The solution to ensure a “High Level Logistics Service” may be in inventory. But, how much does it cost?
In Article 1 of the series “What is Logistics“, we discussed availability’s importance, or “High Level Logistics Service”. According to the approach, consumption is expanding at high rates in regions traditionally low income. In Brazil, since 1994, families who previously had no access to products or services began to consume more in the quest to satisfy their dreams. With limited income, caused by a market with low growth and high inflation rates, reversed with the creation of the Real Plan (Plano Real), these people were able to satisfy much of their repressed demand.
Social Mobility generated by economy’s stabilization and its maturation, economic growth and demographic bonuses has enabled families’ rise to new income levels. It allows them to buy all kind of products, electronics, cars, furniture and even real estate, besides to have access to services previously directed to high income people as dental care, international travels and health insurance.
One difference between traditional consumers, belonging to classes A and B, and the new ones, from C class, is that the last ones started consumption’s process recently; this means that many are consuming , for the first time, products like computers, cell phones and high-definition televisions; something that the wealthy already had for some time. So, when someone from the top of the social pyramid wants to buy a new generation of a product he/she already has, the waiting tolerance will be longer, since for this person the consumption experience is not new. With this, we can say tolerance is associated to the fact that anxiety for a new generation of a product they already had is lower. New consumers are in the opposite situation, since desire to make up for the lost time make them intolerant in waiting.
Products and services have increasingly short life-cycle what brings the sensation that it will be obsolete if it’s not instantly purchased; associated to the consumption craving, this leads people to a behavior of buying a product at the “first attempt of purchase”. This situation can be understood in this way: if the new consumer does not find the desired product or service, an equivalent from competing brand, or even another product category, will be chosen to replace the one not found. This new consumer goes to a retailer with the goal of returning with the desired product as an obligation, almost like a trophy for his hard work.
Summarizing, the new consumer consumption’s anxiety makes a certain product’s lack, in a retailer, generates a definitive revenue’s loss, since the client will replace it with another from a competitor, or even from another segment.
Ensuring high levels of logistics service becomes a competitive advantage, since with it’s possible to meet market expectation. The “High Level Logistics Service” may be an entrance barrier for new players because served market’s continuous preference is obtained. It can be seen in the three parameters to maximize purchase decision: High Level Logistics Service (I), Share of Mind (II) and Price (III) – discussed in Article 1.
From the premise obtained in Figure 1, where sales loss tends to decline while availability increases, we can notice the importance of maintaining an inventory aiming to ensure the “High Level Logistics Service”. However, it is necessary to ensure, for the warehouse performs its function, product storage according to customer expectations; otherwise it’ll mean financial losses.
Another point to be analyzed is the stage of life-cycle where the product is. With the possibility of a product’s obsolescence, its life-cycle must be considered as a risk factor in the decision to stock it, because there will be financial loss if it’s exceeded a certain stage. The life-cycle of a product is divided into four stages: Market Introduction, Growth, Maturity and Saturation and Decline.
This life-cycle model tends to occur with any products or services that have a propensity to go through changes in its technology, configuration, specifications or design. These changes tend to trigger novelty desire, regardless the consumer’s social class.
According to the product or service life-cycle stage, client’s anxiety to buy it immediately tends to increase because there will be more awareness of the product’s future obsolescence. Another point to be evaluated is the existent relationship between life-cycle and social class to which it will be sold. When a new product is launched, it tends to serve classes from the pyramid’s top and, over time, the ones from the bottom.
We can see the relation between Life-cycle vs. Quantity demand vs. Price vs. Life-cycle. The older gets a product, the more it will be demanded. The increase in demand tends to cause price drop because the increase in production scale reduces its cost and, consequently, low the price to the consumer. With this, these products will be more accessible to lower classes, providing acceleration in quantity demanded, increasing the industrial scale, further reducing the price. This process will end when the demand is satisfied and/or with the introduction of a new product with more innovations that makes the former obsolete.
It’s essential a precise inventory management, since when the product is not available, sales losses will occur and, consequently, revenue losses. Although if stored products are obsolete, there will be also financial losses on the asset depreciation. Do understand depreciation as costs or expenses arising out of wear or obsolescence of fixed assets.
One last issue regarding inventories’ maintenance refers to the Opportunity Cost. When the products are still in the early stages of its life-cycle and the sales are below the original projection, the immobilized capital in inventories may be subject to the opportunity cost that occurs when one renounces an investment over another. When the benefits that could be obtained, from the foregone opportunity, are superior to the choice made, we have capital losses that will be the opportunity cost. In other words, opportunity cost represents the value associated to the best alternative not chosen.
The conclusion is: the inventory, if not managed with precision, can cause huge financial losses, eliminating the competitive advantage of maintaining a “High Level Logistics Service”. Therefore, the inventory can be strategic when scaled accurately, that is, adjusted to demanded volumes, in the frequency of product’s turnover and in sync with its life-cycle.
Use all available attributes in the logistics to ensure competitive advantage is critical to market conquer, but for that it is necessary to understand what is logistics.
In the next article, we will see the holistic approach’s importance in managing chain supply.
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