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Friday, March 31, 2006

Stock Balancing Opportunities

Stock Balancing can be a benefit for both Vendors and Vendor's customers. In summary, it can be a mechanism that cleans the channel, removing older or non-performing products and replacing them with newer higher margin higher performing products. If we consider a product life cycle, we will recognize that a longer a product is available for sale in a channel the more likely that product will be discounted due to price pressure. Therefore, a widget that is loaded into a channel in April with a manufacturer's suggested retail price of $100, is likely to be reduced to $80 by August, and put on a seasonal sale in November at $70, and steeply discounted down to $50 or less by mid December, and sold on clearance in February at even lower prices. At the point the product is loaded into the channel the retail customer is making maybe 30-45% margin on a product selling at $100. However, 30-45% margin on a product selling at $80, 70, 50 or even $20 is much less. Stock Balancing this product out of the channel enables the retail customer to remove the product from the shelves and replace it with a product back at the higher cash margin level of $100. For the vendor, this is positive in reinforcing the strength of the brand and attaching a high dollar value to this brand. It also reinforces the idea that a new product is worth more than the older out of style item with fewer options. An efficient vendor should be able to reduce initial tooling and manufacturing costs after launch, and thus be able to reduce prices as price pressure from competitors come into play. This important as it allows the vendor to push retail customers to continuously advertise the new lower price, thus driving even more volume as customers see a new better deal in their local paper, flyer or store shelf. There are many pitfalls to avoid in these scenarios which will be covered in more detail in Stock Balancing Pitfalls to avoid. For further information on Stock Balancing please contact Softduit Partners.
Thursday, March 30, 2006

Stock Balancing Cycle

Stock Balancing Cycle Map I. Product Introduced V1.0 A. Introduction B. Ramp Up C. Sales Leveling D. Discounted II. Product V2.0 Designed III. End Of Life Date Set for V1.0 IV. V1.0 Sales are accelerated or De-accelerated A. Accelerate to reduce volume in Channel B. Deaccelerate to maintain volume if 2.0 is not ready V. Goal is 0 inventory of 1.0; Pleanty of Inventory 2.0 on Introduction VI. Customers Holding 1.0 A. Request Stock Balance Return B. If Approved Place PO for equal value of 2.0 C. 1.0 is shipped back D. 2.0 is shipped out VII. Channel is rebalanced and starts over awaiting 3.0 Posted by Picasa
Wednesday, March 29, 2006

Price Protection Program Components

There are several components or controls that must be instituted by vendors or distributors in order to run an effective Price Protection Program. It is imperative that the Management, Sales, Marketing, Logistics, and Finance teams all have a solid understanding of these programs and be fully versed in Returns management as well. For a starting point in understanding how to balance programs, please read the article "Price Protection versus Returns" Typical Components and Controls of Price Protection Programs 1. Price Protection formulas must be codified in writing. Ex. Price Protection = Old Price - New Price Price is defined as the price offered by Vendor to Customer. Neither Price nor Price Protection is dictated by market rates of Distributors or retailers reselling the product. 2. Price Protection should always be considered a renegotiation of sales of products. As such each group that would normally take part in setting appropriate prices and negotiating them with customers, must be involved in the determination. 3. Proper approval processes must be put in place to oversee dollar/quantity/time limits and to insure that the Vendor Company is not defrauded. 4. Standardized claim forms are recommended. Its impractical to accept non-standard claims from one customer to the next and creates the potential for user error or abuse of the program if key items are overlooked or obscured. 5. Inventory level reporting by distributors or retailers up to a vendor are typically preferred by Vendors such that they can make appropriate channell management decisions. Customers do not always willingly share this information however and as such a Vendor must be prepared to enforce rules that elliminate Price Protection elligibility or go to significant channel volume level forecast models to determine the levels that might be in the channel before a reduction in price occurs. Its common to have some customers reporting and some customers not reporting. This increases the risk of unknown risk if business intelligence practices are not utilized. 6. A documented signed copy of an inventory report should be provided by the customer to the Vendor to provide proof of inventory for which the claim quantity will be set. 7. Price protection can apply to inventory on hand, in transit, not yet shipped by Vendor, and against items in transit for a return depending on the rules of the policy or contract guiding the program. It usually has to be worked out with each customer according to their rules or contract whether or not unshipped PO's should be cancelled and rebooked, or shipped at a new lower price. 8. A claim period should be set. Typically a period of 30-60 days from the date of Price Reduction is typical. As the date of Price Reduction is key, it is very important to have and utilize excellent communication processes with customers that can be documented. Make them sign a statement that they have been notified and have X amount of days to act. Set a deadline for when the claim form must be received. Remember at the end of the process that they are your customers, and be practical where a grace period may be in order, but set tough rules at the outset. 9. Allow for the option to audit inventory levels for price protection claims, and send a team out to a random sample of customers a couple times per year to keep reporting levels honest and accurate and to keep in close touch with your customer. 10. Get the price protection policy set in a contract. Consider whether or not to allow a customer or vendor to withdraw or change a price protection policy. 11. Make provisions for accounts that are past due. If an account has past due invoices institute a policy that gives the Vendor the option to reduce outstanding uncontested open balances with any credits generated by price protection. 12. Remember that Returns or Stock Balances can be the consequence for an ineffective price protection program. For further analysis or information on this topic, please contact Softduit Partners.

Price Protection Defined

What is Price Protection? Price Protection is the mechanism by which a vendor provides compensation to a customer/buyer following the reduction in sales price of an offered item. Vendors performing a price reduction on offered products will compensate or credit their customers who purchased the same product or continue to hold the same product in inventory within a certain time period prior to a price reduction. A consumer analogy would occur if a consumer purchased an MP3 player from a local electronics retailer on a Friday. Woke up Saturday morning and read that the same unit had gone on sale at the same retailer for 30% less. Many retailers will provide a credit of 30% to the consumer if they bring the receipt in to the store. Why do they do this? The consumer could return the unit to the store, get a full refund for 100%, and drive down the street to a competitor and purchase the same unit for the discounted price. Retailers often honor these types of reductions within a 30 day period of a sale. Similarly, Vendors often honor the same time of program to their customers the distributors or retailers that purchase from the vendor. If their customer is still holding the unit in inventory, a shipment is in transit, or PO just received and not shipped, a vendor will honor the new price by providing a price protection credit or discount. The retailer could return their inventory for a full refund and not purchase again or purchase form a competitor. The market forces that create the need for a price reduction, often incent the vendor to incent their customers at a retail level to lower prices and sell units at a faster velocity. Pitfalls to avoid can include situations where a distributor or retailer purchasing from a vendor do not pass the price protection discount on to the channel or the end customer, ultimately 'pocketing' the discount. There are many mechanisms and controls that are typically instituted to run sound price protection policies. Price Protection policies are typically run very closely with stock balancing and returns policies. This phenomenon will be discussed in more detail in Price Protection versus Returns in a future article. For further analysis or information on this topic, please contact Softduit Partners.

Cooperative Advertising and Cooperative Marketing Programs

Programs that incent resellers, distributors or retail customers to market, advertise or promote a manufacturer, distributor or vendors products. Typically, works in a manner where vendor provides a ratable amount of money to buyer to spend on advertising, promotions, or marketing of the Vendors product. Programs are often structured and may have strict rules. "Proof of Performance" is sometimes required by vendor of the buyer to demonstrate that money was spent on vendors products. Once proved or claim authorized by vendor, vendor reimburses the buyer for the advertising or marketing money spent. Ex. Vendor A sells $1,000,000 in Widgets to Retailer B Vendor A allows a 3% coop fund Retailer B advertises the Widgets in a circular on for Father's Day, spending $10,000, and then spends another $10,000 on ads for 4th of July and Back to School. Retailer B submits proof of the advertisments (copy of ad to Vendor A) along with a receipt or claim amount for the money spent on the ad, totalling $30,000. (Some large retailers require contracts where "Proof of Performance" is not required. Vendor A, provides a credit on Retailer B's account to be used towards future purchases. (Note. Could be a check paid to Retailer, or could be a credit applied towards past due balances.) For further analysis or information on this topic, please contact Softduit Partners.

Stock Balancing Vendor Requirements

Stock Balancing terms are a negotiating point between buyer and seller. As such, there are some items that Vendor's (sellers) typically attempt to negotiate. Its important to understand that many vendors will look to for go any Stock Balancing terms all together. Many large retailers will demand this option or some derivative, as such a vendor must be prepared to walk away from the business or negotiate a middle ground under which they can survive profitably. Here are some examples of items that are desirable from a vendor's (seller's) perspective: 1. Limiting the availability of Stock Balancing on Products - ergo if product bought in 2001 is not sold or balanced by the end of program year in March of 2002, the option to stock balance may be terminated. 2. Limiting the size of Stock Balance Returns 3. Instituting a Stocking fee for Stock Balances 4. Requiring a Purchase Order in advance for newer models or alternate models Ex. Retailer wants to return $1m worth of last year Widgets, Vendor requires a PO for $1m in this years widgets. - Typically it is advisable to require immediate shipment on replacement Purchase Orders. - Staggering shipments of orders might ultimately leed to cancellation. It will definitely not help the bottom line. 5. Consolidation of Products by retailer and return of products from a central distribution facillity. 6. Consolidation of Products by Vendors representative 7. On shelf replacement of items by Vendor using vendors representative Ex. Vendor hires firm to go to every store location in Northeast US and pull last years expensive widget off the shelf, and replace with this years even more expensive widget, taking great care to setup appropriate displays and markings and insuring that neither last years products nor this years products are damaged. 8. Vendor will require tracking information of all shipments of products by Retailer. Think of this as a reverse shipment where a Return Material Authorization (RMA/RA) is required to identify the lot of goods, and tracked against shippers BOL. 9. Vendor might require retailer to destroy last years goods. 10. Time limit on return may be set for retailer. Example, if return is authorized on February 1, Vendor might require that all goods be consolidated and delivered by May 1 to be considered for return credit. It would be a mistake to leave the period open indefinitely only to receive goods a year after approval. 11. Limitations on the number of stock balances that may occur in a period may be set. There can be many other options, for further analysis or information on this topic, please contact Softduit Partners.
Monday, March 27, 2006

What is Stock Balancing?

Stock Balancing defined Stock Balancing occurs when a customer returns stocked inventory to the vendor or distributor from which they originally purchased it. The term is a derivative of the idea that the purchaser has too much inventory and needs to rebalance their inventory levels by decreasing inventory of some items and increasing inventory levels of other items. A typical scenario for stock balancing occurs during a new product launch or a yearly reset. A retailer might reset their product lines at the end of March. The retailer will work to sell as much of existing inventories or return anything that cannot be sold by the end of March. Simultaneously, they will work to bring in new models of these products to stock the shelves and distribution pipeline. A stock balancing request may also come from a retailer when they find themselves holding too much inventory that can not be sold within a reasonable amount of time (from the retailers perspective.) If they happened to purchase a product with a slow sell through rate, otherwise known as a dog of a product, they might request a return of all or mostly all of the remaining units. They will then bring in a new product from the same vendor or possibly go to a competitor and replace the product or line with one that turns inventory more rapidly. In future articles, we will discuss the finer points of stock balancing, along with the benefits and pitfalls to avoid. For further information on this topic, you may refer to Softduit Partners if your interested in a direct consultation. We thank you for reading this article and encourage you to subscribe. (all subscriptions are free.)