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SCM Spotlight: From the Market to Under the Carpet – Part 1

Post By : Shammi Dua
Post Date : May 18, 2021
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(Disclaimer: This article was originally published in the April issue of Logistics Insider magazine. All views expressed in this article are of the author’s own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated.)

After nearly a year, I started work from the office. I missed home-cooked food the most. It was not just the food but the affection with which it was served, coming fresh from the kitchen. There was always that extra portion, manuhaar (one may Google its meaning), that one cannot say no to. Once in a while, I tried to return a half-finished dish back to the kitchen, but such a misdemeanour was always vehemently admonished.

While nibbling on my solitary working lunch, amidst the seating restrictions due to Covid, I supposed manuhaar akin to those extra sales achieved beyond the appetite of the distributor, or stock pushed from RDC to depot beyond the forecast or norms.

Reverse Logistics is now a perfected operational process with SOPs defined in many organizations. This helps move stocks back upstream efficiently and at the least cost. In spite of the progress made in the field of Reverse Logistics, I would still be classifying it as a bad cost. Is it not like calling a complaint “a reverse compliment”?

Taking back expired, damaged, excess unsold stock is an assurance companies give to distributors and retailers. Sales return is also done through reverse logistics. Factually, it is negative sales and a logistics costs muda (waste). Regular investigation and controls on stock returns in the Value Chain would definitely add to the bottom line for manufacturer and channel partners.

Over last decade, as the consultants kept nudging us to look beyond the four walls (& think outside the box), many managers gave lesser attention to within the four walls (literally) of their warehouses.

Let me introduce our antagonist today, Mr. SLOB: SLow moving and OBsolete inventory.

SLOB is snug as a bug in a rug, sitting in prime corner space of every warehouse watching all other hero sku’s come and go in a busy hurriedness. Inadvertently, SLOB is swept under the carpet and made incidental to the excitement of next promotion/launch, new month’s targets, coveted Must-Sell-in lines and other actions as prioritised by Region Office.

Mr. SLOB has family tree too — in addition to company’s own products, there are the third party manufactured items (originally intended for a trade, retailer and/or salesman scheme). These could include thermos flasks, wall clocks, T-shirts, laptop bags, lunch box et al.

Watch out: I heard from industry friends that in a poll-bound state, Election duty officers visited regular CPG warehouses to check for excessive gift items in store.

Further there are the POSMs— danglers, shelf talker, shelf stopper, standees, racks, end-caps and even glow-sign boards which were parked in the warehouse corner. All waiting for their turn to see the light of the retail store. Many of these items are not in system inventory and thus fall prey to the “out of sight-out of mind” blow easily.

Mr SLOB also endears stray cases of machinery, spares and office furniture sent for “safe storage” at warehouse. It is unanimously pronounced, “It is good to save it for a later date. Lest we may have to buy afresh”.

Flashback

“Who invited Mr. SLOB to the party?”

“What was the demand and supply planner doing all this while?”

The marketing and sales manager planned the promotion or NPI (new product) with a certain expected outcome, that is (mostly) a significant increase in offtake and consumption. The process includes rigorous study of trends, customer behaviour, competition activity, impact on operating margins and more. Should the proposal meet certain margin and growth aspirations, it is allowed for next stage to production. After putting in so much effort in the proposal, it is but human to add an ounce of qualitative positivity and bullish zeal, pushing the demand plan higher.

A few times in any year, you would observe sudden demand (sales) increase, defying all the Demand Planner’s logic and estimation from expensive DP tools. Needless to say, higher sales always look good, feels good, sounds good. Thus, there is an increase announced in the production plan as the curve is looking up. SC managers gut feeling says that we should invest in additional capacity too! Seasoned leaders at the SnOP would check “What caused this demand surge…was it a geo-political, social cause (covid), factory strike at competitor or have we now started reaping the harvest of the higher reach, customer engagement and consumer marketing efforts?” At this stage, how much of a stretch to the demand plan one should take is a crore rupee question! Personally, I believe that Risk taking is good. One loses all the bets that are not taken!

However, in the VUCA world the unanticipated does happen? Underperformance of a plan would lead to unwelcome stock at different nodes of the value chain.

Stock market analogy: One golden rule for successful day-traders is that they square-off positions at the end of the day, and not convert them into delivery. Lesson in our context: the goal/ target defined for the promotion should be quantity-bound and time-bound.

Master SLOB (took birth in above paragraphs, if it missed your attention) now seeks attention from sales and accounts on liquidation support funds. These funds, if spent, will adversely affect the numbers promised at the proposal stage. Accountants first stand is to try hold margins (push-sales to customer), forget write-off (tauba tauba). There is thus entered a ‘Treaty of Meeting room’. After some mixed efforts, SLOB blissfully moves to its resting place at the depot/customer (till final exile to a cement kiln).

Accountant’s View

I wholeheartedly empathise with the feeling of my accountant friends.

Inventory is an asset. It can be written-off only after certain shelf life. Ageing stock (Mr SLOB) is provided-for in the books. Interestingly, the same accounting principle is applied to machinery and tools!

My suggested modification to the above adage, from a cash lens (and not cost or profit lens):
Inventory is an asset…only if it were to sell it … SLOB is not an asset!

To most functions, Inventory provides comfort and insurance. It is safe to have a little more, also aptly called “safety stock”. Changing Inventory levels is a bellwether of the entire supply chain, it represents the responsiveness, agility and velocity of the Chain.

One myth to be busted is “we turn inventory x times a year” This KPI unintentionally hides the SLOB. I suggest that Inventory-turns should be seen at sub-category level, and line level.

Another interesting prevalent accounting practice is to report inventory at the quarter / year end. This comically reminds me of the Seagram’s advertisement where the 2 guys pull-in their otherwise pot bellies while riding the elevator with a young lady. Again, it does merit reporting inventory levels at more frequent intervals.

Further, let’s comprehend the cost of carrying our nemesis, Mr SLOB.

The cost of carrying inventory has more than what meets the eye; it includes:

  • Warehouse expenses (2 to 4%)
  • Handling costs (2 to 5%)
  • Insurance costs (1 to 3%)
  • Inventory control/ management (3 to 5%)
  • Obsolescence (6 to 12%)
  • Shrinkage/ pilferage (3 to 6%)
  • Opportunity cost of the capital (6 to 12%)

Preact as if there is no carpet!

Warehouses are not carpet under which Mr. SLOB should be allowed to hide.

Our warehouses are playing the role of lean, agile mini-factories that process sales orders with an ever higher degree of customization and speed. These are the most critical node in the value chain that connects to the customers, where the ownership of goods actually changes hands and revenue is realized.

These depots should not be decelerated (pulled down) by non-moving stocks (own or freebies). Instead, we need to care and do regular “inventory servicing” to keep the depot machinery working smoothly.

History will keep repeating until the lesson is learned… learn fast and nurture the future.


Note: The author is the Lead -Supply Chain CSL at Unilever. He can be contacted at [email protected]

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