in Mexico and Service Levels

Modern Channel Collaboration
and Service Levels
in Mexico
MANUFACTURERS VS. RETAILERS
OSCAR NAFARRATE, SINTEC
ANTECEDENTS
By the late 90’s, initiatives to improve service levels (the fulfillment of client
orders of Fill Rate) from the manufacturer to the Modern Channel were
a scarcely relevant issue for companies. A large part of the discussion
was based on perception—vis-à-vis a problem of significant shortages at
the Point of Sale, the client would file a complaint and the manufacturer
would explain; in fact there was no service management process in place.
Today, that is an issue of great relevance, because the Modern Channel
applies economic penalties to the manufacturer if the latter falls short of
the level of fulfillment (Fill Rate) established by the channel, and in view
of the disagreement between manufacturers and the Modern Channel
about the justice (or injustice) of these penalties, there is a possibility that
legislation will be enacted in this regard (Fig. 1).
Fig. 1: MANUFACTURERS’ RELATIONSHIP WITH THE MODERN CHANNEL
Here are the positions of the parties:
VISION OF THE MANUFACTURERS:
VISION OF THE MODERN CHANNEL:
Has the most power in the relationship.
• Sales are lost due to deficient deliveries by the manufacturer:
––Deficient deliveries by the manufacturer directly affect
shortages at sales racks.
––There’s an incentive to deliver (to not lose sales) even though
the shipment causes higher costs.
• If a competitor has the product, customer loyalty is lost: this is the
highest priority when product shortages occur.
•
Not willing to pay up.
• The supermarket fails to honor cost-efficiency agreements on full
trucks, pallets or layers and it isn’t penalized.
• Product shortages on the racks involve reasons that can be
attributed to the supermarket, and the manufacturer loses sales:
––Incorrect orders (volume, timelines).
––Untimely deliveries from the X-Dock to the stores and racks.
• Errors in deliveries aren’t exclusively the responsibility of the
manufacturer—for example:
––Products that are no longer in the catalog, but the Modern
Channel is still placing orders for them.
––Deficient reception capabilities at the X-Dock hamper timely
deliveries.
•
2
MODERN CHANNEL COLLABORATION AND SERVICE LEVELS
Penalties for deficient fill rates are an unfair practice by the Modern
Channel, if such practice isn’t parallel to a management process that sets
forth the responsibilities (and penalties) of each of the parties in making
products available at the selling rack.
Management of product availability at the selling rack has evolved
significantly. In this regard, we can identify 3 stages of evolution (Fig. 2):
PHASE I – STRUCTURAL ENHANCEMENTS AND SERVICELEVEL METRICS
As efforts to increase product availability at the point of sale and as a
restriction to decrease working capital, the following initiatives were
implemented:
The Modern Channel initiated the operation of Cross-Docks. The logic
is very simple—it’s more efficient for manufacturers to make deliveries
at a single point rather than do them at each of the stores; and for the
client it’s more efficient to receive at its location fewer trucks carrying
larger volumes. The cost of distributing to stores is paid for by the
manufacturer via logistical savings. Exceptions remained that they would
keep delivering to the stores: most beverages, snacks, and refrigerated
products, given the logistical structure of the manufacturers that makes
it possible to deliver products to the racks at enhanced cost efficiency
and with the required features (freshness, volume and frequency).
• The Modern Channel and manufacturers designed delivery management
systems; manufacturers and clients separately developed their metrics.
In most cases Fill Rate mas measured by the manufacturer was higher
than the rate reported by the Modern Channel (largely because the
manufacturer did not consider the catalog that the channel had in its
records), although the truth is that information was scarcely managed
between the parties and the result was that some improvements were
achieved.
•
PHASE II – COLLABORATIVE MANAGEMENT
Given the intense competition among the participants in the Modern
Channel, it became essential to ensure product availability at the points of
sale, for which purpose supermarket and department store chains shared
detailed information on the inventory situation at their points of sale, on
ways to place orders with the vendors, and on how to measure service
levels. This resulted in two initiatives:
1.Harmonization of Measurement Systems. Vendors harmonize the way
they measure service to the systems used by their clients, because
in conversations regarding service managements it was common for
clients and vendors to have indicators with differing parameters, a fact
that makes it more difficult to determine operational enhancements.
This harmonization effort represents a series of ways to measure
service, for which the supplier needs to adapt its management system:
a. Same Catalog: Very often clients have an active catalog including
products that the vendor is no longer delivering; this can represent
up to 5 percentile points difference between the levels of service that
the supplier and the clients are recording.
Fig. 2: EVOLUTIONARY STAGES IN
THE MANAGEMENT OF PRODUCT AVAILABILITY
b. Units of sale and of purchase: The sales units of the supplier (boxes/
kg) must be harmonized with the purchase or sale units managed by
the client (boxes, kg, counts).
c. Time periods: Differences can also be identified in time periods,
whether time periods are measured vs. order date or delivery dates
for the purchase. Discrepancies can also occur regarding the start
date of measurement periods (for instance in many cases a period
may start on a day other than the 1st of the month and end on a day
other than the 30th or 31st).
d. Formulas: The calculation method may involve discrepancies in
regards to certain considerations. Is it a % of units delivered vs.
units ordered? Or, must the numerator contain the variable for ontime deliveries? Or, should measurement of per-SKU service be also
included? Or should an average of per-SKU service be computed?
Or, is it a weighted average?
This harmonization is the starting point to have available the same
information, and be able to establish improvements on the basis of being
on the same page.
2.Penalties for failure to perform. As it’s common that deficient service
on the part of the vendor are due to efficiency criteria (the volume is
less-than-truckload or less than route quotas, or it’s more profitable to
manufacture SKU B rather than item A), clients “incentivize” the vendor
by threatening costs for failure to deliver at the agreed levels of service.
3.However, these penalties—as discussed in the introduction—are
unfair when the channel fails to meet the following responsibilities:
a. Provide accurate forecasts of significant changes in demand.
b. Generate orders with the adequate products and volumes to ensure
their availability.
c. Honor efficiency agreements with the vendor; consistent use of
truckloads, pallets, layers or any other logistical unit.
d. On-time receipts and on-time delivery at stores.
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3
PHASE III – FOCUS ON THE CONSUMER/SHOPPER
MODERN CHANNEL COLLABORATION AND SERVICE LEVELS
1.Allocate responsibilities and indicators for the following relevant
At this stage, the Modern Channel and the manufacturers have recently
focused their efforts on ensuring on-rack availability (the factor that really
matters), and for this they must take into consideration the following
elements:
One single organization for rack replenishment. Planning and
replenishment should be placed under one single area of responsibility
that takes into account the targets set as relates to sales racks
(shortages and working capital), capacity restrictions, and delivery
costs (spaces, distribution, inventories, manufacture, and availability of
raw materials).
• Management system. Establish goals for the channel and for
manufacturers, as well as for their internal areas consistent with
their responsibility in ensuring the availability of products on the rack;
they should be specific in terms of review frequency and the nature
of actions to implement. Such reviews must be inter-area and intercompany, as well as at the highest level.
• Information integration. Needed technological steps must be invested
to eliminate the times required to process information and to increase
the creation of scenarios and the making of decisions.
•
COLLABORATIVE MANAGEMENT MODEL FOR THE MODERN
CHANNEL AND VENDORS
“Collaborative management ensures on-rack product
availability and consumer preference.”
processes, which in turn may involve various activities:
a. Catalog maintenance
b. Generation of, and consensus on, forecasts
c. Supply chain planning
d. Purchase order generation
e. Product delivery at the racks
2.Coordinate the process via a unique entity or areas with members from
the Modern Channel and the suppliers, generating working instructions
for all areas involved, taking into account targets for shortages and
inventories at the points of sale and supply restrictions and costs.
3.Manage the process at the level of commercial and operations
executives of the Modern Channel and the suppliers, on a quarterly
basis, via the review of indicators, identification of discrepancies, and
allocation of improvement tasks for the responsible areas.
The largest value-generation opportunities for the Modern Channel and for
vendors lie in earning the preference of the shopper. To focus on penalizing
failures to deliver is a partial solution to the problems involved in ensuring
product availability at the sales racks, and diverts joint efforts to achieve that
goal. How much time and resources do the Modern Channel and the vendors
invest in these discussions? The focus should be on ensuring availability of
products at the racks.
Oscar Nafarrate, Sintec
[email protected]
The collaborative management model (Modern Channel – vendors) to ensure
product availability at the racks must begin with the segmentation of each
point of sale in order to define product portfolios and allocate spaces to each
of the products, and it must involve the three elements below:
MEXICO CITY
MONTERREY
BOGOTA
www.sintec.com
[email protected]
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SAO PAULO