THE OPTIMAL ROLE OF OPTIMAL INVENTORY IN SUPPLY CHAINS AND BUSINESS

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THE OPTIMAL ROLE OF INVENTORY IN SUPPLY CHAINS AND BUSINESS

Class `1 The RightChain™ School of Inventory RightChain™ Institute

“In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” - Solomon

Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Inventory We literally wrote the book on Inventory.

Authored by Dr. Ed Frazelle, RightChain’s founder, and published by McGraw-Hill, Inventory Strategy is the world’s authoritative resource and guide on inventory optimization, best practices, metrics, analytics, and systems.

Introduce the optimal role of inventory in supply chains and business. Explain and illustrate high level inventory tradeoffs. Illustrate the effect of successful inventory management strategies on overall supply chain and business performance. Illustrate inventory optimization case examples for best-in-class supply chains.

OBJECTIVES

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What is a Supply Chain? Inventory in Perspective The Bullwhip Effect

CONTENTS

The RightChain™ Inventory Effect RightChain™ Inventory Use Cases

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Logistics is the flow of material, information, and money between consumers and suppliers. Accordingly, there is physical logistics, digital logistics, and fiscal logistics. The supply chain for a given enterprise is the set of enterprises, systems, facilities, vehicles, and transportation infrastructure connecting the suppliers’ suppliers to the customers’ customers for that specific enterprise. To use a sports analogy, the supply chain is the stadium and logistics is the game! Supply chain flow is optimized when material, information, and money flow simultaneously, in real time, and without paper.

WHAT IS SUPPLY CHAIN LOGISTICS?

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Supply chain logistics is a field full of difficult and complex tradeoffs. The root word for logistics is logic, meaning based on facts, clear rational thought, and sensible reasoning. The root word for “logic” is “ logos ”, meaning Word, divine reasoning, or wisdom from God. Optimization is the process identifying an objective function, constraints, and the solution that satisfies the constraints and objective function. The RIGHT answer for each supply chain logistics tradeoff we face will be found using data, optimization, logic, and logos.

WHAT IS “RIGHT” ?

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Japan: The Land of Lean

Only one third of Japan’s land is habitable, leaving a land mass roughly the size of Los Angeles for commercial and residential activities to co-occupy.

Japan is an island nation. Not rich in natural resources.

It all started in Japan with Toyota.

As seen from outer space, there’s no more occupiable land space. A vertical

The Japanese people are some of the world’s most studious, industrious, and disciplined; making the order they need achievable and vice versa.

As a result, Japan is one of the most congested and

land expensive countries in the world.

world must be and has been developed.

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Don’t philosophize; OPTIMIZE.

Optimization Optimization is an analytical approach to develop solutions to complex problems. The “optimal” solution minimizes or maximizes the objective function while satisfying the stated constraints.

Total Supply Chain Cost ($millions)

Response Time (Days)

Fill Rate

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Supply Chain Optimization Objective Function

Constraints Satisfy Supply Chain Service Policy Supply Chain Service Policy = Fill Rate > Target Response Time < Target

Minimize Total Supply Chain Costs Total Supply Chain Cost (TSCC) = Total Logistics Cost (TLC) + Total Inventory Cost (TIC) + Total Logistics Cost (TLC) = Total Transportation Cost (TTC) + Total Warehousing Cost (TWC) Total Inventory Cost (TIC) = Inventory Carrying Cost (ICC) + Lost Sales Cost (LSC)

On Time = Target Accuracy = Target

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From the Wrong Chain to the RightChain™

Wrong Chain

Maximize Vehicle/Driver Utilization

Maximize Container Utilization

Maximize Line Yield Minimize Unit Cost

Max Space Utilization Max Labor Utilization

Maximize Sales

Maximize GM, GM%, ROIC Minimize total supply chain costs. Meet optimal service targets. Maximize forecast accuracy.

RightChain™

Meet forecasted pickup & delivery schedule at lowest possible cost while meeting quality goals.

Meet forecasted throughput & storage requirements lowest possible cost while meeting quality goals.

Meet forecasted schedule at lowest possible cost while meeting quality goals.

Meet forecasted pickup & delivery schedule

Maximize ROIC Maximize GMROI Maximize Sales Maximize GM

at lowest possible cost while meeting quality goals.

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Coca-Cola FEMSA Supply Chain

Multi-Category Finished Goods Warehouse

Multi-Category Finished Goods Transport

Nutenta Orders Same and Next Day Flexible Urban Deliveries E-com Competition

Unpredictable Raw Material Availability Volatile Raw Material Pricing Unpredictable Transport Capacity

T 1

Multi-sourcing, 10x SKU-base, Each picking, UOM Assembly

T 0

T 2

T 1

TBD

Raw Materials Source Plant

Raw Materials Transport

Raw Materials Warehouse

Coke Bottling Plant

Finished Goods Distribution Center Cross Docking

Coke Plant Finished Goods Warehouse

Consumer Home

Coke Finished Goods Transport

Store Delivery

Store Customer

Cross Docking Cross Trucking

T 1.5

Raw Materials Supply Chain

Finished Goods Supply Chain

Retail Supply Chain

KOFchain

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RightChain™ Finance | Supply Chain Inventory Financials

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RightChain™ Finance | Supply Chain Inventory Financials Cont’d

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Campbell’s Soup Bullwhip Poor Demand Signal Processing Batching for Economies of Scale Price Fluctuations and Promotions Shortage Gaming Bullwhip Counter Attacks

The Bullwhip Effect

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The Bullwhip Effect Increasing Variability of Order Sizes in the Supply Chain

The Bullwhip Effect is a reference to the propagating and increase of order sizes in supply chains as orders move wholesalers to retailers to consumers. As order sizes increase, inventory levels increase accordingly. from suppliers to manufacturers to

8000.00

Consumer Demand Retail to Wholesale Wholesale to MFG. Mfg. to Supplier

7000.00

6000.00

5000.00

4000.00

3000.00

2000.00 Order Quantity

1000.00

0.00

1000.00

Jul-95

Jul-96

Jul-97

Jan-96

Jan-97

Jan-95

Mar-95

Mar-96

Mar-97

Sep-95

Nov-95

Sep-96

Nov-96

Sep-97

Nov-97

May-95

May-96

May-97

Period

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What Causes the Bullwhip Effect?

• Long, Expensive Setups • Expensive Purchase Order Processing • Transportation Economies • MRP/DRP Jitters via Manual Intervention • Incentives and Measurement Systems

• In anticipation of shortages and gaming

• With high-low

• Repeated, inaccurate forecasting processes

pricing, forward buying is the “optimal” ordering policy. one part of the supply chain propagates order variability up the supply chain.

behaviors by competitors,

automatically amplify order variability. • The longer and more variable the lead time, the larger the amplification effect.

firms order more than needed (phantom orders). • Phantom orders are cancelled when the shortage is over.

• Promotion in

Shortage Gaming

Poor Demand Signal Processing

Batching for Economies of Scale

Price Fluctuations & Promotions

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Information Sharing

Coordinated Planning

Efficiency Improvement

Poor Demand Signal Processing

• Sell-Thru • POS Data • Consumer Direct • Warehouse Withdrawls

• VMI • CRP • DRP

• Lead Time Reduction • Postponement

Bullwhip Counter Attacks

Batching for Economies of Scale

• Consolidated Shipments • Truckload Assortments • Mixed SKU Pallets Cross-Docking

• EDI • CAO • Setup Reduction • PO Cost Reduction

Price Fluctuations and Promotions Shortage Gaming

• EDLP • ABC

• Allocation Based on Past Sales

• Forecast Sharing • Capacity and Inventory Sharing

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Inventory: What’s the problem? PowerPoint Template

Unreliable Data Accuracy and Availability

Base Data Errors Un-vetted Database Changes

Inadequate Training and Education

Un/Mis Trained Planners Faulty Fundamentals

Conflicting Concepts Irreconcilable

Inventory Challenges

Problematic Perspectives

Interdependencies Operational Myopia Misplaced Accountabilities

Mis-aligned and Mis-guided Metrics

Traditional Accounting Conflicting Metrics

Poisonous Paradigms

LEAN/TPS/JIT Procurement “Cost” Avoidance

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Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Inventory Methodology

RightChain™ Deployment Deployment Optimization

RightChain™ Turns Turn Rate Optimization

RightChain™ Lots Lot Size Optimization

RightChain™ Forecasting Forecast Optimization

RightChain™ SKUs SKU Optimization

Forecast Accuracy, Fill Rate, Revenue, Gross Margin increases Gross Margin %, GMROI, IVA™ Increases

RightChain™ Inventory | Seven Steps to Optimal Inventory Based on Dr. Frazelle’s Inventory Strategy book published by McGraw-Hill, RightChain’s Inventory Optimization methodology and cloud-based SaaS artificial intelligence maximizes gross margin, gross margin percent, gross margin return on inventory, and inventory value added at the SKU, category, supply chain, and business unit level. Safety stock, lot size, pipeline, and build inventory are optimized at the SKU level.

RightChain™ Nodes Flow Path Optimization

Safety Stock Inventory

RightChain™ Deployment Deployment Optimization

RightChain™ Turns Turn Rate Optimization

RightChain™ Loads Load/Mode/Leadtime Optimization

Pipeline Inventory

RightChain™ Lots Lot Size Optimization

Gross Margin, Gross Margin Percent

RightChain™ Forecasting AI-Based Forecast Optimization

Lot Size/Ramp Inventory

RightChain™ SKUs SKU Optimization

Inventory Value Added, Gross Margin Return on Inventory

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Section 1 PriceSmart vs Domestic Warehouse Club Supply Chain Configurations RightChain™ Inventory Benefits

Gross margin increases 1 to 4 points.

Fill rate increases 3 to 8 points.

Forecast accuracy increases 3 to 8 points.

Inventory decreases 14% to 31%.

Lost sales decreases 2% to 9%.

Gross Margin %, GMROI increases Forecast Accuracy, Fill Rate, Revenue, Gross Margin increases

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RightChain™ Inventory Maturity Model

Optimal inventory levels are established in live and digital collaboration with suppliers and customers. COLLABORATION

Inventory levels are optimized for all supply chain nodes and links via integrated planning and optimization with sales, finances, and operations. INTEGRATION

OPTIMIZATION

Inventory levels are optimized by determining, setting, and employing optimal set points for fill rate targets, turn rate targets, safety stock levels,lot sizes, and

Inventory levels are stable and planned with plans reasonably reflecting actual behaviors. STABILITY

Basic inventory metrics are in place including turns, days on hand, $s on hand, inventory accuracy for SKUs and locations. ITEGRITY

deployment allocations.

Honda Service Parts Dell PCs Coca-Cola Consolidated U. S. Army Maintenance Disney P&G

RightChain™ Inventory Use Cases

Colgate Carrier

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Honda RightChain™ Inventory Performance Results

RightChain™ Inventory Implemented

Fill rate increasing from 96% to 99%.

Inventory decreasing from 6.0 months on hand to 3.5.

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Return on Invested Capital

DELL INTEL CISCO

• Consumer Direct Channel Design • $Millions per Day via Internet • Supplier Inventory 15 Minutes Away • Supplier City • Merge-in-Transit • 14 Days of Total Inventory DELL | THE HARE WINS

MICROSOFT PCS

22%

27%

30%

32%

49%

Merge-in-Transit

CPU Factory

CPU Order

System Order

Monitor Order

Dell.com

Monitor Factory

Speaker Order

Speaker Factory

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RightChain™ Inventory Optimization for Coca-Cola Consolidated

Average Inventory Value (AIV)

Inventory Carrying Cost (ICC)

Inventory Performance Index (IPI)

Inventory Policy Cost (IPC)

Lost Sales Cost (LSC)

Gross Margin (GM)

Inventory Value Added (IVA)™

RightChain™ Turns

Unit Fill Rate M a x

Turns

GMROI

Lost Sales

Lost GM

SKU or Category

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

1,354 1,369 1,377 1,386 1,395 1,405 1,417 1,432 1,441 1,454 1,468 1,479 1,495 1,510 1,515 1,521 1,529 1,541 1,543 1,548 1,554 1,562

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

406 411 413 416 418 422 425 430 432 436 440 444 449 453 454 456 459 462 463 464 466 469

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

393 314 275 236 196 157 118

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

799 725 688 651 615 579 543 508 491 475 464 459 456 457 458 459 460 463 464 465 466 469

2.4 2.4 2.4 2.3 2.3 2.3 2.3 2.3 2.3 2.2 2.2 2.2 2.2 2.2 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

393 471 510 550 589 628 667 707 726 746 761 769 777 781 782 783 783 784 784 784 785 785

0.29 0.34 0.37 0.40 0.42 0.45 0.47 0.49 0.50 0.51 0.52 0.52 0.52 0.52 0.52 0.51 0.51 0.51 0.51 0.51 0.51 0.50

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

(14)

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

2,018 1,614 1,412 1,211 1,009

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

393 314 275 236 196 157 118

1.20 1.42 1.53 1.64 1.75 1.85 1.95 2.04 2.09 2.12 2.15 2.15 2.15 2.14 2.14 2.13 2.12 2.11 2.10 2.10 2.09 2.08

50.00% 60.00% 65.00% 70.00% 75.00% 80.00% 85.00% 90.00% 92.50% 95.00% 97.00% 98.00% 99.00% 99.50% 99.60% 99.70% 99.80% 99.90% 99.91% 99.93% 99.95% 99.97% Current

026417

60 97

#N/A

134 170 206 242 277 294 310 321 326 329 328 327 326 325 322 321 320 319 316

# of SKUs

807 605 404 303 202 121

Forecast Annual Demand (FAD)

221

79 59 39 24 16

Leadtime Forecast Error

78%

Unit Selling Price (USP, $/case)

18.26

81 40 20 16 12

Unit Inventory Value (UIV)

8 4 3 2 2 1 1 1 0 0

14.71

Shortage Factor (SF)

19.45%

8 4 4 3 2 1

Leadtime (L, Days)

7.00

Cost per Setup or PO

308.00

Inventory Carrying Rate (ICR)

30%

FAD Rank Percentile

Current

26% 99.60%

1,044

313

901

3.1

688

0.38

187

0.38

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