32 CGT | OCTOBER 2010 | CONSUMERGOODS.COM

CUSTOM RESEARCH

To satisfy customer demand, consumer goods(CG) supply chains strive to have the rightamount of inventory in the right locations tomeet customer service and revenue goals withnothing left over. In reality, it’s not quite thatsimple, so some CG companies have turnedto inventory optimization initiatives to help.While other supply chain projects were puton hold during the downturn, interest ininventory optimization continues to grow asmore CG companies understand the bene-fits. This month, CGT partners with Logilityto ascertain how the industry perceives thisimportant program, which 74 percent ofrespondents claim is one of their top five sup-ply chain priorities.

Business DriversHistorically, inventory reduction was an easyway for companies to cut operating costs andwas often the primary source of ROI for tech-

nology implementations like ERP. However,the majority of our respondents still feel thereis excess inventory in their supply chains (seeFigure 1) with 49 percent believing the excessis between 11 percent and 30 percent of inven-tory. Only 11 percent of our respondentsbelieve they have their inventory under con-trol with minimal excess. While inventoryreduction is the primary driver, there are otherbusiness goals (see Figure 2). More than half(53 percent) of our respondents citedimproved customer service levels as a veryinfluential factor, almost half (43 percent) aimto cost effectively meet demand, and 40 per-cent are trying to free up working capital.

Adoption PerceptionCompanies understand the broad benefits ofinventory optimization, but only half havestandard processes in place as part of supplychain management protocol (see Figure 3).

Almost one-third are either in the early stagesof exploration or have plans for a major ini-tiative within the coming year. There is theperception, however, that inventory optimiza-tion is more mainstream as one-quarterbelieve it is ongoing at larger CG companiesand another 20 percent believe it is activethroughout the industry regardless of size.

Some of those perceived differences maydepend on how companies define inventoryoptimization. The most common implemen-tation (44 percent) includes optimizing localsafety stock at the finished goods level. Only20 percent are optimizing inventory acrossmultiple locations of the supply chain, andjust 11 percent are optimizing local safetystock at several supply chain stages. Inventorytargets are reviewed and reset monthly orquarterly for the majority of research partic-ipants, and most measure inventory perform-ance in days of supply.

Inventory OptimizationDELIVERING MORE THAN JUST INVENTORY REDUCTION

EXPERT PERSPECTIVE • B Y K A R I N B U R S A , V P O F M A R K E T I N G , L O G I L I T Y

THE VALUE OF MULTI-ECHELON INVENTORY OPTIMIZATIONMulti-Echelon Inventory Optimiza-tion (MEIO) can provide significantvalue to consumer goods busi-nesses that have more complexsupply chains, a larger number ofSKUs and higher variability.

In the beauty products divisionof one major consumer productscompany, inventory optimizationis a critical focus, freeing up cashfor reinvesting in the business andmaximizing value for both con-sumers and shareholders.

The business had already madeexcellent progress in reducing

inventory within individual stagesof its supply chains. But as prod-uct lifecycles decreased and thenumber of product offerings relent-lessly increased, it became moreand more challenging to enactinventory reductions withoutimpacting service levels.

“Implementing multi-echelonoptimization tools reignited ourinventory reduction while contin-uing to maintain our excellent cus-tomer service,” says the VicePresident of Product Supply at theworldwide business unit.

The team starts by optimizinginventory within an existing supplychain environment, and then strate-gically redesigns the supply chainusing MEIO to create a new valuecurve. For one supply chain witheight echelons and 4,000 nodes, tac-tical optimization yielded a 7 percentinventory reduction, with the follow-on strategic implementa-tion adding another 4percent reduction. The divi-sion has now implementedMEIO in 85 percent of itsglobal supply chains.

“Logility’s multi-echelon inven-tory optimization tools are still fuel-ing inventory improvements today,”the VP added enthusiastically. “Thesehuge reductions are on top of previ-ous improvements made using sin-gle-stage inventory optimization.”

Company executives state thatmulti-echelon inventory optimiza-

tion has saved morethan $100 million to date, and theyexpect to doublethat figure over thenext several years.

32-33.CR_v3 10/4/10 5:58 PM Page 32

BUSINESS DRIVER Very Influential Somewhat NotInfluential Influential Influential

Cost-effectively meet demand 43% 41% 11% 5%

Improve customer service levels 53% 31% 16% 0%

Free up working capital 40% 37% 20% 3%

Minimize the impact of demand 26% 43% 20% 11%uncertainty and forecast error

Prevent supply volatility and long lead 25% 38% 32% 5%times from creating excess inventory

Increase inventory turns 25% 54% 20% 1%

Identify causes of excess inventory 17% 34% 41% 8%

Improve SKU by SKU target setting/efficiency 13% 47% 30% 10%

Provide all stakeholders with a common 8% 30% 46% 16%perspective on the supply chain

FIGURE 2

Business Drivers for Inventory Optimization

FIGURE 3

Inventory Optimization Adoption Status

CONSUMERGOODS.COM | OCTOBER 2010 | CGT 33

B Y K A R A R O M A N O W

Opportunities Like many data-intensive supply chain activ-ities, technology can help accelerate adop-tion and value realization. Over half (61percent) of respondents are primarily usingspreadsheets to manage the process, but 44percent also have specific software tools.Another 42 percent use built-in componentsof existing ERP or supply chain applications.

Most companies plan on continuing theirformal, repeatable inventory policy planningand target setting to improve customer serv-

ice levels and free up working capital. Almosthalf plan on starting or increasing their useof best of breed tools to support processes.One program that almost half of respondentsintend to start and one-quarter plan onincreasing is managing inventory at suppliersites, continuing the collaborative trend ofrecent years. Over half will continue to lever-age inventory optimization to drive morefact-based decisions within existing S&OPprocesses and another one-third will increasethis activity.

Overall, inventory optimization has greatvalue potential. Technology adoption willaccelerate the benefits but must be supportedby strong, standard processes. The specificelements of the initiatives may vary, but aslong as the goals and scope are clearly defined,success is definitely achievable.

“The majority of our

respondents still feel there

is excess inventory in their

supply chains with 49 percent

believing the excess is

between 11 percent and

30 percent of inventory.”

2%

14%

3%

23%

11%

11%

4%

Greater than 30 percent

21% to 30%

11% to 20%

5% to 10%

There is minimal excessinventory in our supply chain

Don’t know

There is excess inventory butcan’t estimate a percentage

EXCESS

FIGURE 1

Excess Inventory in End-to-End Supply Chain

50%

20%

11%

9%

2%

8%

A regular discipline is part of oursupply chain management process

In the early stages ofexploration or adoption

Conducted on a project basis,sporadically over time

A major corporate supply chaininitiative for the coming year

None of the above

Ongoing in other parts of the company

STATUS

32-33.CR_v3 10/4/10 5:59 PM Page 33

Consumer Goods Technology

September 2010

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

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

2. What is your primary consumer goods vertical?

Primary consumer goods vertical %Food / Beverage 28%Consumer Packaged Goods 18%

Food / BeverageConsumer Packaged GoodsApparel / FootwearConsumer Durable GoodsDistribution / Wholesale

9% 9%12%

25%26%

18%

Less than $50 million

$50 to $249 million

$250 to $499 million

$500 to $999 million

$1 billion to $5 billion

More than $5 billion

Co su e ac aged Goods 8%Apparel / Footwear 12%Consumer Durable Goods 11%Distribution / Wholesale 9%Retail 8%Health and Beauty 5%Paper / Lumber / Timber 5%Medical Devices 2%Transportation / Logistics 2%Consumer Electronics 0%Other 2%

28%

18%

12%11%

9% 8%5% 5%

2% 2% 2%

Food / BeverageConsumer Packaged GoodsApparel / FootwearConsumer Durable GoodsDistribution / WholesaleRetailHealth and BeautyPaper / Lumber / TimberMedical DevicesTransportation / LogisticsConsumer ElectronicsOther

9% 9%12%

25%26%

18%

Less than $50 million

$50 to $249 million

$250 to $499 million

$500 to $999 million

$1 billion to $5 billion

More than $5 billion

3. What percent of your company's sales are highly seasonal?

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

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

Inventory turns %Better 32%

38%

28%33%

2%

Less than 20 percent

20 to 49 percent

50 percent or more

Don't know

54%Better

Better 32%Average 54%Worse 5%Don't know 9%

38%

28%33%

2%

Less than 20 percent

20 to 49 percent

50 percent or more

Don't know

32%

54%

5%9%

Better

Average

Worse

Don't know

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?

%23%35%14%2%11%11%5%

5 to 10 percent11 to 20 percent21 to 30 percentGreater than 30 percentBelieve there is excess inventory but can't estimate a percentage

Excess

We believe there is minimal excess inventory in our supply chainDon't know

35%

5 to 10 percent

11 to 20 percent

21 to 30 percent

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

23%

35%

14%

2%

11% 11%

5%

5 to 10 percent

11 to 20 percent

21 to 30 percent

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

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

%18%26%5%20%2%29%

Formal inventory optimizationOnly early adopters are doing inventory optimizationInventory optimization is ongoing at large CPG companiesInventory optimization has been extensively adopted within one or two CPG sectorsInventory optimization is active at many CPG companies regardless of size or sectorInventory optimization initiatives are in place at more than 50 percent of CPG companiesDon't know

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

18%

26%

5%

20%

2%

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

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%

48%

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

No inventory optimization initiatives are currently planned

6%

48%

20%

14%

6% 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

No inventory optimization initiatives are currently planned

Don't know

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

%50%11%20%9%2%8%

In the early stages of exploration or adoptionA major corporate supply chain initiative for the coming yearOngoing in other parts of the companyNone of the above

Inventory optimizationA regular discipline that is part of our supply chain management processConducted on a project basis, sporadically over time

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

50%

11%

20%

15%

2%

8%

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

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

44%

61%

42%

2% 6%

Specific software tools for inventory optimization

Primarily spreadsheets and rules of thumb

Built-in components of our existing ERP/APS system

Don't know

Other

10. If you do perform inventory optimization within your supply chain, what is the scope?

%44%11%20%8%11%6%

Local safety stock optimization at several supply chain stagesInventory optimization across multiple stages / locations of the supply chainMulti-echelon inventory optimization across the end-to-end supply chainDon't perform any inventory optimizationDon't know

ScopeLocal safety stock optimization at the Finished Goods level

44%

Local safety stock optimization at the Finished Goods level

Local safety stock optimization at several supply chain stages

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

44%

11%

20%

8%

11%

6%

Local safety stock optimization at the Finished Goods level

Local safety stock optimization at several supply chain stages

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

11. How often do you review and reset inventory targets?

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

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

Measure %Days of Supply 86%S i L l 67%

16%

34% 36%

15%

3%

Annually

Quarterly

Monthly

Weekly

Don't know

86%

Days of Supply

Service Levels

Order Fulfillment RateService Levels 67%Order Fulfillment Rate 56%Don't use any of these 8%Don't know 0%

16%

34% 36%

15%

3%

Annually

Quarterly

Monthly

Weekly

Don't know

86%

67%56%

15%

Days of Supply

Service Levels

Order Fulfillment Rate

Don't use any of these

Don't know

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

56%

8%3%

17%14%

2%

Supply Chain Organization

Manufacturing Operations

Sales & Marketing

Inventory Management

Cross-Functional Team

Don't know

Other

14. What factors are driving your efforts in inventory optimization? Please rate the influence of each.

FactorsNot

InfluentialSomewhat Influential Influential

Very InfluentialFactors 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 by SKU target setting /Improve SKU-by-SKU target setting / efficiency 11% 30% 47% 13%

Identify causes of excess inventory 8% 41% 34% 17%Provide all stakeholders with a common perspective on the supply chain 16% 46% 30% 8%

Minimize the impact of demand 11% 20% 43% 26%uncertainty and forecast error 11% 20% 43% 26%

Prevent supply volatility and long lead times from creating excess inventory 5% 32% 38% 25%

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

Start Continue Increase6% 73% 20%

ActivitiesF l t bl i t li l i 6% 73% 20%

7% 70% 22%31% 53% 16%25% 53% 23%26% 49% 26%

Formal, repeatable inventory policy planningFormal, repeatable inventory target settingUse of best-of-breed toolsExpand use to more business unitsManaging inventory at customers' sites

44% 38% 18%11% 66% 23%10% 69% 21%

15% 53% 33%

Managing inventory at suppliers' sitesInventory reduction to free up working capitalInventory optimization to improve service levelsInventory optimization to drive more fact-based decisions within your existing S&OP process