Download - SF State SP class 10
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San Francisco State UniversitySupply Chain Management
Class
October 7, 2004
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Requested AgendaRequested 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
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OutlineOutline 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)
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Outline (cont.)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)
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ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
TerminologyTerminology
Value ChainDemand Chain(finished goods)
Supply Chain
Supply ChainFor this class, this is the…..
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ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
Inventory is only one component of Landed Inventory is only one component of Landed CostCost
Transportation Handling InventoryProductCost
++ =Landed Cost+
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Comparing cost for current practices Comparing cost for current practices in in
Rx, Grocery and Foodservice Rx, Grocery and Foodservice (1996 (1996 dollars)dollars)
12%
71%
29%
23%
17%
28%
48%
43%
29%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Rx Grocery Foodservice
Dem
an
d C
hain
Cost
s, %
Inve
ntor
y
Tr a
nspo
rta t
ion
Inve
ntor
y
Han
dlin
g
$2.36/case$1.83/bottle $3.33/case
Tr a
nspo
rtat
ion
Inve
ntor
y
Han
dlin
g
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ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
Inventory is only one component of Landed Inventory is only one component of Landed CostCost
Transportation Handling InventoryProductCost
++ =Landed Cost+
IMPORTANTIn order to achieve lowest landed cost, you must
sub-optimize one or more of its components
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Packaged Grocery = $2.36/caseCost per Participant
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Transportation Inventory Handling
Mfr. Retail
$0.68
$0.32$0.38
$0.31$0.27
$0.40
The trading partners sometimes have conflicting objectives
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ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
Inventory is only one component of Landed Inventory is only one component of Landed CostCost
Transportation Handling InventoryProductCost
++ =Landed Cost+
Our focus today
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Why is inventory management Why is inventory management important?important?
P&G 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
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250
260
270
280
290
300
310
320
330
340
350
360
Out of Stocks for top selling 2000 UPCsN
um
ber
of
OO
S I
tem
s p
er S
tore
(Weekly profile)
Sat 1
2pm
Sun 12a
m
Sun 12p
m
Mon12
am
Mon 1
2pm
Tues 1
2am
Tues 1
2pm
Wed
12a
m
Wed
12p
m
Thur 12a
m
Thur 12p
m
Fri 12
am
Fri 12
pm
Sat 1
2am
Sun Mon Tue Wed Thur Fri SatSat
13.8%
17.8%17.8%
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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
Impact of Out of Stock Events
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How the shareholders benefit by solving this How the shareholders benefit by solving this problemproblem
Suggest reading Chapter 3, Cash is King
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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
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ROICOperating EarningsInvested Capital=
ROIC Approach to Value ROIC Approach to Value AnalysisAnalysis
(Return On Invested Capital) (Return On Invested Capital)
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Relationship between Market Value, ROIC and Earnings growth For S&P 500 over six yr period
1.5 1.8 1.7 (*) (*)
1.7 1.6 2.1 1.9 (*)
1.5 1.6 2.0 2.9 3.6
1.3
1.8
(*)
2.0
1.8
1.7
2.3
2.8
3.1
4.0
(*)
3.6
5.1
5.5
5.3
(*) 5 or fewer companies
<-5% -5% to -2% -2% to +2% 2% to 5% > 5%
<3%
>15%
12%-15%
9%-12%
6%-9%
3%-6%
Current New
Ratio of market value to book value
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Projected Benefit for large Rx Retail Projected Benefit for large Rx Retail ChainChain
Impact on Rx Retail chain cash flow
$532 $48 $65 $81 $100
$294
$899
$110$97$85$75$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
$1,500
$1,600
FY00 FY01 FY02 FY03 FY04 Total
Imp
act
on
Cas
h F
low
* ($
mil)
Incremental cash flow from return on reinvested capital ($294 M)
Cash flow from reduced working capital ($899 M)
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 DOSCompany with 50 DOS going to 30 DOS (with 30 days payment terms)(with 30 days payment terms)
05
101520253035404550
Before After
Day o
f S
up
ply
What percent of capital tied up in inventory has been freed up?What percent of capital tied up in inventory has been freed up?
Payment terms100%
50 DOS
30 DOS
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Company with 50 DOS going to 25 DOSCompany with 50 DOS going to 25 DOS (with 30 days payment terms)(with 30 days payment terms)
05
101520253035404550
Before After
Day o
f S
up
ply
What percent of capital tied up in inventory has been freed up?What percent of capital tied up in inventory has been freed up?50 DOS
25 DOS
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Company with 50 DOS going to 25 DOSCompany with 50 DOS going to 25 DOS (with 30 days payment terms)(with 30 days payment terms)
05
101520253035404550
Before After
Payment terms
Day o
f S
up
ply
How much of the inventory capital has been freed up?How much of the inventory capital has been freed up?This 5 DOS is
capital obtained for free, meaning,
growth will generate more and more free
cash.100% + 5 DOS
50 DOS
25 DOS
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What happens to our ROIC if we canachieve negative working capital??
ROICOperating Earnings
Invested Capital=
ROIC Approach to Value ROIC Approach to Value AnalysisAnalysis
(Return On Invested Capital) (Return On Invested Capital)
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Fundamentals ofInventory
Management
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Why do we need more than one day of Why do we need more than one day of inventory?inventory?
Supply Demand
-Order/Deliveryfrequency
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Effect of order/delivery frequency on Effect of order/delivery frequency on inventoryinventory
invento
ry
timeOrder/Deliveryfrequency
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Can our Inventory go to Zero?Can our Inventory go to Zero?
Supply Demand
- Partial deliveries- Late deliveries
- Variability of demand
-Deliveryfrequency
zero
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Example #1 of Variable Demand
0
5
10
15
20
25
30
35
time
Dem
and
Low variability of demand
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How do we cover for the How do we cover for the variability of demand and supply?variability of demand and supply?
invento
ry
timeDeliveryfrequency
Safety stock
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Example #2 of Variable Demand
0
10
20
30
40
50
60
time
Dem
and
High variability of demand
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How do we cover for the How do we cover for the variability of demand and supply?variability of demand and supply?
invento
ry
timeDelivery frequency
Safety stock
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Relationship of Safety Stock to Service Relationship of Safety Stock to Service levellevel
Service level
Safe
ty S
tock
60% 99.9%
Infinite
low
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The Inventory Management The Inventory Management Balancing ActBalancing Act
ServiceLevels
InventoryLevels
Balancing Act
CFO says… too much Inventory
Marketing says…
too many “out of stocks”
High
High
Low
Low
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Some products are: Some products are: pulled by demand, some are pushedpulled 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 The components of Total DemandDemand
Turn Promotion & New products
Short life cycle
Requirements based on
forecast of Pull
Requirements basedon a Push plan
Total rawDemand
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What do we do once we know What do we do once we know Total Raw Demand?Total Raw Demand?
TurnPromotion & New products
Short life cycle
Requirements based on
forecast of Pull
Requirements basedon a Push plan
Total RawDemand
ReplenishmentPlan
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What is the objective of the What is the objective of the Replenishment Plan??Replenishment Plan??
The right quantity in the right place at the
right time to achieve the lowest landed cost
ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
Transportation Handling InventoryProductCost
++ = LowestLanded Cost+
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Manufacturerregional
Warehouses
Stores
Wholesalers &Retail Distr. Ctrs.
Plants
Considerations for the replenishment Considerations for the replenishment planplan
Truck loads
pallets inTruck loads
cases andeaches
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The Pampers BullwhipThe Pampers Bullwhip
ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
Forecast ofConsumer demand
Forecast ofstore demand
Forecast ofDC demand
Forecast ofRegional demand
Forecast ofPlant demand
Variability of demand
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The Multi-echelon solutionThe Multi-echelon solution
ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
One Forecast ofConsumer demand
Plan for store replenishment
Plan for DC replenishment
Plan for Regional replenishment
Plan for Plant replenishment
Variability of demandReplenishment plans
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The early days of Evant and some 20/20 hindsight
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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-Mart’s grocery market share as of: 1993…. 0% 1995…..6% 2001…..10.3% (+ Sam’s Club) 2003…..16% (including Sam’s Club)
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Plant
Mfr.Regional
Stores
Plant Whse
Retail/Wholesale DC
Over flow Whse
60%
40%
25%
Packaged Grocery
Total days = 104Cases handled 6 timesTransported 1000 miles
Total cost/case = $2.36
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ECR Report FindingsECR Report Findings(Efficient Consumer Response)(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)
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NONSTOP Logistics NONSTOP Logistics VisionVision Plants
Mfr.Whse
Distr.Center
Stores
38 Sort and Load Centers
““Cut Replenishment cost in half”Cut Replenishment cost in half”
or
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Suppliers
Plant Mfr.Whse
Distr.Center Consumer
Value Chain
Store
SupplyChain Demand Chain
finishedgoods
Wholesaleor Retail
Value Chain = Supply Chain + Demand Chain
146 days for Rx146 days for Rx104 days for CPG104 days for CPG
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Original Investors & Original Investors & PartnersPartners
Individual Investors $1million
Transportation JB Hunt $1million Schneider National $1million
Warehousing Excel $1million GATX $1million
Frozen food Americold $1million
Data (promotional) AC Neilsen $1million
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Reception by IndustryReception 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 (I’ll be second and suspicious of something for nothing)
Wholesalers confused (friend or foe??)
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When & Why the Strategy When & Why the Strategy changedchanged
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.
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Grocery Industry ValidationsGrocery Industry Validations
#of
SKUs
DCINV
Days
NSINV
Days
%INV
Reduction
DCServ. Level
N-SServ. Level
DC, Dry Retail 2,630 20.4 7.5 62.5% 95.3% 99.1%DC,
FrozenRetail
440 24.4 6.2 74.5% 94.5% 97.5%
DC, Dry Whls. 2,125 19.0 7.3 61.6% 96.8% 99.8%Mkt.
Whse Mfr.(frozen)
563 47.8 6.5 86.4% 90.3% 96.4%
DC, Dry Retail(1 Mfr)
387 20.9 7.3 65.1% 94.9% 99.3%
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New Business Model New Business Model --- --- 19961996 (software or service???)(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)
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The final business modelThe 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
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Evant will provide extensive Evant will provide extensive retail merchandising retail merchandising functionalityfunctionality
Front officeCustomer management
12 applications
FulfillmentWMS and Transportation
12 applications
Ops Support
Financials& HR
9 apps
Evant Retail Merchandise Management[ Store ][ Catalog ][ Web ]
16 applications and “merchandise system of record”
Retail IT Requirements
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Gaining Traction with Gaining Traction with CustomersCustomers
(recognized plus deferred)(recognized plus deferred)
'99 '00 '01 '02 '03
$0
$5
$10
$15
$20
$25
$30
Notes: Excludes Hammaccher Revenue in 2001
$400K
$27 mill
$5.2 mill
$11.8 mill
$18.8 mill
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Distributors and Distributors and ManufacturersManufacturers
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What are the opportunities today?
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ManufacturerWarehouses
Retailers ConsumersWholesalersSuppliers Plants
What is needed to optimize the supply What is needed to optimize the supply chain??chain??
Transportation options, cost, status, time
Handling options, cost, time, status
Inventory amount, value, purpose, status
Product cost options Base price
projections
Manufacturer promos & new products
Reta
iler
pro
moti
on
s
Integrated software to convert this dataIntegrated software to convert this data into actionable plans for each trading partnerinto actionable plans for each trading partner
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What are the opportunities What are the opportunities tomorrow?tomorrow?
RFID and/or other visibility solutions combined with replenishment plans
Real-time business systems
Shared solutions hosted by third parties
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StoreConsumer
Current Retail Business Model for wine
ProducerProducer
shared DCDistributor
DCRetailer DC
Cost/Sell $3 $12.5 $16.67 $16.67 $25Margin $9.50 $4.16 $6.25Margin % 76% 25% 33.4%Days of Inv months to yrs 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67
Example of $25 bottle at retail
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StoreConsumer
CurrentCurrent Retail Business Model Retail Business Model
ProducerProducer
shared DCDistributor
DCRetailer DC
Buy/Sell $3 N/A $12.5 $18.75 N/A $25Margin $9.50 N/A $4.16 $8.34Margin % 76% 25% 33.3%Days of Inv 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67EBIT increase $0.12% increase 17.6%
Example of $25 bottle at retail
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StoreConsumer
Current Retail Business Model
ProducerProducer
shared DCDistributor
DCRetailer DC
Buy/Sell $3 N/A $12.5 $18.75 N/A $25Margin $9.50 N/A $4.16 $8.34Margin % 76% 25% 33.3%Days of Inv 45 45 45 $ carry 45days $0.04 $0.15 $0.21 $0.21EBIT (5%) $1.25EBIT (4%) $0.67EBIT increase $0.12 $0.17% increase 17.6% 13.5%
Example of $25 bottle at retail (inventory impact)
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StoreConsumer
New Vine Retail Business Model
ProducerProducer
shared DCDistributor
DCRetailer DC
Buy/Sell $3 $12.5 N/A $25Margin $9.5 $11.25Margin % 76% 45%New Vine fee $1.25Margin increase $5.00Inventory saving $0.15EBIT before $1.25EBIT after $4.16EBIT increase 3.33X
Example of $25 bottle at retail (price +inventory impact)
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Thank you
Homer Dunnfounder
415 403-6768
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Package Grocery finished goods(mfr + Package Grocery finished goods(mfr + retailer) retailer)
43%
29% 28%
0%
10%
20%
30%
40%
50%
Transportation Inventory Handing
$2.36/case$2.36/caseThe trading partners sometimes have conflicting objectives