Executive Briefings

Collaborative Inventory Practices Yield Market Advantage

AMR Research recently shared insights into building collaborative practices as a necessary base on which to develop sustainable long-term relationships. This article tells the story of how a high-tech OEM experienced business breakthroughs with partners through an innovative view of its network by addressing cultural barriers and internal alignment as well as launching smart deployments of technology.

A major electronics product company used its local-geography business executives and relationships, a sound collaboration model, and a business case proven via an extensive pilot to enable a global network of collaboration methodologies for inventory management and product fulfillment and replenishment. This enterprise-based effort required a global team with executive involvement and assistance from its technology partner, Infosys. This is an ongoing initiative.

The need to change was brought on by product unavailability across all major regions. After further analysis, the company identified the following problems with its traditional multi-tier and multichannel distribution network:

1. Lack of coordination across wholesale and retail tiers created excess inventory and limited visibility and led to stockouts and delays.
2. Lack of consistency in planning collaboration with major customers, such as distributors and retailers, meant inefficient product allocation.
3. Distribution processes were not flexible enough to handle the market share growth of a couple hit products, leading to high incidents of product stockouts.

The stockouts of high-demand products created a secondary wave of demand. About one-third of the time, a consumer's initial interest in Product A could be converted into a sale of Product B from the same brand at the same point or another point of purchase. This resulted in channel conflict and added distribution and replenishment complexity.

To address these issues, the OEM designed and built a set of collaborative processes for inventory management, planning, and replenishment based on the following:

Effective use of collaborative planning, forecasting, and replenishment (CPFR) processes and tools--The OEM provided baseline data and anchored the distribution network to customer demand.

Enabling cost-neutral vendor-managed inventory (VMI) for key customers--Working with the third-party logistics (3PL) partners operating its warehouses, the OEM deployed consigned inventory programs with guaranteed product availability and replenishment-time service levels. To mitigate costs, it charged customers nominal fees for the improved replenishment and service levels.

Eliminating network tiers and transactions--In markets with three or four distribution tiers, the OEM realigned its distributor relationships based on where the end users were getting their products and worked backwards, with the goal of cutting out layers in the network and reducing delivery time.

Utilizing direct store delivery--The company used its logistics partners for transporting and positioning inventory more efficiently than distributors, which, in some cases, were doing little more than moving boxes.
This sounds simple on paper, but it required a substantial investment in resources and a smart deployment approach.

Bringing in external assistance: The OEM created an internal cross-functional team, but to augment this team with project management, change management, consulting, analytical, and technical skills, a partner was required.
Infosys was selected and assisted in the following:

1. Designing the strategy and execution approach for on-boarding channel partners via new business-to-business (B2B) integrations and collaborative processes
2. Implementing through enabling several partners around the world with on-boarding
3. Capturing business metrics to document improvements post adoption of the new collaborative processes

As the application was deployed across the regions and users became more self-sufficient, the OEM was able to on-board more channel partners by itself because of the effective knowledge transfer by the Infosys team.

Implementing in a pilot region to build the business case: Although its collaboration model was sound, the OEM realized that, in order to gain the buy-in of the large, powerful retailers in markets such as the United States and Europe, it needed to deploy the application in smaller markets first, prove the results, and then build the business case.

The program was initially deployed in a few markets where deployment costs and risk were small in order to demonstrate the scalability and feasibility. In Taiwan, results after a few weeks included the following:

1. Decrease in stockouts from roughly 40% to less than 1%
2. Corresponding 40% increase in sales during the period
3. 2% increase in market share (part of retailer decisions on shelf allocation in exchange for accepting retail direct orders)
4. 1% increase in net-per-unit sales price (after discounts), based on increase related to nominal fees for improved service levels
5. Potential for achieving tens of millions of annualized net gains for the OEM

These results were difficult to ignore and helped with buy-in and deployment in other regions, but there was still a lot of work needed, both internally and externally.

Next step: broader deployment of collaborative processes: After the early successes, the OEM faced the real challenge of convincing the majority of its large channel partners and customers to adopt the new collaborative measures. Here was the OEM's approach:

Planning for the internal sale--As important as getting the supply chain aligned on these changes, the OEM had to convince internal management to approve the next wave of funding to broadly deploy the initiatives, as well as secure enough financing for extensive internal education and change management. These efforts would enable a globally consistent approach to short-term planning and execution for distribution and replenishment.

Using existing points of contact--This was done within the sales teams that handled executive relationships with each major channel partner.

Relying on the proof points--The OEM used the early success in Taiwan as proof points to broadly evangelize the benefits of the application.

Identifying the need for change to all parties--The OEM was transparent about the fact that shifts in its own product mix, goals for market penetration and share growth, and underlying global demand patterns were all contributing to its desire to revamp channel agreements, including elimination of distributor tiers and getting closer to end consumers where possible.

Soliciting other parties in a given distribution chain for support--This included the 3PLs, which stood to benefit from being hired to enable VMI or forward inventory positioning each time, and the retailers, which were starving for products.

Diving into the details--Working with each large channel partner and customer, the OEM developed a detailed business case and laid out a plan for rapid, simple process and technology on-boarding.

Using the "carrot and stick"--The OEM was able to use the popularity of its hot products in cases where channel partners were reluctant to adopt the distribution and changed replenishment processes. This sent a clear signal to the channel partners that ones adopting the new model would get allocation preference.

The approach taken by the OEM highlights a number of best practices we see that ensure successful deployment of collaborative processes and tools:

1. Identify the burning platform on which the efforts will be focused. This helps gain the commitment necessary and keeps the momentum going.
2. Ensure metrics and incentives are aligned and will drive the right behavior.
3. Get executive management involvement and buy-in.
4. Use a structured program approach with sufficient resources by building an internal cross-functional team supplemented by external resources.
5. Take a holistic view of the multi-tier network and redefine where needed, reducing layers, in collaboration with partners.
6. Start with a pilot to prove both the benefits and that you forecasting is better than your customers.
7. Focus on building long-term relationships based on trust, understanding that a cultural shift is needed internally and externally.
8. Implement the necessary architecture and technologies to support the program and data requirements.
I look forward to hearing about your collaborative efforts: jbarrett@amrresearch.com
http://www.amrresearch.com

AMR Research recently shared insights into building collaborative practices as a necessary base on which to develop sustainable long-term relationships. This article tells the story of how a high-tech OEM experienced business breakthroughs with partners through an innovative view of its network by addressing cultural barriers and internal alignment as well as launching smart deployments of technology.

A major electronics product company used its local-geography business executives and relationships, a sound collaboration model, and a business case proven via an extensive pilot to enable a global network of collaboration methodologies for inventory management and product fulfillment and replenishment. This enterprise-based effort required a global team with executive involvement and assistance from its technology partner, Infosys. This is an ongoing initiative.

The need to change was brought on by product unavailability across all major regions. After further analysis, the company identified the following problems with its traditional multi-tier and multichannel distribution network:

1. Lack of coordination across wholesale and retail tiers created excess inventory and limited visibility and led to stockouts and delays.
2. Lack of consistency in planning collaboration with major customers, such as distributors and retailers, meant inefficient product allocation.
3. Distribution processes were not flexible enough to handle the market share growth of a couple hit products, leading to high incidents of product stockouts.

The stockouts of high-demand products created a secondary wave of demand. About one-third of the time, a consumer's initial interest in Product A could be converted into a sale of Product B from the same brand at the same point or another point of purchase. This resulted in channel conflict and added distribution and replenishment complexity.

To address these issues, the OEM designed and built a set of collaborative processes for inventory management, planning, and replenishment based on the following:

Effective use of collaborative planning, forecasting, and replenishment (CPFR) processes and tools--The OEM provided baseline data and anchored the distribution network to customer demand.

Enabling cost-neutral vendor-managed inventory (VMI) for key customers--Working with the third-party logistics (3PL) partners operating its warehouses, the OEM deployed consigned inventory programs with guaranteed product availability and replenishment-time service levels. To mitigate costs, it charged customers nominal fees for the improved replenishment and service levels.

Eliminating network tiers and transactions--In markets with three or four distribution tiers, the OEM realigned its distributor relationships based on where the end users were getting their products and worked backwards, with the goal of cutting out layers in the network and reducing delivery time.

Utilizing direct store delivery--The company used its logistics partners for transporting and positioning inventory more efficiently than distributors, which, in some cases, were doing little more than moving boxes.
This sounds simple on paper, but it required a substantial investment in resources and a smart deployment approach.

Bringing in external assistance: The OEM created an internal cross-functional team, but to augment this team with project management, change management, consulting, analytical, and technical skills, a partner was required.
Infosys was selected and assisted in the following:

1. Designing the strategy and execution approach for on-boarding channel partners via new business-to-business (B2B) integrations and collaborative processes
2. Implementing through enabling several partners around the world with on-boarding
3. Capturing business metrics to document improvements post adoption of the new collaborative processes

As the application was deployed across the regions and users became more self-sufficient, the OEM was able to on-board more channel partners by itself because of the effective knowledge transfer by the Infosys team.

Implementing in a pilot region to build the business case: Although its collaboration model was sound, the OEM realized that, in order to gain the buy-in of the large, powerful retailers in markets such as the United States and Europe, it needed to deploy the application in smaller markets first, prove the results, and then build the business case.

The program was initially deployed in a few markets where deployment costs and risk were small in order to demonstrate the scalability and feasibility. In Taiwan, results after a few weeks included the following:

1. Decrease in stockouts from roughly 40% to less than 1%
2. Corresponding 40% increase in sales during the period
3. 2% increase in market share (part of retailer decisions on shelf allocation in exchange for accepting retail direct orders)
4. 1% increase in net-per-unit sales price (after discounts), based on increase related to nominal fees for improved service levels
5. Potential for achieving tens of millions of annualized net gains for the OEM

These results were difficult to ignore and helped with buy-in and deployment in other regions, but there was still a lot of work needed, both internally and externally.

Next step: broader deployment of collaborative processes: After the early successes, the OEM faced the real challenge of convincing the majority of its large channel partners and customers to adopt the new collaborative measures. Here was the OEM's approach:

Planning for the internal sale--As important as getting the supply chain aligned on these changes, the OEM had to convince internal management to approve the next wave of funding to broadly deploy the initiatives, as well as secure enough financing for extensive internal education and change management. These efforts would enable a globally consistent approach to short-term planning and execution for distribution and replenishment.

Using existing points of contact--This was done within the sales teams that handled executive relationships with each major channel partner.

Relying on the proof points--The OEM used the early success in Taiwan as proof points to broadly evangelize the benefits of the application.

Identifying the need for change to all parties--The OEM was transparent about the fact that shifts in its own product mix, goals for market penetration and share growth, and underlying global demand patterns were all contributing to its desire to revamp channel agreements, including elimination of distributor tiers and getting closer to end consumers where possible.

Soliciting other parties in a given distribution chain for support--This included the 3PLs, which stood to benefit from being hired to enable VMI or forward inventory positioning each time, and the retailers, which were starving for products.

Diving into the details--Working with each large channel partner and customer, the OEM developed a detailed business case and laid out a plan for rapid, simple process and technology on-boarding.

Using the "carrot and stick"--The OEM was able to use the popularity of its hot products in cases where channel partners were reluctant to adopt the distribution and changed replenishment processes. This sent a clear signal to the channel partners that ones adopting the new model would get allocation preference.

The approach taken by the OEM highlights a number of best practices we see that ensure successful deployment of collaborative processes and tools:

1. Identify the burning platform on which the efforts will be focused. This helps gain the commitment necessary and keeps the momentum going.
2. Ensure metrics and incentives are aligned and will drive the right behavior.
3. Get executive management involvement and buy-in.
4. Use a structured program approach with sufficient resources by building an internal cross-functional team supplemented by external resources.
5. Take a holistic view of the multi-tier network and redefine where needed, reducing layers, in collaboration with partners.
6. Start with a pilot to prove both the benefits and that you forecasting is better than your customers.
7. Focus on building long-term relationships based on trust, understanding that a cultural shift is needed internally and externally.
8. Implement the necessary architecture and technologies to support the program and data requirements.
I look forward to hearing about your collaborative efforts: jbarrett@amrresearch.com
http://www.amrresearch.com