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How much inventory do you really need??Target setting 2.0
Prof.dr. Bram [email protected]
+32.497.58.28.60
be.linkedin.com/pub/bram-desmet/1/788/823/
@bram_desmet
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My name is Bram …
• Business
– 1998 - 2003: IT manager, Arcelor-Mittal, Gent (Sidmar)
– 2003 - …: Consultant Strategy – SupplyChain – Operations, MÖBIUS
– 2009 - …: Managing Director, Solventure, S&OP software and software based services
– Sector experience: aftermarket, chemical/pharma, consumer goods, discrete/high-tech, metals, retail, recycling, SME's (+50 companies)
• Academic
– 1998, Master in Mathematics, Gent University
– 2002-2004, Executive MBA, Vlerick Business School
– 2006-2009, PhD in Operations Research, Gent, Multi-Echelon Inventory Optimization
– 2010-…, Adjunct Professor at the Vlerick Business School, Supply Chain and Operations
• Contact info
– [email protected], +32.497.58.28.60
– be.linkedin.com/pub/bram-desmet/1/788/823/
– @bram_desmet
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How much inventory do we really need??
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Company 2: strong in inventory turns but
out of balance
Company 3: betterbalanced but did not
recover to pre-crisis levels
Company 1: betterbalanced & good
rebound after crisis
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STRENGTH
BALANCE
RESILIENCE
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e.g. reduce cost bysourcing in far East
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e.g. increase market share by extendingproduct portfolio
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e.g. reduce inventoryby lowering safetystocks
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Focus/incentives in a typical productioncompany …
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Resulting pressure in the triangle
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Aligning the triangleis about maximizingROCE
Top-line
EBIT
ROCE
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Market leaders are
‘extremely disciplined
and focused’ on 1 of 3
strategic options
Treacy & Wiersema, 1995
Operational Excellence Product Leadership Customer Intimacy
• ‘Best price’ and/or
• ‘Best access’ (‘fast, easy,
painless’)
• ‘Best product’ • ‘Best service’ and/or
• ‘Best connectivity’
(‘relationship
orientation’)
• Efficiency through
process thinking
• Zero-defect service
• Best product through
continuous product
innovation
• Clear innovation strategy:
where to place the bets?
• Understanding the
broader problem
• Having expertise about
the customer’s business
• Customers carefully
selected
• The operations
department drives the
company
• Attention is paid to
process speed and quality
• R&D is key: idea
management
• Marketing is also key:
educate people with a
missionary zeal
• Get engineers, designers,
and marketers
systematically together
• Demonstrate expertise
and experience
• Strengthen the
relationship
• Build loyalty: focus on
customer retention
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Product Leadershiphighest cost in R&D, marketing, supply chain
Customer intimacythe extra mile comes at an extra cost
Operational Excellencecost leader in every fibre of the organization
service
inventory cost
Higherturns
Lowercost
Higherservice
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Product Leadershiphighest complexity, highest risk
Customer intimacycontrolled complexity
Operational Excellence simplicity drives efficiency
service
inventory cost
Higherturns
Lowercost
Higherservice
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Product Leadershipemotion beyond functional service
Customer intimacyan extra mile for a premium
Operational Excellenceexcel in the basics
service
inventory cost
Higherturns
Lower cost(excl.COGS)
Higher serviceAs measured by
Gross Margin
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Product Leadershiphighest risk with highest potential payoff
Customer intimacyan extra mile at an extra cost and premium
Operational Excellenceexcel in cost and the service basics
service
inventory cost
Higherturns
Higher serviceAs measured by
Gross Margin
Lower cost(R&D + SG&A)
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Product Leader
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Product Leader
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Indirect cost 32-33%gross margin 42-43%
� EBIT of 10%
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Indirect cost 32-33%gross margin 39-41%
� EBIT of 7-8%
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Product Leader
Indirect cost around 32-33%For a gross margin 42-43%
� EBIT of 10%
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Product Leader
Turns of 3 for an Indirect costaround 32-33%
For a gross margin 42-43%
� EBIT of 10%
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Notice Company 3:
Indirect cost around 18-19%For a gross margin 35%
� EBIT of 16-17%… because of underspending!
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service
inventory cost
Higherturns
Higher serviceAs measured by
Gross Margin
10%
20%
30%
42%
36
9 16%24%
32%
Lower cost(R&D + SG&A)
Example Benchmark for Technology Companies
Product Leader
� EBIT of 10%
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Cost Leader
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CostLeader
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Indirect cost 22-27%gross margin 25-30%
� EBIT of 3%
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Indirect cost 23-25%gross margin 21-23%
� EBIT of -2% to 0%
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Cost/Opex Leader
Indirect cost 22-27%gross margin 25-30%
� EBIT of 3%
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Opex/Cost Leader
Turns of 6-8 for …an indirect cost 22-27%
gross margin 25-30%
� EBIT of 3%
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Product Leader
Turns of 3 for an Indirect costaround 32-33%
For a gross margin 42-43%
� EBIT of 10%
Product Leader
tGrossProfi-1
urnsInventoryTEBIT%
NetSales
sCostofGood
urnsInventoryTEBIT%
urnsInventoryT
sCostofGood
NetSalesEBIT%
Inventory$
EBIT ⋅=
⋅=
⋅=
52,0%421
3%10
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
Turns of 6-8 for …an indirect cost 22-27%
gross margin 25-30%
� EBIT of 3%
29,0%271
7%3
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
>>
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Product Leader
Turns of 3 for an Indirect costaround 32-33%
For a gross margin 42-43%
� EBIT of 10%
Opex/Cost Leader
Turns of 6-8 for …an indirect cost 22-27%
gross margin 25-30%
� EBIT of 3%
Product Leader
tGrossProfi-1
urnsInventoryTEBIT%
NetSales
sCostofGood
urnsInventoryTEBIT%
urnsInventoryT
sCostofGood
NetSalesEBIT%
Inventory$
EBIT ⋅=
⋅=
⋅=
52,0%421
3%10
Inventory$
EBIT=
−
⋅= 29,0
%271
7%3
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
= 51,0%301
9%4
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
Turns of 9 for …an indirect cost 26%
gross margin 30%
� EBIT of 4%
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Product Leader
Turns of 3 for an Indirect costaround 32-33%
For a gross margin 42-43%
� EBIT of 10%
Product Leader
tGrossProfi-1
urnsInventoryTEBIT%
NetSales
sCostofGood
urnsInventoryTEBIT%
urnsInventoryT
sCostofGood
NetSalesEBIT%
Inventory$
EBIT ⋅=
⋅=
⋅=
52,0%421
3%10
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
51,0%301
9%4
Inventory$
EBIT=
−
⋅=
Opex/Cost Leader
Turns of 9 for …an indirect cost 26%
gross margin 30%
� EBIT of 4%
49,0%361
5,4%7
Inventory$
EBIT=
−
⋅=
Customer Intimacy
Leader
Turns of 4,5 for …an indirect cost 29%
gross margin 36%
� EBIT of 7%
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service
Higherturns
Higher serviceAs measured by
Gross Margin
30%
36%
42%
34,5
9 26%29%
32%
Lower cost(R&D + SG&A)
Example Benchmark for Technology Companies
Product Leader
� EBIT of 10%EBIT/Inventory$ = 0,5
Opex/Cost Leader
� EBIT of 4%EBIT/Inventory$ = 0,5
Customer Intimacy
� EBIT of 7%EBIT/Inventory$ = 0,5
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Product Leader
Turns of 3 for an Indirect costaround 32%
For a gross margin 42%
� EBIT of 10%
Opex/Cost Leader
Turns of 9 for …an indirect cost 26%
gross margin 30%
� EBIT of 4%
Customer Intimacy
Leader
Turns of 4,5 for …an indirect cost 29%
gross margin 36%
� EBIT of 7%
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Product Leader
Turns of 3 for an Indirect costaround 32%
For a gross margin 42%
� EBIT of 10%
Opex/Cost Leader
Turns of 9 for …an indirect cost 26%
gross margin 30%
� EBIT of 4%
Customer Intimacy Leader
Turns of 4,5 for …an indirect cost 29%
gross margin 36%
� EBIT of 7%
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service
inventory cost
Higherturns
Higher serviceAs measured by
Gross Margin
30%
36%
42%
34,5
9 26%29%
32%
Lower cost(R&D + SG&A)
Benchmarking Approach
1. Analyse grossmargin of different
competitors
3. Analyse Inventory Performance for Product
/ Customer / Cost
2. Analyse R&D + SG&A expenses of different
competitors
4. Balance the targets byensuring the same
EBIT/Inventory$ performance
Gross Margin SG&A R&D Strat
High High High Product
Medium High Low Customer
Low Low Low Cost
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• Don’t benchmark in 1 dimension, but in multiple dimension
• Make sure to look at Service, Cost and Cash aspects (the Supply Chain Triangle)
• Different strategies lead to different targets
• Always define targets for a combined set of metrics
• All strategies should enable a comparableROCE
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Thank You!!
Prof.dr. Bram [email protected]
+32.497.58.28.60
be.linkedin.com/pub/bram-desmet/1/788/823/
@bram_desmet