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CUSTOM RESEARCH

Inventory Optimization
DELIVERING MORE THAN JUST INVENTORY REDUCTION

To satisfy customer demand, consumer goods
(CG) supply chains strive to have the right
amount of inventory in the right locations to
meet customer service and revenue goals with
nothing left over. In reality, it’s not quite that
simple, so some CG companies have turned
to inventory optimization initiatives to help.
While other supply chain projects were put
on hold during the downturn, interest in
inventory optimization continues to grow as
more CG companies understand the bene-
fits. This month, CGT partners with Logility
to ascertain how the industry perceives this
important program, which 74 percent of
respondents claim is one of their top five sup-
ply chain priorities.
Business Drivers
Historically, inventory reduction was an easy
way for companies to cut operating costs and
was often the primary source of ROI for tech-
nology implementations like ERP. However,
the majority of our respondents still feel there
is excess inventory in their supply chains (see
Figure 1) with 49 percent believing the excess
is between 11 percent and 30 percent of inven-
tory. Only 11 percent of our respondents
believe they have their inventory under con-
trol with minimal excess. While inventory
reduction is the primary driver, there are other
business goals (see Figure 2). More than half
(53 percent) of our respondents cited
improved customer service levels as a very
influential factor, almost half (43 percent) aim
to cost effectively meet demand, and 40 per-
cent are trying to free up working capital.
Adoption Perception
Companies understand the broad benefits of
inventory optimization, but only half have
standard processes in place as part of supply
chain management protocol (see Figure 3).
Almost one-third are either in the early stages
of exploration or have plans for a major ini-
tiative within the coming year. There is the
perception, however, that inventory optimiza-
tion is more mainstream as one-quarter
believe it is ongoing at larger CG companies
and another 20 percent believe it is active
throughout the industry regardless of size.
Some of those perceived differences may
depend on how companies define inventory
optimization. The most common implemen-
tation (44 percent) includes optimizing local
safety stock at the finished goods level. Only
20 percent are optimizing inventory across
multiple locations of the supply chain, and
just 11 percent are optimizing local safety
stock at several supply chain stages. Inventory
targets are reviewed and reset monthly or
quarterly for the majority of research partic-
ipants, and most measure inventory perform-
ance in days of supply.

EXPERT PERSPECTIVE • BY KARIN BURSA, VP OF MARKETING, LOGILITY

T HE VALUE OF MU LTI - ECHELO N I N VEN TO RY O P T I MI Z AT I O N

Multi-Echelon Inventory Optimiza-
tion (MEIO) can provide significant
value to consumer goods busi-
nesses that have more complex
supply chains, a larger number of
SKUs and higher variability.
In the beauty products division
of one major consumer products
company, inventory optimization
is a critical focus, freeing up cash
for reinvesting in the business and
maximizing value for both con-
sumers and shareholders.
The business had already made
excellent progress in reducing
inventory within individual stages
of its supply chains. But as prod-
uct lifecycles decreased and the
number of product offerings relent-
lessly increased, it became more
and more challenging to enact
inventory reductions without
impacting service levels.
“Implementing multi-echelon
optimization tools reignited our
inventory reduction while contin-
uing to maintain our excellent cus-
tomer service,” says the Vice
President of Product Supply at the
worldwide business unit.
The team starts by optimizing
inventory within an existing supply
chain environment, and then strate-
gically redesigns the supply chain
using MEIO to create a new value
curve. For one supply chain with
eight echelons and 4,000 nodes, tac-
tical optimization yielded a 7 percent
inventory reduction, with the follow-
on strategic implementa-
tion adding another 4
percent reduction. The divi-
sion has now implemented
MEIO in 85 percent of its
global supply chains.
“Logility’s multi-echelon inven-
tory optimization tools are still fuel-
ing inventory improvements today,”
the VP added enthusiastically. “These
huge reductions are on top of previ-
ous improvements made using sin-
gle-stage inventory optimization.”
Company executives state that
multi-echelon inventory optimiza-
tion has saved more
than $100 million
to date, and they
expect to double
that figure over the
next several years.

32 CGT | OCTOBER 2010 | CONSUMERGOODS.COM

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BY KARA ROMANOW

FIGURE 1
Excess Inventory in End-to-End Supply Chain
EX C E S S

Greater than 30 percent 2%

21% to 30% 14%

Opportunities
Like many data-intensive supply chain activ- 11% to 20% 3%
ities, technology can help accelerate adop-
tion and value realization. Over half (61 5% to 10% 23%
percent) of respondents are primarily using
There is excess inventory but
spreadsheets to manage the process, but 44 can’t estimate a percentage 11%
percent also have specific software tools. There is minimal excess
inventory in our supply chain 11%
Another 42 percent use built-in components
of existing ERP or supply chain applications. Don’t know 4%
Most companies plan on continuing their
formal, repeatable inventory policy planning
and target setting to improve customer serv- FIGURE 2
Business Drivers for Inventory Optimization
“The majority of our BUSINESS DRIVER Very Influential Somewhat Not
Influential Influential Influential
respondents still feel there
Improve customer service levels 53% 31% 16% 0%
is excess inventory in their Cost-effectively meet demand 43% 41% 11% 5%
supply chains with 49 percent Free up working capital 40% 37% 20% 3%
Minimize the impact of demand 26% 43% 20% 11%
believing the excess is uncertainty and forecast error
Prevent supply volatility and long lead 25% 38% 32% 5%
between 11 percent and times from creating excess inventory
30 percent of inventory.” Increase inventory turns 25% 54% 20% 1%
Identify causes of excess inventory 17% 34% 41% 8%
ice levels and free up working capital. Almost Improve SKU by SKU target setting/efficiency 13% 47% 30% 10%
half plan on starting or increasing their use Provide all stakeholders with a common 8% 30% 46% 16%
of best of breed tools to support processes. perspective on the supply chain
One program that almost half of respondents
intend to start and one-quarter plan on
increasing is managing inventory at supplier FIGURE 3

sites, continuing the collaborative trend of Inventory Optimization Adoption Status

recent years. Over half will continue to lever- STAT U S
age inventory optimization to drive more A regular discipline is part of our
50%
fact-based decisions within existing S&OP supply chain management process
processes and another one-third will increase In the early stages of
20%
this activity. exploration or adoption
Overall, inventory optimization has great Conducted on a project basis,
11%
sporadically over time
value potential. Technology adoption will
A major corporate supply chain
accelerate the benefits but must be supported 9%
initiative for the coming year
by strong, standard processes. The specific
elements of the initiatives may vary, but as Ongoing in other parts of the company 2%
long as the goals and scope are clearly defined,
None of the above 8%
success is definitely achievable.

CONSUMERGOODS.COM | OCTOBER 2010 | CGT 33

Consumer Goods Technology

September 2010
1. What was your company's annual revenue in 2009?

2009 revenue %
Less than $50 million
Less than $50 million 9%
26% $50 to $249 million
$50 to $249 million 9% 25%
$250 to $499 million
$250 to $499 million 12%
18% $500 to $999 million
$500 to $999 million 25%
$1 billion to $5 billion
$1 billion to $5 billion 26% 12% More than $5 billion
More than $5 billion 18% 9% 9%

2. What is your primary consumer goods vertical?

Food / Beverage
Primary consumer goods vertical % Consumer Packaged Goods
Food / Beverage 28% Apparel / Footwear
Consumer Durable Goods
Consumer
Co su e Packaged
ac aged Goods 18%
8%
Distribution / Wholesale
Apparel / Footwear 12% Retail
Consumer Durable Goods 11% Health and Beauty
Paper / Lumber / Timber
Distribution / Wholesale 9%
Medical Devices
Retail 8% 28%
Transportation / Logistics
Health and Beauty 5% Consumer Electronics
Paper / Lumber / Timber 5% Other
18%
Medical Devices 2%
Transportation / Logistics 2%
12%
Consumer Electronics 0% 11%
Other 2% 9%
8%
5% 5%
2% 2% 2%
3. What percent of your company's sales are highly seasonal?

Highly seasonal %
Less than 20 percent
Less than 20 percent 38%
38% 20 to 49 percent
20 to 49 percent 28%
33%
50 percent or more 33% 50 percent or more
28%
Don't know 2% Don't know

2%

4. How would you compare your company's inventory turns against competitors?

Inventory turns %
Better
Better 32%
54% Average
Average 54%
Worse 5% Worse

Don't know 9% Don't know

32%

9%
5%
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 %
5 to 10 percent 23%
11 to 20 percent 35%
21 to 30 percent 14%
Greater than 30 percent 2%
Believe there is excess inventory but can't estimate a percentage 11%
We believe there is minimal excess inventory in our supply chain 11%
Don't know 5%

5 to 10 percent

11 to 20 percent

21 to 30 percent
35%
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

Don't know

23%

14%

11% 11%

5%

2%
6. To what degree do you feel formal inventory optizimation programs have been adopted by CPG companies?

Formal inventory optimization %

Only early adopters are doing inventory optimization 18%
Inventory optimization is ongoing at large CPG companies 26%
Inventory optimization has been extensively adopted within one or two CPG sectors 5%
Inventory optimization is active at many CPG companies regardless of size or sector 20%
Inventory optimization initiatives are in place at more than 50 percent of CPG companies 2%
Don't know 29%

Only early adopters are doing inventory optimization

Inventory optimization is ongoing at large CPG companies

Inventory optimization has been extensively adopted within one or two CPG sectors

Inventory optimization is active at many CPG companies regardless of size or sector

Inventory optimization initiatives are in place at more than 50 percent of CPG companies

Don't know

29%
26%

20%
18%

5%
2%
7. At the VP level within your organization, where does inventory optimization rank as a supply chain priority?

Supply chain priority %

Top priority among supply chain initiatives 6%
In our Top 3 supply chain priorities 48%
In our Top 5 supply chain priorities 20%
Important, but not a Top 5 priority 14%
No inventory optimization initiatives are currently planned 6%
Don't know 6%

Top priority among supply chain initiatives

In our Top 3 supply chain priorities

In our Top 5 supply chain priorities

Important, but not a Top 5 priority

48%
No inventory optimization initiatives are currently planned

Don't know

20%

14%

6% 6% 6%
8. Inventory optimization in our company / division / business unit is:

Inventory optimization %
A regular discipline that is part of our supply chain management process 50%
Conducted on a project basis, sporadically over time 11%
In the early stages of exploration or adoption 20%
A major corporate supply chain initiative for the coming year 9%
Ongoing in other parts of the company 2%
None of the above 8%

50% A regular discipline that is part of our supply chain management process

Conducted on a project basis, sporadically over time

In the early stages of exploration or adoption

A major corporate supply chain initiative for the coming year

Ongoing in other parts of the company

None of the above

20%

11%
15%
8%

2%
9. Our team's inventory optimization tools include:

Tools %
Specific software tools for inventory optimization 44%
Primarily spreadsheets and rules of thumb 61%
Built-in components of our existing ERP/APS system 42%
Don't know 2%
Other 6%

Specific software tools for inventory optimization

Primarily spreadsheets and rules of thumb

61% Built-in components of our existing ERP/APS system

44% Don't know

42%
Other

2% 6%
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 44%
Local safety stock optimization at several supply chain stages 11%
Inventory optimization across multiple stages / locations of the supply chain 20%
Multi-echelon inventory optimization across the end-to-end supply chain 8%
Don't perform any inventory optimization 11%
Don't know 6%

Local safety stock optimization at the Finished Goods level

Local safety stock optimization at several supply chain stages

44% Inventory optimization across multiple stages / locations of the supply chain

Multi-echelon inventory optimization across the end-to-end supply chain

Don't perform any inventory optimization

Don't know

20%

11% 11%
8%
6%
11. How often do you review and reset inventory targets? Annually

Quarterly
Inventory targets %
Annually 16% 36% Monthly
34%
Quarterly 34% Weekly
Monthly 36%
Don't know
Weekly 11%
Don't know 3%
16%
15%

3%

12. How do you measure inventory performance? Multiple responses permitted.

Days of Supply
Measure %
Days of Supply 86% Service Levels

S i L
Service Levelsl 67% 86% Order Fulfillment Rate

Order Fulfillment Rate 56% Don't use any of these

Don't use any of these 8% 67% Don't know
Don't know 0% 56%

15%
13. Who has ultimate responsibility for the inventory in your company?

Ultimate responsibility %
Supply Chain Organization 56%
Manufacturing Operations 8%
Sales & Marketing 3%
Inventory Management 17%
Cross-Functional Team 14%
Don't know 0%
Other 2%

Supply Chain Organization

Manufacturing Operations

Sales & Marketing

56%
Inventory Management

Cross-Functional Team

Don't know

Other

17%
14%
8%
3% 2%
14. What factors are driving your efforts in inventory optimization? Please rate the influence of each.

Not Somewhat Very

Factors Influential Influential Influential Influential
Free Up Working Capital 3% 20% 37% 40%
Increase Inventory Turns 2% 20% 54% 25%
Cost Effectively Meet Demand 5% 11% 41% 43%
Improve Customer Service Levels 0% 16% 31% 53%
Improve SKU
SKU-by-SKU
by SKU target setting /
11% 30% 47% 13%
efficiency
Identify causes of excess inventory 8% 41% 34% 17%
Provide all stakeholders with a common
16% 46% 30% 8%
perspective on the supply chain
Minimize the impact of demand
11% 20% 43% 26%
uncertainty and forecast error
Prevent supply volatility and long lead
5% 32% 38% 25%
times from creating excess inventory

15. What inventory optimization activities will you start, continue or increase over the next 12 months?

Activities Start Continue Increase

F l repeatable
Formal, t bl inventory
i t li planning
policy l i 6% 73% 20%
Formal, repeatable inventory target setting 7% 70% 22%
Use of best-of-breed tools 31% 53% 16%
Expand use to more business units 25% 53% 23%
Managing inventory at customers' sites 26% 49% 26%
Managing inventory at suppliers' sites 44% 38% 18%
Inventory reduction to free up working capital 11% 66% 23%
Inventory optimization to improve service levels 10% 69% 21%
Inventory optimization to drive more fact-based decisions within your
15% 53% 33%
existing S&OP process