops to meet the requirement. For the manufacturer, the benefit is little more than a good grade on the retailer's scorecard. Instead of simply continuing to meet this requirement without question, the manufacturer must ask, "What is the right WOS number for my business, and does it vary by channel?" For the brand owner, high safety stock leads to higher markdown and price protection expenses and potentially places inventory in the wrong location. Similarly, for the retailer, it locks capital in the form of inventory.
Revenue, margin and free cash flow improvements depend on how intelligently and effectively a company uses the power of POS data.
Instead of taking the easy approachmaintaining uniform safety-stock levels across all categories and all regions throughout the product life cyclesafety stock should be used for its intended purpose: buffering for demand and supply variability and meeting a target customer service level. When analysing significant amounts of POS data in the CE space, it becomes clear that when you account for supply and demand variability, you typically do not need more than 2-4 weeks of safety stock in the channel (this will vary based on the requirements of each individual channel).
But for a retailer to be comfortable with the lower 2-week safety-stock figure, the manufacturer must demonstrate performance of on-time delivery and on-time "right quantity" metrics.
It should also be noted that high inventory levels mask the flaws of forecasting. While adopting a strategy of lean inventory will improve margins, low safety stock can also make you vulnerable to the losses associated with inaccurate forecasts. Consequently, forecast improvement and inventory reduction must go hand in hand. Since you are going to manage WOS at a more granular level, say at a distribution centre or store level, you must manage the forecast similarly at a lower level.
2. Use process playbooks to proactively monitor store performance and conduct root-cause analysis to identify structural problems
Process playbookspre-defined sets of business strategies and rules that guide informed responsesaddress both problems and opportunities with appropriate action. Whether they exist at the strategic or the tactical level, process playbooks are based on a series of three actions that occur in a continuous cycle:
Monitoring performance to identify deviations from the strategic plan
Performing root-cause analysis to clarify the underlying reasons for these deviations
Taking predetermined actions to address these root causes with a set of rules and contingency plans that have a high probability of leading to a specific outcome
Most retailer scorecards typically measure performance at the national level. Any regional-level/store-level discrepancies are lost in the aggregation to the national level. These discrepancies can lead to a significant amount of lost sales.
Active monitoring of store-level trends using process playbooks can uncover issues ranging from simple POS issues (e.g. data is incorrect due to shrink), to lack of inventory, to more complicated issues such as presentation stock set-up issues.
3. Co-manage forecasting and replenishment
The typical chain-level collaboration between the manufacturer and retailer leaves individual store inventory levels and replenishment thresholds in the hands of the retailer. Given the typical retailer goal of maximising revenue from different brand assortments and given the fact that many retailers are currently streamlining operations by reducing headcountmaintaining brand awareness takes a back seat. Manufacturers' considerable efforts to optimise their supply chains are held hostage to the performance of the last 100 feet.
The current economic downturn demands not just collaboration, but the power of co-management. Manufacturers will need to utilise their own and/or third-party resources, called sales support representatives (SSR)or field marketing representatives (FMR)to monitor floor performance and advise the retailer on issues and potential resolutions.
For instance, an SSR can use a questionnaire to collect tactical store intelligence such as which products are displayed where, what competitor models are also displayed and where, what SKUs are visible, how many and what SKUs are returned, etc.
Additional data that is typically not available in the normal course of interaction between a manufacturer and retailer can easily be gathered through the co-management process, and can be invaluable for store-performance monitoring.
4. Empower your sales and marketing organisation to use demand shaping playbooks to increase the size of your market
Past strategies have aimed to improve a company's profit and loss by pre-emptively identifying problems and taking the necessary corrective action. But the overarching business priority is to enlarge the market size. Demand shaping, which is another term for employing promotional activities targeting a specific region or market segment, can be very effective in accomplishing this.
Price cuts are widely used to increase and protect revenue, but there are many other strategies that can better serve an organization. The cumulative impact of POS analysis-driven strategies protects service levels and profits.
In the face of widespread global business and economic disruption, manufacturers will do well to employ an array of tools, strategies and tactics to anticipate and effectively respond to supply and demand fluctuations, while improving profit and loss metrics. By institutionalising corporate knowledge and standard workflows across diverse regions and networks, process playbooks enable companies to make informed choices in the face of precipitous demand shifts, regional sales variations, product stock-outs, high channel inventory levels, extreme price sensitivity, and other challenges associated with short-product life cycles and unprecedented market uncertainty.