“We just have to live with it,” the General Manager replied.
The GM was responding to my comment that month-end surges in sales orders were causing inefficiencies in the company’s logistics operations.
I was presenting an operations assessment report to a company that distributed name-brand computer printers and accessories. One of the key observations from my report was that the majority of sales orders (more than 50% of monthly sales) came at the end of every month.
Staff from sales, accounting, to logistics rushed deliveries to fulfil the orders and meet revenue targets. Sales personnel counted on the deliveries to achieve if not beat their quotas and benefit from incentives. Not attaining the targets and quotas was simply not acceptable.
The company is an exclusive distributor for a large name-brand supplier of printers. The supplier dictated the monthly sales targets. The supplier expected the company to meet those targets from month to month, no questions asked. Hence, the company’s General Manager said that month-end surges were something they could do nothing about. It was something they had to live with.
Many executives do not want to shift from the practice of month-end selling and delivery. “It’s not for discussion,” a consumer goods wholesale executive once told me when I said the monthly surge in deliveries was causing her firm’s transportation expenses to rise. The executive did not want to change a practice which has become so ingrained in the company’s culture.
Executives don’t dispute that month-end surges bring about inefficiencies and high costs throughout the supply chain. Surges cause stock run-outs as inventories deplete quicker than suppliers or manufacturing lines can replenish. The surges also drive up inventories of customers which result in increased product returns especially for products with limited shelf lives.
Logistics expenses increase as month-end surges strain storage and transport capacities. Some firms rent additional storage to stockpile products in anticipation of sales surges. Transport providers tend to sub-contract additional trucks to ensure there are enough vehicles to meet the demand. Both the additional storage and transport capacities result in higher delivered costs for products.
Month-end surges are sometimes coupled with periodic sales promotions and price changes which fuel more spikes in orders and delivery volumes. Surges thus cause a “bullwhip” effect in which the up-and-down delivery volumes and resulting peaks and valleys in inventories amplify speculations throughout the supply chain.
Executives are reluctant to move away from month-end surges because they fear lower sales will result. They are afraid shifting from month-end sales would cause a decrease in revenue which they can ill afford in organizations that especially measure performance by monthly targets.
Moving from month-end sales to just deliveries driven by demand is common-sense logical. It’s just not accepted given the anxiety it would cause among executives. In a demand-driven supply chain, one delivers only what and when it is needed. The fear is the demand and the subsequent sales might not be up to par with immediate targets.
A downturn in sales would indeed be expected as customers would exhaust overstocked inventories from any previous surge. In succeeding months, demand would pick up and sales would average closer to what would have been with month-end surges. But executives would have to have faith that that will happen and executives don’t like to count on faith.
Stakeholders in many companies measure executives via short-term targets. Stakeholders want to see continuous growth in their company’s finances especially if they expect dividends and bonuses every year. Creditors, such as banks who provide loans, also want to see continuous short-term gains to assure themselves that they will be paid the interest and principal of what they lent.
The month-end surge is a manifestation of short-term thinking. Shifting from the month-end surge requires changing one’s mindset from short-term to long-term management.
When delivering only what is needed and when it is needed, all functions of the organization have to work closely together. Sales needs to forecast future demand from the grass-roots level or from the end-user, whether that be the customer or the customer’s customers. Marketing would support sales where it sees demand is lacking or where there is potential.
The supply chain from logistics, manufacturing, and procurement would have to build in a capable system and structure to anticipate the demand. Sales, Marketing, and the Supply Chain, most of all, would need to communicate and come out with a consensus of action every time they review actual and forecasted demand.
Attaining higher sales is not a product of individual sales persons or a result of incentives for just one group. It is the product of teamwork. Any challenge in fulfilling demand and achieving targets can be met if the organization works as a team.
And isn’t that what organizations are supposed to be doing in the first place?