Any allocation of resource (time, money and people) is driven by the supplier’s key business mission, usually expressed as Return On Capital Employed, itself a driver of share price and autonomy in running the business. This can be achieved by a combination of driving sales performance and improving the retailer’s profitability.
Driving Sales Performance
Sales performance is obviously of key importance, and all allocation of resources should be aimed at increasing sales to customers via one or more of the following:
- Selling more of the current products to customers already stocking the products
This is the easiest way to grow sales, given that the customer already knows and is experiencing steady sales of the products. Moreover, as standard items in the supplier’s product portfolio, they are routine in terms of production and distribution and tend to be very profitable. However, given their historic role and predictability, they tend to be undervalued by ambitious NAMs, leaving them vulnerable to attack by the competition.
Ideally 50% allocation of resources.
- Selling New Products to Existing Customers
Here the customer has already experienced some success with items in the supplier’s current product portfolio, and therefore should be willing to consider stocking new products from the same source. However, there can be issues in terms of the retailer not wanting to become over-dependent upon one supplier and will therefore accept the new product on condition that it replaces a weaker product in the portfolio.
Ideally 30% allocation of resources.
- Selling Current Products to New Customers
Here the supplier attempts to capitalise on knowledge and insight relating to the type of customer that appears to like or experience success with the supplier’s current range, based upon their experience with customers already stocking that range. In effect the supplier develops a template describing the ideal retailer and proceeds to sell them the current range.
Ideally 15% allocation of resources.
- Selling New Products to New Customers
Here the supplier is working simultaneously with two unknowns, an option that has little or no value when resources are scarce.
Ideally no more than 5% allocation of resources.
Thus there are four, and only four, ways of growing the business using scarce resources.
Impacting the Customer’s Profitability
In terms of impacting the customer’s profitability, resource allocation should be aimed at improving the customer’s net margin and capital rotation as follows:
Improving the Customer’s Net Margin
- This can be achieved by a combination of Raising Selling Prices by Adding Value and Advertising Brands; Increasing Sales via increases in Shopping Basket size, Store Traffic, Advertising the Store, and Sales Promotion; Cutting Costs; and Adjusting Margin Mix by selling more High Margin Items and Increased use of Own Label.
Improving the Customer’s Capital Rotation
- This can be achieved by a combination of Increasing Sales, and Reducing Capital Employed by Better use of Fixed assets, and Reducing Current Assets in terms of Stocks, Debtors and Cash.
- The retailer’s capital rotation is further increased by the provision of free trade credit.
Finally, in order to assess the extent and consequences of things going wrong in the allocation of scarce resources it is important to conduct a risk analysis and generate contingency plans where appropriate.
Risk Analysis
Understanding Risk helps in focussing attention on all the things that could go wrong in allocating scarce resources. Assessing their potential impact on the business in terms of high, medium and low can help define their importance to the success of the project. Attempting to calculate the chances of those things going wrong provides a basis for combining chance and impact to generate contingency plans in managing that risk.
Scarcity creates value. Taking a systematic approach to allocating and managing scarce resources and demanding retailer acknowledgement of that value ultimately leads to increased supplier profitability, the ultimate goal…
