Earlier this year, when I interviewed Steve Dallman, general manager of Intel’s worldwide channel organization, during his visit to India, the visiting bigwig announced the chipmaker’s new initiative towards faster logistic movement. The announcement was as much a boon for the channel as it appeared lucrative for the distributors.
He had said that Intel would introduce a mechanism to ensure quicker delivery of shipment. Under this arrangement, its products would reach partners in B and C class cities faster than they usually do. Multiple hubs to pick up shipment are aimed at giving a boost to the entire business paradigm in the chain.
An effective and smooth supply chain is critical to the success and survival of IT distributors and sub-distributors.
The logistics control can easily cost a company almost 30 to 40% of its sales. This only underlines the significance of efficient logistic management with faster turnaround time for moving products from the vendor to the consumer. But we must note that as much as 70% of the inventory management decision and control vests with the vendors.
The partners also come under pressure from the vendors to meet the set targets and get lured by the schemes rolled out by them only to liquidate the stocks.
A key issue faced by many, both at the distributor- and partner-level is ‘dumping of stocks’. Sub-distributors often experience the brunt as vendors lure them to liquidate stocks by rolling out ’schemes’ – which may be typically based on unrealistic targets.
Many sub-distributors and regional distributors lose huge sums of money owing to such dumping of stocks. The reason, channels say, is that the sub-distributors lack the time to plan inventory, as the focus on sales alone.
Another way in which control by vendors affects the disties is that they often require the latter to maintain large upfront stocks. Many vendors, without having the relevant experience, come out with a model that makes the distributors carry huge upfront stocks; which is then pushed down the channel often causing inventory pile-ups along the chain.
The ability to accurately forecast demand and devise stock-carrying plans for distributors varies from vendor to vendor and affects the channel down the line. Most vendors are at various stages of experimenting with their inventory management systems to iron out stock buildups and help manage their channels more efficiently.
But partners, especially in the smaller cities, are faced with the predicament of cost implications with ERP operations. “We are caught mid-way where we cannot go for an expensive system like an ERP and also cannot operate at the entry level of manually managing inventory,” laments Indore-based Sanjeev Sharma of Veltronics.
But in this context, my argument is that as entrepreneurs, you need to take a more realistic approach vis- -vis the money you pump in and the return on investments. Somewhere down the line, you have to balance between acquiring an “expensive tool” like an ERP and moving beyond the traditional manually managing the problems. As you engage in new avenues of business, you must be alert to reduce the threat of pressing issues and cumbersome processes in logistic management and also unwarranted payment default and delay.
It is not that vendors don’t acknowledge the problems faced by the channel. A few vendors recommend a constant value chain restructuring to optimize the business processes in terms of supply chain as well as hope to achieve improvement in forecasting by establishing the use of demand management systems. Among other issues, the payment terms on channel, incomplete form of VAT, and availability of parts are some of the issues that inventory management poses before the channel.
The frequent downward trend of revision in prices, technology transition and periodic rollout of new product lines and product enhancements adversely affect logistic planning.
My perception is that, while there are problems – blame giving and responsibility shifting cannot be a good approach to overcome these hurdles.
There are a few remedies in the hands of the industry to tackle factors such as VAT and tech obsolescence, in the ultimate the vendors, disties and channels need to work out ways and means to reduce inventory time and become more efficient in their operations.
Usually, vendors advise monthly tracking of inventory while emphasizing the need to spread out sales across the entire month in order to avoid bottlenecks toward the end of each month.
Then there are some vendors who even track the secondary sales movement of products; from disty to reseller or end-customer to understand the real-time demand. Some companies also encourage partners to buy products every 10 days to avoid any month-end or quarter-end stocking. Besides, this encourages a constant pricing strategy rather than get into any price fluctuations that may affect inventory.
All said, with regard to what the turnover goals should be, products with higher gross margins can be turned around fewer number of times compared to those with lower margins. If the inventory levels tend to fluctuate throughout the month, the channels need to calculate the total inventory value on the first and the 15th of every month to attain better results. Therefore, following the best practices in operations, better sales forecasting and taking into consideration the volume-versus-value equation, the channels can certainly make their inventory management more efficient and thus improve their margins considerably.