A VC in Vacationland

Where does your supply chain thinking stop?  When it goes out the door of your distribution center? At the customer DC? At the store back room or shelf?  Or as it goes out the door in the hands of the consumer?

For the typical consumer products company, I’ll bet that it probably stops when it goes out the door of your DC.  You probably have a 95+% fill rate on orders at that point.  It then becomes the "responsibility" of your marketing and sales guys, right?  They are the ones supposed to make the sale happen at the consumer level.  But the reality is that average on-shelf product availability are in the mid 60’s, according to numerous retailer surveys, and have remained at that level for many years.

When was the last time you saw a sales or marketing guy take an interest in the exotic logistics of getting the right product onto a shelf exactly when the consumer is ready to buy it?  Try never, or rarely, and that mostly consists of whining to the supply chain guys about why they can’t get it right.

Last mile supply chain management–from the retailer DC to the store shelf, ostensibly the responsibility of the retailer, is the black hole of supply chain strategy.  Once in the store back room, on-shelf stocking becomes the job of low-paid and generally untrained store employees or merchandisers.  Hit or miss stocking strategies are often focused on replenishment schedules for employees defined by store managers, or specific days-in-store for merchandisers, only sometimes based on sell-through data or forecasts.

Why has last mile supply chain management never been taken seriously by supply chain professionals?  There are many possible reasons–it has not been taught in the universities, there is little research done on the subject, only a few technologies exist to manage the last mile, there is confusion between sales and supply chain and/or manufacturers and retailers about who "owns" the last mile, etc. etc. This is not to say that companies are not working on these problems.  A number of major consumer product companies are initiating collaborative work with their retailers to improve on-shelf availability.

So what are some ways to "fill" the black hole of supply chain management to reduce on-shelf product out-of-stock problems? Here are three ways in which supply chain professional can begin to tackle the problem:

1. It’s the Revenue, Stupid.  For consumer product companies and retailers, low on-shelf availability cost them both money.  Retailers often say they don’t care about on-shelf out of stocks because substitute products are only a few feet away. Consumer product manufacturers say that in-store supply chains should be "managed" by sales & marketing, not their supply chain guys. There are also data sensitivities as well as not wanting vendors involved in retailer decision processes. But this intransigence results in lost revenue for both parties, something that makes less and less sense in a world where long-term growth in consumer spending is threatened by energy and commodity price increases.
2. Who’s on First? As we mentioned earlier, responsibility for in-store, on-shelf product availability management is a contentious area.  Retailers do not like vendors telling them they are doing a poor job. Similarly, most consumer products companies do not have solutions available to help retailers better manage in-store operations.  Before any meaningful progress can be made on reducing on-shelf out of stocks, retailers and vendors must engage in serious discussions about how changing the business models will benefit both of them.  One consumer products company is proposing a "turn-key" solution for their retailers, that involves the vendor suggesting product stocking levels at retailer DC’s and eventually stores, along with measuring and reporting improved revenues for both parties.
3. Innovative Business Models. Most every vendor has shown up at a retailer sometime over the last decade with a mandate from their management to "do something to help you" to improve revenues. When asked how, words like "collaboration" and "account teams" are mentioned.  Rarely, however, have the vendors or retailers thought out the correct business model to make this happen. How are people going to interact, what new processes need to be put into place, what new technologies are needed, how will success be measured are only a few of the questions that need to be answered. Often, no one wants to put the time in to answering these questions and the initiatives become forgotten.

The big question is whether vendors and retailers are ready to tackle this problem.  For vendors, there is not much else they can do to improve their existing supply chains, which now basically end at the retailer distribution center.  The opportunity for vendors lies in defining new supply chain management capabilities that can reach into retailer stores to help them improve on-shelf availability without creating new issues and costs for retailers. Only then can they tap that huge lost revenue pool defined by a consumer showing up in a store and not finding the product(s) they wanted.