San Francisco State University Supply Chain Management Class

1
San Francisco State UniversitySupply Chain
Management Class

• October 7, 2004

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

4
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)

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)
2.36/case
1.83/bottle
3.33/case
Inventory
Transportation
Transportation
Inventory
Handling
Handling
Inventory
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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
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
10
Inventory is only one component of Landed Cost
Manufacturer Warehouses
Retailers
Consumers
Wholesalers
Suppliers
Plants




Landed Cost
Our focus today
11
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

12
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
13
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

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How the shareholders benefit by solving this
problem
Suggest reading Chapter 3, Cash is King
15
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

16

ROIC Approach to Value Analysis(Return On
Invested Capital)
Operating Earnings
ROIC

Invested Capital
17
Relationship between Market Value, ROIC and
Earnings growth For SP 500 over six yr period
Ratio of market value to book value
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
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Projected Benefit for large Rx Retail Chain
Total 1.2 billion in cash flow
Based on revenue growth rate of 14.
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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
20
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
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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
22

ROIC Approach to Value Analysis(Return On
Invested Capital)
Operating Earnings
ROIC

Invested Capital
What happens to our ROIC if we can achieve
negative working capital??
23

• Fundamentals of
• Inventory Management

24
Why do we need more than one day of inventory?

• Order/Delivery
• frequency

Supply
Demand
25
Effect of order/delivery frequency on inventory
inventory
time
Order/Delivery frequency
26
Can our Inventory go to Zero?
- Variability of demand

• Delivery
• frequency

Supply
Demand
- Partial deliveries - Late deliveries
27
Example 1 of Variable Demand
Demand
28
How do we cover for the variability of demand and
supply?
inventory
time
Delivery frequency
29
Example 2 of Variable Demand
High variability of demand
Demand
30
How do we cover for the variability of demand and
supply?
inventory
time
Delivery frequency
31
Relationship of Safety Stock to Service level
Infinite
Safety Stock
low
60
99.9
Service level
32
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
33
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

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The components of Total Demand
Turn
Promotion New products
Short life cycle
35
What do we do once we know Total Raw Demand?
36
What is the objective of the Replenishment Plan??
37
Considerations for the replenishment plan
cases and eaches
pallets in Truck loads
Truck loads
Plants
Wholesalers Retail Distr. Ctrs.
Manufacturer regional Warehouses
Stores
38
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
39
The Multi-echelon solution
One Forecast of Consumer demand
40
The early days of Evant and some 20/20 hindsight
41
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)

42
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
43
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)

44
NONSTOP Logistics Vision
Stores
Plants
Cut Replenishment cost in half
38 Sort and Load Centers
or
Mfr. Whse
Distr. Center
45
Value Chain Supply Chain Demand Chain
Wholesale or Retail
Mfr. Whse
Distr. Center
Plant
Store
Consumer
Suppliers
46
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

47
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??)

48
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.

49
Grocery Industry Validations
50
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)

51
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

52
Evant will 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
53
Gaining Traction with Customers(recognized plus
deferred)
27 mill
18.8 mill
11.8 mill
5.2 mill
400K
Notes Excludes Hammaccher Revenue in 2001
54
Retail Customers
55
Distributors and Manufacturers
56
What are the opportunities today?
57
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
58
What are the opportunities tomorrow?

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

59
Current Retail Business Model for wine
Example of 25 bottle at retail
Store
Consumer
60
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 9.50 N/A 4.16
8.34 Margin 76 25
33.3 Days of Inv 45 45 45
carry 45days 0.04 0.15
0.21 0.21 EBIT (5)
1.25 EBIT (4) 0.67 EBIT
increase 0.12 increase
17.6
61
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 9.50 N/A 4.16
8.34 Margin 76 25
33.3 Days of Inv 45 45 45
carry 45days 0.04 0.15
0.21 0.21 EBIT (5)
1.25 EBIT (4) 0.67 EBIT
increase 0.12 0.17
increase 17.6 13.5
62
New Vine Retail Business Model
Example of 25 bottle at retail (price inventory
impact)
Store
Consumer
Buy/Sell 3 12.5 N/A
25 Margin 9.5
11.25 Margin 76
45 New Vine fee 1.25 Margin
increase 5.00 Inventory saving
0.15 EBIT before
1.25 EBIT after 4.16 EBIT
increase 3.33X
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Thank you

• Homer Dunn
• founder
• 415 403-6768

64
Package Grocery finished goods(mfr retailer)
2.36/case
The trading partners sometimes have conflicting
objectives