Recently, a few of my manufacturing clients have brought up the question of whether they should require or reward their channel partners for carrying inventory.
Channel partners carrying inventory has obvious advantages to the manufacturer: less strain on the supply chain, larger average shipment sizes, less inventory, more predictable production schedules, larger lot sizes, etc.
So manufacturers should require or encourage all their channel partners to carry inventory that allows them to serve their end users without having to place placing frequent, rush orders… right? Well, it depends.
It really comes down to how effectively channel partners can forecast end-user demand. .. In situations in which forecasting effectively is difficult; requiring or encouraging channel partners to carry inventory is likely to create problems for the manufacturer in the form of returns, requests for credits and obsolete inventory in the supply chain. I’ve seen dramatic short-term benefits from manufacturers that set up programs rewarding channel partners’ holding inventory… only to see them come crashing down in a flurry of returns and decreased ordering about six months later.
The challenge is that not all channel partners are effective in forecasting… sometimes that’s due to a lack of sophistication… sometimes it’s just the nature of their demand patterns.
The key for manufacturers is to figure out the optimal ways in which different types of channel partners should be holding inventory, then require or reward those desired behaviors. Large, sophisticated channel partners selling a small number of SKUs to a large number of end-users are typically prime candidates to carry inventory. Small, unsophisticated channel partners selling a variety of SKUs to a small number of end-users are less likely to be effective carrying inventory. The rub is that most channel partners fall somewhere in the middle.
Manufacturers must determine the characteristics that make a channel partner a good candidate to carry inventory at different levels, then build the appropriate requirement / reward framework so the channel partner performs as desired.
Bart Schwartz, President / ICR / 630.503.6093 / email@example.com