Theory of Constraints Handbook - James Cox Iii [370]
Handled correctly, shorter product life is an excellent opportunity to enhance everyone’s sales and profits. However, attempts at optimizing cost encourage mountains of unneeded inventory in the supply chain while simultaneously perpetuating shortages.
The TOC strategy for distribution and retail increases Throughput of the entire supply chain in at least six different ways (described in the next section). Often, the potential impact on business volume and profits is greater from Throughput increases than from reductions in Inventory. Thank goodness, the distribution solution does not force a choice—increased turns, increased Throughput, and decreased Inventory occur from the same holistic approach.
The S&T free viewer, described previously, should now be used to view the consumer goods S&T.
The Current Supply Chain Frame of Reference
To understand what determines a good strategy for distribution and retail of consumer goods, it’s critical first to understand traditional practices. Driven by local optima, manufacturers push inventory into the distribution channel as soon as it’s produced. Cost accounting rewards them in the short term by reporting the inventory movement as sales and profits on their books, even though no consumer has bought the products.
The Inventory has moved from the manufacturer’s docks to the distributor’s warehouse. The longer the Inventory sits in the distributor’s warehouse, the higher the risk of obsolescence, the greater the carrying costs for the distributor, and therefore the lower that distributor’s profits. For the distributor, profit is directly tied to the number of times they can turn the Inventory. Therefore, the manufacturer, the distributor, and each subsequent link keep pushing the inventory until it reaches the retail shops (if this link exists) or the end consumer level.
In this paradigm, much or most of the Inventory sits at the retail level, while little or no Inventory is at the manufacturer’s plants. At the same time, customers who visit a retail shop often cannot find the specific item for which they’re looking.
Why do some retailers carry so much Inventory if it just sits in their store much of the time? Why do they tolerate costly obsolescence and high carrying costs and still have customers walk out of their shops without the desired goods in hand? To answer this question, consider common manufacturer and distributor practices.
Many manufacturers and distributors offer quantity discounts, on a per-order basis. In addition, many of these same manufacturers and distributors have freight policies and charges that penalize the retailer for smaller orders. Since most retailers compete with other shops close by selling similar goods, the retailer needs a similar cost basis to stay competitive in price and margins. Therefore, retailers place large orders with manufacturers (for much more than is needed to satisfy short-term demand) in order to gain better per-order discounts. As a result, retailers have much larger quantities of goods on hand than they need to cover immediate consumer demand and replenishment time. With this inventory on hand, even as consumer tastes are changing or as manufacturers replace existing products with new products, retailers are pushing their existing inventory on the consumer. You can see this phenomenon in the car market, computers, cell phones, etc.
Knowing the new product is coming, the retailers rush to get rid of the old products at fire sale prices or with special deals, anxious to avoid obsolescence. By doing these mass promotions, the retailers kill the market