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San Francisco State University
Supply Chain Management Class
October 16th, 2006
Requested 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
Outline
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
Outline (cont.)
Three types of demand
The forecast and the replenishment plan
Collaboration and multi-echelon (a solution for the bull
whip effect)
The early days of Evant with some 20/20
hindsight
Discussion of the New Vine Logistics models
What are the opportunities tomorrow
(optional) The potential of multi-echelon in the
food service industry
Terminology
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Value Chain
Supply Demand Chain
Chain (finished goods)
For this presentation, this is the..
Supply Chain
Inventory Is Only One Component of
Landed Cost
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Product
+ Transportation+ Handling
+ Inventory
= Landed Cost
Cost
Comparing Cost for Current Practices in
Rx, Grocery and Foodservice (1996 dollars)
Inventory Is Only One Component of
Landed Cost
Suppliers Plants Manufacturer Wholesalers Retailers Consumers
Warehouses
+ + + = Landed Cost
Transportation Handling Inventory
Product
Cost
IMPORTANT
In order to achieve lowest landed cost, you must
sub-optimize one or more of its components
Package Grocery Finished Goods
(mfr + retailer) $2.36/case
The trading partners sometimes have conflicting objectives
50% 43%
40%
29% 28%
30%
20%
10%
0%
Transportation Inventory Handing
Packaged Grocery = $2.36/case
Cost per Participant
The trading partners sometimes have conflicting objectives
30.00% $0.68
25.00%
20.00% $0.38 $0.40
$0.32
15.00%
$0.31 $0.27
10.00%
5.00%
0.00%
Transportation Inventory Handling
Mfr. Retail
Inventory Is Only One Component of
Landed Cost
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Product
+ Transportation+ Handling
+ Inventory
= Landed Cost
Cost
Our focus today
Why Is Inventory Management
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
Out of Stocks for Top Selling 2000 UPCs
(Weekly profile)
360
Sat Sun Mon Tue Wed Thur Fri Sat
350
17.8%
Number of OOS Items per Store
340
330
320
310
300
290
280
270 13.8%
260
250
Impact of Out of Stock Events
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
How the Shareholders Benefit by
Solving This Problem
Suggest reading:
Chapter 3, Cash is King
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
ROIC Approach to Value Analysis
(Return On Invested Capital)
EBIT
ROIC =
Invested Capital
Relationship Between Market Value,
ROIC and Earnings Growth for S&P 500
over a Six Year Period
<-5% -5% to -2% -2% to +2% 2% to 5% > 5%
<3% 1.5 1.8 1.7 (*) (*)
3%-6% 1.7 1.6 2.1 1.9 (*)
6%-9% 1.5 1.6 2.0 2.9 3.6
9%-12% 1.3 2.0 2.3 4.0 5.1
12%-15% 1.8 1.8 2.8 (*) 5.5
>15% (*) 1.7 3.1 Current 3.6 5.3 New
(*) 5 or fewer companies
Projected Benefit for a Large Rx Retail
Chain
Impact on Rx Retail chain cash flow
$1,600
$1,500
$1,400 Incremental cash flow from return on reinvested capital ($294 M)
on Cash Flow* ($mil)
$1,300
$1,200 Cash flow from reduced working capital ($899 M)
$1,100
$294
Impact
$1,000
$900 Total = $1.2 billion in cash flow
$800
$700
$600
$500
$899
$400
$300
$200
$81 $100
$100 $532 $48 $65
$75 $85 $97 $110
$-
FY00 FY01 FY02 FY03 FY04 Total
* Chart does not show the impact on cash flow ~$13 mil from change in
accounts payable, taxes, operating expenses, etc. Based on revenue
growth rate of 14%.
Company with 50 DOS Going to 30 DOS
(with 30 days payment terms)
What percent of capital tied up in inventory has been freed up?
50 DOS
50
30 DOS
40
Day of Supply
100%
30
Payment terms
20
10
0
Before After
Company with 50 DOS Going to 25 DOS
(with 30 days payment terms)
What percent of capital tied up in inventory has been freed up?
50 DOS
50
40
Day of Supply
25 DOS
30
20
10
0
Before After
Company with 50 DOS Going to 25 DOS
(with 30 days payment terms)
How much of the inventory capital has been freed up?
50 DOS
This 5 DOS is capital
obtained for free,
50 meaning, growth
will generate more
40 and more free cash.
Day of Supply
30 100% + 5 DOS
Payment terms
20 25 DOS
10
0
Before After
ROIC Approach to Value Analysis
(Return On Invested Capital)
EBIT
ROIC =
Invested Capital
What happens to our ROIC if we can
achieve negative working capital??
Fundamentals of
Inventory Management
Why Do We Need More Than One Day
of Inventory?
-Order/Delivery
frequency
Supply Demand
Effect of Order/Delivery Frequency on Inventory
inventory
Order/Delivery time
frequency
Can Our Inventory Go to Zero?
zero
-Delivery - Variability of
frequency demand
Supply Demand
- Partial deliveries
- Late deliveries
Example #1 of Variable Demand
35
Low variability of demand
30
25
Demand
20
15
10
5
0
time
How Do We Cover for the Variability of
Demand and Supply?
inventory
Safety stock
Delivery frequency
time
Example #2 of Variable Demand
High variability of demand
60
50
40
Demand
30
20
10
0
time
How Do We Cover for the Variability of
Demand and Supply?
inventory
Safety stock
Delivery frequency
time
Relationship of Inventory to Service Level
Infinite
Inventory
low
60% 99.9%
Service level
The Inventory Management Balancing Act
Marketing says… CFO says…
too many “out too much
of stocks” Inventory
Service Inventory
Low Levels Levels High
High Low
Balancing Act
Some Products Are:
Pulled By Demand, Some Are Pushed
Pushed per a plan Pulled by Demand
New products Consumables
Short lifecycle products Pushed products,
following the initial
Promoted products push
The Components of Total Demand
What do We Do Once We Know
Total Raw Demand?
Replenishment
Plan
What Is the Objective of the Replenishment Plan?
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
The right quantity in the right place at the
right time to achieve the lowest landed cost
Lowest
Product
+ Transportation+ Handling
+ Inventory
= Landed Cost
Cost
Considerations for the Replenishment Plan
cases and
pallets in eaches
Truck loads
Truck loads
Plants
Wholesalers &
Manufacturer
Retail Distr. Ctrs.
regional
Warehouses
Stores
The Pampers Bullwhip
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Forecast of Forecast of Forecast of Forecast of Forecast of
Plant demand Regional demand DC demand store demand Consumer demand
Variability of demand
The Multi-echelon Solution
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Plan for Plant Plan for Regional Plan for DC Plan for store One Forecast of
replenishment replenishment replenishment replenishment Consumer demand
Replenishment plans
Variability of demand
The Early Days of Evant
and Some 20/20 Hindsight
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)
Packaged Grocery
25%
Plant Whse Over flow Whse
Plant
40% Total days = 104
Mfr. Cases handled 6 times
Regional Transported 1000 miles
Total cost/case = $2.36
Retail/Wholesale DC
Stores
ECR Report Findings
(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)
NONSTOP (Evant) ‘s Logistics Vision
Plants Stores
“Cut Replenishment cost in half”
38 Sort and
Load Centers
or
Mfr. Distr.
Whse Center
Value Chain = Supply Chain + Demand Chain
finished
goods Down from 104 days for CPG
Supply
Demand Chain
Chain
Wholesale
or Retail
Plant Mfr. Distr. Store
Whse Center Consumer
Suppliers
Value Chain
Original Investors & Partners
Individual Investors $1million
Transportation
JB Hunt $1million
Schneider National $1million
Warehousing
Excel $1million
GATX $1million
Frozen food
Americold $1million
Data (promotional)
AC Neilsen $1million
Reception 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??)
When & Why the Strategy Changed
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.
Grocery Industry Validations
Nonstop Compared to DCs
# DC NS % DC N-S
of INV INV INV Serv. Serv.
SKUs Days Days Reduction Level Level
DC, Dry
Retail 2,630 20.4 7.5 62.5% 95.3% 99.1%
DC,
Frozen 440 24.4 6.2 74.5% 94.5% 97.5%
Retail
DC, Dry
Whls. 2,125 19.0 7.3 61.6% 96.8% 99.8%
Mkt.
Whse Mfr. 563 47.8 6.5 86.4% 90.3% 96.4%
(frozen)
DC, Dry
Retail 387 20.9 7.3 65.1% 94.9% 99.3%
(1 Mfr)
New Business Model --- 1996
(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)
The 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
Evant’s Goal: Provide Extensive Retail
Merchandising Functionality
Retail IT Requirements
Front office Ops
Customer management Support
12 applications
Financials
Fulfillment &
WMS and Transportation HR
12 applications 9 apps
Evant Retail Merchandise Management
[ Store ][ Catalog ][ Web ]
16 applications and “merchandise system of record”
Evant’s Increasing Success with Customers
(Measured in recognized + deferred revenues)
$30 mill
$30
$25 $18.8 mill
$20
$11.8 mill
$15
$5.2 mill
$10
$400K
$5
$0
'99 '00 '01 '02
Notes: Excludes Hammaccher Revenue in 2001 '03
Retail Customers
Distributors and Manufacturers
What Are the Opportunities Today?
What Is Needed to Optimize the Supply Chain?
Manufacturer promos & new products
Transportation options, cost, status, time
Product
cost options Base price
projections
Manufacturer
Suppliers Plants Wholesalers Retailers Consumers
Warehouses
Retailer promotions
Inventory amount, value, purpose, status
Handling options, cost, time, status
Integrated software to convert this data
into actionable plans for each trading partner
What Are the Opportunities Tomorrow ?
RFID and/or other visibility solutions
Real-time business systems
Shared solutions hosted by third parties
Current Retail Business Model for Wine
Example of $25 bottle at retail
Producer Distributor Retailer DC Store
Producer Consumer
shared DC DC
Cost/Sell $3 $12.5 $18.75 N/A $25
Margin $8.5 $6.25 $6.25
Margin % 68% 33% 25.5%
Days of Inv months to yrs 45 45 45
$ carry 45days $0.04 $0.15 $0.23 $0.23
EBIT (5%) $1.25
EBIT (4%) $0.75
Current Retail Business Model
Example of $25 bottle at retail
Producer Distributor Retailer DC Store
Producer Consumer
shared DC DC
Buy/Sell $3 N/A $12.5 $18.75 N/A $25
Margin $8.5 N/A $6.25 $6.25
Margin % 68% 33% 25.5%
Days of Inv 45 45 45
$ carry 45days $0.04 $0.15 $0.23 $0.23
EBIT (5%) $1.25
EBIT (4%) $0.75
EBIT increase $0.11
% increase 15%
Current Retail Business Model
Example of $25 bottle at retail (inventory impact)
Producer Distributor Retailer DC Store
Producer Consumer
shared DC DC
Buy/Sell $3 N/A $12.5 $18.75 N/A $25
Margin $8.5 N/A $6.25 $6.25
Margin % 68% 33% 25.5%
Days of Inv 45 45 45
$ carry 45days $0.04 $0.15 $0.23 $0.23
EBIT (5%) $1.25
EBIT (4%) $0.75
EBIT increase $0.11 $0.19
% increase 15% 15%
New Vine Retail Business Model
Example of $25 bottle at retail (price +inventory impact)
Producer Distributor Retailer DC Store
Producer Consumer
shared DC DC
Buy/Sell $3 N/A $12.5 N/A $12.5 $25
Margin $8.5 N/A $6.25 $12.5
Margin % 68% 33% 50%
New Vine fee -$1.25
Margin increase $5.00
Inventory saving $0.19
EBIT before $1.25
EBIT after $5.19
EBIT increase 4.15X
Thank You
Example of potential benefits of
Multi-echelon in food service industry
Comparing Cost for Current Practices in
Rx, Grocery and Foodservice (1996 dollars)
80% $1.83/bottle $2.36/case $3.33/case
71%
70%
Demand Chain Costs, %
60%
50% 48%
43%
Inventory
40%
29%28% 29%
30%
23%
20% 17%
Inventory
Handling
Handling
Inventory
12%
10%
0%
Rx Grocery Foodservice
Total Finished Goods portion of the
Foodservice Supply Chain = $3.33/case
(Percent of activity costs per Participant)
60.00%
50.00% 53% 53%
49%
47%
40.00%
39%
30.00%
32%
20.00%
10.00% 14%
12%
0%
0.00%
Mfr Distributer Operator
46% 47% 7%
Transportation Inventory Handling
Total Demand Chain = $3.33/case
Percent of Activity Costs per Participant
(Replenishment Only)
60.00%
50.00% 53% 53%
49%
47%
40.00%
39% Inventory
30.00% Savings
20.00%
32%
10.00% 14%
12%
0%
0.00%
Mfr Distributer Operator
(46%) (47%) (7%)
Transportation Inventory Handling
Adding a “Consolidation Level” to
the Supply Chain
Plant
LTL = 8% to 10%
Multi-drop 50% to 85%
Distr.Center
Operators
Adding a “Consolidation Level”
to the Supply Chain
Manufacturer Plant
Distributor
Reduced safety stock
Consolidation Added handling
LTL = 8% to 10% Added Inventory (unless)
Ctr.
to FTL
?
Multi-drop 50% to 75%
to FTL Distr.Center
Product price discounts Reduced Product Cost
Operators
Adding a “Consolidation Level” to the Demand
Portion of the Supply Chain
Plant
Distributor
Added Inventory (unless)
Traditional solution
with 2 forecasts ?
and replenishments
Distr.Center
Operators
Adding a “Consolidation Level”
to the Supply Chain
Plant
Distributor
Added Inventory (unless)
Evant multi-level
Optimization from a ?
Single forecast
Distr.Center
Reduced safety stock
More consistent Service levels
Improved buyer productivity
Operators
Total Demand Chain = $3.33/case
Percent of Activity Costs per Participant (multi-echelon)
Mfr Inventory
Savings
Mfr Transport
Savings
60.00%
53%
50.00% 53% 49%
40.00% 47% PFG Inventory
39% Savings
30.00%
Mfr Handling
20.00% Savings 32%
14%
12%
10.00% 0%
0.00%
Mfr Distributer Operator
Transportation Inventory Handling
