Sunday, June 5, 2011

The Case Against Category Management – Exercise 5 -1

The ability for interested partners to manage inventory from a variety of locations and sources changes everything; the main one being the real possibility for ‘Vendor Managed Inventory’.

In the years leading up to today, we have seen suppliers attempt to assist retailers out of necessity, but the results have been appalling and frustrating for everyone. I settled on two possible scenarios, one of which must occur in order to save smaller retailers from extinction: 1) Retailers must adapt the Walmart or 7-Eleven models of gathering stock in distribution centers and managing their own inventories OR 2) Suppliers must become deeply entrenched in managing retailers’ inventory for them. In 99 percent of the cases, the second option is the only reasonable solution. I’m sure suppliers do not want to lose their retailers, and retailers do not want to lose their businesses, so using our technology as a guide, I came up with a solution that will be advantageous to both parties.

The program consists of a relationship in which suppliers become proactive in driving their stock through retail stores and directly into the hands of consumers. It’s a revelation of sorts provoked by a new book I read recently entitled “The New Science of Retailing,” by Marshall Fisher and Ananth Raman (ISBN 978-1422110577).

The story goes that in the mid-1990s, studios such as Disney sold copies of their videos to retailers like Blockbuster for around $60 each. The retailer in turn would rent each video for a $3 rental fee, meaning the retailer’s breakeven point was twenty rentals. Retailers would typically purchase one video for every twenty customers likely to rent it; but, this setup created many unhappy customers who had to wait their turn to acquire a copy for themselves. Out-of-stocks were the bane of the industry. As retailers and movie studios realized they were losing revenues with this kind of arrangement, they decided to do something about it.

The marginal cost of producing an additional tape was only $3, so from the perspective of the supply chain as a whole, the breakeven volume was one rental. At that price, everyone should have been willing to stock as many video tapes as needed to supply every customer wanting to rent it.

As a result, many studios and retailers entered into ‘revenue-sharing agreements’ where studios began selling videos to retailers for only $3 and were entitled to share in the revenues from rentals at a rate of around 50 percent. Consequently, fill rates shot up as did customer satisfaction.

I pondered this for a while, knowing our technology opens up a lot of new possibilities, and began to wonder how we might implement a similar idea along these lines within our retailers’ supply channels. After several weeks of study, I developed a pilot proposal to present to my customers.

After presenting it to a few customers, I saw they liked it. Their first impression was, ‘it sounds like a good deal for the retailers, but how will suppliers feel about it?’ So, I talked to a couple of their suppliers who immediately showed interest in putting the idea into action. As a result of those meetings, I developed a strategy using the input and suggestions from both the retailers and their suppliers.

What I am going to present to you next, are the final results of that study and how we are preceding without delay. I am not asking you to accept or dismiss the idea off hand, but it’s my first attempt at unveiling the idea to a general audience, and would greatly appreciate input, both pro and con, either through this forum or through a private message. I think a debate on this solution will prove beneficial to everyone.


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