Core Benchmarks Planning, Inventory & Forecasting The Supply Chain Leadership Forum 2010 Dallas, Texas Track D-3 Facilitated by Greg Hazlett Principal, Tompkins Associates
Session Scope This Session Will Focus On: Finished goods metrics tracked Organizational responsibilities: Who s responsible, who s accountable Inventory trends: 2007 2009 Results Ramifications Opportunities for further improvement 2
Finished Goods Inventory Metrics Percentage of Respondents Utilizing Finished Goods Inventory Metrics Inventory Turns Inventory Balance (units, dollars, lbs, etc.) Days of Supply On-time Shipment Order Fill Rates Inventory Accuracy Out of Stocks SKU In-stock Percentages Backorders Shrinkage (all causes) Gross Margin Return on Investment Holding Costs Percentage of Inventory in Acounts Payable Other Did Not Answer 36.2% 35.2% 35.2% 25.7% 17.1% 9.5% 7.6% 1.0% 47.6% 83.8% 81.0% 75.2% 66.7% 64.8% 61.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 3
Finished Goods Inventory Metrics Detailed Analysis Not surprisingly, the inventory turns metric is the most commonly used measurement. Companies also frequently track the actual balances of dollars, units or pounds of finished goods inventory. The next most popular metric is days of supply, which is also growing in use across several major industries particularly with retailers as a good indicator of demand changes. The service metrics of on-time shipment and order fill rates are regularly utilized as well. Inventory accuracy was also selected as an important metric by more than 50% of survey participants. 4
Inventory Metrics Inventory Metrics By Industry Sector Inventory Metrics Manufacturing Retail Top Quartile Inventory Turns 11.9 turns 10.6 turns 21.3 turns Inventory Accuracy 98.0% 97.5% 99.6% OS&D 1.0% 0.2% < 0.1% Storage Utilization 78.3% 73. 4% 85.0% Stock-out Frequency 1.90% 16.3% 0.1% There is significant discrepancy between average and top quartile especially in inventory turns and stock-out frequency. Sizeable differences in OS&D and stock-out frequency are apparent between manufacturing and retail sectors. Additional detail at industry segment level is available later in presentation. 5
Organizational Responsibility How Responsibility for Finished Goods Inventory is Segmented Organizationally in Respondents Companies Planning Inventory Needs Determining Inventory Levels Distributing Inventory Controlling Inventory Divisionwide Corporatewide 45.7% 42.9% 40.0% 33.3% 39.0% 39.0% 34.3% 40.0% Geographically 14.3% 18.1% 24.8% 25.7% Did not Answer 1.0% 0.0% 1.0% 1.0% Planning inventory needs, determining inventory levels and distributing inventory are most often performed at the corporate level. Controlling inventory is commonly completed at the division level. 6
Geographical Responsibility How Responsibility for Finished Goods Inventory is Segmented Geographically in Respondents Companies Planning Inventory Needs Determining Inventory Levels Distributing Inventory Controlling Inventory Domestic Only 35.2% 36.2% 32.4% 37.1% International Only 1.0% 1.0% 1.0% 0.0% Domestic and International 61.9% 59.0% 63.8% 58.1% Did not answer 1.9% 3.8% 2.9% 4.8% In a majority of companies that have an international component for finished goods inventory, there is one organization that handles both domestic and international finished goods inventory. This applies to all industries. 7
Setting FG Inventory Targets Areas of Respondents' Companies that are Primarily Responsible for Setting Finished Goods Inventory Targets Procurement / Purchasing Merchandising Manufacturing Distribution Operations Customer Service Inventory Management Forecasting Marketing Retail Operations Sales Finance / Accounting / Controller Executives Logistics and Transportation 21.9% The inventory management organization in many companies is responsible for setting finished goods inventory targets either by themselves or as a shared responsibility. Several other functional areas are involved in setting finished good inventory targets. This implies that the sales, inventory and operations planning (SI&OP) process is being used with cross-functional representation for setting inventory targets. 100% 9.5% 5.7% 3.8% 4.8% 2.9% 20.0% 9.5% 3.8% 1.0% 2.9% 4.8% 6.7% 5.7% Shared 36.2% 13.3% 32.4% 25.7% 13.3% 43.8% 29.5% 21.0% 9.5% 19.0% 26.7% 32.4% 8
FG Inventory Levels: Accountability Areas of Respondents Companies that are Primarily Accountable for Finished Goods Inventory Levels 100% Shared Procurement / Purchasing 12.4% 37.1% Merchandising 6.7% 15.2% Manufacturing 6.7% 41.0% Distribution Operations 4.8% 33.3% Customer Service 0.0% 19.0% Inventory Management 12.4% 46.7% Forecasting 5.7% 28.6% Marketing 1.9% 19.0% Retail Operations 0.0% 11.4% Sales 1.9% 20.0% Finance / Accounting / Controller 1.0% 18.1% Executives 8.6% 22.9% Logistics and Transportation 3.8% 22.9% Several different organizations within companies have responsibility for the levels of finished goods inventory. Inventory management department is most common, but many functional areas are also involved. Surprisingly, executives also play a significant role in managing finished goods inventory levels. 9
Inventory Metrics Inventory Control by Segment Automotive The automotive industry is split between corporate and division responsibility. Consumer Goods Responses for the consumer goods industry are dispersed among corporate, division and geographic responsibility. Food and Beverage Generally for food and beverage companies, responsibility is at the division level except for planning, which is a corporate responsibility. Inventory Accuracy by Segment Automotive 91.8% Consumer Goods 97.9% Food and Beverage 99.2% High Tech 99.1% Pharmaceutical 99.3% Retail 98.2% High Tech High tech is split between corporate and geographic responsibility. Pharmaceutical The pharmaceutical industry places responsibility geographically for planning, but divisionally for all other aspects of inventory management. Retail Retail companies are weighted heavily toward corporate responsibility for all aspects of inventory management. 10
FG Inventory Levels: Accountability Industry Analysis Industry Auto Consumer Products Retail High Tech Food and Beverage Pharmaceutical 1 st Choice Procurement Inventory Management Merchandising Procurement Manufacturing Inventory Management 2 nd Choice Inventory Management Procurement Inventory Management Inventory Management Procurement Distribution Operations Order Fill Rate Automotive Consumer Products Retail High Tech Food and Beverage Pharmaceutical 93.0% 89.7% 89.7% 97.0% 96.5% 95.0% This chart identifies the functional areas most selected as being accountable for finished goods inventory levels by industry. 11
Charged For or Owns Inventory Areas of companies that get charged for or own finished goods inventory are spread out among several functional areas with inventory management, manufacturing, procurement and distribution operations being selected most frequently in the survey. Executives also are charged with ownership of finished goods inventory in approximately one out of 12 companies. Areas of Respondents Companies that Get Charged for or Own Finished Goods Inventory Procurement / Purchasing Merchandising Manufacturing Distribution Operations Customer Service Inventory Management Forecasting Marketing Retail Operations Sales Finance / Accounting / Controller Executives Logistics and Transportation 100% 9.5% 3.8% 13.3% 8.6% 1.9% 11.4% 4.8% 3.8% 0.0% 5.7% 1.0% 8.6% 3.8% Shared 24.8% 12.4% 21.9% 23.8% 8.6% 34.3% 16.2% 11.4% 14.3% 15.2% 12.4% 16.2% 17.1% 12
Charged For or Owns Inventory Industry Analysis Industry 1 st Choice 2 nd Choice Order Accuracy Auto Inventory Management Distribution Operations Automotive Consumer Products 91.8% 97.9% Consumer Products Retail Procurement Retail Operations Inventory Management Merchandising Retail High Tech Food and Beverage 98.2% 99.1% 99.2% High Tech Inventory Management Executives Pharmaceutical 99.9% Food and Beverage Inventory Management Sales Pharmaceutical Distribution Operations Inventory Management This chart identifies the functional areas most likely to be charged for or own finished goods inventory levels by industry. 13
FG Inventory Dollars as a % of Sales Percentage of Respondents Experiencing a Change in Finished Goods Inventory Dollars as a Percentage of Sales Year-end 2009 vs. Year-end 2007 Year-end 2009 vs. Year-end 2008 > 10% Reduction 34.3% 22.9% 1-9% Reduction 37.1% 41.0% No Change 6.7% 12.4% 1-9% Increase 9.5% 8.6% >10% Increase 5.7% 6.7% More than 40% of companies experienced a 1-9% decrease in finished goods inventory as a percentage of sales between 2008 and 2009. Nearly one-quarter of respondents noticed a reduction greater than 10%. From 2007 to 2009, there were also major reductions in finished goods inventory, leading to a trend that continued through 2009. Companies that did not see this effect may not have been strongly impacted by economic conditions, did not reduce inventories proportionally with the sales movement, or saw declines in sales beyond the amount of inventory that they could reduce. 14
Reasons for FG Changes: 2009 Smarter Planning Drop in Sales Management Focus Sales Growth Lower Stock Levels Inventory Mix No Impact Inventory Shrink Fill Rate Changes End of Life Market Changes Technology Buying Less Reasons for Finished Goods Inventory Changes 2.6% 2.6% 1.3% 1.3% 1.3% 1.3% 6.6% 5.3% 5.3% 10.5% 21.1% 21.1% 19.7% 0% 5% 10% 15% 20% 25% Percentage of Respondents Better planning practices helped a large percentage of respondents reduce their finished goods inventory. Likewise, a drop in sales forced numerous companies to reduce inventory. During the slowed economic conditions of 2009, management turned their attention to reducing finished goods inventory to maintain profitability, causing management focus to be one of the top reasons for the changes. 15
Customer Satisfaction Changes Percentage of Respondents 50% 40% 30% 20% 10% 0% Changes in Customer Satisfaction Levels from Year-End 2008 to Year-End 2009 (Measured by Order Fill Rates or the Equivalent) 2.9% > 10% Reduction 15.2% 1-9% Reduction 32.4% 39.1% No Change 1-9% Increase 6.7% >10% Increase 3.8% No Response Customer satisfaction levels increased for nearly half of the companies, remained the same for 32%, and declined for 18%. Clearly, reduced inventory levels did not have a major negative impact on service levels. 16
FG Inventory: Improvement Potential Amount of Improvement Potential for Finished Goods Inventory Minor Moderate Inventory Dollars 23.8% 47.6% Holding Costs 57.1% 27.6% Inventory Turns 26.7% 48.6% Customer Satisfaction 48.6% 29.5% Major 21.9% 7.6% 17.1% 12.4% Did not answer 6.7% 7.6% 7.6% 9.5% Focusing on the amount of opportunity for finished goods improvement in the future, responses are somewhat conservative. The majority of respondents indicate a moderate or minor opportunity. Also, a surprising number of survey participants did not answer this question, possibly indicating that they are uncertain of the improvement potential or believe it to be negative. 17
Areas of Change for FG Inventory Areas of Change Needed for Finished Goods Inventory Improvement Inventory Dollars Holding Costs Inventory Turns Customer Satisfaction Suppliers 54.3% 36.2% 42.9% 32.4% Policies 46.7% 38.1% 47.6% 35.2% Processes 67.6% 45.7% 72.4% 56.2% Logistics 23.8% 34.3% 32.4% 34.3% Technology 43.8% 34.3% 50.5% 38.1% People 45.7% 29.5% 45.7% 61.0% Customer 32.4% 16.2% 25.7% 32.4% A process change is by far the most often identified area that needs improvement for finished goods inventory. The second area that needs the most changes depends on the metric: Suppliers impact inventory dollars Inventory policies impact holding costs; Technology impacts inventory turns People impact customer satisfaction 18
Inventory Management Processes Inventory Management Process Replenish Inventory When it Runs Low Have Formal Process for SKU Discontinuation Have Formal S&OP (or SIOP) Process Have Access to POS Information Have Product Hierarchy to Increase Forecast Accuracy Do Markdowns Have Formal Process to Forecast New SKUs Have Internal Reverse Logistics Process Do Returns and Markdowns Do Forced Allocations Do Replenishment and Forced Allocations Determine Optimum Safety Stock Working Capital vs. Lost Gross Margin Have Declining Net SKU Base Percentage of Participants 87.6% 69.5% 69.5% 63.8% 62.9% 60.0% 55.2% 53.3% 53.3% 51.4% 47.6% 32.4% 31.4% 19
Inventory Management Processes Detailed Analysis Most of the inventory management practices identified by respondents are being performed by more than 50% of the survey group. Many people are now discussing Sales, Inventory and Operations Planning (SIOP) processes, and surprisingly, a number of companies already have a process in place. However, the success level of their processes is unclear. SKU discontinuation has long been a source of problems for operations, yet a large percentage of companies say they have a process in use. Contrary to the expectation that point of sale (POS) data would be difficult to obtain, a large percentage of survey respondents are using POS information for finished goods inventory management. Again, it is not clear how effectively this data is being used. 20
Discussion Points 21
Discussion Points How do the metrics presented in this session vary from those you use for your distribution operations? Was there any data or results that you found particularly surprising (e.g., customer satisfaction increasing while inventory levels dropped)? With the worst behind us, how has your company s inventory policies changed in the past few months? What major inventory initiatives does your company currently perform? 22
Appendix: Survey Demographics 23
Survey Participant Demographics Percentage of Survey Respondents by Industry Retailer / Distributor 30% Manufacturer 70% Survey results are based on 105 responses. Seventy percent of the survey respondents are from manufacturing companies, and 30% are from retail and distributor organizations. However, roughly the same number of manufacturing and retail organizations were asked to complete the survey. 24
Survey Participant Demographics Percentage of Respondents by Industry Segment Industrial Commercial Food and Beverage Electronics Automotive, Truck and Vehicle Department and Discount Hobby, Toys, Arts and Crafts, and Sporting Goods Healthcare and Medical Products Hardware and Home Improvement Pharmaceutical Home Products, Furniture and Appliance Beauty, Health and Wellness Apparel, Fabric and Accessories Consumer Goods Specialty Service Provider 9.5% 7.6% 6.7% 5.7% 5.7% 5.7% 4.8% 4.8% 4.8% 4.8% 2.9% 1.9% 1.9% 17.1% 16.2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% The number of responses and the percentage of companies answering each question varies depending on the topic and question, but in general, the distribution of responses across industry segments in the figure above hold true for the results in this report. 25
Survey Participant Demographics Percentage of Respondents by Title Manager 25% Supervisor and Below 4% VP and Above 35% Director 36% There is a good distribution of respondents across supply chain titles, representing all organizational levels of the supply chain. 26
Survey Participant Demographics Percentage of Respondents by Country 100% 80% 89.5% 60% 40% 20% 0% 6.7% 1.0% 1.0% 1.0% 1.0% USA Canada UK Belgium Brazil Germany There is an obvious bias toward companies based in the U.S. However, Canada represents nearly 7% of respondents, and there is 1% from each of the other four countries identified. 27