To say it’s not easy selling goods at retail in 2020 is likely an understatement—especially if you’re in the automotive aftermarket. While consumers are enjoying more choices of products, places and ways to buy than ever before, brands must manage increasingly complex supply chains that require more coordination with more partners to meet this fragmented demand.
Brick-and-mortar retailers, trying to compete with online retailers like Amazon, are putting pressure on suppliers. In a 2019 article about Walmart’s delivery demands, the Wall Street Journal noted, “Retailers have been imposing tougher requirements on suppliers as they work to lower costs, reduce inventory and speed the flow of goods to consumers accustomed to Amazon’s variety and speedy shipping.” Manufacturers are left to deal with the cost of carrying additional inventory or face having their products out of stock in stores along with fines for late or incomplete deliveries.
The e-commerce arena hasn’t been much more accommodating. While Amazon may be a key distribution channel, heavy or bulky products such as lubricants are being scrutinized because high shipping costs have cut into margins. And Amazon is more than happy to offer its own cheaper, private label version of products when they see a market opportunity. Motor oil, for example, became a target in 2018 when the company recognized that many consumers don’t distinguish between brands and are not brand loyal.
In this environment where brands are seen as interchangeable, it’s critical to ensure your company’s product is always available on the shelf, either physically or virtually. Shoppers are much more likely to purchase another brand’s motor oil than they are to wait or find another way to purchase your brand. As a result, your company loses that sale and perhaps future sales as well.
Maintaining on-shelf availability and customer service is also key to building strong relationships with retailers. Stock-outs inevitably result in lost sales for both your company and the retailer. Additionally, retail buyers will typically order more and give other preferential treatment to suppliers they know they can rely on to fill orders and keep shelves stocked.
Finally, there’s your own bottom line to consider. Keeping up with consumer and retailer needs can lead to skyrocketing costs, such as growing safety stock and expedited freight.
Today, brands are finding success by focusing on more efficient inventory management. By ensuring that they have the right amounts of the right products in the right places throughout their supply chain network, brands can meet demand everywhere it exists while minimizing excess inventory that won’t be sold at full price.
The key is to accurately gauge and respond to demand where it really matters: at the store point-of-sale and online checkout. In other words, true demand is reflected in what end consumers are buying, not just what retailers are ordering.
What Is a Demand-driven Supply Chain?
A truly demand-driven supply chain is one that uses current end-consumer demand to guide all inventory management decisions, from how to allocate product within warehouses to which orders to cut when inventory is constrained. According to management consulting firm Boston Consulting Group, “A DDSC offers real-time information on demand and inventory levels to all supply chain participants so that they can react quickly and effectively when unexpected changes arise.”
The challenge is that “in the past, matching supply and demand has been extremely difficult given the long reaction time of supply chains and the inherent challenges that arise from communicating across the various IT platforms in a company’s extended chain,” the firm continued. While retailers have started sharing point-of-sale and inventory data, most do so with unique platforms, formats and levels of detail. Many distributors are less sophisticated, and manufacturers have their own separate systems, too.
The resulting data silos have traditionally hindered the effective sharing of information among supply chain partners. Brands have historically relied on retailer orders to make decisions instead. However, orders do not represent true demand and are dependent on algorithms working only in the retailers’ best interest.
The problems this creates go one of two ways: If orders are too small or too slow to respond to demand increases, out-of-stocks lead to lost sales. If orders are too large, retailers return unsold product, or suppliers are forced to mark it down or run promotions to sell the inventory.
However, thanks to advancements in technology and software solutions, brands can overcome these obstacles to align supply with true demand. Current point-of-sale and online checkout data, along with end-to-end inventory data, can be effectively extracted from across various information technology platforms and integrated to assess how long the inventory at each supply chain node will last, based on consumer sales. Companies have been using demand-driven supply chains to empower faster reactions to demand or supply changes and to proactively put product in the right volume, assortment and locations based on what’s actually coming off the shelf.
Let’s look at some examples of how a demand-driven supply chain has enabled brands to raise their bottom line by strengthening retailer relationships, increasing orders to reduce lost sales, and lowering inventory carrying and freight costs.
Valvoline, a global marketer and supplier of lubricants, uses a demand-driven supply chain as a competitive advantage to stand out to retailers. With a clear and comprehensive understanding of what’s happening at each store, the company can see out-of-stock problems coming earlier and be ready to maintain on-shelf availability and fulfillment metrics. The “bullwhip effect”—when retailers’ reactivity to demand creates inefficiencies in the supply chain—is essentially minimized, so the company can reduce the amount of safety stock it needs and avoid situations in which it must expedite freight to fill orders.
“Valvoline’s supply chain strategy is to become more and more forward-looking, proactively aligning inventory to future demand instead of simply reacting to customer orders,” said Craig Moughler, chief supply chain officer at Valvoline. The marketer’s chosen software solution, Alloy, “will be a cornerstone of that strategy because it can project where problems are most likely to occur in the future at a granular level.”
If metrics are only calculated at a high level, it may look like performance is fine when it is actually breaking down at the point-of-sale. This breakdown occurs because averages gloss over outliers in which service levels or out-of-stocks are actually outside acceptable thresholds.
For example, an account may be 98 percent in-stock overall, but some stores may be close to 100 percent in-stock while others have dropped down to 95 percent or less.
Each of those understocked stores represents a specific opportunity for improvement. Managing at a granular level and responding quickly to changing consumer demand can lead to direct growth in a company’s top line.
A marketer responsible for several well-known motor oil brands used demand-driven data insights to increase a retailer’s order for one of its products. It identified a store that had been experiencing strong sales growth, but the store’s orders had not caught up yet. The brand was consistently selling out, and the lost sales were significant over time.
The firm emailed the details to the retailer’s inventory analyst, who had not noticed the trend but immediately responded by increasing future orders for that store. This ensured that the store had sufficient weeks of supply to meet the point-of-sale demand, adding up to an annual $180,000 boost in sales.
Looking at another industry, the confectionary maker Ferrero has also benefited from this granular analysis of demand and inventory across its key retail channels in North America. Previously, the brand had a consistent inventory balancing problem. One retailer would always over-order and have too much inventory on hand, which would expire before it could be sold. At the same time, another retailer would be starved for product and experience significant out-of-stocks, not to mention unhappiness with the brand.
The issue was made worse because the company used a distributor to fill some of its orders, which made it difficult to understand what was happening at the retailer level.
Ferrero used Alloy to build a comprehensive, ongoing picture of its network inventory health. Its supply chain teams could then see how many units were on hand and being shipped to each retail store, distribution center, distributor warehouse and brand warehouse, in terms of the aggregated downstream consumer demand.
Using point-of-sale data, the company could easily identify where inventory was too high or too low and prevent the over- or under-supply problems. This has proven particularly relevant during holiday seasons, when Ferrero products are in high demand for a limited amount of time.
Having current visibility of inventory and sales has allowed the company to respond quickly to changes. As a result, the company expects to raise its bottom line by 5 percent annually.
From Theory to Practice
How easy (or hard) it is to realize the benefits of a demand-driven supply chain will depend on the complexity of your network and product lines. The more stock keeping units you have and the more partners in your supply chain, the more data coming from different systems in different formats you’ll have to manage and integrate.
Start with understanding which partners share which data and how. Make sure to capture nuances like how they identify products, such as a universal product code or a retailer-specific ID number; what units they provide it in, such as cases or gallons; what time frames they report in and how all that maps to your own systems. Point-of-sale data and inventory data are required, as well as orders, shipments and forecasts, to build an actionable picture of network health.
Consider how many data points you’ll need to extract, convert and analyze on a daily or weekly basis to maintain up-to-date information on supply and demand. Given the size and difficulty of the task, it may mean dedicating resources to the effort or investing in a software solution.
Ferrero recognized that simply determining weeks of supply at a high-level for three key retailers, two distributors and their own warehouses would take over a week of combined work from more than one skilled business analyst. This is where the company chose to work with Alloy to get the job done.
The right approach for your company may be different, but the bottom-line improvements from demand-driven supply chain management have proven effective for many companies.
Cindy Chow is a marketing director at Alloy, a demand-driven supply chain management platform. Contact her at firstname.lastname@example.org