sf state sp class 10

San Francisco State UniversitySupply Chain Management

Class

October 7, 2004

Requested AgendaRequested 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

OutlineOutline 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 Three types of demand The forecast and the replenishment plan Collaboration and multi-echelon (a solution for the bull whip

effect)

Outline (cont.)Outline (cont.)

The early days of Evant with some 20/20 hindsight What are the opportunities tomorrow Potential fundamental changes in the wine and sprits

industry, (the Dell model)

ManufacturerWarehouses

Retailers ConsumersWholesalersSuppliers Plants

TerminologyTerminology

Value ChainDemand Chain(finished goods)

Supply Chain

Supply ChainFor this class, this is the…..



Inventory is only one component of Landed Inventory is only one component of Landed CostCost

Transportation Handling InventoryProductCost

++ =Landed Cost+

Comparing cost for current practices Comparing cost for current practices in in

Rx, Grocery and Foodservice Rx, Grocery and Foodservice (1996 (1996 dollars)dollars)

12%

71%

29%

23%

17%

28%

48%

43%

29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Rx Grocery Foodservice

Dem

an

d C

hain

Cost

s, %

Inve

ntor

y

Tr a

nspo

rta t

ion

Inve

ntor

y

Han

dlin

g

$2.36/case$1.83/bottle $3.33/case

Tr a

nspo

rtat

ion

Inve

ntor

y

Han

dlin

g





++ =Landed Cost+

IMPORTANTIn order to achieve lowest landed cost, you must

sub-optimize one or more of its components

Packaged Grocery = $2.36/caseCost per Participant

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Transportation Inventory Handling

Mfr. Retail

$0.68

$0.32$0.38

$0.31$0.27

$0.40

The trading partners sometimes have conflicting objectives





++ =Landed Cost+

Our focus today

Why is inventory management Why is inventory management important?important?

P&G 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

250

260

270

280

290

300

310

320

330

340

350

360

Out of Stocks for top selling 2000 UPCsN

um

ber

of

OO

S I

tem

s p

er S

tore

(Weekly profile)

Sat 1

2pm

Sun 12a

m

Sun 12p

m

Mon12

am

Mon 1

2pm

Tues 1

2am

Tues 1

2pm

Wed

12a

m

Wed

12p

m

Thur 12a

m

Thur 12p

m

Fri 12

am

Fri 12

pm

Sat 1

2am

Sun Mon Tue Wed Thur Fri SatSat

13.8%

17.8%17.8%

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

Impact of Out of Stock Events

How the shareholders benefit by solving this How the shareholders benefit by solving this problemproblem

Suggest reading Chapter 3, Cash is King

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

ROICOperating EarningsInvested Capital=

ROIC Approach to Value ROIC Approach to Value AnalysisAnalysis

(Return On Invested Capital) (Return On Invested Capital)

Relationship between Market Value, ROIC and Earnings growth For S&P 500 over six yr period

1.5 1.8 1.7 (*) (*)

1.7 1.6 2.1 1.9 (*)

1.5 1.6 2.0 2.9 3.6

1.3

1.8

(*)

2.0

1.8

1.7

2.3

2.8

3.1

4.0

(*)

3.6

5.1

5.5

5.3

(*) 5 or fewer companies

<-5% -5% to -2% -2% to +2% 2% to 5% > 5%

<3%

>15%

12%-15%

9%-12%

6%-9%

3%-6%

Current New

Ratio of market value to book value

Projected Benefit for large Rx Retail Projected Benefit for large Rx Retail ChainChain

Impact on Rx Retail chain cash flow

$532 $48 $65 $81 $100

$294

$899

$110$97$85$75$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

FY00 FY01 FY02 FY03 FY04 Total

Imp

act

on

Cas

h F

low

* ($

mil)

Incremental cash flow from return on reinvested capital ($294 M)

Cash flow from reduced working capital ($899 M)

Total = $1.2 billion in cash flow

* Based on revenue growth rate of 14%.

Company with 50 DOS going to 30 DOSCompany with 50 DOS going to 30 DOS (with 30 days payment terms)(with 30 days payment terms)

05

101520253035404550

Before After

Day o

f S

up

ply

What percent of capital tied up in inventory has been freed up?What percent of capital tied up in inventory has been freed up?

Payment terms100%

50 DOS

30 DOS


05

101520253035404550

Before After

Day o

f S

up

ply

What percent of capital tied up in inventory has been freed up?What percent of capital tied up in inventory has been freed up?50 DOS

25 DOS


05

101520253035404550

Before After

Payment terms

Day o

f S

up

ply

How much of the inventory capital has been freed up?How much of the inventory capital has been freed up?This 5 DOS is

capital obtained for free, meaning,

growth will generate more and more free

cash.100% + 5 DOS

50 DOS

25 DOS

What happens to our ROIC if we canachieve negative working capital??

ROICOperating Earnings

Invested Capital=

ROIC Approach to Value ROIC Approach to Value AnalysisAnalysis

(Return On Invested Capital) (Return On Invested Capital)

Fundamentals ofInventory

Management

Why do we need more than one day of Why do we need more than one day of inventory?inventory?

Supply Demand

-Order/Deliveryfrequency

Effect of order/delivery frequency on Effect of order/delivery frequency on inventoryinventory

invento

ry

timeOrder/Deliveryfrequency

Can our Inventory go to Zero?Can our Inventory go to Zero?

Supply Demand

- Partial deliveries- Late deliveries

- Variability of demand

-Deliveryfrequency

zero

Example #1 of Variable Demand

0

5

10

15

20

25

30

35

time

Dem

and

Low variability of demand

How do we cover for the How do we cover for the variability of demand and supply?variability of demand and supply?

invento

ry

timeDeliveryfrequency

Safety stock

Example #2 of Variable Demand

0

10

20

30

40

50

60

time

Dem

and

High variability of demand

How do we cover for the How do we cover for the variability of demand and supply?variability of demand and supply?

invento

ry

timeDelivery frequency

Safety stock

Relationship of Safety Stock to Service Relationship of Safety Stock to Service levellevel

Service level

Safe

ty S

tock

60% 99.9%

Infinite

low

The Inventory Management The Inventory Management Balancing ActBalancing Act

ServiceLevels

InventoryLevels

Balancing Act

CFO says… too much Inventory

Marketing says…

too many “out of stocks”

High

High

Low

Low

Some products are: Some products are: pulled by demand, some are pushedpulled 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

The components of Total The components of Total DemandDemand

Turn Promotion & New products

Short life cycle

Requirements based on

forecast of Pull

Requirements basedon a Push plan

Total rawDemand

What do we do once we know What do we do once we know Total Raw Demand?Total Raw Demand?

TurnPromotion & New products

Short life cycle

Requirements based on

forecast of Pull

Requirements basedon a Push plan

Total RawDemand

ReplenishmentPlan

What is the objective of the What is the objective of the Replenishment Plan??Replenishment Plan??

The right quantity in the right place at the

right time to achieve the lowest landed cost




++ = LowestLanded Cost+

Manufacturerregional

Warehouses

Stores

Wholesalers &Retail Distr. Ctrs.

Plants

Considerations for the replenishment Considerations for the replenishment planplan

Truck loads

pallets inTruck loads

cases andeaches

The Pampers BullwhipThe Pampers Bullwhip



Forecast ofConsumer demand

Forecast ofstore demand

Forecast ofDC demand

Forecast ofRegional demand

Forecast ofPlant demand

Variability of demand

The Multi-echelon solutionThe Multi-echelon solution



One Forecast ofConsumer demand

Plan for store replenishment

Plan for DC replenishment

Plan for Regional replenishment

Plan for Plant replenishment

Variability of demandReplenishment plans

The early days of Evant and some 20/20 hindsight

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-Mart’s grocery market share as of: 1993…. 0% 1995…..6% 2001…..10.3% (+ Sam’s Club) 2003…..16% (including Sam’s Club)

Plant

Mfr.Regional

Stores

Plant Whse

Retail/Wholesale DC

Over flow Whse

60%

40%

25%

Packaged Grocery

Total days = 104Cases handled 6 timesTransported 1000 miles

Total cost/case = $2.36

ECR Report FindingsECR Report Findings(Efficient Consumer Response)(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)

NONSTOP Logistics NONSTOP Logistics VisionVision Plants

Mfr.Whse

Distr.Center

Stores

38 Sort and Load Centers

““Cut Replenishment cost in half”Cut Replenishment cost in half”

or

Suppliers

Plant Mfr.Whse

Distr.Center Consumer

Value Chain

Store

SupplyChain Demand Chain

finishedgoods

Wholesaleor Retail

Value Chain = Supply Chain + Demand Chain

146 days for Rx146 days for Rx104 days for CPG104 days for CPG

Original Investors & Original Investors & PartnersPartners

Individual Investors $1million

Transportation JB Hunt $1million Schneider National $1million

Warehousing Excel $1million GATX $1million

Frozen food Americold $1million

Data (promotional) AC Neilsen $1million

Reception by IndustryReception 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 (I’ll be second and suspicious of something for nothing)

Wholesalers confused (friend or foe??)

When & Why the Strategy When & Why the Strategy changedchanged

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.

Grocery Industry ValidationsGrocery Industry Validations

#of

SKUs

DCINV

Days

NSINV

Days

%INV

Reduction

DCServ. Level

N-SServ. Level

DC, Dry Retail 2,630 20.4 7.5 62.5% 95.3% 99.1%DC,

FrozenRetail

440 24.4 6.2 74.5% 94.5% 97.5%

DC, Dry Whls. 2,125 19.0 7.3 61.6% 96.8% 99.8%Mkt.

Whse Mfr.(frozen)

563 47.8 6.5 86.4% 90.3% 96.4%

DC, Dry Retail(1 Mfr)

387 20.9 7.3 65.1% 94.9% 99.3%

New Business Model New Business Model --- --- 19961996 (software or service???)(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)

The final business modelThe 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

Evant will provide extensive Evant will provide extensive retail merchandising retail merchandising functionalityfunctionality

Front officeCustomer management

12 applications

FulfillmentWMS and Transportation

12 applications

Ops Support

Financials& HR

9 apps

Evant Retail Merchandise Management[ Store ][ Catalog ][ Web ]

16 applications and “merchandise system of record”

Retail IT Requirements

Gaining Traction with Gaining Traction with CustomersCustomers

(recognized plus deferred)(recognized plus deferred)

'99 '00 '01 '02 '03

$0

$5

$10

$15

$20

$25

$30

Notes: Excludes Hammaccher Revenue in 2001

$400K

$27 mill

$5.2 mill

$11.8 mill

$18.8 mill

Retail CustomersRetail Customers

http://www.campingworld.com/

http://www.partyamerica.com/

Distributors and Distributors and ManufacturersManufacturers

http://www.janssen-ortho.com/JOI/eng_intro.asp

What are the opportunities today?



What is needed to optimize the supply What is needed to optimize the supply chain??chain??

Transportation options, cost, status, time

Handling options, cost, time, status

Inventory amount, value, purpose, status

Product cost options Base price

projections

Manufacturer promos & new products

Reta

iler

pro

moti

on

s

Integrated software to convert this dataIntegrated software to convert this data into actionable plans for each trading partnerinto actionable plans for each trading partner

What are the opportunities What are the opportunities tomorrow?tomorrow?

RFID and/or other visibility solutions combined with replenishment plans

Real-time business systems

Shared solutions hosted by third parties

StoreConsumer

Current Retail Business Model for wine

ProducerProducer

shared DCDistributor

DCRetailer DC

Cost/Sell $3 $12.5 $16.67 $16.67 $25Margin $9.50 $4.16 $6.25Margin % 76% 25% 33.4%Days of Inv months to yrs 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67

Example of $25 bottle at retail

StoreConsumer

CurrentCurrent Retail Business Model Retail Business Model

ProducerProducer


DCRetailer DC

Buy/Sell $3 N/A $12.5 $18.75 N/A $25Margin $9.50 N/A $4.16 $8.34Margin % 76% 25% 33.3%Days of Inv 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67EBIT increase $0.12% increase 17.6%

Example of $25 bottle at retail

StoreConsumer

Current Retail Business Model

ProducerProducer


DCRetailer DC

Buy/Sell $3 N/A $12.5 $18.75 N/A $25Margin $9.50 N/A $4.16 $8.34Margin % 76% 25% 33.3%Days of Inv 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67EBIT increase $0.12 $0.17% increase 17.6% 13.5%

Example of $25 bottle at retail (inventory impact)

StoreConsumer

New Vine Retail Business Model

ProducerProducer


DCRetailer DC

Buy/Sell $3 $12.5 N/A $25Margin $9.5 $11.25Margin % 76% 45%New Vine fee $1.25Margin increase $5.00Inventory saving $0.15EBIT before $1.25EBIT after $4.16EBIT increase 3.33X

Example of $25 bottle at retail (price +inventory impact)

Thank you

Homer Dunnfounder

415 403-6768

Package Grocery finished goods(mfr + Package Grocery finished goods(mfr + retailer) retailer)

43%

29% 28%

0%

10%

20%

30%

40%

50%

Transportation Inventory Handing

$2.36/case$2.36/caseThe trading partners sometimes have conflicting objectives

sf state sp class 10

Documents

inventory capital

day of inventory

inventory management

case cost

product cost

dos payment terms

lowest landed cost

percent of capital