San Francisco State University Supply Chain Management Class

1
San Francisco State UniversitySupply Chain
Management Class

• October 16th, 2006

Inventory Management
2
Requested Agenda

• Basics of Inventory management (with some real
  world perspective)
• The world of startups- what worked, what didn't
• What might you do differently -with or
  without 20/20 hindsight
• What are the opportunities today

3
Outline

• Supply Chain terminology
• Inventory as a component of landed cost
• Supply chain issues are different for mfrs,
  wholesalers and retailers
• Why is inventory management important?
• The balancing act between inventory and service
  level
• Safety stock
• The push and pull of inventory management

4
Outline (cont.)

• Three types of demand
• The forecast and the replenishment plan
• Collaboration and multi-echelon (a solution for
  the bull whip effect)
• The early days of Evant with some 20/20 hindsight
• Discussion of the New Vine Logistics models
• What are the opportunities tomorrow
• (optional) The potential of multi-echelon in the
  food service industry

5
Terminology
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants
6
Inventory Is Only One Component of Landed Cost
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants




Landed Cost
7
Comparing Cost for Current Practices in Rx,
Grocery and Foodservice (1996 dollars)
8
Inventory Is Only One Component of Landed Cost
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants




Landed Cost
IMPORTANT In order to achieve lowest landed cost,
you must sub-optimize one or more of its
components
9
Package Grocery Finished Goods (mfr retailer)
2.36/case
The trading partners sometimes have conflicting
objectives
10
Packaged Grocery 2.36/caseCost per Participant
The trading partners sometimes have conflicting
objectives
0.68
0.40
0.38
0.32
0.31
0.27
11
Inventory Is Only One Component of Landed Cost
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants




Landed Cost
Our focus today
12
Why Is Inventory Management Important?

• PG Study with Large grocery retailer
• Fastest selling 2000 products
• 800 stores
• 6 months manual count at each store each day
• Objective was to determine the level of store
  shelf out of stocks and the resulting impact

13
Out of Stocks for Top Selling 2000 UPCs
(Weekly profile)
360
Sun
Wed
Thur
Fri
Sat
Sat
Mon
Tue
17.8
350
340
330
320
310
Number of OOS Items per Store
300
290
280
13.8
270
260
250
14
Impact of Out of Stock Events

• Revenue loss to retailers 11 of sales
• Most customers finding an Out of Stock spend at
  another store or not at all
• Same brand substitution recovers less than 25 of
  OUT of STOCKS for manufacturer

15
How the Shareholders Benefit by Solving This
Problem
Suggest reading Chapter 3, Cash is King
16
McKinsey Valuation Premise

• Market Valuation is driven by
• Return on Invested Capital (ROIC)
• Rate of Sales and Earnings growth
• Strategy for the future
• Quality of management

17

ROIC Approach to Value Analysis(Return On
Invested Capital)
18
Relationship Between Market Value, ROIC and
Earnings Growth for SP 500 over a Six Year Period
ROIC - Cost of Capital
-5 to -2
-2 to 2
2 to 5
gt 5
lt-5
1.8
1.7
()
1.5
()
lt3
1.6
2.1
1.9
()
1.7
3-6
1.6
3.6
1.5
2.0
2.9
6-9
Average Sales growth
1.3
2.0
4.0
5.1
2.3
9-12
5.5
1.8
1.8
2.8
()
12-15
1.7
3.1
3.6
5.3
()
gt15
() 5 or fewer companies
19
Projected Benefit for a Large Rx Retail Chain
Total 1.2 billion in cash flow
Chart does not show the impact on cash flow
13 mil from change in accounts payable, taxes,
operating expenses, etc. Based on revenue
growth rate of 14.
20
Company with 50 DOS Going to 30 DOS (with 30
days payment terms)
What percent of capital tied up in inventory has
been freed up?
50 DOS
30 DOS
Day of Supply
21
Company with 50 DOS Going to 25 DOS (with 30
days payment terms)
What percent of capital tied up in inventory has
been freed up?
50 DOS
25 DOS
Day of Supply
22
Company with 50 DOS Going to 25 DOS (with 30
days payment terms)
How much of the inventory capital has been freed
up?
50 DOS
This 5 DOS is capital obtained for free, meaning,
growth will generate more and more free cash.
100 5 DOS
Day of Supply
25 DOS
23

ROIC Approach to Value Analysis(Return On
Invested Capital)
What happens to our ROIC if we can achieve
negative working capital??
24

• Fundamentals of
• Inventory Management

25
Why Do We Need More Than One Day of Inventory?

• Order/Delivery
• frequency

Supply
Demand
26
Effect of Order/Delivery Frequency on Inventory
inventory
time
Order/Delivery frequency
27
Can Our Inventory Go to Zero?
- Variability of demand

• Delivery
• frequency

Supply
Demand
- Partial deliveries - Late deliveries
28
Example 1 of Variable Demand
Demand
29
How Do We Cover for the Variability of Demand and
Supply?
inventory
time
Delivery frequency
30
Example 2 of Variable Demand
High variability of demand
Demand
31
How Do We Cover for the Variability of Demand and
Supply?
inventory
Delivery frequency
time
32
Relationship of Inventory to Service Level
Infinite
Inventory
low
60
99.9
Service level
33
The Inventory Management Balancing Act
CFO says too much Inventory
Marketing says too many out of stocks
Inventory Levels
Service Levels
High
Low
High
Low
Balancing Act
34
Some Products Are Pulled By Demand, Some Are
Pushed

• Pushed per a plan
• New products
• Short lifecycle products
• Promoted products

• Pulled by Demand
• Consumables
• Pushed products, following the initial push

35
The Components of Total Demand
36
What do We Do Once We Know Total Raw Demand?
37
What Is the Objective of the Replenishment Plan?
38
Considerations for the Replenishment Plan
cases and eaches
pallets in Truck loads
Truck loads
Plants
Wholesalers Retail Distr. Ctrs.
Manufacturer regional Warehouses
Stores
39
The Pampers Bullwhip
Forecast of Consumer demand
Forecast of store demand
Forecast of DC demand
Forecast of Regional demand
Forecast of Plant demand
Variability of demand
40
The Multi-echelon Solution
One Forecast of Consumer demand
41
The Early Days of Evant and Some 20/20 Hindsight
42
Opportunity (Events of 1993)

• Wal-Mart announcement
• entering the grocery business
• objective to take 10 market share by 2000
• largest Grocery Chain had 6 market share
• Grocery Industry initiated major study (ECR)
• how to compete with Club stores and Wal-Mart
• FYI...Wal-Marts grocery market share as of
• 1993. 0
• 1995..6
• 2001..10.3 ( Sams Club)
• 2003..16 (including Sams Club)

43
Packaged Grocery
25
Plant Whse
Over flow Whse
Plant
60
40
Total days 104 Cases handled 6
times Transported 1000 miles Total cost/case
2.36
Mfr. Regional
Retail/Wholesale DC
Stores
44
ECR Report Findings(Efficient Consumer Response)

• Costs can be reduced by 30 billion per year
• 17 billion per year in replenishment
• Two phase plan to get there
• Watered down by each set of participants trying
  to protect their position (ie VMI/CRP)

45
NONSTOP (Evant) s Logistics Vision
Stores
Plants
Cut Replenishment cost in half
38 Sort and Load Centers
or
Mfr. Whse
Distr. Center
46
Value Chain Supply Chain Demand Chain
Wholesale or Retail
Mfr. Whse
Distr. Center
Plant
Store
Consumer
Suppliers
47
Original Investors Partners

• Individual Investors 1million
• Transportation
• JB Hunt 1million
• Schneider National 1million
• Warehousing
• Excel 1million
• GATX 1million
• Frozen food
• Americold 1million
• Data (promotional)
• AC Neilsen 1million

48
Reception by Industry

• Manufacturers very receptive even though they
  paid the fees
• Retailers slow to adopt even though little or no
  cost to them and had largest portion of savings
  (Ill be second and suspicious of something for
  nothing)
• Wholesalers confused (friend or foe??)

49
When Why the Strategy Changed

• First Sort Load Center was opening Aug-95
• 12 million funding term sheet signed for closing
  on June 27th 1995
• 18 of top 30 CPG Mfrs had agreed to be part of
  start up
• First week of June, large wholesaler sends out a
  letter to the Mfrs
• By June 9th all but 6 Mfrs had decided to
  wait..Lead investor backed out of funding.

50
Grocery Industry Validations Nonstop Compared to
DCs
51
New Business Model --- 1996 (software or
service???)

• Provide a bolt on optimization service
• Fees based upon business results
• Sell business value to CEO/CFO
• Develop interfaces to popular procurement systems
  and co-market (SCS partnership)
• Find a Tier One VC lead investor (KPCB)

52
The Final Business Model

• Move from Service model to Software license
  model
• Acquire added functionality needed and develop
  platform independent offering
• Recruited experienced software management team
• Build a software company that owns its market
  segment
• Become the system of record for retailers for all
  product data

53
Evants Goal Provide Extensive Retail
Merchandising Functionality
Retail IT Requirements
Front office Customer management 12 applications
Ops Support Financials HR 9 apps
"Evant A Multi-channel Merchandise
Management Application That's Worth the Wait
--- AMR Research
Fulfillment WMS and Transportation 12 applications
Evant's vision is to enable flexible, effective
cross-channel Merchandise Planning and Execution
Evant Retail Merchandise Management Store
Catalog Web 16 applications and merchandise
system of record
54
Evants Increasing Success with
Customers(Measured in recognized deferred
revenues)
30 mill
18.8 mill
11.8 mill
5.2 mill
400K
Notes Excludes Hammaccher Revenue in 2001
55
Retail Customers
56
Distributors and Manufacturers
57

• What Are the Opportunities Today?

58
What Is Needed to Optimize the Supply Chain?
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants
Integrated software to convert this data into
actionable plans for each trading partner
59
What Are the Opportunities Tomorrow ?

• RFID and/or other visibility solutions
• Real-time business systems
• Shared solutions hosted by third parties

60
Current Retail Business Model for Wine
Example of 25 bottle at retail
Store
Consumer
61
Current Retail Business Model
Example of 25 bottle at retail
Store
Consumer
Buy/Sell 3 N/A 12.5 18.75 N/A 25 Marg
in 8.5 N/A 6.25
6.25 Margin 68 33
25.5 Days of Inv 45 45 45
carry 45days 0.04 0.15
0.23 0.23 EBIT (5)
1.25 EBIT (4) 0.75 EBIT
increase 0.11 increase
15
62
Current Retail Business Model
Example of 25 bottle at retail (inventory impact)
Store
Consumer
Buy/Sell 3 N/A 12.5 18.75 N/A 25 Marg
in 8.5 N/A 6.25
6.25 Margin 68 33
25.5 Days of Inv 45 45 45
carry 45days 0.04 0.15
0.23 0.23 EBIT (5)
1.25 EBIT (4) 0.75 EBIT
increase 0.11 0.19
increase 15 15
63
New Vine Retail Business Model
Example of 25 bottle at retail (price inventory
impact)
Store
Consumer
Buy/Sell 3 N/A 12.5 N/A
12.5 25 Margin 8.5 N/A 6.25
12.5 Margin 68 33
50 New Vine fee -1.25 Margin
increase 5.00 Inventory saving
0.19 EBIT before
1.25 EBIT after 5.19 EBIT
increase 4.15X
64
Thank You
65
Example of potential benefits of Multi-echelon
in food service industry
66
Comparing Cost for Current Practices in Rx,
Grocery and Foodservice (1996 dollars)
2.36/case
1.83/bottle
3.33/case
Inventory
Transportation
Transportation
Inventory
Handling
Handling
Inventory
67
Total Finished Goods portion of the Foodservice
Supply Chain 3.33/case(Percent of activity
costs per Participant)
53
53
49
47
39
32
14
12
0
46
47
7
68
Total Demand Chain 3.33/casePercent of
Activity Costs per Participant (Replenishment
Only)
53
53
49
47
Inventory Savings
39
32
14
12
0
(46)
(47)
(7)
69
Adding a Consolidation Level to the Supply
Chain
Plant
LTL 8 to 10 Multi-drop 50 to 85
Distr.Center
Operators
70
Adding a Consolidation Level to the Supply
Chain
Plant
Consolidation Ctr.
Distr.Center
Operators
71
Adding a Consolidation Level to the Demand
Portion of the Supply Chain
Plant
Distributor
Added Inventory (unless)
Traditional solution with 2 forecasts and
replenishments
?
Distr.Center
Operators
72
Adding a Consolidation Level to the Supply
Chain
Plant
Distributor
Added Inventory (unless)
Evant multi-level Optimization from a Single
forecast
?
Distr.Center
Reduced safety stock More consistent Service
levels Improved buyer productivity
Operators
73
Total Demand Chain 3.33/casePercent of
Activity Costs per Participant (multi-echelon)
Mfr Inventory Savings
Mfr Transport Savings
53
49
53
47
39
Mfr Handling Savings
32
14
12
0