The logistics dynamics

Logistics and supply chain management is the lifeblood of IT distribution. As the role of distribution is constantly evolving, managing inventory and the logistics engine can determine success from failure.

Tags: Avnet IncorporatedInfor Global Solutions IncorporationMindwareSupply chain managementTrigon ComputersUnatrac IT Distribution (unatrac-itd.com/index.html)
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The logistics dynamics
By  Manda Banda Published  November 1, 2011

Logistics and supply chain management is the lifeblood of IT distribution. As the role of distribution is constantly evolving, managing inventory and the logistics engine can determine success from failure. How are IT distributors rising to the challenge of managing their logistics in the Middle East region?

With more distributors seeking to roll out best practices, efficiencies and effectiveness across different operations in their supply chain to necessitate cross-border logistics in the region, many have been looking at ways to increase their competitiveness in the market. For resellers, a well run logistics engine or supply chain means they won’t have to wait for lengthy periods to receive stock from their distribution partners.
At the same time, distributors have to strike a balance to ensure that they avoid the mistakes of over or under stocking their inventory.

Stock levels are the key to a successful technology business. In fact, more money is lost on inventory than any other single area of a typical IT business. Too little stock means lost sales. Too much stock on the other hand means lost profit through both financial costs of keeping excess inventory and the likely reduced margins the business will have to take to clear it.

“Logistics management is very important and it’s the backbone of any IT distribution company. A distribution business means supplying products to the channel in a timely and efficient manner and that’s why logistics and the whole supply chain management play a crucial role in terms of forecasting, stocking and fulfillment of products. If the inventory forecast is wrong, it simply means stocking will add pressure both in terms of your business being under stocked or over stock,” said Arun Chawla, chief executive officer at regional distributor Trigon.

According to Chawla, forecasting in the current market situation can be tricky and shouldn’t be done on last year’s sell-out but on the basis of the past 60 days trends. He adds that based on the past 45 to 60 days sell-out, a company should be able to maintain the right stock levels. He warns that over supplying the market is not healthy at any given moment.

Inventory forecasting

“One of the keys to success in IT distribution is to have better visibility of customer demand,” said Paul Hammond, general manager, Infor Middle East. “Proper logistics management, including a trained team of professionals with adequate software, will enable IT distribution companies to improve forecast, increase on-time deliveries, reduce finished goods inventory and reduce inventory obsolescence.”

Hammond says supply chain research consistently demonstrates that improvement in forecasting accuracy is the fastest route to reduced inventories and higher customer service metrics. “At Infor we believe better demand and inventory planning is only the first step,” he said.

In these volatile market conditions in the channel, extra inventory means more storage space and higher insurance premiums. Bearing in mind that PCs have little more shelf life than many food stuffs, such is the pace of change in IT distribution. Therefore, it is essential to ensure tight controls are in place to manage ordering. Looking closely at sell-out per week over the past few months to see the trends will give distributors a better picture of which products are needed and which ones are not, experts say.
Chawla agrees and says proper communication, informing channel partners about the current market trends, competitors’ market situation and position is vital and helps suppliers to understand the situation and react accordingly.

Chris Green, sales manager, Avnet Technology Solutions, Middle East region, said strong and sound logistics is one of the main pillars of success for a distribution company like Avnet Technology Solutions. Green said in addition to the regional capability, an important part of Avnet’s value is its ability to provide global logistics on behalf of channel partners and its suppliers, helping to provide a seamless experience across borders. “Avnet’s ability to have stock readily available in a timely manner is a key element to accelerating success for our channel partners and helping them to achieve their business goals. We work closely with our suppliers and channel partners to monitor supply and demand in the market and forecast accordingly,” he commented.
At another regional value added distributor Mindware, Mario Gay, general manager, MENA region, said in an ideal world a good logistics and operations manager should have figures for lead time, cost of logistics and stocking, and the weekly and monthly sales demand readily to hand, to determine the ‘Economic Order Quantity’ (EOQ) in order to have the right level of stock.

“Unfortunately, we see that the reality is still far different from the nice theoretical model and the forecasts are built by necessity. These days it’s with a more unpredictable demand. The goal is to serve quickly the customers and not to lose sales. The risk of having overstocked is always present in the channel,” said Gay. “We retrieve our monthly sales out and we forecast what it is going to be a base line by product in the following month corrected in function of seasonality, promotion and other vendor initiatives.”

Gay said at the end of the day the level of stock a distributor keeps or maintains is a management decision. He explained that any IT distribution has an expected demand in the month driven by run rate business, and this should represent the base line of calculation. “It is a management decision to assign a certain ‘level of confidence’ to this expectation and discount in function of the risk of obsolesce of product and lead time in the channel,” Gay added.

Different logistics dynamics

Ajay Singh Chauhan, chief executive officer, Psilog International, says managing logistics is the most critical aspect of any distribution operation in the region. Chauhan says there is a lot of strategic planning involved here with regards to IT distribution considering the market demand and price drop trends. “It pays to deploy a centralised inventory to get a better grip on the operations. This will provide real-time information on movement of products and enable actions to be taken in real-time,” he said.

Chauhan said centralisation of your logistics management plays a crucial role as it enables distributors to forecast the movement of slow and fast moving stock. This, says Chauhan, also aids in reducing the risks in under or over stocking as one derives accurate data by region, demographics and all necessary reports are readily available at the point of need.

Mindware’s Gay added that IT distribution has always been centred on the logistic function and it will continue to be the case going forward. The job of a distributor is to make sure that products reach customers on time in different markets, or in other words, that there is an efficient operative solution to move products between the point of origin (vendor) and the point of consumption (customer)  in order to meet the requirements of consumers.

For some territories, particularly Saudi Arabia, local third party distributors play a role in penetrating these complex markets. Asim Saud AlJammaz, vice president of Saudi-based value added distributor Al-Jammaz Distribution, said the company has a dedicated Logistics Services Business Unit, Al-Jammaz Distribution, which offers a complete end-to-end supply chain solution for itself and other international companies and partners that would like to have their logistics handled by a third party.

“The logistics business unit has enabled many companies to be able to do business in Saudi Arabia, without worrying about having physical presence in the Kingdom,” he said.

AlJammaz says logistics management from the company’s perspective, is part of the broader value added services that Al-Jammaz Distribution offers to its channel and vendor partners in Saudi Arabia.

AlJammaz said as the company has its headquarters in Riyadh with branch offices and warehousing facilities in Jeddah, Khobar and Qasim, its is vital that it has a robust logistics engine to feed its 12 point of sale offices spread across the Kingdom.

“We handle our own products and inventory of other IT companies that utilise our services through the Logistics Business Unit. It’s vital for us to have a solid operation that is able to provide value to the channel and those vendors whose products and technologies we represent,” he said.

Ismail Abdel Aziz, regional territories manager, at Unatrac IT Distribution, another regional distributor, said one of the main factors for developing a successful IT distribution model has to do with managing your logistics and inventory efficiently.

“We are in a price sensitive region hence the importance for us to develop the right costing model to suit this geography. Items classification, accurate costing, good pricing, fast delivery are key factors that can only be achieved if you have a robust logistics and inventory management system,” he said.

Inventory pitfalls

Pundits say looking closely at sell-out per week over the past few months is essential to ensure tight controls are in place when ordering stock. Inventory that is in excess of normal levels should not be ordered without proper justification, especially when it comes to great offers for large volume orders.

Trigon’s Chawla agreed and said over supplying the channel is not healthy at any time. “We base our forecasting on the past 60 days sell-out and if stock is maintained accordingly, it even becomes more practical for us to make the best decision. We regularly communicate with our channel partners and understand the requirements to ensure no one gets trapped,” he said.

Chawla said while every business has its own challenges it’s the joint responsibility of vendors and distributors to work together on how to tackle and control product over stuffing. “Issues around grey imports need to be dealt with by all who are interested in running ethical businesses in the channel. Protecting partners ensures that they continue to buy products and solutions from authorised distribution channels,” he said.

Green said from an Avnet perspective, the company reviews the current distribution total available market (DTAM) of the product and align that with the supplier’s market expectation to ensure that the company is holding the right stock at the right time.

“Avnet has a strong product management team that takes feedback from sales and reviews the stock position on a daily basis. If you are under stocked you may miss out on sales opportunities and if you are over stocked you increase your risk of holding aged inventory. At Avnet we work closely with all stake holders to get the balance right,” he said.

Green remarked that given the unpredictable trade mentality of some channel partners in the region, especially in Dubai, it’s difficult for distributors to properly predict demand, but that by reviewing historical data and communicating regularly with suppliers the company is able to achieve accurate forecasting. “We constantly monitor the situation, staying in touch with the channel on their product needs, reviewing the suppliers’ supply situation and ensuring we are aligned with our inventory. Another dimension is the disruption caused by practices such as grey marketing. This is a big challenge which seems to affect some products more than others. It is an issue that affects the whole market when it happens, but I do believe that most suppliers are trying their best to stop this type of activity,” he noted.

Aziz agreed that due to the easy nature of establishing new IT companies in Dubai, it’s a huge challenge for authorised distributors to be able to forecast properly on inventory. He said that what Unatrac IT has started to do is keep and maintain regular communication ensuring that the company gathers information of the partners’ business pipeline to ensure better forecasting methods. “For fast moving items we forecast on a ten day cycle while for normal stock the projection is up to four weeks,” he said.

He pointed out that authorised distributors need to play a greater role in ensuring that the supply of products in the channel is not disrupted by someone bent on grey imports. “Through partner programmes and other loyalty schemes, distributors in conjunction with vendors can help in protecting the legitimate distribution channels from being stuffed with grey imports,” Aziz said.

Mindware’s Gay said that during 2011 the demand of products has been quite volatile and if one looks at the variance between one month and the other, it’s much higher than in the past years. “This has led to the conclusion that in this environment, distributors should be more conservative and not overstock. However in reality distributors often have to please their vendor partners, especially at quarter-end,” he said.

Gay said it is becoming more difficult to forecast out of the total sales or what can be classified as run rate business. This can create some big variance in the expectation from both channel partners and vendors.

Looking ahead, Gay said the concept of Supply Chain Management 2.0 is coming rapidly. “In the past we had to have our own warehouse, our own team and a dedicated internal system handling logistics. The future is to still have one centralised warehouse that feeds into smaller warehouses,” he said.

Psilog International’s Chauhan, said logistics will continue to play a key role as it is vital to the business initiatives and market penetration. He said other aspects of logistics have seen more distributors leaning towards value addition as it positively impacts the sales revenues in the longer run.

“We use cutting-edge hand-held devices that combine bar coding and RFID technology to capture and reflect updated inventory information. Forecasting and inventory management is done more appreciably as we reduce human errors by deploying automated process and control points to make sure that the product is monitored from the time of sale and during its cycle of warranty,” said Chauhan.

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