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Archive for the ‘Contracting’ Category

It’s not every day that you see a video about supply chain contracting, so I cannot resist posting about it:

The video comes from Vox and they have an article that goes with it (The hidden war over grocery shelf space, Nov 22). That article, in turn, was at least partially inspired by a report written for the Center for Science in the Public Interest (Rigged: Supermarket Shelves for Sale, Sep 28, 2016).

The contract in question is a slotting allowance. Slotting allowances are paid by food manufacturers to retailers in order to get items onto shelves. The money is paid upfront and often varies with the number of stock keeping units (SKUs) introduced and the number of stores in which the products will be stocked. The term comes from the act of creating a space — i.e., a slot — for an item in a warehouse or on a store shelf. The origin story is that retailers at some point started demanding that vendors compensate them for the costs they incur in helping launch new products (which often fail). The reality is that the money involved is now significantly higher than the cost of rearranging products. In effect, retailers are selling off their real estate.

So are slotting allowances good or bad for markets and customers?

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There is a good chance that the last time you bought something on Amazon’s website, it wasn’t actually sold by Amazon. It instead came from an independent merchant, and Amazon just handled the logistics of getting the item to you. That arrangement has an implication that I never considered until a recent Wall Street Journal article (Amazon Prods Its Sellers to Free Up Warehouse Space, Nov 4): By inviting in the additional sellers, Amazon is giving up control of just what is in its fulfillment centers. If a merchant wants to sell miscellaneous crap, that is their business. At the same time, however, that miscellanea potentially ties up space that Amazon needs — or at least could use more profitably on other items. This is particularly true as we head into the holiday season when Amazon should reasonably expect business to be booming.

What is a poor e-commerce giant to do?

How about a little surge pricing? (more…)

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The World Series starts tonight. While everyone in Chicago is focused on the prospect of the Cubs winning the Series, that is not a certainty. The one thing that is certain is that someone is going to lose – and that raises the prospect of a Cub or Chief Wahoo on t-shirt proclaiming that a team won something that they didn’t.

So what happens to t-shirts and other tchotchkes celebrating events that never happened? That was the topic of a recent Chicago Tribune story (Where do losing baseball teams’ postseason T-shirts end up?, October 18). The article itself is a little confused (it very much seems that a paragraph was dropped) but it does layout some options:

Last year, VF Licensed Sports Group required customers who wanted early access to merchandise celebrating a baseball team’s postseason run agree to ship any merchandise with a losing team’s 2015 MLB postseason clinch logos, images or graphics to international nonprofit World Vision. Customers had 24 hours following a loss to get in touch with World Vision to start the donation process, according to a 2015 agreement provided by a retailer. …

Another retailer was sent a revised agreement that replaced the donation requirement with a mandate to ship any items for losing teams back for destruction. …

Retailers who violate an agreement not to sell, advertise or promote the losing team’s merchandise agree to pay $100,000 per breach, according to the 2016 World Series preprinted merchandise agreement.

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For those who are not baseball fans, let me give you a quick update: The Chicago Cubs are really good this year. They won over 100 games in the regular season and have now jumped out to a 2 – 0 lead in their best-of-five series with the San Francisco Giants. FiveThirtyEight  has them as the favorite to win the World Series.

If all of that is news to you, you should also be told that the Cubs have, frankly, sucked for a long, long time. They haven’t won a pennant since 1945 and a World Series since 1908. There is even a short story (The Last Pennant Before Armageddon) tying the Cubs winning a pennant to the end of the world. (To answer the obvious question, the World Series is scheduled to start on October 25th. Barring rain delays, the last possible game would be on November 2nd. The US presidential election is on November 8th.)

So if the Cubs make it to the World Series, there will be a lot of excitement around here. If they actually win the Series, Cook County will likely shut down for a month. And that all raises a question: How many Cubs t-shirts can be sold?

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Tight supplies occur in lots of supply chains. Pick any industry with rapidly rising demand and you are likely to see at least the occasional glitch in the supply of a key component or input. Still, the setting described in a recent Wall Street Journal article is fairly unique (Hunger for Organic Foods Stretches Supply Chain, Apr 3).

Nature’s Path is among a number of organic-food purveyors taking steps to tackle supply constraints that are hampering the growth of one of the hottest categories of the U.S. food industry. Companies including soup maker Pacific Foods of Oregon Inc. and publicly traded burrito chain Chipotle Mexican Grill Inc.are digging deeper into the supply chain with such moves as financing farmers, offering technical training and hiring full-time headhunters to recruit organic growers.

The efforts are aimed at ramping up organic-food output that has failed to keep pace with surging consumer demand, due in part to the significant costs and risks that U.S. farmers face in converting from conventional to organic farming. Longer-term, the steps could help bring down organic-food prices that have been bolstered by tight supplies, companies say.

According to the article, retail sales of organic food have tripled in the last ten years and that has put a lot of pressure to increase the output of organic products.

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I cut my academic teeth doing work on supply chain contracting. I consequently found a BBC report on pay-to-stay payments interesting (Premier Foods accused over ‘pay and stay’ practice, Dec 5). The subject of the report is Premier Foods, a large UK manufacturer with several food brands. Premier had the chutzpah to effectively ask its suppliers for bags of cash. Here is what the firm’s CEO wrote.

[Chief Executive Gavin Darby] wrote: “We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas.”

He added: “We will now require you to make an investment payment to support our growth.

“I understand that this approach may lead to some questions.

“However, it is important that we take the right steps now to support our future growth.”

But when a supplier raised questions in an email about the annual payments, another member of Premier’s staff replied.

“We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list.”

You can contemplate the lovely Britishness of “nominated for de-list” while watching this video on the subject.

I should note that Premier Foods has since backed off its demand after the negative press following this report (see here).

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It’s been a long time since we’ve posted about the roll of allocation schemes in supply chains, but they remain one of my favorite topics. Allocation schemes involve a pretty simple issue: Suppose a supplier is selling to multiple retailers and at some point gets more orders than it has capacity to fulfill. How should the supplier dole out its limited capacity to its retailers? At one time or another, this has been relevant for high tech goods, luxury items and a number of other industries. But one place this almost always comes up is automobiles — newly released vehicles in particular. A hot new release is going to sell at its full sticker price (and maybe more) so allocating new cars is like passing out thousand dollar bills. So how should an automaker approach this problem?

Here is how Dodge is approaching this for its new Challenger SRT Hellcat — a muscle car with more horsepower than a Lamborghini (Dodge Challenger Hellcat dealer ordering begins — with a catch, Sep 9).

Dodge will base Hellcat dealer allocation on the total number of Dodge vehicles a dealer has sold within the last 180 days, including everything from Dart to Durango to Viper, brand head Tim Kuniskis said.

In December, a second allocation calculation will be made based on the previous 90-days’ sales performance, as well as a traditional 30-day inventory turn.

The dealer allocation for the Challenger Hellcat rewards the dealers “that are selling the Dodge brand,” Kuniskis said. “You sell a lot of Darts for me, Journeys for me, Durangos for me, I’m going to give you the rights to this one, too, because this is a halo of the brand.”

After the initial allocation, Dodge will also begin to measure the Hellcat’s days-on-lot and use it as a factor to determine the number of Challenger SRT Hellcats a dealer will get, Kuniskis said.

The longer a Hellcat sits without being sold — as it might if it were to have a $10,000 or $20,000 market adjustment on it — relative to those on other dealer lots, the fewer future Hellcat vehicles a dealer will receive, the Dodge brand boss explained.

(more…)

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