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- Summary
- Top Tips
- Explanation of topic
- Weaknesses Identified
- Best Practices
Summary
Promotions can be challenging for manufacturers in that they often put significant pressure on factories which either need produce large amounts of stock up-front or be flexible in response to sharp sales uplifts.
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Promotions put pressure on factories |
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In an ideal world, the manufacturer would just produce a large amount of stock prior to the start of the promotion and then deliver once the orders are received from the customer. In reality, however, things are not that simple. Many FMCG food products have got short shelf lives and shoppers want to buy product that is as fresh as possible. Promotions can therefore increase the risk of product wastage. Even for long shelf-life products, manufacturers are under pressure to reduce working capital by improving forecast accuracy.
Very few manufacturers are willing to compromise either of these two targets by producing excessive stocks in anticipation of promotional demand. The key for success is collaborative forecasting with both the retailers and the manufacturers working closely together to jointly forecast potential promotional uplifts. [see Forecasting]
Top Tips
- Collaborative working to understand each customer’s needs and expectations. An agreed plan of promotional execution and contingency.
- Understand lead times and responsive action required if volumes deviate from forecasts.
- Monitor volumes daily prior, during and post promotion.
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Explanation of topic
In actual fact, promotions can be both a challenge and an opportunity to a factory manager. The bigger volumes and potential longer run times for a promotion can mean that the factory incurs fewer line changeovers. This could actually help the factory to achieve its production targets. The issue from a manufacturing perspective is when demand on a promotional stock keeping unit (SKU) is greater than the forecast [see Forecasting] and if the factory’s plan therefore needs to be changed in the last minute. This is particularly an issue for short shelf-life products with short delivery lead times and puts a large degree of pressure on the distribution chain [see Distribution]. It may also result in significant waste, when production continues to match demand that is no longer there due to the time lag between the availability of EPOS data and orders on the factory.
Things get even more complicated if a number of different SKUs are being promoted concurrently (all utilising the same production line).
Further manufacturing challenges are posed when the supplier is utilising third party manufacturing sites. These could be overseas factories, co-manufacturers or co-packers. In some instances a product on promotion could involve all of these!
Changes to the production plan also need to take in to account the lead time on packaging materials. All it takes is for just one component (e.g. the lid of a jar) to be unavailable for the whole production run to be put on hold.
A further challenge is faced when the promotion is retailer specific, or is a retailer branded product from a suppliers that makes other brands as well. Any over production cannot easily be sold by the supplier to another retailer. If production needs to be increased there is less likelihood that extra raw materials will be available.
Finally, all factories need shutdown periods for routine maintenance. This should not be a problem for product availability if the shutdown has been planned for (i.e. extra stock of the promotion has been produced). However, this is not always the case with promotions that are agreed at short notice. In the current retail environment this is becoming much more common.
Order Lead Times
The lead times from order to delivery can significantly impact the suppliers ability to respond to promotional demand. In some instances the lead times to delivery can be as few as a few hours (usually direct to store products such as bread). In these instances the supplier needs to start production with zero visibility of a provisional order forecast. This results in significant potential for waste or gaps on shelves.
Packaging Lead Times
Even when a manufacturer has the factory capacity to respond to a large promotional order he is still constrained by the level of raw materials he has in stock. These often have to be ordered well in advance. In addition some ingredients such as commodities need to be ordered months in advance and often come from far afield.
Customer Specific promotions (or Customer Brands)
These are a challenge due to the fact that the supplier may be left with stock that he cannot sell elsewhere. Although this does not directly impact OSA it is a key reason for agreeing a collaborative forecast with the retailer [see Communication & Collaboration]. The opposite situation arises when demand is so great that production capacity issues are encountered.
Promoting products that are imported, co-manufactured or co-packed
The forecast becomes even more important when the main production isn’t in the direct control of the supplier. The larger multinational suppliers are increasingly sending more production overseas so they find it difficult to respond to last minute changes to plans. The retailers may ask the suppliers to hold even more stock but these days the pressure on working capital is just as great amongst manufacturers as the retailers
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Weaknesses Identified
Short lead times put significant pressure on factories to produce without forecasts or orders
With short lead time products the manufacturer may have to start production without any visibility of the provisional forecast. The manufacturer receives the order once 70% of the promotion volume is produced. In reality the order could be significantly different to the forecast creating a waste issue for the manufacturer (this is also prevalent for lines that are not being promoted with stable historical demand). Now and then, the stores are over-reacting to daily demand and waste. This issue is also found with other manufacturers promoting products with higher shelf life. This creates a lack of confidence on retailers’ forecast and reluctance to carry extra stock necessary to cover promotion fluctuations.
Long packaging lead times make it difficult for factories to respond to changes in demand
Even when the manufacturer is able to react to high promotion demand fluctuations, the main challenge is the packaging supply that needs to be accurately forecasted a long time in advance. It is more important to get the forecasting right because these fluctuations can have a significant repercussion on promotion OSA.
Retailer branded (or customer specific) promotions require even more robust forecasting
Excessive forecasts can result in too much product which cannot be sold elsewhere. If the forecast is too low there is pressure on the manufacturer to have enough packaging and ingredients. This is obviously harder for those sku's that are retailer specific than those that can be sold to multiple customers. Even when packaging is available the manufacturer may have to put on extra shifts to get the work done – adding extra cost and complexity to the supplier.
Products with longer lead times (eg. Manufactured overseas) need greater focus. However they do not always get this
These products need clear up front forecasting as well as jointly agreed contingencies. An 8 week lead time from a factory in China will not help anyone if there are gaps on shelves. Indeed there is an argument that says should we even promote a product that has such long lead times? However, in categories such as BWS these lead times are often unavoidable.
Other weaknesses
Factory maintenance is needed on a regular basis but can sometimes negatively impact a promotion. Some countries in Europe have production shutdowns for a few weeks every summer – this needs careful planning with the retailers. There is also the rare issue of production break-downs. Also, factory personnel sometimes have KPI’s that conflict with customer service and sales and often do not understand the pressure that retailers are under or the retail strategies that are currently taking place.
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Best Practices
Increased collaboration and contingency planning
There is an opportunity for manufacturers to fully explain the production constraints they have by SKU to the retailers. This could then enable a joint approach to how to forecast “top end” and “bottom end” volumes as well as appropriate manufacturing contingencies. This collaboration will tackle ALL of the weaknesses identified above as it enables everyone in the supply chain (upstream and downstream) to have the same plan. If things do not go to plan then everyone is agreed on the contingency. [see Promotions Process]
Spare production capacity as a contingency
Most manufacturers keep some spare production capacity, up to 20% in order to be able to respond to any unexpected demand created by promotions tendency to fluctuate over the forecast. This capacity enables the manufacturers to be flexible to satisfy continuously the customers in case of demand changes, late confirmation of promotions, price alignment to competition, late mechanic change...and ensure consistent promotion OSA. However it must be noted that manufacturers need to ensure that their assets are utilised as much as possible – therefore they cannot actively keep spare capacity if an opportunity arises to make and sell more product elsewhere.
Improving factory flexibility and the factory’s understanding of retailer’s strategies
Some manufacturers have seen improvements in factory performance and flexibility after actively training them to understand the retailer’s needs. This can take the form of a "Factory Roadshow" where each factory in turn is presented with the latest information on what is happening in the trade and the need for as much flexibility as possible to be able to meet the current challenges in the retail market. In some instances retailer personnel have gone to factories to share their knowledge and requirements.
Other initiatives such as the “changeover challenge” at one manufacturer incentivises the factories to speed up the time it takes to switch from one product on a production line to another
Order verification and correction
Once there is a respectable level of collaboration and trust then it becomes possible for the manufacturer to challenge orders placed by the retailer For example, retailer systems often order significant quantities in the last week of the promotion because they are looking at the demand through the promotion. However, by the time the stock arrives in the retailer DC the promotion could be over and demand is back to its base level. This is the time when the manufacturer can flag that the order is too high and get it amended prior to delivery.
Other promising practices:
- Effective contingency planning involving the commercial teams – for example an agreement up front to replace an OOS promotional sku with a new sku. This needs a lot of work and co-ordination – particularly as it puts stores under more pressure (links to store practices) – but can prove to be very beneficial to all concerned if implemented well
- More detailed records of promotional history – for example not only promotional uplifts and competitor activity but also information such as manufacturer production issues and other reasons for poor supply
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Other Focus Areas:
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Forecasting |
Getting Product to Store |
On the
Shop Floor |
Distribution |
Communication
& Collaboration |
I.T |
Promotions Process |
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Promotional On-Shelf Availability - Next steps:
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