THE SUPPLY CHAIN DIGEST LETTER The Supply Chain Digest

[Pages:16]THE SUPPLY CHAIN DIGEST LETTER

The

Supply Chain Digest

Letter TM

This Month: Focus on Inventory Optimization

inside

The Holy Grail that is Inventory Optimization..... 1

Inventory Optimization Technology....................... 1

Inventory Optimization Thought Leaders Discussion........................ 2

Inventory Optimization Solution Profile: Manhattan Associates...... 3

Inventory Optimization Solution Profile: JDA Software Group, Inc........................ 7

Inventory Optimization Solution Profile: Terra Technology.............. 9

O'Reilly Auto Parts Optimizes Inventory....... 14

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The Holy Grail that is Inventory Optimization

In the end, inventory management is really at the heart of supply chain management ? the place where efforts to balance supply and demand meet in the real supply chain.

Too little inventory equals stock outs and lost sales. Too much inventory sucks up working capital, increases inventory risk, gums up the whole supply chain, and eventually causes management to start screaming.

The seemingly inevitable result ? companies lurch back and forth between periods of high and low inventory levels, each with their own set of problems, depending on the latest edict from the top. When customer service issues are at the forefront, inventory levels grow. When inventory costs become the concern, the pendulum swings back strongly in the other direction.

In a very real sense, the holy grail of the supply chain is to optimize inventory levels in a way that precisely manages the trade-offs between inventory levels, supply chain cost and customer service, matched to the unique strategies and objectives of each individual company or business unit.

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Inventory Optimization Technology

Virtually every supply chain technology application in the end has some impact on inventory levels, including both demand and supply side technologies, and both planning and execution applications.

Nonetheless, in recent years a specific type of software category most typically called "Inventory Optimization" has gained increasing recognition and adoption. In general, it can be considered a subset of the overall Supply Chain Planning software arena. However, the reality is that even within the Inventory Optimization software category, there are many different flavors.

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Inventory Optimization Thought Leaders Discussion

Supply Chain Digest's Dan Gilmore recently spoke with Inventory Optimization expert Rod Daugherty of Manhattan Associates on several themes related to Inventory Optimization software. The discussion below is an edited version of the full interview, which is available at scdigest. com/Inventory_Optimization_Resources.php.

Gilmore: How would you summarize the concept of

fact it doesn't do much good to have one without the

Inventory Optimization?

other. You must have the proper tool that appropriately

Daugherty:The optimal deployment of inventory is a vital business function for an enterprise. The benefits of running a manufacturing, distribution or retailing

combines the components of inventory, so technology is very important - and there really are very few vendors that do this.

operation with leaner inventories range from a permanent The strategy side requires people that understand the

reduction in working capital to increased sales and higher vision and have the discipline to execute on the Inventory

customer satisfaction.

Optimization strategy. The complexities of managing

Managing inventory in a multi-echelon network versus a single-echelon network presents major challenges. One is the failure to achieve true network inventory optimization because replenishment strategies are applied

inventory increase significantly for a multi-echelon distribution network with multiple tiers of locations, such as a network comprising a central warehouse and downstream customer-facing locations.

to one echelon without regard to its impact on the other

echelons. Another challenge is to base upper-echelon replenishment decisions on specious demand forecasts.

Gilmore: What do you see the companies that are best at optimizing inventories do that middle performers do

These challenges can create a whole bunch of negative not?

consequences, from redundant inventories across the networks to stock-outs and many other business problems.

Daugherty: One of the things all top performers have in common is a strong Inventory Optimization team. In fact, other than having the best software to support Inventory

Inventory Optimization must natively be multi-echelon Optimization, the single most important thing that all top

capable - otherwise it simply cannot be optimal.

performers have in common is that they are completely

Inventory Optimization provides a holistic solution that aligned top to bottom in the enterprise.

solves the inventory objective of meeting the desired service goal on the least possible amount of inventory for the supply chain network top to bottom. This is done as a single optimization exercise rather than in a sequence of sub-exercises for each echelon, and takes into account inventory drivers at each successive higher echelon, including lead time, lead time variation and demand variation.

This starts with the senior executive responsible for inventory management. The best performers have a senior exec that understands the profit potential represented by their inventory investment. These companies have a top IO system ? I'd suggest the Manhattan Associates Inventory Optimization as an example - and a properly aligned and

motivated IO team. The

Gilmore: The role of strategy versus technology in optimizing inventories - how do the two work together?

top performers have a crystal clear vision of their key metrics and the IO team touches base weekly on achievement of the on-going IO goals

Daugherty: It requires

and all things IO related.

equal amounts of both - in

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(Continued from Page 2): Thought Leaders Discussion...

Gilmore: What are some of the more recent technology innovations in this area?

Daugherty: I think nimble and dynamic demand forecasting that proactively adapts to changes in the demand signal, particularly SKUs with intermittent demand, is an important new capability.

I'd also cite the ability to exploit data transparency within the enterprise to enable a holistic IO solution within a single solution. One more is the capability to use different safety stock distributions across time for different SKU classifications like Slow Moving and Intermittent Demand SKUs, rather than just assuming a normal distribution.

Gilmore: What kind of results do you see companies achieving, recognizing they all start at a different place?

Daugherty: It depends on a company's optimization goals. Speaking from first hand experience with our customers, for those that want to lower their inventory investment, they typically achieve 15 to 20% inventory reduction on at least the same service. For companies focused on achieving improved customer service, we have seen increases in service levels of 5 to 15% percent with the accompanying increases in revenue.

We had one customer that completely re-engineered its entire supply chain process, including going from a relatively simple, single echelon replenishment model that went direct from manufacturers to the customer facing facilities to a multi-echelon model that included introducing new regional distribution centers ? and a new layer of inventory.

Their primary business goal was to improve their supply chain logistics, particularly getting tight control over their transportation spend. By implementing our multiechelon inventory optimization solution they were able to introduce the additional level of inventory at regional DCs without increasing their network inventory - in fact, we lowered the overall network inventory incrementally while maintaining their already high service levels, which enabled them to achieve their transportation goal.

SCD

Inventory Optimization

SolutioN Profile

For 17 years, Manhattan Associates has concentrated exclusively on helping companies streamline their supply chains to achieve lower costs, higher profits and happier customers. Virtually all of our 2,300 employees focus on supply chain optimization. They work directly to bring value to our 1,200 customers through research and development, training, implementation and ongoing support.

Inventory Optimization allows companies to optimize customer service levels, minimize total network inventory and maximize profitability. It predicts inventory needs more accurately and automatically adapts to changing demand patterns to minimize inventory. With Multi-Echelon Replenishment, the forecasting and replenishment of multi-tiered and multi-channeled distribution networks are managed in one place--giving visibility across the entire operation.

Key Customers: Alliance-Healthcare

Cabela's Camping World Hawkeye Foodservice

Longs Drugs McKesson Papa John's O'Reilly Auto Parts United Stationers

Website & Contact Info: inventory_optimization

770.955.7070 info@

Featured White Papers/Collateral: ? White Paper: Multi-Echelon Inventory Management ? Inventory Optimization Case Study: O'Reilly Auto

Parts ? Inventory Optimization Solution Overview

Available at the Manhattan Associates website, or SCDigest's Inventory Optimization Resources Page

Inventory_Optimization_ Resources.php

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(Continued from Page 1):Inventory Optimization

"... the companies that can come closest to reaching the illusive Inventory Optimization goal will have a substantial market advantage over those that can only achieve middling performance ? or worse."

(Continued from Page 1): Holy Grail...

A lot easier said than done ? and a goal that requires upgrades to strategy, process and technology.

So just what is "Inventory Optimization?" It's a goal ? operating at the least possible inventory that maintains targeted customer service levels. It's also a new category of software that takes traditional inventory planning to a whole new level. Either way, with today's inventory management challenges, the companies that can come closest to reaching the illusive Inventory Optimization goal will have a substantial market advantage over those that can only achieve middling performance ? or worse.

Inventory Pressures Mount

A number of factors are combining to put upward pressure on inventory levels for many companies.

The number one factor by far is the growth of offshoring. Almost by definition, this lengthening of supply chain transit times from days to weeks will add to a company's buffer inventory stock. Add to that even longer orderto-delivery cycles, the need to fix production orders sometimes months in advance, and increased variability, and it's no wonder inventories are rising by most estimates.

For example, in its annual analysis of working capital practices, CFO magazine found that the largest 1000 publicly traded companies had inventories rise by 2.1% in 2006, the last year for which data was available at

SCDigest Letter press time. Offshoring is cited as a key factor, as "companies searching ever farther afield for cheap goods and labor found it prudent to carry more inventory as a guard against potential supply-chain disruptions."

A supply chain executive from Newell Rubbermaid noted a couple of years ago that the company "was building more warehouses than ever" to store all the products coming in from offshore suppliers.

In addition, the dramatically rising price of fuel and transportation costs are actually causing inventory levels to increase, as the trade off between transportation and inventory swings back to holding higher levels of inventory based on pure economics.

In the 2008 State of Logistics Report from CSCMP, author Rosalyn Wilson notes "the move to regionalized distribution centers continued in 2007, with many more firms announcing plans to relocate or open new DCs serving smaller markets. These changes are being made to shorten delivery times and length of haul to save fuel," even if the overall result is increased network inventory levels.

A number of companies have also stated in the past year that they were reducing the amount of air freight in favor of ocean to reduce transport costs ? again at the expense of increased inventory levels.

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(Continued from Page 4): Holy Grail...

At the other end of the spectrum, CEOs, CFOs, and Wall Street analysts are placing more focus than ever on inventory levels. Part of that is the impact of inventory levels on working capital and cash flow. The other part involves concerns that high levels of inventory can lead to large write downs of obsolete inventory or profitkilling discounts.

Finally, those inventory concerns are also directly related to the increasing challenge of shorter product lifecycles, which make the penalties for out-of-stocks (lost profit in the early part of the lifecycle) and excess and obsolete inventories (markdowns, write-offs late in the cycle) much greater today than in the past era of longer product maturity curves.

Understanding Inventory Drivers

What factors drive inventory levels? There are a surprisingly large number, which is why inventory management is so challenging.

At a recent Retail Industry Leaders Association (RILA) Logistics conference, Wal-Mart's Johnnie Dobbs (executive VP of Logistics and Supply Chain) noted that even Wal-Mart was challenged with managing inventory levels, due in part to the fact that "there were so many paths that could lead to inventory in the DC." Indeed, Wal-Mart, legendary for its inventory management skills, actually had a period where for several years its inventory growth was much faster than its historical

continued - page 6

Inventory Levels - Selected Industries

Inventory management practices, requirements and effectiveness vary considerably between different industry sectors.

The table below shows the median level (half industry above, half below) of Days Inventory Outstanding (DIO) from a number of leading industry groups in the US. DIO is really just another way to look at the "inventory turns" number that is more commonly used by supply chain professionals.

DIO is calculated by taking year-end inventories and dividing them by an average day of sales, or Total Inventory/Total Revenue/365. To turn DIO into inventory turns, divide 365 by the DIO level. So, for example, a DIO of 36.5 means a company has 10 inventory turns per year (365/36.5).

Industry Sector

Aerospace and Defense Apparel/Luxury Goods Auto Parts and Components Beverages Building Products Chemicals Communications/Network Products Computers and Peripherals Containers and Packaging Department Stores/Mass Merchants Electrical Equipment

Median Days Inventory

Outstanding

46 51 31 20 36 46 27 27 40 63 45

Industry Sector

Food Manufacturers Grocery and Drug Retailers Household Products/CPG Machinery/Industrial Medical Devices and Supplies Metals/Mining Paper/Forest Products Personal Care Products Pharmaceuticals Semiconductors Specialty Retail

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Median Days Inventory

Outstanding

45 26 40 52 46 51 39 43 46 42 57

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(Continued from Page 5): Holy Grail...

levels of about 50% (see graphic below). That pattern caused the company to launch its "Inventory DeLoad" program, which has started to pay big dividends. In 2007, for example, the Wal-Mart Stores division reversed the trend, with inventory growth of just 0.7% versus a sales increase of 5.8%.

A large food company recently launched an investigation into why its levels of inventory were consistently higher than its competition. As part of that effort, SCDigest helped compile the following list of inventory drivers, roughly from the highest level variables to the most granular:

? Supply Chain Organization: Is there an integrated approach to the supply chain and inventory decisions, or functional silos? The less integrated, the more inventory problems (shortages or overages) are likely to occur.

? Supply Chain Network Design: The greater the number of stocking points, all things being equal, the higher the level of inventory. The longer the supply chain (e.g., goods produced offshore), the higher the level of inventory.

? Customer Service Policies: A company's strategies and goals related to customer service, both generally and at an A, B, C category level, will greatly impact inventories.

? Safety Stock Policies: Relatedly, how aggressive or not a company wants to be with safety levels, and how frequently a company revisits safety stock assumptions and SKU-level targets, are key variables.

? Degrees of Freedom for Inventory Decisions: The more individuals that have the

ability to add inventory into the supply chain, the

higher the levels are likely to be.

? Management of Trade-Offs: Company specific decisions about the traditional inventory, transportation, and unit cost trade-offs. The lowest total cost will usually have higher inventories than the lowest inventory cost option.

? Forecast Accuracy: The greater the level of

forecast inaccuracy, generally the lower levels of

total inventory.

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Even Wal-Mart Struggles with Inventory

Wal-Mart, a company known historically for its inventory management prowess, let inventory growth get out of control for a few years.

The chart below shows the company's inventory growth versus sales growth. As can be seen, from 2001 to 2005 (a trend which continued through 2006), the company let inventory growth reach far above its target of 50% of sales growth, reaching almost 100% of sales growth in 2004, meaning the company was gaining almost no inventory leverage from its increased sales. That situation drove the company to launch its "Inventory DeLoad" program in 2007, which seems to have paid big dividends in terms of inventory reduction, as inventory growth slowed way down.

100%

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60%

50%

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30%

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10%

0%

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2001

2002

2003

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Responding to Customer Demand with Advanced Inventory Optimization & Management Solutions

By David Johnston, Vice President JDA Software

Inventory Optimization

SolutioN Profile

Consumer goods manufacturers are no strangers to cyclical demand volatility, exacerbated by a challenging economy, with shortening product life cycles, rampant promotions and markdowns, and a proliferation of purchasing options. Manufacturers have high stakes in inventory management and optimization, with minimal margin for error or complacency.

In today's global environment, manufacturing success depends on the ability to operate with a global view. How can manufacturers effectively synchronize demand, logistics and production to mitigate out-of-stocks and excess inventory and respond successfully to consumer demand volatility?

A responsive supply chain is critical in today's market; realtime data and accurate forecasting fuel supply chain efficiency. Companies relying on fragmented and outdated information, processes and technologies are at risk of losing ground.

Forward-looking companies are seeking to strike a balance between demand, capacity and profit across their entire organization. Furthermore, many are making the shift from consensus demand management to profit and revenue optimization. For this reason, companies are rethinking how they approach sales and operations planning (S&OP), including taking a global approach to S&OP rather than a disparate and decentralized process.

Increasingly, companies are investing in advanced IT solutions that support and elevate S&OP to enable integrated business planning. Moreover, they're selecting solutions that will help them adjust to demand shifts and more accurately source, produce and deliver products. This includes fully integrated, scalable solutions proven in an array of applications--from inventory optimization, forecasting and demand planning, logistics and transportation management.

Many companies have already deployed sophisticated technology to improve demand forecasting, product life cycle management, achieve procurement economies of scale, and ensure consistently responsive manufacturing practices, including:

? The largest meat processing company in the world recently leveraged inventory optimization software to deal with consumer demand spikes and generate one view of demand across its supply chain, sales and marketing operations.

? A leading manufacturer of consumer products implemented a transportation and logistics management software that helped reduce transportation costs by 7 to 10 percent.

? A consumer goods supplier to a leading warehouse club deployed software to reduce inventory levels, increase sales, boost inventory turn-around and improve forecast accuracy.

JDA? Software Group, Inc. is focused on helping companies realize real supply chain and revenue management results ? fast. JDA Software delivers integrated merchandising as well as supply chain and revenue management planning, execution, and optimization solutions for the consumer-driven supply chain and services industries. Through its industry leading solutions, leading manufacturers, distributors, retailers and services companies around the world are growing their businesses with greater predictability and more profitably.

JDA's Network & Inventory Optimization solution provides strategic, end-to-end capabilities to evaluate, design and optimize your supply chain network, whether you are looking to expand your production and distribution network, or optimize your current network and inventory policies. JDA Inventory Policy Optimization is a multi-echelon solution that helps companies determine safety stock levels at various locations in retail and distribution supply chains so as to achieve the user-specified fill rate or in-stock targets.

Key Customers:

Anheuser Busch, Campbell Soup Company, H.J. Heinz, Church & Dwight, Macy's , K-Swiss, Kraft Foods, L'Oreal, Johnson & Johnson, Kimberly-Clark Corporation, Tyson Foods Inc.

BJ's Wholesale Club, Federated Department Stores Charlotte Russe, Vitamin Shoppe

Website and Contact Details

? Email: info@ Phone: 800-479-7382

Collateral:

? White Paper: Optimizing Consumer Goods Manufacturing with Constraint-Based Supply Chain Synchronization

? JDA Assortment Planning Solution Overview ? JDA Manufacturing Solutions Overview

Available at letter

Enterprise-wide architecture can provide 360 degree global

visibility, whether to factories on-shore or off, logistics

suppliers, distribution centers, and retailers. Intelligent

investments in global enterprise planning can enable

companies to gain greater visibility into their entire supply

chain and the consumer-centric market, so planning and

execution decisions are accurate demand data. Manufacturers

are coming to expect and demand software solutions that

provide the complete picture--an end-to-end overview of

supply chain to retail partners. SCD

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(Continued from Page 6): Holy Grail...

? Demand Variability: Highly dynamic demand in general leads to greater inventory levels to maintain customer service targets.

? Supply Variability: The more variable the supply, the more buffer inventory that needs to be held. Obviously, this is a potential issue with offshoring. In general, variability of supply is worse than a long supply chain in terms of the impact on inventory.

? SKU Counts: The higher the number of SKUs, the higher the level of inventory will generally be for the same dollars in sales.

? Total Cycle Times: The faster the cycle times, the lower levels of inventory required. Procter & Gamble, for instance, is trying to make its factory more flexible, with much quicker set-up times, in part to reduce inventory levels.

? Level of Supply Chain Collaboration: The more integrated a company is with suppliers and customers to jointly manage inventories, the lower inventories are likely to be.

? Vendor Relationships: Companies that have supplier-owned inventory programs, or just-in-time supplier logistics centers, will have lower total inventories on the raw materials/components side.

? Level of Supply Chain Visibility: The better visibility a company has to its network-wide inventory, the lower its total inventory should be. This is part of the promised potential of RFID.

? Inventory Accuracy: The more accurate a company maintains its levels of raw materials and finished goods inventories, the lower the level of inventory, as planners have better trust in the numbers upon which they are planning.

? Order Patterns (Seasonality): Less consistent demand patterns can lead to higher inventory levels. As an extreme example, some wrapping paper manufacturers build inventory all year to ship only in the couple of months before Christmas.

? Metrics: What gets rewarded? Metrics drive behavior, and it is no different with inventory. Have a plant that is driven primarily by yield and cost per unit metrics? Expect more inventory, for example.

That's a big list ? which explains just how tough inventory optimization really is ? and why technology is so important for inventory optimization leaders. The sheer scope of the variables is more than the best planners with the best spreadsheets can manage (See Understanding Inventory Optimization Technology on page 1).

Nonetheless, using the above list of inventory drivers to assess your level of capability and level of excellence in people, process and technology can help you move further towards the goal of optimized inventory management. SCD

Inventory Optimization

Resources

You'll find a wealth of resources on our web site: letter.

Including:

White papers ? Video ? Case studies Expert columns ? Supplier brochures

You'll find the information and insight you need to better understand Inventory Optimization!

Resource web site: Inventory_Optimization_Resources.php

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