Aftermath of Demonetization in the Aftermarket

Authored by

Co-Authored by Dr. Shelja Jose

Published by, 19th January 2017

According to RBI data, 90% of all transactions in India are made with cash. A little over 80% of this cash became practically useless overnight after Rs1000 and Rs500 currency notes were demonetized on November 8 this year. This withdrawal of legal tender status of these notes came as a major blow to traders who rely mainly on cash for business transactions. Kashmere gate in old Delhi, one of India’s largest wholesale markets for auto parts, which is overcrowded on any usual day, wore a completely deserted look for the days after November 8. Business in other auto components wholesale markets across the country also tanked.

An examination of the impact of this unexpected event (described as a Black Swan1 by many), threw up some interesting observations about two sets of spare parts manufacturers in the aftermarket. In the week following November 8, there was an immediate slump in sales of a few companies. In a few others, there was no perceptible change (compared to sales of the same period of previous years). But by month end, the trend reversed. Business hopped back to normal (or in some cases improved) for the first set of companies while the second set suffered a severe hit. Industry reports indicate that, not only are the latter looking at abysmal numbers for the month, but are also anxious about the top line for next two quarters.

Yes, two sets of companies in the same environment had drastically different experiences of the same circumstances. Why? Let’s take a closer look. The difference lies in whether the supply chain of the company is managed by ‘push’ method or TOC ‘pull’ replenishment systems. The ones that are managed with a pull-based supply chain appear to be anti-fragile2!

So what happened?

Saga of two paradigms: Push vs pull supply chains

Demonetization created a drought of currency in the market. Our study showed that traditional companies operating on push systems felt little or no impact immediately. These organizations have a typical sales pattern. The first couple of weeks see very little sales. It picks up in the third week and peaks at the month end. When the market was reeling under the aftermath of demonetization, these companies remained relatively unaffected since the level of activity at that time of the month is usually not high. But when the month end approached and their channel partners refused to pick up the anticipated stock, all hell broke loose!

The first links in the channel for most companies are distributors, wholesalers or dealers. Since most of the cash with retailers was in the demonetized currency, they rushed to distributors and wholesalers to get rid of the old currency by paying their dues, clearing overdues and in some cases even paying in advance for purchases to be made in the future! Unfortunately distributors could not do the same with companies. Though the distributors and wholesalers became flush with cash, they could not deposit this bounty in their accounts as the banking system was almost paralyzed. So despite having cash, distributors and wholesalers did not have “money” to clear dues. Thus they were unable to buy more stock from companies as their billing accounts were under lock (a fairly common occurrence). Consequently, the primary sales of companies was hit badly.
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On the other hand, companies operating with TOC “pull” replenishment systems are having a different experience. In the TOC pull replenishment method, retailers or distributors are only supplied to the extent to which goods have moved from them due to consumption. Orders are placed daily at all nodes and replenished frequently. When the market was in shock and consumption was almost frozen for a few days, the signals of this decline immediately reached the companies. But sales picked up once the initial pall was over and consumption resumed (albeit at subdued levels), even without any incentives or credit extensions. Since retailers in this system have very little possibility of their money being locked up in excess stock (as they are not required to buy in bulk), they preferred to use whatever liquidity they had to buy small lots needed to service customers. Moreover, unlike traditional companies whose availability took a big hit because of distributors’ inability to buy, the availability of products of TOC companies remained high. According to numerous accounts, this advantage of high availability and the willingness to supply small lots actually prompted some retailers to substitute products that they had traditionally sourced from other companies to these firms, leading to a shift in market share – shop by shop, SKU by SKU.

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