Managing in an environment of vendor short fills

Indian retail industry contributes to almost one-third of the country’s GDP. However, this industry is dominated by single-store businesses. Some such businesses occupy as little space as 10 sq. ft (your local pan dabba!). These businesses are widely spread and usually serviced by wholesale distributors. The wholesale distributors, in turn, purchase in bulk from branded consumer goods companies. This arrangement essentially dilutes the power of the ‘last mile’.

However, in recent decades, the emergence of organized multi-store businesses is challenging this status-quo. These organized retailers hold the absolute power of the last mile in most developed retail markets like US and Europe. This power translates into heavier pressure on costs driving down the overall prices to the consumer.

This is not happening in India, as yet, mainly because organized retail is not a large part of the Indian retail industry. We still have a seller’s market of sorts. Brands are the main driver of sales. All this creates an environment where short filling on a retailer’s order becomes ‘chalta hai’ (‘short filling’ means providing lesser than the quantity request on an order).

The key reason for this short-sight is the relative low contribution to revenue (revenue share) from any single organized retailer to the revenues of a top-brand consumer goods company (see diagram above). However, there are contract manufacturers who enjoy economies of scale (given today’s more efficient production technology).

Some retailers source private brands (goods which are branded by retailer) from such contract manufacturers. There are chances that a retailer could, in the best case scenario, end up with a significant revenue share of the contract manufacturer. This significant share ensures service discipline. However, the path to resolving short-fills is not just hiring a contract manufacturer. It is a path that is part of a roadmap introduced below.

The path to lower vendor short-fills is given in steps five thru seven above. It starts from building a base on contract manufacturers. This base would not give immediate benefits but as the relation matures over time, the retailer might have enough volumes to launch private brands across various products lines and across larger store space.

Some retailers in India, even today, handle most of their logistics through a manual or an automated system. Optimization technologies, if configured suitably, can help recommend more optimal solutions than a human can ever produce. These technologies don’t necessarily replace humans. They simply let human’s do more high-end tasks.

An unconventional step to manage vendor short fills is to use forecasting software to predict short-fills and late-deliveries. These predications could be later used to alter purchase orders. Though humans can do this too, systems can calculate to a precise level not just across key items but across all sub-items considering the various factors that might affect the consumer goods company – high-sales season, patterns in scheduled and unscheduled maintenance, new product introductions, etc.

(Dheeraj Akula is Consultant, JDA Software Group. The views expressed in this article are the views of the author and do not necessarily reflect the views or policies of CIOL)