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Predicting the future

Using point-of-sale data in distributor/supplier collaborative relationships

by Howard Coleman

Weather forecasters amaze me. They look at the data at their disposal and the variables at play, and make a prediction about what’s going to happen tomorrow or next week.

Some supply chain managers are like weather forecasters. While the weather people don’t know for sure if a storm will hit tomorrow, lots of supply chain people delude themselves into thinking that either sales people or some newfangled variation on regression analysis can accurately predict the quantity of each widget customers will order in any given week – and a couple of months out into the future.

No amount of bashing the sales force, your ERP system or pouring more money into software is going to forecast the next point on the graph with any certainty. It’s the same problem with forecasting an impending thunderstorm – it’s an anomalous spike on the graph – it can’t be done with much accuracy. So don’t waste your time and the company’s money trying.

Are Planning Systems Fundamentally Broke?
Wholesale distributors are in a traditional buy-hold-sell business model. They make money by managing inventory (and have done so for generations). While lean thinking (driving waste out of our processes) has progressed by leaps and bounds over the past years, it still seems to me that when it comes to inventory and supply chain management, and in particular supplier collaboration, it may have regressed. Many wholesale distributors and their supply chain partners are still using that old order point/economic order quantity approach or some variation. Supplier collaboration discussions often seem to be reduced to price and rebate discussions. Each party uses their own independent forecasts: 1) the wholesale distributor to place an order with the supplier, 2) the supplier to develop an “order forecast” for their production and capacity planning purposes, in advance of receiving the orders. As a result, the supplier can incur a capacity-order mismatch. I believe that the solutions of the 1990s have not kept pace with the business needs of today.

That’s too bad, because momentum has been lost. The fact is, the only way to achieve excellent rates of delivery and lowest inventory is with a “pull-based replenishment model” (as opposed to “Push”).

Look at it this way: “Pull” is like an elevator that starts when a button is pressed, even if there is only one passenger. “Push” is like an escalator. It attempts to continue to supply regardless of whether there is actual demand (a passenger).

What we know (basic inventory 101) is that the amount of inventory is a clear function of the degree of variability in demand and lead times, plus safety stocks and order quantity sizes. So, the only way to deliver on time every time, with minimum inventory, is to reduce the forecast variability, optimize lead times, safety stock and order quantity sizes. In other words, focus on the constraints – the inventory drivers. Inventory levels should be dynamic and based on actual demand and the replenishment lead time. Your supplier should be producing based on actual demand too, not on forecast. The current paradigm (the status quo), is a difficult one for both sides to let go of. It requires a change in thinking! And until it does, both sides will still be reliant on inaccurate demand forecasts, broken replenishment processes and old ways of collaborating.

So, I think, we need to get supply chain managers back in the game at both the wholesale-distributor and at the supplier level.

A Demand-Driven Supply Chain
Cost will always be a driver in supply chain management. If any lean concepts are adopted, it should be the elimination of waste. But, we have traditionally used inventory (cost) to buffer uncertainty. This is no longer sustainable. It costs too much!

Now, consider how demand-driven supply chains could align planning, procurement and replenishment processes to actual demand, transforming the traditional supply chain into an integrated multi-tier supply network that eliminates information lag, provides greater visibility and decision support, monitors, alerts and resolves critical supply chain events, and addresses and resolves issues proactively before they become problems. Some key characteristics would be:

• Product movements driven by actual demand
• Real-time demand/supply visibility across the partner tiers
• Inventory managed to dynamic target inventory levels
• Early identification of demand/supply issues
• Single demand signals shared with supply partners, that is, there is “one version of the truth”

Question: Can you describe your supply chain using these characteristics?

What’s Real Collaboration?
First, think like this: Supply chain management is a form of cash flow management. Secondly, supply chain management should be a tool that provides a base to build a strategic relationship with your supply chain partners. Thirdly, some questions: what are the tools available to help both wholesale distributors and their supply chain partners transform into smarter partners? Shouldn’t the desired outcome be higher profits, less complexity and lower total cost of inventory? And, do point-of-sale (POS) technologies have a relevance here?

To compete and thrive in this demand-driven environment, wholesale distributors and their suppliers will have to collaborate differently from in the past. A number of different wholesale distributors and their supply chain partners are embracing collaborative planning. Right now, it seems to be characterized by vendor managed inventory (VMI) solutions that promote and foster the sharing of shipment data. Results-to-date seem to indicate that VMI has produced lower inventories and better service levels, but the jury is still out on whether it is actually providing shortened cycle times, is sufficiently focused on the constraints, profitable inventory flow strategies or reducing the total cost of inventory. Unfortunately, VMI seems to be executed by one wholesale distributor/supplier at a time, resulting in isolated information silos. Despite this mixed evaluation, by integrating and leveraging downstream data, I believe POS technology can be scaled to handle the vast amounts of data available and drive better supply chain procurement decisions and increased visibility, as opposed to just using forecasts. But, there has to be a broader base of participants for the supplier and wholesale distributor to gain advantage.

The technology isn’t new. In fact, it’s right out of the retailer’s playbook (no, you’re not that much different). The folks at Wal-Mart will tell you it’s their survival kit. You see, Wal-Mart doesn’t consider themselves a retail business, but rather a distribution business.

Yes, Wal-Mart does, of course, exert quite a bit of power over its suppliers. They pretty much call the shots, through huge purchasing power, and they can pretty much tell their suppliers what to do and at what price. But there is, I believe, something for us to learn that could be adopted by other types of distribution companies.

Leverage Technology – Point-of-Sale is Power
You have sales information and know where and when products are flowing. In fact, I have clients in some vertical markets that are actually compensated handsomely by their suppliers for this data. Switching from push to pull, Wal-Mart no longer sends purchase orders; suppliers act according to the sales of their product and only see the information pertaining to their products. Wal-Mart’s first core competency, being in the distribution business, is their data handling, transforming data into knowledge.

By adopting this switch from push to pull, the supplier does not drive the final transaction at the end customer point of contact. The final transaction in the supply chain (the customer) is the most important, and we can learn from this to shape the start and the middle of the supply chain (just where you are as a wholesale-distributor).

Connecting Through Collaboration?
Typically, a supplier’s demand forecasts are based on their own historical record of shipments (the wholesale distributor’s purchase orders) versus actual end-user demand at the point of actual purchase (the customer). Wholesale distributor purchase order quantities often include the whip saw effects of demand variation, safety stock maintenance, economic order quantities, etc., distorting the actual demand incurred at the wholesale distributor level. This disconnection of true demand from the procurement quantity can ultimately misrepresent the production planning and capacity needs of the supplier to maintain an adequate available supply.

POS changes the paradigm to integrate real customer demand and designs forecasts based on actual sales. If suppliers could tap POS data, the purest form of demand, directly from the wholesale distributor, then there would be improved synchronization of supply and demand. Suppliers would see more consistent demand patterns, allowing them to develop more effective production and inventory plans, better balancing the variations that come from using shipment data alone. This, then, becomes the best forecast, operating from a common view, and creating more accurate demand signals up and through the entire supply chain while providing greater visibility into the wholesale distributor’s total supply chain inventory. Demand signals would be sensed and responded to throughout the supply chain and could be synchronized both for planning and execution. Plans would not be created and consumed in isolation. Transactional systems would not just hum along with little to no guided intelligence. Speed of flow of relevant information (and materials) would become a critical success factor.

Collaboration Is Growth
Wholesale distributor and supplier relationships are a perennial
subject of discussion. Whether at trade shows or at each other’s offices, the topic engenders discussions about the relationship. Clearly, distributors and suppliers have common ground. Their relationships must be based on mutual trust, they have to be honest in their conversations and they both have to grow. After all is said and done, the relationship needs to be more than a fancy trade show and a hospitality suite.

The proverbial term “win-win” describing relationship agreements or understandings is admirable but is in reality hard to achieve. Distributors choose their best suppliers to create the best customer offerings. Suppliers want to build a distribution channel. But what comes after? At some level, it’s all about money and the term channel partner can often become just a charming phrase.

A pull-based supply chain relationship utilizing POS data has real benefits for each side, beyond the price and/or rebate discussion, as it can meet some definitive relationship criteria:

• Sharing of real demand information (trust)
• Effective communication processes
• An opportunity for continued growth, including growth in the relationship

I can’t believe that most suppliers wouldn’t appreciate better methods to gain visibility or a sense of what the customer is buying – more real time – getting as close to the customer as possible. POS data is a way to do this.

A growing use of POS data could help both suppliers and wholesale distributors to take a giant step forward in becoming demand-driven rather than being encumbered by distorting elements such as batch order sizes, safety stocks, lead times, etc. The granularity of the data creates a very clear picture for suppliers and one that is not based on their forecasts or their compulsion to stuff (push) their channels.

What’s The Role of Buying Groups & Cooperatives?
If you are a buying group member, will your buying group support this type of strategy? The benefits to both wholesale distributor and supplier are really in the number of members participating in supplying POS data to any one supplier. This increases size and bargaining power. Even smaller members can adopt and benefit. The supplier gains the benefit of a total picture, not just from some members, providing some POS data.
To me, it seems logical that more and more wholesale distributors and suppliers will benefit from acknowledging a demand signal to:

• Optimize inventories
• Increase supply chain visibility
• Reduce stock-outs
• Lower costs
• Improve production and capacity planning
• Improve customer service
• Boost revenue and profitability

Finally, data is important although, ultimately, it is only a piece of the puzzle. Wholesale distributors and suppliers will need to rethink their business processes, organization, systems and terms of trade to effectively manage the acquisition and leveraging of downstream data. Organizations that take the lead in transforming this data into usable information will use it collaboratively across functional units, rather than continue to use it only to optimize their own situation. Companies that collaboratively manage their supply chains will gain a real operational advantage.

What are your thoughts? Do you experience any of these gaps? Will your next breakthrough in performance (as wholesale-distributor or supplier) come from learning to plan better and respond to inventory and supply chain variance? Do we need to close the gap between planning and execution? How do the buying groups fit in?

Your debate is encouraged!

Howard W. Coleman is principal of MCA Associates, a management consulting firm that works with wholesale distribution and manufacturing companies committed to operational excellence. Contact him at (203) 732-0603, or by e-mail at hcoleman@mcaassociates.com.

This article originally appeared in the May/June 2013 issue of Industrial Supply magazine. Copyright 2013, Direct Business Media.

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