Monday, July 19, 2010

Your suppliers’ environment

The explosion of convenience retail outlets came at a time when suppliers needed it the most. The only problem was the majority of the new retailers weren't retailers at all … they were gas station owners and oil jobbers. For the right person, opening a new store was a no brainer. You simply identified a good location, erected a new building on top of some fuel tanks, added a few pumps, and filled the store with inventory.

The majority of these new retailers started with one, two or three stores and couldn't justify the hiring of a grocery manager, so they did the next best thing … turned the stocking of their new stores over to their suppliers. To a supplier, a new retailer was worth around half a million dollars in annual sales per location. If they picked up an eight-store retailer, it meant around $4 million in total dollars. Twenty such retailers, $10 million, and so on and so forth.

The only way suppliers could handle a retailer's inventory management for him was to eliminate the identity of individual items and throw them into classes like groceries, beer and cigarettes. These classes were called 'categories' and categories were made up of a mysterious mix of products that experts considered a good balance of a particular group consisting of types of items. For example, in the HBA section a store needed a certain percentage of aspirin, mouthwash, deodorant, band aids, etc. to make up a category.

Markups were high … Ridiculously high. Everybody made money at the expense of the consumer who willingly spent his hard earned dollars in the interest of 'convenience'. Compared to profits, losses were negligible.

As the years went by, suppliers became more and more entrenched in the retailer's management. Competition dictated they give up some of their profits to keep their retailers happy. They offered perks – trips to Maui, golf in Las Vegas, lavish dinners, kickbacks to retail store managers, free merchandise, even rebates … everything and anything that would keep the retailers happy.

Suppliers invested millions of dollars in supporting the associations retailers joined to assist them in their management decisions. The associations sang the praises of the supplier's knowledge and expertise in helping retailers maintain their inventories at the least possible cost. Bookkeeping systems were designed to support this Category Management form of inventory control. Suppliers hired pre-salesmen to go into the stores and make up the orders so the retailers wouldn't have to bother with it. Margins were high. There was plenty for everyone to get a nice share of the profits. Suppliers gained absolute power over the retailer's supply chain, yet everybody remained contented with the arrangement.

Power corrupts and absolute power corrupts absolutely. Suppliers became dictatorial about their part in the supply chain process, demanding control over placement and territory using a carrot and stick method of persuasion. They demanded more and more space to provide decent markups, and huge penalties were imposed if a retailer refused to cooperate. As retailers got weaker, suppliers got more persistent, and all the while … everybody was losing.

In an article in Progressive Grocer Magazine dated February 15, 2003, Joseph Tarnowski said:

  • $40 billion, or 3.5 percent, of total retail sales are lost each year due to supply chain information inefficiencies.
  • 30 percent of item data in retail catalogs is in error, and each error cost trading partners $60 to $80.
  • Trading partners perform 25 minutes of manual cleansing per SKU per year.
  • 60 percent of all invoices generated have errors, 43 percent of invoices result in deductions, and each invoice error cost $40 to $400 to reconcile.
  • Just a simple error on one purchase order can send a wave of data confusion throughout a grocery organization — from shipping and receiving to buying, merchandising, and back room inventory — and have detrimental impacts on customer service and sales.

Clearly, there is a situation here that's not getting any better.

The first to feel the pinch is the consumer, the retailer and ultimately, the supplier. According to Marcia Layton Turner's book, K-Marts 10 Deadly Sins, if retailers were to be allowed to receive more of what the customers were buying, less of what they were not, and predict what merchandise mixes were going to be popular in the future, things would be a lot better — not only for the consumer, but the retailer and most beneficial for the supplier.

Go into any convenience store today and you will find 25 percent of the stock is just sitting there like a bag of rocks. If suppliers knew that, they could use that knowledge to put inventory in the stores that would move so it could be replaced with other inventory that would move and create more income for the supplier and the retailer. But, suppliers are so busy unloading their dead inventory into retailers' stores they don't have the time or the inclination to fix it.

Suppose for a moment that a supplier could deliver only the products a retailer could sell until the next delivery cycle and replace inventory that is not selling with merchandise that would sell; he could put just the amount of inventory in his trucks that the retailer needed, he would be more careful about putting new unproven items in the retailers' stores, and he would have a much greater interest in removing slow-moving items that were clogging up the retailers' aisles.

In addition, he would be able to track the inventory from the warehouse to the retail store, reducing driver theft, and produce invoices that would be consistent with what the retailer actually received. As a result, the retailer would make more money and be able to expand and build more stores to accommodate more products from the supplier.

What might have been a godsend for retailers and suppliers in the 1970s has become a horrible problem that is killing retailers and as a result, their suppliers. As more and more retailers go out of business, suppliers will suffer until all they can sell to is Walmart. Lots of luck on that one.

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