System Dynamics Breaks Dealer Hording and Stabilizes Seed Market

The Issue You Tackled

Product returns are a common problem and generate significant costs. Much has been written about reducing returns by aligning buyer and seller incentives, and yet high levels of returns persist. To address why, we examined the interactions between a supplier and its dealers in the hybrid seed industry. Through an in-depth exploration of a seed supplier experiencing over 30% returns, we studied the complex interactions among the supplier, dealers, and growers in the industry. Our research revealed influences on returns from variables (e.g., salesforce size, sales targets) that have not been identified previously. In the seed supply chain, the supplier sells seeds to dealers, who then resell them to growers. Both supply and demand are highly uncertain, which can result in supply shortages. If supply is limited, dealers tend to overstock seeds, exacerbating shortages, and intensifying competition and hoarding among dealers. This behavior leads to seed stocks that are not adequately matched to grower demand, and causes high returns. Seed suppliers often encourage dealers to overstock seeds to achieve opportunistic sales or to limit competitors’ shelf space. While there are short-term benefits associated with overstocking to gain additional sales from growers, the cost associated with excessive returns may, at times, far outweigh them.

What You Actually Did

Our research builds on interviews and direct observations to provide information on key variables (e.g., sales effort allocation), their interdependences (e.g., pressure and effort allocation), critical feedback processes (e.g., from sales effort allocation, to returns, to sales targets and next period effort allocation), and managers’ decision making process (e.g., dealers’ orders). Review of secondary data, company documents, standard operating procedures, helped us detail the physical features (e.g., shipments, level of returns, sales targets) of our model. We uncovered supplier driven influences (e.g., supplier’s salesforce size, recovery targets) on returns that have not been identified previously in Operations Management literature. We explored the impact of these influences through a formal system dynamics model capturing specifics of the supplier-dealer system, how they work together and how they behave when subjected to demand shocks.

Through a series of experiments varying the sales force size, the aggressiveness of its targets, and dealer incentives, we see that these factors interact to further exacerbate the level of returns. This cycle is reinforcing when examined across multiple seasons, and can be provoked by temporary increases in demand. The data suggested a link between the nature of sales activities and the probability of returns. Salespeople perform mainly two types of activities; they either position seeds with or push seeds to dealers. Positioning seeds takes more time and improves the sales forecast. In contrast, pushing seeds is comparatively quick and does not improve the sales forecast. Salespeople start the sales season positioning seeds. However, they shift from positioning to pushing as the time left to meet sales targets decreases and pressure upon them increases.

When sales force resources are constrained this causes high returns. Even with sufficient sales resources, a demand shock can stress the system, leading into a low performance equilibrium with high returns. We also observed that aggressive sales targets increased pressure on the sales force to push seeds and resulted in more returns. While a traditional prescription to the problem of high returns would be to implement adequate incentives for dealers, our analysis shows that the effectiveness of incentives depends on the adequacy of available sales resources. Dealer incentives solve the dealer over-ordering problem. However, over-ordering is just one component of the seed returns problem. Returns also occur when salespeople are faced with intense pressure to meet targets.

The Results

Our research shows that several parameters influence sales pressure: (1) availability of sales resources, (2) fraction of revenues lost from past year returns to be recovered and (3) sales targets. Increased sales resources, smaller fractions of revenues lost to be recovered, and moderate sales targets lower returns by reducing the pressure on salespeople. Our research highlighted the causes of returns, the limitations of dealer incentives, and the importance of adequate sales resources and moderate sales targets. Overly-aggressive sales targets increase sales pressure, and can detrimentally tilt the behavior of the system into a low-performance equilibrium characterized by high returns. Because this behavior is self-reinforcing, even transient aggressive sales targets can permanently tilt the system into a poor performance equilibrium from which it may not easily recover. The client followed our recommendations and experienced a reduction in seed returns from 30% to 18% in the first year. The relevant policies implemented were:

• A dealer penalty policy

• An order pacing policy, limiting the initial pace of dealer orders

• A salesperson playbook policy, monitoring and limiting push activity through a protocol of salespeople’ s desired behavior.

After this early success, the client also started to collect data nationally (by sales team and salesperson) to measure progress toward sales targets as well as to estimate sales pressure. They changed their sales reward system to address some of the issues we encountered during the modeling effort and began to apply this integrated solution to other products that were experiencing high returns.

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