By Carl Hall, President and CEO, Datalliance
We are re-posting this article to include a very relevant excerpt from a March 8, 2016, Gartner report titled “Take Six Actions to Improve Product Life Cycle Management in Consumer Products” written by analysts Steve Steutermann and Janet Suleski. In the report, the Gartner analysts do a great job of applying numbers and specific points to the challenges of item proliferation driven in part by customer segmentation:
“Item proliferation is the plague of the consumer products industry. Since 2010, there has been a 32% increase in active items across the industry, despite average revenue growth of only 3% to 4% during this same time period. The result has been an average sales per item decline of 22%, symbolic of the level of item proliferation during this time period. The impacts are:
- Shelf allocation — More items to planogram and merchandise leading to on-shelf availability challenges.
- Inventory — More overall inventory across a larger portfolio of items.
- Forecast accuracy — Items found in the item tail can have three to five times more forecast error, leading to customer service challenges and more inventory to manage.”
I have been attending quite a few supply chain and technology-oriented conferences of late. One topic that has come up frequently, but may not always be associated with these industry conferences is market segmentation.
One of the speakers talked about markets fragmenting to a single individual. He pointed to a commonly used example of how Amazon suggests additional purchases based on our previous orders (Amazon's recommendation algorithm). But this example may lead you to think of segments of one as only a B2C problem. It is not. There are plenty of other examples that hit us in the B2B world.
First is the customization of products by distributors or retailers. Distributors are fighting against increasing commoditization of the products they sell. One of the ways they are fighting is by specifying products for their market. For example, a retailer telling the manufacturer how many blueberries should be in a cup of yogurt or a distributor specifying an entire line of hand tools built to different specifications than the supplier's standard products. And this extends down to the end user, with truck fleets now specifying particular filtration products. We’ve gone from a world where a supplier made the best product they could, to a world where suppliers started to tier their products into “good, better and best,” and now, to a scenario where each outlet is specifying products to their own standard.
This increasing segmentation creates a real challenge for the supply chain. It has created an explosion of SKUs to be manufactured, distributed and inventoried across the supply chain. This proliferation of SKUs puts pressure on our back-office systems and business models. The systems themselves must be able to handle more items. And our business models must adapt to a world with more items each with lower sales rates in order to achieve the same sales volume. All the while, everyone is facing margin compression across the board.
This market segmentation doesn't end with the challenges created by more SKUs. Our business processes also face challenges. For instance, when we started Datalliance, it was to do Vendor Managed Inventory (VMI). That meant creating an order from a supplier to a distributor's stocking warehouse (diagram). Increasingly we have been challenged to create new ways to handle different replenishment scenarios.
Today we create orders from a single supplier to replenish: (See Datalliance VMI Features) :
- A distributor's stocking warehouse (that was new 15 years ago!),
- Individual stores,
- A "cross dock" facility where we replenish multiple stores from that locations, and
- Multiple customers on a single shipment.
And, we are now embarking on creating orders from multiple suppliers into these same environments. I am confident that the options will continue to multiply as businesses continue to find new ways to create value. Increasingly, suppliers understand that it is not a “one size fits all” world.
I can remember the day when taking an order meant getting a piece of paper in the mail with a list of items and quantities. These days, suppliers may still take some orders by paper or phone, but they must also handle fax, EDI, web and VMI orders. These methods developed because of the clear advantages over paper orders in the mail from 20 years ago. But they also come with unique variations and challenges.
The suppliers who are going to be most successful going forward are going to become very good at all of these methods. They will attract customers not only by meeting their customers’ expectations from a product standpoint, but also by offering their customers options that will lower total supply chain costs. This will allow the suppliers and their customers to meet market needs more cost effectively and maintain their margins.
About the Author
Carl Hall is the President and CEO of Datalliance. Carl founded Datalliance in 1991 as a consulting company and has led the company’s transition to a service provider offering the premier vendor managed inventory solution, Datalliance. Carl spent 14 years with IBM gaining management experience in distribution, customer service and national marketing. As part of the IBM/Procter & Gamble team, Carl helped to create the original vendor managed inventory program between Procter & Gamble and Wal-Mart. Today Carl works with customers to continue to innovate the Datalliance VMI system. You can find more information about Carl on LinkedIn at https://www.linkedin.com/pub/carl-hall/6/841/288