A key strategy to maximize supply chain operational efficiency is to focus on the end consumer to fight product shortages and excess inventories, two problems that cause financial losses.
To achieve this, the challenge is that the market currently measures its efficiency from specific Key Performance Indicators (KPI), which separately sets each player in the supply chain. For example, a manufacturer evaluates sell-in to measure its sales to a retailer.
This individual focus is repeated in other areas (sales, purchasing, logistics, trade marketing, etc.). This causes for the distinct areas to seek local excellence, without observing the overall performance. For example, when the store’s inventory is full, the manufacturer appears to have gained a profit, but in the mid-and long term, this situation is not generating any return as the consumer are not purchasing the products. The manufacturer will then not be able to sell more and if the production is not adjusted, high inventories on this side will lock up capital.
Sell-in gives a wrong perspective, as it takes the whole chain to behave in a way that generates excess inventory or product shortages. In other words: it doesn’t pay off for each link to only be committed to “pushing the stock forward”. What should in fact be determined is the effectiveness of each step, all the way to if a purchase is made by the end consumer — therefore, sell-out.
If the end consumer did not purchase the item, the cycle of the supply chain is not completed, due to manufacturers moving production to retailers with no purchase being made.
Therefore, instead of measuring how many items have been sold to retail, what should be considered is what has been bought by the end consumer, precisely because he is the one who guides the behavior of all areas in the supply chain.
What changes need to be made within management along the entire supply chain when focusing on sell-out?
- Aggregate Inventory: Inventory management should be measured by the concept of aggregation. With it, the retailer keeps the ideal number of items in stock and replenishment is based on the demand by consumption of the end consumer, which then impacts other stages of the supply chain. This is the opposite of what is mostly practiced today.
- Purchase Order: It is mostly the retailer’s responsibility to make a request for replenishment. With the sell-out model, we seek to increase the level of integration among the agents, so the steps work as needed and not by a predetermined purchasing process that can generate surplus.
- Payment Method: Management by sell-out also impacts on the payment method between the manufacturer and retailer. Instead of volume of purchased products, payment may be established based on items sold to the end consumer, improving the dynamics of the process.
In addition to adjusting the interests of each area in the supply chain, common sell-out KPI promotes competitiveness because it creates a commitment from everyone against fluctuations between inventory shortages and excesses. This strategy can be enhanced by managing this KPI with innovative technological solutions specialized in supply chain management based on sell-out for collaborative planning and replenishment.
Contact us to gain more insights into how to move from sell-in to a successful sell-out model: https://www.neogrid.com/uk/contact