"The Power of Availability: Doubling/ tripling your profits without additional investment!"
In retail companies dealing with personal care, house hold products, fashion products etc, the usual tirade by Sales to increase sales emphasises the need for better product, lower prices, more spend in marketing / awareness, more trade schemes or credit increase to distributors. Interestingly all these require additional investment and are in the responsibility areas of other functions.
Surprisingly companies, whose market shares are less than 15%, project a sales growth very close to the market growth. Why not more than double the rate of market growth? The reasons provided usually include 'There is no more demand for our product' and that trying to create this demand requires a huge investment (as stated in the above para) which will make the initiative unprofitable.
'There is no more demand for our product'- then how come the market share is 15%? It should have been over 80%. Somebody else is selling the rest 85% hence demand is not the issue.
Can a company increase sales substantially without additional investment? One of the most attractive options is to address lost sales due to unavailability at the retail shops. Obviously one needs to check if the lost sales are substantial and if they can be addressed without additional investment.
Consider case of a company with more than 50 SKUs, and market shares less than 20% and good acceptable competitive quality product. Most well known FMCG and fashion product companies would fall in this category.
The extent of lost sales in any area can be estimated to very close to the stock-outs in the supplying warehouse such as a distributor. The check is very simple-take the snapshot of stocks at times spread across 2-3 months and compare the same with the products that the company has in its range and those sold by all other competitors in the area (and not with what Sales indicates as the saleable range). The snapshot will indicate random stock-outs and range thinner than that held by the company. You can draw your conclusions of the potential lost sales.
But the lost sales is much higher that this first indication! The chances of retailer not pushing other brand in case the company's product is not available are very low. The potential loss for him is not only the sales loss for this product but the whole shopping list of the customer if the customer decides to switch shop. Obviously he cannot afford such a loss and hence will push hard other brands. Such lost sales are not reported by the retailer as he did not lose sales. The damage is catastrophic if the unavailable SKU is priced higher than its competitors. If the customer believes the influencer (retailer) and has a good experience, he has discovered a lower priced product with the same quality/ taste/ experience. Word of mouth will further increase this damage.
What about the shops which do not carry the company's products at all? Not all companies have distributors to cover the whole universe of potential shops.
If the forecasted quantity is sold earlier, in say 15 days, instead of the month, Sales declares either 'sold out' or forecast met. The flip side is that sales lost are nearly 100% for the period, as the rate of sales has increased.
The common approach adopted by companies to avoid this lost sales is to 'dump' distributors and retailers with very high stocks. It also serves the purpose of 'locking the capital' of these entities to prevent him from buying other brands.
This approach further increases unavailability and lost sales!!!
Forecasts can never be accurate. With the dumping and forecasts rarely being accurate the distributors/ retailers' capital gets locked in the higher than required stocks of few SKUs. Resultantly, he does not have cash to buy the stocked out SKUs (indicated by the usual pleas for allowing credit limits overruns or stoppages of supply due to high over due). The stocked out SKUs are items which sell, and SKUs which sell are fast movers!!! We have already discussed the huge damage of random stock-outs at the retail stores.
These forecasts are converted to monthly production plans. Plants produce in large batches to achieve the highest productivity. With the pressure to dispose the finished goods produced as fast as possible, the material is allocated to sales people who predicted their requirement. The way out for sales people- Dump irrespective of the sales trend.