Leveraging POS Intelligence to Improve Retail Flow-Through

Historically, consumer product companies have focused on 'selling in' their products to the retail channel without paying adequate attention to the actual 'selling out' to the end consumer. Since typical contracts safeguard retailers against the risk of carrying inventory -through protective clauses, such as price protection and end-of-life (EOL) markdown support, they don't mind the sell-in focus and use it to their advantage during quarter-end sales pressures. In fact, most sales-incentive programs are focused on enticing retailers to buy more product from manufacturers, rather than collaboratively focusing on increasing the sellout to the end customer.

Retailers focus on maximizing sales of a particular category for the short term - spreading product lavishly across many branches to expedite sales - and are not as concerned as manufacturers are with maximizing the sales of a particular brand. With a high-demand item like the iPod, retailers will try to hoard as much product as possible, often causing shortages and lost sales elsewhere. But then, when sales of hot products drop off, or slowermoving product backs up in the retailer's pipeline, the resulting inventory carrying costs, deep discounting and diminished brand profits come out of the manufacturer's pocket. These hoard-and-discount cycles can cause a 4-6 point swing in product net profits and make the difference between a profitable product and one that incurs losses.

Specifically in the consumer electronics industry, a hot-selling product can swing to a net operating loss solely because of the liquidation costs at EOL, with the rush to flush the old version out of the retail channel so that the new version can get its shelf space. In an industry where margins and product life cycles increasingly shrink, and growth is a competitive necessity, such preventable financial and brand-equity losses are insupportable.

Clearly, brand owners need to shift their focus to what the end consumer is buying from the retailer, and point-of-sale (POS) is the best data source to affect it. Once the focus shifts away from celebrating sell-in to increasing sell-out, the attitude toward channel inventory shifts to keeping it under tight control and ensuring that it is deployed in the right place to maximize end-consumer sales opportunities. Fortunately, it is possible for brand owners to get daily insights into both the POS and store-level inventory picture because of recent advances in information technology.

When analyzed correctly and regularly, this information is highly effective, ensuring that channel inventory is deployed accurately and, most important, in uncovering hidden sales opportunities. Leading consumer product (CP) companies embrace POS to drive their supply chains by making both short-term and long-term decisions based on consumer behavior rather than on what the retail buyer is planning to order.

Using POS Effectively
Many of these CP thought leaders have developed competencies around POS that enable them to make better decisions about inventory deployment and promotions than the retailer can. For example, typical brand owners have multiple products placed at every retailer store. Each of these products has different popularity and pull across regions and store locations. However, in most cases, retailers deploy the same mix of products to every region, leading to simultaneous stock-outs and overstocks, unless the brand owner intervenes, based on insights provided by POS.

A brand owner recently saw store availability jump from 70 to 95 percent by closely monitoring POS and inventory deployment and, at the same time, lowering the overall inventory at the retailer. The manufacturer increased operating margins and sales, thereby lifting the company to tier-one status with the retailer. The clincher in this case was the brand owner's ability to point out that the retailer's abysmal sales - despite a hot market and a channel flush with inventory - resulted from the stores displaying the older version of their best-selling product, which was obviously out of stock. Simply resetting the store displays with the new version increased the sales in the market by 500 percent - a win-win scenario for both the brand owner and the retailer.

Brand owners are increasingly focusing on creating competencies around POS and taking charge of the execution of their brands in the retail channel for increased sales and margins. Retailers too, are more open than ever to sharing daily POS information with brand owners as they see the advantages in a mutually beneficial partnership. Wal-Mart's RetaiLink is a classic example of a big-box retailer encouraging brand owners to take an active part in inventory management and monitoring sales execution in the retail stores.

Retail Channel Management Models
In the past few years, multiple successful models of a mutually beneficial relationship centered on brand owners playing an active part in retail channel management have emerged. Among them are:

1. The aggressive consignment model, where the brand owner takes financial ownership of the inventory in the channel and accepts payments only at POS. In return, the retailer lets the brand owner control the movement of goods and gives additional benefits, such as increased price and better shelf space, to account for the enhanced cash flow and reduction in working capital. Such relationships require extensive contract renegotiations and may not be feasible for every retailer/brand-owner relationship.

2. The brand owner only takes ownership of managing the inventory within agreed-upon parameters, without any changes to the financial contracts. The retailer in such relationships monitors the overall service-level performance, but the manufacturer controls the movement and placement of goods. Typically, such models work well for commodity products that are not of strategic focus for the retailer, and for brand owners with significant clout with the retailer.

3. In an enhanced CPFR (collaborative planning, forecasting and replenishment) model, the brand owner shares insights derived from analysis of POS data to influence the forecast signal and deployment of inventory. More important, the brand owner also points out opportunities for increased sales through targeted promotions. This is a significant departure from traditional CPFR, where the focus is primarily on order collaboration - heavily influenced by the brand owner's focus on achieving a quarterly sell-in goal. When the brand owner enters a CPFR discussion with clear, operational insights derived from a systematic analysis of the POS data, the discussion turns into a lively exchange of ideas aimed at increasing the sell-out while keeping inventory under tight control.

Developing POS Competency
The shift in focus to sell-out requires brand owners to systematically develop competencies around POS in order to have meaningful impact on sell-out and channel inventory. Integrating clean POS data within an array of cutting edge, exception-based, demand-sensing and planning tools and services now makes it possible for manufacturers to stay in tune with changing consumer preferences and to ensure that their supply chain is directly aligned with the market at all times. Daily visibility and analysis by SKU and by store are fundamental to optimizing shelf inventory by individual store demand. Analysis of POS data at the store level enables replenishment teams to preemptively address potential stock-outs and act upon sudden local bursts of demand by quickly diverting the flow of goods to the high-selling regions.

Developing rich analytics capability at the store/SKU level not only enables quick reaction to changes but also creates a broad, root-cause analysis framework to understand the underlying market forces that are causing the change from expected patterns. The framework can help identify shifts in consumer references toward the product mix or the effect of a competitor introducing a new product or making a price move. Also, the framework can provide the necessary breathing room to counter a negative trend or take advantage of a positive one before it is too late to react.

By developing process playbooks that map trends in POS performance to a library of possible root causes, brand owners can take surgical, demand-shaping actions at a region/SKU level to ensure optimal spend of their promotions budget and prevent localized problems from becoming broad trends. While POS data can be instrumental in optimizing the performance in the retail channel, such data also provide significant advantages to the brand owners to manage their own supply chain. The problems posed by low-mix accuracy in short-life-cycle product supply chains are well known. The problem only worsens when procurement and capacity allocation decisions are made based on forecasts derived from historical sell-in signals that do not reflect current market reality and incorporate multiple levels of bias.

Fresh POS data, on the other hand, represent consumer preferences on a daily basis. When coupled with syndicated market data, POS provides a far more accurate forecast signal and mix accuracy.

The Managed Services Approach
Moving to a POS-driven supply chain may seem daunting at the beginning, starting with the immediate concern about the validity and cleanliness of the POS data. Many brand owners receive regular feeds of POS data but do very little with the data, due to either skepticism about quality or the lack of a clear approach for deriving meaningful insights from the data. Most companies lack an internal POS competency, resulting in the data at best being collated into reports, without any operational plan associated with it. To get over the adoption hump, many companies are taking a managed services approach, working with partners to develop a POS competency that can be integrated into the organization in the long term.

Finally, new-generation demand sensing and forecasting solutions not only reduce inventories and markdowns, prevent stock-outs and increase sales; they lift the focus to a higher strategic level. Streamlining operational processes and enabling end-to-end visibility along the entire supply chain enable what happens at the store shelf to align more closely with corporate goals. These actions also result in a better end-customer shopping experience, thus reinforcing customer brand loyalty - no small dividend.
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