ISLD Forum April 11, 2005

1
ISLD ForumApril 11, 2005

• A Balanced Perspective
• EPC/RFID Implementation in the CPG Industry
• Pam Stegemen - VP Supply Chain and Technology
• Sean Campbell - Partner, IBM Business Consulting
  Services

2
Workshop Objectives

• Discuss rationale for conducting the study
• Review key findings and implications
• Discuss recommended action plans

Answer any open questions about the study
3
Lessons Learned - History of e-collaboration tools

• It should not be about The Technology
• More emphasis on process change and improving
  product visibility and enhancing consumer value
• Set business oriented goals and measure results
• Be realistic about costs and savings
• Dont amplify the hype cycle
• Communications must be increased
• Top level message must be consistent
• Maintain flexibility and technology options
• Manage the pace of implementation
• Ensure there is a positive consumer point of view

EDI
GDS
4
The Goal Better supply and demand visibility
Better Product Visibility
Requires
Technical
Process
People

• Product location / movement data
• Automated data capture
• Links with GDS

• End-to-end processes
• Process standardization
• Industry infrastructure

• Collaboration
• Goal and incentive alignment
• Measurement and feedback

5
Why GMA conducted the study

• Many manufacturers have EPC initiatives in
  progress to explore potential benefits and to
  pilot the technology. These early adopters share
  a need to address common challenges

• Believing in the long term EPC vision, but
  not having a clear migration path to
  anticipated benefits
• Balancing the need of solving business
  problems across the value chain vs. the
  current focus around the technology of RFID
  tags and EPC itself
• Understanding distribution of investments
  and benefits among the value chain
  participants

GMA engaged both IBM and A.T. Kearney to conduct
the study
6
Scope of Analysis

• Manufacturer Companies
• 24 NA business cases - 90 companies with sales
  gt2 billion
• All business cases represented companies with
  relatively efficient operations (e.g. use WMS )
• Benefits identified are incremental to other
  current operational improvement initiatives

• Analysis Areas
• Pallet and case level tagging (no inner packs or
  eaches)
• Processes covered those from point of finished
  goods production thru receipt and storage in the
  retail backroom and movement to the sales floor
• Source tagging not addressed

Raw Matls Pkg. Suppliers
Manufacturer
Retailer
Door to Floor
Mfr. DC
Retailer RDC
Store Back Room
Store Shelf
Factory
Factory
Key
Included
Excluded
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Manufacturer Business Case Data

• Business Case Data
• 10 yr. time phased cash flows
• Includes est. retail adoption rates
• Includes company specific tagging strategies
  (slap ship -gt tag in mfg)
• Any anomalies were investigated and reviewed
  with company for clarification
• Assumptions, data, timing of investments and
  delivery of benefits came from individual
  participant companies and have NOT been changed
  (except tag costs)
• Business cases have been presented internally to
  respective management teams and represent a
  current, point in time, corporate view

8
Modelling Adjustments

• We normalized volumes and associated costs and
  benefit projections to eliminate any distortions
  caused by size
• We used constant tag cost estimates (with
  sensitivity analysis) as opposed to maintaining
  variety of existing company projections
• High level of variability across companies
• Ability to compare impact of tag prices across
  companies
• Provides direction around target or break-even
  tag prices
• Eliminates debate around starting, ending and
  rate of decreasing cost estimates
• We recalculated net present value analysis based
  on these modifications

9
Category Definitions Data Points Available
Dry Goods (food)
Dry Goods (non-food)
Cereal, Pasta
Health, Beauty Cosmetics
Frozen / Chilled
Detergent, Paper Products
Carbonated Drinks Snacks
Fresh Produce
Pharmacy
Shampoo, Lotion, Cold Medicine
Cigarettes Tobacco
Alcoholic Beverages
Frozen Dinners, Ice Cream, Juice
News Stationery
Toys
Consumer Electronics
Soda, Potato Chips, Pretzels
Music, Video Games
Apparel
Data Included
No Data Included
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Benefits Many Benefit Opportunities, but Four
Consistently Ranked as Primary Areas

• Reduced retailer claims (overages, shortages)
• Reduced DC/Plant labor
• Reduced returns labor

Increase Operating Income
Reduce Operating Costs
Increase Capital Efficiency
Reduce Working Capital

• Reduced inventory (safety stock)
• Reduction in write-offs due to returns/unsale-able
  s

Increase ShareholderValue
Increase Market Share

• Improved on shelf availability
• Reduced Counterfeiting
• Reduced Diversion

Increase Revenue

• Improved promotional planning and execution
• Improved shrink management

Increase Volume
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Benefits Vary Significantly across Product
Categories
Manufacturer Benefits Overview
Legend
Other DC labor Credits/claims Inventory
reduction Out of stock
DSD CSD, snacks
Grocery - food
Grocery non-food
Grocery frozen
HBC/OTC
All benefits are Averages, as of total 10-year
NPV benefits varied significantly by company
Note Percentages are averages and of total
over a 10-year horizon Source IBM and A.T.
Kearney business case studies
12
Out-of Stocks Still a Challenge for DC DSD
Based Product Categories
Company Analysis Example
Average OOS Rate for Selected DC-Based Categories

• Avg. Overall OOS Rate 7.9
• Avg. DSD OOS Rate 6.8

Average OOS Rate for Selected DSD-Based
Categories
Source Retail Out-of-Stocks A Worldwide
Examination of Extent, Causes and Consumer
Responses Full-Shelf Satisfaction Reducing
Out-Of-Stocks In the Grocery Channel An In-Depth
Look at DSD Categories
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Out of Stocks Impact Varies by Category,
Consumer Behavior Trading Partner Not all OOS
Lead to Lost Sales
Company Analysis Example
Average Consumer Response to OOS Situation
Retailer Impact (43)

• Average net lost sales due to OOS
• Overall CPG Basket 2.5
• DSD-Based Categories 2.1

Manufacturer Impact (31)
- Excluded from analysis although industry
research indicates incremental loss in revenue to
both manufacturer and retailer due to switching
to smaller or cheaper substitutes
Source Retail Out-of-Stocks A Worldwide
Examination of Extent, Causes and Consumer
Responses Full-Shelf Satisfaction Reducing
Out-Of-Stocks In the Grocery Channel An In-Depth
Look at DSD Categories
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Out-of Stocks RFID has the Potential to Help
Improve Store Level Execution and Upstream
Efficiencies
Impact to manufacturer and retailer will vary
based upon brand loyalty of the product
DC-Based Example
OOS at Retail Shelf (average 8)
Upstream Issues (5-30)
Retail Store Issues (70-95)
Primary Area of Benefit
Receiving Accuracy
Backroom Visibility
Replen. from Backroom
Data Accuracy
Product Availability- Forecasting
Planogram Comp.
Cycle Count
Physical Inv.
Retailer DC Execution
Mfg. DC Execution
POS Accuracy
Replen. Algorithms
Primary level of impact
- Case level impact
- Item level impact
The majority of anticipated benefits from the
reduction of out of stocks in a DC environment is
predicated on enhanced retail store execution
Source Retail Out-of-Stocks A Worldwide
Examination of Extent, Causes and Consumer
Responses IBM Business Consulting Services
analysis
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Most of the Benefits will Require Coordination
with Trading Partners
Source IBM Business Consulting Services
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Costs Vary by distribution method (DC vs. DSD),
with tag costs, infrastructure/integration as
key drivers
DC Supply Chain Costs
DSD Supply Chain Costs
Higher Percentage
25 higher in total costs due to number of
facilities
All costs are averages, and are expressed as of
total cost based on a 10-year NPV horizon
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Other Cost Category

• Corporate Overhead
• Extra Labor required to manage and administer
  EPC/RFID related infrastructure and data
• Incremental Short Term Costs
• Carrying Dual Inventory
• Additional Warehouse costs
• Labor expenses related to tagging subset of
  pallets and cases

18
Business Case Results Vary by Category
Analysis of Manufacturer Business Cases (Pallet
and Case Level Tagging) - Range of NPV Results
by Product Category Using Constant Tag Costs
Tag costs
Business cases show positive NPV if tag prices
are 0.05 0.10
Business cases indicate that 0.00 tags do not
generate a positive NPV for all
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Even if we double the projected out of stock
benefit, we do not achieve a positive NPV for all
categories
Out-of-stock 100
Tag costs
.25
.15
.05
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Overview of Study Findings

• Benefit and cost estimates vary significantly by
  company and product category -these differences
  should be considered in any roll-out plan
• Trading partners must be capable of sharing
  clean data, via GDS, to gain maximum benefits
  from EPC
• Manufacturers business cases are heavily
  contingent upon retailers improving operations
  (and sharing new data)
• While the vision for EPC/RFID is compelling, the
  economics for manufacturers are currently
  tempering adoption
• Even optimistic estimates for tag prices are
  insufficient to generate a positive returns for
  many manufacturers
• Need to find new ways to increase the value
  potential, build more confidence in benefits and
  decrease overall costs

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Benefits appear to differ by category
attributes(Manufacturer View)

• High value, low volume
• Significant out-of-stocks, shrinkage, and
  unsaleables
• High level of counterfeit, illegal diverting
• Significant use of mixed pallets and eaches
• Low use of bar code technology in supply chain
• Examples Pharma, OTC, consumer electronics,
  high fashion, cosmetics, some HBC and non-food

• Low value, high volume
• Limited shrinkage
• Lower levels or value ofout-of-stocks
• Low risk of counterfeit, illegal diverting
• Significant use of full pallet, full truck
  ordering
• Sophisticated use of bar code technology, WMS,
  etc.
• Example Dry foods, perishables, beverages,
  frozen goods, DSD distribution

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Recommended Industry Actions
Understand Category Dynamics Rollout categories
most able to gain return on EPC investment in the
short term
Define process changes and demonstrate
benefits Collaborate with trading partners to
develop plan for solving business issues Using
EPC and process changes
Share data freely, openly and in a standardized
way All business cases assumed complete, free
access to product movement data EPC network
cannot work with use of data
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Managing the Transition 2005 2008

• Complete data synchronization efforts. Without
  correct data limited benefits will be realized
• Understand the benefit drivers, especially those
  requiring collaboration
• Adapt business processes to take advantage of new
  supply chain data
• Expect to manage parallel systems for several
  years. Ensure management systems are agile
• Leverage the invested infrastructure encourage
  broader retail involvement and consider other EPC
  applications
• Plan as an investment

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Questions?

• Pam StegemanVice President, Supply Chain and
  Technologypstegeman_at_gmabrands.com
• Sean CampbellPartner, IBM Business Consulting
  Servicessean.campbell_at_us.ibm.com