47% 26% 30% Inventory Optimization CUSTOM RESEARCH. Vs. Vs. Top 5 Drivers of Inventory Optimization. Inventory Optimization. Adoption Levels 33% 21%

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1 CUSTOM RESEARCH BY KARA ROMANOW Top 5 Drivers of Inventory Optimization Inventory Optimization Adoption Levels Improve Customer Service Levels EXPERT PERSPECTIVE By Karin Bursa, Vice President, Logility 89% % Free Up Working Capital Inventory Optimization STILL A SUPPLY CHAIN PRIORITY Inventory management is at the heart of many initiatives for consumer goods (CG) companies, yet long gone are the days when excess inventory yielded low hanging fruit to justify the ROI for improvement projects. Nowadays, most CG companies have fairly lean supply chains and are constantly working to balance customer service levels with inventory costs. For many, inventory optimization (IO) technology and accompanying processes allow further reductions in inventory while enabling high service levels amidst challenging conditions. CGT partnered with Logility to understand adoption of inventory optimization, revisiting research we first conducted in 2012 on the same topic. The changes have been subtle. Roughly 70 percent of respondents in both 2012 and today rank IO as either a Top 3 or Top 5 supply chain priority. There have been slight shifts in adoption and technology usage, but the initiative remains aspirational for many companies, albeit less so in the largest enterprises. Adoption overall has changed, with slightly fewer companies using IO as an integrated part of their supply chain or S&OP processes than in 2012, yet 7 percent more use it sporadically on a project basis. For those using IO consistently today, 55 percent are optimizing local safety stock at either the finished goods level or at several supply chain stages. Only 21 percent are performing multi-echelon inventory optimization (MEIO) across multiple locations compared to 38 percent in Ownership of inventory is similar as responsibilities for inventory continue to reside in the supply chain organization for 48 percent of respondents. Drivers behind IO initiatives remain consistent with customer service leading the way, followed by freeing up working capital, cost effectively meeting demand and identifying causes of excess inventory. Finally, technology usage has shifted with 37 percent using spreadsheets, 32 percent using built-in components of ERP systems, and 22 percent using specific IO tools. So, how big is the inventory problem? Half of respondents feel its inventory turns are average and 31 percent claim to have better than average turns. However, one-third has less than 10 percent excess inventory, and if we dig further into this group, we found some interesting trends: 57% feel their inventory turns are better than their competitors 43% rank IO as a Top 3 supply chain priority 79% rank IO as either a Top 3 or Top 5 priority 71% integrate IO as a regular discipline as part of their supply chain and/or S&OP process 43% use technology built into existing ERP or APS systems 29% leverage specific tools for MEIO While we can t claim that IO directly led to this performance, it is certainly worth exploring. 12 CGT OCTOBER 2014 CONSUMERGOODS.COM 33% A regular discipline that is part of our supply chain management process Cost-Effectively Meet Demand 80% Identify Causes of Excess Inventory 80% 82 Inventory Optimization 80 Maturity 80 78% Increase Inventory Turns 80 multiple responses permitted Conducted on a project basis, sporadically over time 60 Primary Tool Used for Inventory Optimization Spreadsheets 19% 37% Built-in components of existing ERP/ APS system focused on finished goods A proven discipline that is part of both the supply chain and sales & operations processes % Specific software tools for multi-echelon inventory optimization In the early stages of exploration or adoption Don t Know Other % 5 5 Total may not equal 100% due to rounding Major corporate supply chain initiative INVENTORY OPTIMIZATION BY COMPANY SIZE None of the above 0 Big Companies (>$1B) vs. Smaller Companies ( $1B) Ownership of Inventory Optimization Excess Inventory Held Throughout End-to-End Supply Chain OWNER ALL RESPONDENTS BIG SMALL Supply Chain 48% 57% 32% 9% 32% Cross-Functional 20% AMOUNT OF EXCESS USING SPREADSHEETS 5-10% 11-20% 33% 21-30% 7% Greater than 30% Excess inventory, but can t estimate a percentage Minimal excess inventory in the supply chain 47% 26% Small Companies Vs. Big Companies Doing MEIO Only of all respondents perform multi-echelon inventory optimization (MEIO) across multiple stages/locations supply chain. 11% Small Companies Doing MEIO Vs. 30% Big Companies Doing MEIO Inventory Optimization (IO) has several different meanings from simple inventory management techniques all the way to advanced 0 20 optimization multi-echelon At its simplest, organizations start by applying standard rules to finished goods inventory for individual SKU/locations, calculating how much safety stock is needed for a desired service level. Most companies start here, employing spreadsheets or simple rules supported by their ERP system. This rules of thumb phase features general policies and presents a big opportunity for further optimization. The next level in the maturity path is optimizing all inventory at a site within the supply chain network, using science to set time-phased statistical safety stock levels at the single site as part of a tactical planning process. These safety stock levels are usually simple recommendations generated by basic rules of thumb to cover peak selling seasons as well as off-season performance for a specific set of SKUs. This is the point at which ERPmanaged inventory policies begin to fall short. The next level is multi-echelon inventory optimization (MEIO), which applies science to model inventory across the entire network, analyzing how actions in one tier impact the cost and service levels of the overall supply chain, from raw materials through work in process to distribution channels and the customer. MEIO techniques have saved many consumer goods companies hundreds of millions of dollars while improving customer service. Optimization is more than reducing inventory; it is about evaluating your entire network to identify the appropriate inventory investment required to support your business strategy and service goals. Visit consumergoods.com to download the full research report. CONSUMERGOODS.COM OCTOBER 2014 CGT

2 Consumer Goods Technology September 2014

3 1. What was your company's annual revenue in 2013? Annual revenue % Less than $50 million $50 to $249 million $250 to $499 million $500 to $999 million 7% $1 billion to $5 billion 29% More than $5 billion 26% 29% 26% Less than $50 million $50 to $249 million $250 to $499 million $500 to $999 million $1 billion to $5 billion 7% More than $5 billion

4 2. What is your primary consumer goods vertical? Consumer goods vertical % Food / Beverage 38% Consumer Packaged Goods 24% Apparel 19% Consumer Durable Goods 10% Health and Beauty 10% 38% Food / Beverage 24% Consumer Packaged Goods 19% Apparel Consumer Durable Goods 10% 10% Health and Beauty

5 3. What percent of your company's sales are highly seasonal? Highly seasonal sales % Less than 20 percent 29% 20 to 49 percent 4 50 percent or more 24% 2% 4 29% 24% Less than 20 percent 20 to 49 percent 50 percent or more 2% 4. How would you company your company's inventory turns against competitors? Inventory turns % Better 31% Average 50% Worse 10% 10% 50% 31% Better Average 10% 10% Worse

6 5. Do you believe there is excess inventory being held throughout your end-to-end supply chain? If so, what percentage of total inventory do you suspect is excess? Excess inventory % 5 to 10 percent 11 to 20 percent 33% 21 to 30 percent 7% Greater than 30 percent Believe there is excess inventory but can't estimate a percentage We believe there is minimal excess inventory in our supply chain 5 to 10 percent 11 to 20 percent 21 to 30 percent 33% Greater than 30 percent Believe there is excess inventory but can't estimate a percentage We believe there is minimal excess inventory in our supply chain 7%

7 6. In general, to what degree do you feel formal multi-echelon inventory optimization business practices have been adopted by CPG companies? Adopted Inventory optimization is ongoing at large CPG companies Inventory optimization is active at many CPG companies regardless of size or sector Only early adopters are doing inventory optimization Inventory optimization has been extensively adopted within one or two CPG sectors Inventory optimization initiatives are in place at more than 50 percent of CPG companies % 29% 24% 19% 12% 10% 7% Inventory optimization is ongoing at large CPG companies Inventory optimization is active at many CPG companies regardless of size or sector 29% 24% Only early adopters are doing inventory optimization 19% Inventory optimization has been extensively adopted within one or two CPG sectors Inventory optimization initiatives are in place at more than 50 percent of CPG companies 12% 10% 7%

8 7. At the VP level within your organization, where does inventory optimization rank as a supply chain priority? Inventory optimization rank % In our Top 3 supply chain priorities 36% In our Top 5 supply chain priorities 33% Important, but not a Top 5 priority Top Priority among supply chain initiatives 7% No inventory optimization initiatives are currently planned 2% 36% 33% In our Top 3 supply chain priorities In our Top 5 supply chain priorities Important, but not a Top 5 priority Top Priority among supply chain initiatives No inventory optimization initiatives are currently planned 7% 2%

9 8. Inventory optimization in our company / division / business unit is: Inventory optimization A regular discipline that is part of our supply chain management process Conducted on a project basis, sporadically over time A proven discipline that is part of both our supply chain and sales & operations processes In the early stages of exploration or adoption A major corporate supply chain initiative for the coming year None of the above % 33% 19% A regular discipline that is part of our supply chain management process 33% Conducted on a project basis, sporadically over time A proven discipline that is part of both our supply chain and sales & operations processes In the early stages of exploration or adoption A major corporate supply chain initiative for the coming year 19% None of the above

10 9. Our team's primary inventory optimization tool is: Primary tool Primarily spreadsheets Built-in components of our existing ERP/APS system focused on finished goods Specific software tools for multi-echelon inventory optimization Other % 37% 32% 22% Primarily spreadsheets 37% 32% Built-in components of our existing ERP/APS system Specific software tools 22% Other

11 10. If you do perform inventory optimization within your supply chain, what is the scope? Scope Local safety stock optimization at the Finished Goods level Local safety stock optimization at several supply chain stages Multi-echelon inventory optimization across multiple stages / locations supply chain Don't perform any inventory optimization % 29% 26% 7% Local safety stock optimization at the Finished Goods level Local safety stock optimization at several supply chain stages 29% 26% Multi-echelon inventory optimization across multiple stages / locations supply chain Don't perform any inventory optimization 7%

12 11. How often do you review and reset inventory targets? How often % Annually Quarterly 29% Monthly 19% Weekly 10% 29% 19% Annually Quarterly Monthly 10% Weekly

13 12. How do you measure inventory performance? Multiple responses permitted. Measure performance % Service Levels or Fill Rate 64% Days of Supply 52% Financial Inventory Investment or Working Capital 48% Annual Inventory Turns 4 64% Service Levels or Fill Rate Days of Supply 52% 48% 4 Financial Inventory Investment or Working Capital Annual Inventory Turns

14 13. Who has ultimate responsibility for the inventory in your company? Responsibility % Supply Chain Organization 48% Cross Functional Team 20% Inventory Management 10% 10% Manufacturing Operations 8% Other 48% Supply Chain Organization Cross Functional Team Inventory Management 20% Manufacturing Operations 10% 10% 8% Other

15 14. What factors are driving your efforts in inventory optimization? Please rate the influence of each. Not Somewhat Very influential Influential Influential Influential Free up working capital 2% 1 41% 41% Increase inventory turns 2% 20% 56% 22% Cost effectively meet demand 2% 41% 39% Improve customer service levels 3% 8% 38% 51% Improve SKU-by-SKU target setting / efficiency 10% 2 58% 8% Identify causes of excess inventory 3% 18% 62% 18% Provide all stakeholders with a common perspective on the supply chain 10% 4 38% 8% Minimize the impact of demand uncertainty and forecast error 28% 5 13% Prevent supply volatility and long lead times from creating excess inventory 20% 53% 23% 15. What inventory optimization activities will you start, continue or increase over the next 12 months? Start Continue Increase Formal, repeatable inventory target setting 11% 76% 13% Use of best-of-breed tools 38% 50% 13% Expand use to more business units 37% 53% 10% Managing inventory at customers' sites 32% 52% 16% Managing inventory at suppliers' sites 33% 50% Inventory reduction to free up working capital 19% 54% 27% Inventory optimization to improve service levels 24% 53% 24% Inventory optimization to drive more fact-based decisions within your existing S&OP process 39% 42% 19%