Straightening the hockey stick

Distribution companies have monthly sales targets to meet. Ideally, these companies should be marching rapidly towards the target. In reality, they merely inch towards it in the first three weeks and make a dash for it in the last week. About 40% of the sales target is conquered in the last week of the month. The first, second and third weeks see sales touching 10%, 20% and 30% respectively, give or take a few points. This trend is so widespread and common that it even has a name – the hockey stick sales syndrome. Companies not only accept the “hockey stick” as part of their reality, they also align internal processes, measurements in operations, distribution and sales practices to accommodate and reinforce it.
 
The uneven sales pattern and the syndrome might seem innocuous as, despite the skew, companies do manage to meet the sales targets at the end of the month. The negative effects of the syndrome, however, are plenty and should not be ignored.

• Production plans are aligned with monthly sales plans. As 40% of the sales happens in the last week of the month, the production team has to make available the required huge quantities in the regional warehouses/CFAs before this crucial week. The plant overworks to fulfil this need, ignoring fresh requests for additional quantities. These requests come from distributors or regional warehouses that can exceed the forecasted sales. This is good news, and plants should more than welcome such requests. But they are unable to do because their capacities are booked, thanks to the “hockey stick” syndrome.  So, the additional demand goes unfulfilled, the additional quantities don’t make it to the retail counters. The company loses sales, and, possibly, customers who could switch to other brands

• Often, regional warehouses run out of stocks. When distributors ask for items which are stocked out, sales people at the warehouses push whatever is available onto the distributors. This increases the level of inventory held by the distributors and, at the same time, locks up their capital in slow moving inventory. As a result, they are unable to buy fresh stock for the next month. This further aggravates the problem of unavailability which exacerbates the sales loss. Companies do, from time to time, relax the credit limits of such distributors to facilitate the movement of stocks. If they do so, companies lose out some more.

• Faced with shortage of capital, distributors become wary of giving credit to retailers. They are forced to supply to only those retailers who can make payments promptly and quickly. Retailers who fail to do so lose favour with the distributors. These retailers, who are ill-serviced, are unable to serve their customers who in turn could switch to competitor brands. If they have a good experience with the alternative brand, they might continue with it, even recommend it to others. This is how companies can rapidly lose customers and market share.

• Distributors can sink so deep into this mess that they need the company’s help to come out. However, such help from salespeople is not always forthcoming. Labelling the distributors as ‘incapable’ or ‘underperformers,’ the salespeople go on to appoint more distributors.

• To ensure that all the SKUs are available throughout the month and not just after the last week of the month when 40% of the stocks arrive, distributors have to hoard at least 45-60 days of stocks. In this scenario, they are unable to accommodate, at short notice, any new products that the company might introduce. To protect its interests, the company has to aid distributors in liquidating current stock with discounts. If the company doesn’t stretch out a helping hand, distributors end up with obsolete or near-dead stock. Their ability to buy more stock weakens further, and the company loses out on sales.

• As mentioned earlier, the hockey stick syndrome dictates that production happens in large batches. This means large quantities of raw material are procured; WIP on the floor is also high. The regional warehouses too are hoarding stocks. The plant, along with the distribution points, has to store more than 45-60 days of stock

Clearly, the syndrome is not good for business. When consumption doesn’t spike at the end of the month, why should sales hit 40% in the last week of the month? How can the stick be straightened?

Companies need to change the way they do sales, distribution, production and procurement. The efficiency of each entity should not be measured in isolation but in relation to the overall success of the company.

Releasing distributors’ capital can do wonders for boosting sales. This can be done through reducing inventory by 50%. At the same time, availability has to be maintained at 100%. With more cash in their pockets, distributors are able to buy a variety of SKUs. As availability at retail counters improves, sales will grow, too. The entire distribution network can bid adieu to the hockey stick for good.
'Power of Availability Theory of Constraints – Vector Consulting Group https://www.vectorconsulting.in/

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About the Author: Puneet Kulraj is the Founding Direcor, Vector Consulting Group and has a career spanning 23 years in Sales, Product Management, Project Management and Consulting of which 9 years has been in TOC consulting. He carries rich and varied experience in project execution across a wide range of industries. He has pioneered the application of TOC Sales and Distribution Solution in the Indian environment and has been a distinguished speaker at International TOC Conferences. Author of numerous articles in TOC Journals he also is a Guest Faculty at premier B-Schools