Supply Chain Strategy Assessment

1Jay Martin May 2012 Supply Chain Assessment.ppt

Global Consumer Products and Health & Beauty Company

Supply Chain Assessment & Strategy Consumer Products Company


The client’s new COO was faced with understanding their business and where and how their Supply Chain could improve profitability.

• Client had a new senior executive over Supply Chain with a more diverse operational background outside of the function.

• The company had outsourced almost all of their Supply Chain functions, and had very recently spun out its warehousing operations in its largest market to a 3PL.

• Recent issues regarding legacy sourcing decisions made close to a decade ago clouded an understanding of real operational performance.

• Operations metrics were provided and monitored by the Finance organization, whose accounting methods focused more on risk rather than actual losses.

• A Board Member, with many years at a competitor, was pushing for a performance improvement / metric focus that was of questionable relevance to this client’s business given almost the entire Supply Chain had been outsourced.

• Staffing had been greatly reduced throughout the organization given a recent economic downturn in Europe and the United States a few years earlier.

Supply Chain Assessment & Strategy Situation


The client asked Chief Innovation to complete a Supply Chain Assessment that would answer a variety of questions.

Supply Chain Assessment & Strategy Assignment

• How is our Supply Chain performing? How is it impacting profitability?

• With so much of the operations outsourced, what can and should we be doing to optimize our contractual relationships and manage our partners?

• Are we over-staffed or under-staffed? Evaluate the different functional teams.

• What areas could additional staff investment be justified against profitability?

• What metrics should we continue to use and what new ones might we consider?

• How can we better sunset low volume/profit impacting SKUs?

• What areas should we make changes in and what should we be doing differently?

The following document is a mix of what are the options for a project like this, how to do one and the structure we completed for this client.


What ‘is our Supply Chain Strategy’ is two different things, though semantics and mixed usage creates obvious confusion.

• 1) The Strategy for our Supply Chain –The overall guiding principles for the company with respect to its operations and their support of the business.

• 2) Supply Chain’s Strategy –The ‘Plan’ to execute the above, with specific goals and objectives and those actions required to make them a reality.

The first is more of a ‘vision’ or a choice made by the company with respect to how they will view the execution of their operational areas, and where and how they will make the trade-offs. The second is a detailed planning document, by sub-functional area, showing metrics, targets, actions, accountability and anticipated results.

The key word is ‘trade-offs’. Given our existing and future business, what priorities do we have for the different performance attributes.

Supply Chain Assessment & Strategy Definition


One way to think of this is using the balance of Operational Effectiveness and Responsiveness, and below are six examples.

Source: Supply Chain Quarterly, though believe original concept was from A.T. Kearney

Operational Effectiveness

Continuous Flow Efficient Fast

• Primary focus is for low working capital

delivered to customers.

• Primarily ‘make-to-stock’

• Market demand drives production to

replenish to predefined inventory levels

• Lowest cost mode

• Able to support multiple strategies

• For commoditized products

• Make to forecast

• Continuous production or ordering

• Competitive cost and continuous

portfolio renewal

• Short time-to-market and low costs are

two primary deliverables

• Demand is a ‘push’ by forecast

• Primary strategy for fashion and

beauty products

Responsiveness

Custom Configured Agile Flexible

• Focus is on the end-user

• Products designed to have common

components and customized later

• Smooth forecasting at front end

• Fulfillment/meeting customer needs is

critical

• Respond to unpredictable demand

• Exclusive, short-lifecycle products

• Asset utilization not highly relevant

towards total costs

• Common components/materials

• This strategy used to support

companies with Industrial customers

• Solving customer problems is major

thrust of this strategy

• Usually used for products which have

a high level of service involved

• Flexible processes

• Price insensitive customers

The examples fit the needs of many companies, but not everyone.

Supply Chain Assessment & Strategy Examples


For many companies, these strategies do not fit ‘off-the-shelf’. Their real best choice comes in prioritizing and asking tough questions.

Sub-Function Question

R&D Do I need to do real research or focus on incremental product changes?

Product Development How broad a product range do I need? How often do I need new products?

Product Development Do I need to have unique products? Can I/should I ‘copy-cat’?

Inbound Can I use full truck load ground to get my orders or expedite shipments?

Warehousing /

InventoryShould I have dedicated warehouses or let a 3PL handle it?

Warehousing /

InventoryAt what cost is perfect fulfillment worth it to me? What is acceptable?

Warehousing /

InventoryWhat ‘tail’ products will we keep, for how long, and at for what order levels?

Outbound/Delivery What minimums order quantities will I allow? How do I do bracket pricing?

These are just example questions showing the balance in priorities.

Supply Chain Assessment & Strategy Difficult Questions


This was a quick assignment, and these types of projects are all different, but the overall work flowed similar to the four steps below.

Gather Data AnalysisInterview

ProgramFinal Report

1 2 3 4

• Confirm objectives

• Provide request for information needed

• Review past projects

• Create and agree on detailed work plan

• Start building cost model from 10-K (income)

• Identify competitors

• Select key suppliers

• Review documents supplied by client

• Review metrics and past performance, confirm

• Research competitors

• Identify interview targets

• Map/analyze processes

• Build interview guide

• Continue on cost model

• Analyze inventory

• Analyze product losses

• Analyze transportation and 3PL contract/results

• Conduct interview program

• Structure analysis

• Confirm feedback

• Compare to data and documents provided

• Develop issues lists

• Follow-up To Do lists

• Create new process strawmen

• Finish competitor profiles

• Discuss metrics and dashboard drafts

• Develop Final Report Structure

• Review with client

• Populate analysis section

• Review master list of issues to build recommendations

• Consolidate and match recommendations into implementation plan

• Review with COO

• Present / deliver to Senior Executive Team

Deliverables

• Supply Chain Assessment Report

• Supply Chain Strategy & Recommendations

• Metrics / Dashboard Structure

Supply Chain Assessment & Strategy Approach


At the start of assignments like these, it advantageous to create a Master file to compile and track key project/client information.

Excel Master FileSection / Worksheet Contents / Purpose

RolodexMaintain and takes notes on who you meet or

the key people inside the client, as well as

people you’d like to meet / interview.

Issues / Notes

This is the heart of the project. Keep a giant

long running list with everything you learn from

meetings, interviews, the annual report, old

projects and documents. We use 5 columns:

Source (document/venue), Person (if

applicable), Top Level Subject, Type (issue, to

do item, fact) and Content (what is issue, fact)

Files Received / StatusRunning list of all documents received, file

names, format (xls, doc, ppt, pdf), dates (if

they have them) and who provided them

Cost Model / Income

Statement

Build a cost model for Supply Chain using

either recent year end Income Statement or

recent quarter. Ask client for preference.

Products and DivisionsCompile a list of each division and respective

products (with brands and names) to fully

understand the scope of their operations.

Sites & Countries List of all countries and facilities for client.

Supply Chain Assessment & Strategy Master File for Project


After more than 20 interviews and review of dozens of files, we had almost 500 lines of issues and observations to make conclusions.

• Staff including the CEO, Marketing, R&D, Finance, Accounting, IT, the 3PL and all of the Supply Chain function were interviewed.

• Close to 100 documents were received and reviewed.

• The Forecasting and Inventory sections contained implementation details that the client asked for given she was knew.

• The recommendations build on the existing strategy, while emphasizing the need to perfect the Demand Planning/Forecasting expertise.

• A total of 59 recommendations across all areas were detailed on the following pages. Further explanations were shown in more detail.

• The project was quick, and only lasted about 5 weeks. The final report was around 110 pages, of which the structure of some is shown here.

This document contains structural ideas to help others complete projects similar to this. All client data has been removed/substituted.

Supply Chain Assessment & Strategy Project Scope


The Supply Chain Assessment & Strategy document was broken out into the 5 sections below, and this document combines 1 into 5.

1 Summary & Recommendations

2 Sourcing & Demand Planning

3 Transportation & Inventory

4 Metrics & Competitive Assessment

5 Next Steps / Implementation

Supply Chain Assessment & Strategy Document Structure


A company such as ClientCo can achieve higher profitability by focusing its efforts in optimizing its Supply Chain activities.

Reduce how much it costs to make your

products (materials and labor)

Reduce how much you pay to purchase

your products or Raw Materials

Reduce how much it costs to have your

products delivered to your DCs

Reduce the time your inventory spends in

your hands (i.e. working capital)

Minimize the costs of handling your

products

Reduce the amount of products that expire

or become obsolete/written-off/discounted

Minimize the costs of delivering your

products to your customers

Minimize the amount of products returns

Minimize the cost of the return process

Optimize facility and operating costs

Operate with minimal tolerable overhead

Ensure optimal sales thru availability

Product Development

Planning

Sourcing

Manufacturing

Transportation

Inventory Management

Delivery

Reduced payments to Suppliers

Reduced waste of product

Reduced payments for employees

Lower working capital costs

Supply Chain Assessment & Strategy Where is the money?


A highly outsourced system bleeds money across the spectrum of functions in easily identifiable/ quantifiable manners.

Planning Sourcing In-Bound Warehouse Delivery

Overpay for product ClientCo pays delivery

Sales comp on cancellations

Product losses in-transit

Extra picking fees

Inventory carry costs

Inventory write-offs

Air freight

Expedite fees

Poor quality

Sub-optimized lots

Too much inventory

Too little inventory

Poor execution in Demand Planning creates costs on both extremes.

Supply Chain Assessment & Strategy Operational Losses (Money)


Using publicly available sources, the client can be compared to its major competitors using annual reports and 10-Ks.

The data above (and some row names) are all illustrative, and though each competitor has a unique business model, it can be very valuable.

Supply Chain Assessment & Strategy Competitors – Top Level

ClientCo


As part of the project, CI completed Supply Chain focused profiles of the client’s top competitors in the United States.

Headquarters

London, UK

Founded

1960

Revenue / Income

14,875 MM USD

2,528 MM

Employees

23,400

Ownership / Leadership

• Public: NYSE: ZXY

• CEO – Michael Freedman

• President – Diana Jax

• COO – Richard Guha

• CFO – John Simpson

• July 2014 – The EU begins looking at trade issues

• Hedge funds are shorting the stock in the U.S. and Europe

• Continued accusations relating to rashes caused by diapers in Hungary

• Warren Buffet reduced his position by over $300 million

Marketing (Customers/Products)

• Sold in 12,300 retail stores

• Partnered with other British companies and key charities

• Heavy into sports partnerships

• Juice and Soda (43.6%),

• Sanitary (36.1 %)

• Haircare (5.3%)

• Skincare (6.8%)

• Products sold and distributed in 65 countries. Revenue breakdown:

• Europe 35%

• N.A. & Mexico 25%

• Latam 20%

• APAC & China 15%

• Africa 5%

• Largest plants in Paris, France, Elgin, IL and Shanghai, China

• New plant recently opened in Argentina (500k sqf)

• 760 Distribution ‘points’

• Most French sold products are contract manufactured

• 40% of products purchased from the largest 5 manufacturers

• Heavily expanding self-manufacturing

• 60-65% of products will be self-produced once AL plant ramps up

• Bought DebCo (Chula Vista, CA) in 2006

Supply Chain Information

Additional Information

International

Product Segments

Note: Used most recent and best sources from the internet. Timing may vary.

Supply Chain Assessment & Strategy Competitor Profile


In focusing on Sourcing, costs can be primarily reduced via four different venues (not including design and other changes).

Changing Suppliers

Renegotiating with Existing Suppliers

Optimizing Existing Agreements

Manufacturing (bring in-house)

Suppliers

A

B

C

D

For each one of these, the relevant options, additional research needed and decisions needed should be spelled out for the client.

2Supply Chain Assessment & Strategy Sourcing Cost Reduction Options


A top level analysis of their suppliers and the spend helps understand the focus and needs to consolidate or which ones to focus on.

# Supplier HQ / Plants Key Products 2013 ($000) % Prod Spend

1 Supplier A Paris, France

• TastyTreats

• Chewy Packs for Kids

• Chewy Bars

58.027 29.0

2 Supplier B Leven, Belgium • ClientCo Cola 42,673 21.8

3 Supplier C Essex, UK

• PrettySkin

• YouAintaHag

• Skin Droppers

40,592 20.2

4 Supplier D Atlanta, Georgia• Yumsters

• Besties Candies28,919 14.9

5 Supplier E Shenzhen, China• Headachers

• MightzFines25,430 12.8

6 Supplier F Toronto, Canada • New Hair Wigs 17,632 8.4

The analysis at this client showed a great deal of concentration with a few key suppliers across all their divisions. (all data is illustrative)

2Supply Chain Assessment & Strategy Top Suppliers


The client was reviewing whether to begin manufacturing in some of their divisions where all was currently contracted out to others.

Manufacturing D

Should we manufacture for

ourselves?

Do we have the skills or can they be

easily acquired?

What would our raw material costs be?

What are our risks in the event of a

downward demand spike?

How easily could our IT and Financial

systems support it?

What equipment / facilities would be

required?

Do we have any risks that our

Suppliers would not?

Could we manufacture for

others?

Regardless of a decision to do so, much of the analytical work and research could be used to become a ‘smarter’ purchaser.

• Factory space

• RM/WIP/FG holding

• Climate control, etc.

• Processing equipment

• Packaging (if internal)

Is there market demand for these

services?

Would the market (e.g. competitors) source from us?

2Supply Chain Assessment & Strategy Sourcing – Manufacturing Logic


Demand Planning – or Forecasting – is an area that is very critical for any Consumer Products company, especially those who outsource.

• Past customer demand

• Price

• Promotions

• Events

• Inclusion in multi-packs

• Related product impact

• Competitive products

• Retailer count/growth

• New product introductions

• Seasonality (minimal)

• Recent press

• Public perception

• Regulation changes

• Prior unmet demand

• Product sunset plans

• Other factors….

• Sales

• Profit

• Customer satisfaction

• Financial forecasting

• Shipping costs

• Inventory levels

• Optimal working capital

• Expiration risks

• Optimal purchasing

• Lot size benefits

• Transportation planning

• Back-order coordination

• Internal coordination

• Effective planning

Examples of Considerations Why it is important? (Impacts)

The financial impacts of doing this ‘right’ (or not) can be enormous.

2Supply Chain Assessment & Strategy Forecasting


Our project showed the need to rebuild the area and laid out some of the things that needed to be addressed with the team assigned to it.

Item # Item Assignment, Work or Decision Needed

1 Owner & RolesOwner of Forecasting is Dre Bruni. Team and J-C need to clarify

overall roles of Marketing, Supply Chain and others (e.g. International)

2 ProcessFrancois will develop a new process with Jay’s help. Process will not

change as much as the activities inside of existing steps/meetings

3 MetricsMAPE will be a key metric for overall forecasting performance, though

other supporting ones may be used to assess forecasting’s impacts

4 TargetsCalculations on available data showed real forecast error was 9%, but

that was end of 2012. Will need to assess current actuals first.

5 Dashboard / ReportingAn overall Supply Chain Dashboard is being developed, and will

incorporate metrics from this process. Jean-Claude will decide.

6 MeetingsA bi-weekly (or possibly) weekly meeting with Marketing and Supply

Chain will be the core of the interaction. Moscow input is critical.

7 DecisionsOwnership of ‘orders’ and ‘inventory’ needs to be established. We

propose putting all responsibility and performance with one function.

8 Documentation/FormsA variety of input and output forms need to be developed to facilitate

input, provide a paper trail and help understand when we are ‘off’

9International

Coordination

Input from other markets is key and critical, and expectation is that

Marketing or International will play this role and obtain input/feedback.

10 TrainingProcess documentation should be easy to understand and not require

‘manuals’, but on-boarding/confirmation of understanding is key.

2Supply Chain Assessment & Strategy Forecasting Components


For ClientCo, Forecasting will have positive impacts on performance across the company, and will improve profitability.

Fewer missed orders

Increased Product Sales

Increased

Profitability

More reorders (due to confidence in

delivery)

Higher sales rep satisfaction (e.g. higher

attrition and engagement)

Reduced expedited and air freight costs:

Supplier to DC

Reduced Transportation ExpensesReduced expedited delivery costs: DC to

Customer

Reduced shipping charges to customers

paid for by ClientCo due to missed

shipment or partial shipments

Reduced product loss from lower

obsolete product lotsReduction of product waste

Reduce product costs from optimal lot

sizes and orderingReduced spend on product

Reduced office labor for back order

processing and coordinationReduction in non-value added labor

Optimal inventory balance (to sales)* Reduced working capital costs

* Overall inventory level could rise to support higher fulfillment rate, but premise is that unneeded inventory in those SKUs that had it will be reduced/minimized.

2Supply Chain Assessment & Strategy Demand Planning & Profitability


Excessive Inventory

Back-orders

Why this happens

• Poorly forecast our requirements

• Purchasing orders too little

• 3PL makes mistakes

• Manufacturer/supplier issues

• Transportation issues

Why this happens

• Poorly forecast our requirements

• Purchasing orders too much

• Shelf-life too low for fluctuations

“Perfect Forecast”How much product do we need?

This NEVER happens. The goal is to financially

optimize the errors

• Lost sales

• Sub-optimal lot ordering

• Management distraction

• Expedite / air shipment fees

• Company paid shipping expense

• Customer satisfaction

• Write-offs-expired product

• Discounting to push through

• Working capital inefficiency

The basic premise of forecasting is the attempt to best estimate required customer demand. Being over or under both have costs.

‘Forecasting’ is a general term that refers to ‘making statements about the future’, and in these terms it is reference to product needs.

2Supply Chain Assessment & Strategy Failure of ‘too much’ vs. ‘too little’


Excessive Inventory Back-orders

For a successful Supply Chain, the balance on both sides of the inventory equation are needed to be understood.

Cost of Excess Inventory Estimate

Risk of product being written-off 1% per year

Working capital cost of inventory 8% per year

Increased chance of discounting n/a

Total Cost of Excess Inventory 1% per month

Cost of Insufficient Inventory Estimate

Lost profit from missed sale +70%

Wholesaler fine for late delivery $12 per case

Air shipping & expedite fees n/a

Sub-optimal lot ordering n/a

Staff labor to process back-order n/a

Customer dissatisfaction n/a

3PL additional pick/packing fees n/a

Total Cost of Back-order TBD

These percentages show back-orders are a far greater cost than excess inventory. This is ‘until’ inventory levels are so great that obsoletes become inevitable, then 1% a month becomes ‘100%’, direct to the dumpster. Note: All % are in terms of COGS of the item.

2Supply Chain Assessment & Strategy Cost Balancing


For an outsourced manufacturing operation, the planning and reorder points are critical and must be monitored and lead-times understood.

Re-order

Point

Order

Quantity

Order Lead-time

Safety stock

Analyzed demand

Time

Re-order

Point

Order

Quantity

Safety stock

Promotion Planned

Time

Red in the first chart shows analysis of the demand stronger than anticipated. A review of the expected re-order point

is made (moved up) and vigilant monitoring would be prudent. Impact to safety stock requirements may be justified.

Green shows demand to have been lower than the original forecast. This would result in a delay of the re-order date.

In all cases of demand changes, coordination and warning needs to provided to the Supplier for their preparation.

The Blue shows that demand followed the original forecast (unlikely by the way), but that an impact (e.g. promotion) is

planned by marketing or the field, and the demand slope is expected to change drastically.

2Supply Chain Assessment & Strategy Demand Variability


Our assessment addressed all three areas of inventory needing to be managed, and below is a top level view with the recommendations.

Raw Materials (RM)

Promotional & Marketing Materials

Finished Goods (FG)

Write-offs

Write-offs

Transportation Costs

Write-offs

Carry Cost Excess

SKU proliferation

Continue current inventorylevel reduction process

launched in Belgium in 2009 already in progress

Marketing team ownership

Local foreign sourcing

Forecasting resources

New demand planning tools

Write-off investigations

New Sunset process

New cost metric/dashboard

Stock-out investigations

Issues Proposed Action AreasTypes of Inventory

3Supply Chain Assessment & Strategy Inventory Summary


For this client, a detailed analysis of inventory and losses was critical to better understand its significant impact on recent profitability.

• FG Inventory write-offs for 2013 were $ 2.1 MM versus 6.8 MM in 2012.

• The pain of past years raw material sourcing is still being both cleaned up and felt, with over $ 7.3 million still on the books at year-end 2013.

• Materials and promotional product obsolescence accounted for $1.6 MM, but this is not a Supply Chain issue.

• Some major events and anomalies resulting in inventory losses include:

– Container ship hijacked off Indonesian coast

– Russian inventory write-offs due to political difficulty

– Cannibalization between Jay Cola and NewCola

• The ‘Inventory Reserve’ is not a focus at this time, because though it is an important measure in performance, it is not the ‘real money’ we are looking to capture with respect to benefit realization of improvements.

3Supply Chain Assessment & Strategy Inventory – Write-offs


Detailed analysis on causes, products and locations should be completed, with corrective action plans developed for future mitigation.

$2,138 K

$1,577 k

$196 k

$371 k

Damages

TBD

Expired FG

Top W/O ($000) % of total

5 645.5 29.5%

10 957.7 43.6%

20 1,218.8 60.5%

A few percent of this client’s SKUs represented over 60% of their losses, with most concentrated in a few product lines and markets.

3Supply Chain Assessment & Strategy Inventory – Write-off Causation

Top 5 etc. SKUs in terms of losses


Our team analyzed the top SKUs (losses) to better understand what events, accidents or poor forecasting resulted in their write-offs.

The client COO launched an initiative across the world to investigate this and take action to mitigate these issues in the future.

3Supply Chain Assessment & Strategy Inventory – Investigate Highest Losses


A historic oversupply of certain raw materials was being corrected, and much of these legacy issues were drawing to a close.

Raw MaterialUsed In

(Products)

Balance

($ thousands)Notes

1 Food Base - GumGumsters

Chewy Bots 3,840

Products being phased out, doing a

promotional to move the rest in Eastern

Europe

2 Soda Syrup - GrapeNo longer used

(was Grape Soda) 2,194

Replacing grape flavor with a new

supplier, working to repurpose stock.

3 Skin Base Jay Skin 2,322

Currently at risk on expiry date for the

Italian stored items. Looking to move

back into France

4 Raw HairExtensions

Wigs 1,114

Prior hair quality issues from India,

looking to sell wholesale into a market

where our products are not present.

Brokers are being evaluated.

5 Hair Base Hair Jay 1,065

Moving up end product production given

expiration date of raw materials is

approaching soon. Minimal impact.

Total 10,631

3Supply Chain Assessment & Strategy Inventory – Raw Materials


Companies need to understand their total costs and risks to hold inventory, and the below chart shows some of the major areas.

Item Description Relevance to ClientCo

Cost of CapitalCost to your company for the lack of

access to the capital used to buy the item.

Major item. Assumption is

between 3-4% of cost/year.

Obsolescence RiskAverage chance that product could

become expired or obsolete.

Major item. Risk currently

2.5%. Was much higher.

ShrinkageTheft, damage or other negative result

while inventory is in your possession.

Not a major issue other than

major crime events (e.g hijack)

Handling CostsThe cost of inspection, storage and

movement while in inventory.3PL fixed costs

Product Maintenance CostAny special considerations required to

maintain product life (e.g. refrigeration).Not a major issue

Facility CostsFixed costs and allocation of storage,

including site maintenance.

Fixed cost, minimal incremental

costs

Asset TaxesTaxes incurred on company assets

specifically related to inventory. (if any)

Unsure, but expected to be

minimal as compared to 1 & 2

Supply Chain needs to understand the total cost of holding inventory and all the facets that should be incorporated for accuracy.

3Supply Chain Assessment & Strategy Inventory – Holding Cost


For these types of projects, Chief Innovation likes to create a graphic picture of the long-tail by revenue and by units (below).

2

5.3%

94.7%

47.9%

52.1%

0.6%

99.4% 74.2%

25.8%

% of Revenue % of Products % of Revenue % of Products

These types of charts help emphasize to resistant executives the enormity of SKU proliferation compared to lack of contribution.

Sales Volume

2013

Bottom 40 Products Bottom 20 Products

3Supply Chain Assessment & Strategy Inventory – Long Tail ($s)


An analysis by revenue, market and volume is very useful per below. Candidates for sunset (elimination) can become very apparent.

Units

Sold

Cum %

% of Total SalesProduct NameRank

Note: These values are believed to be a consolidation of all markets for the given products.

3Supply Chain Assessment & Strategy The Bottom SKUs by Revenue


The cost of SKU proliferation manifests itself at both the time of addition of a new product, as well as throughout its life.

SKU Creation Over the Lifetime

• Evaluation by Marketing

• Item Master creation

• Product introduction resources

• Product introduction alerting

• Creation of warehouse location

• Setting up vendor (if new)

• Obsolete inventory risks

• Occupies warehouse space

• Distraction of Marketing

• Risk for returns or recalls

• Increased out-of-stock risk

• Product costs for low volumes

• Ordering costs

• Cost of keeping product in stock (for longer time periods)

• Product elimination costs

• Price discounts for low sales

• Distraction for Wholesalers

Profits are in proportion to revenue, costs are in proportion to transactions. If costs were completely allocated, these would be losers.

3Supply Chain Assessment & Strategy Inventory - Sunset Process


The decision to Sunset a product or SKU should follow a logic tree.

Should we retire this

SKU/product?

Are the overall sales

low?

Are there good reasons

to keep it?

Have the sales been

declining?

Can we retire all the SKUs of the product?

Does MOQ create an

expiration risk?

Will it eliminate a Supplier?

Are there new products that

replace it?

Is there potential for it to rebound?

The questions above should drive the answer and are mostly factual (i.e. not opinions). Completing this analysis of the entire long-tail should highlight those obvious ones no one wants to ‘rescue’.

It is a complimentary

product?

Note: There may be more questions here, and Marketing should complete the analysis and prep Executives.

Does it use any of our raw

materials?

Will key Retailers get

upset?

Is it a key heritage product?

Does it fail to support our positioning?

Is the profit impact from it very small?

3Supply Chain Assessment & Strategy Inventory - Sunset Logic


CI provided the client with a top-level process on how to develop metrics and a dashboard, and then built the framework for a stop-gap.

Establish Strategic

Goals

Link to Supply Chain

Metrics

Base Metrics onReal Data

Provide Access / Create

Dashboard

Drive Supporting

Actions

• Revenue

• Growth

• New markets

• Overhead costs

• Working capital

• Equity value / stock

• New products

• Wholesalers

• Retention

• Dollars / order

• Revenue mix (new products or customers vs. old)

• Fulfillment

• COGS

• Sourcing costs

• Logistics costs

• Expedite levels

• Inventory/sales

• Inventory aging

• Out-of-stocks

• Returns / costs

• SCM staffing

• SAP or JDE / Oracle

• Financial reporting

• Physical inventory

• 3PL reporting

• Marketing data

• Develop a dashboard format

• Assign an owner

• Assign each metric and owner

• Assign new staff to issues

• Alter safety stocks

• More carefully manage Air freight

• ……….

We identified all of the options, and then jointly with the Supply Chain Team, and then created a new comprehensive metric as the focus.

4Supply Chain Assessment & Strategy Dashboard & Metrics


A top level metric showing excess costs created by Supply Chain was developed with an interim dashboard structure for ease of focus.

The premise of this metric is that “a perfect Supply Chain would cost ‘X’ dollars to operate, and this number is everything above that.”

4Supply Chain Assessment & Strategy SCM Dashboard

Client Co


One of the first things CI did was validate and dispel some of the general beliefs of the executive team and the Board of Directors.

What we thought Reality Reasons / Implications

Supply Chain is hurting our

profitability, but we are not sure

just by how much.

Possibly over $37 million for

2013.

Lost profit from missed orders,

along with obvious excess costs

in shipping and inventory.

2% was our forecast error for the

last quarter of 2012 when we did

an analysis. We are doing okay.

Over 13% was the reality.

Prior calculation was made

without including key data that

impacts accuracy.

Four turns is our goal.

A balance between inventory

control and fulfillment is required,

with fulfillment being the priority.

The cost of a back-order dwarfs

the savings from managing

inventory, though both are critical.

Inventory losses are in the

“tens of millions”.

Finished Goods write-offs were

under a million in 2013, down

from a little more in 2012.

The one bit of good news.

Losses in Raw Materials and

Promos were not included here.

Our Forecasting should be ‘easy’

given how the wholesalers.

Actual demand outside the U.S.

shows enormous fluctuation

period to period.

‘Smooth’ or predictable demand

is not the norm, especially in 28

of 43 markets outside France

Supply Chain needs to worry

about many things.

P.O. order date optimization fixes

the bulk of expensive problems.

With an outsourced Supply

Chain, kicking off the start is the

key to supporting profitability.

5Supply Chain Assessment & Strategy Results – Original beliefs


Where were over 50 recommendations from this effort, with four major areas encompassing the majority of recommendations.

Demand Planning

Metrics & Dashboard

InventoryManagement

Sourcing & Supplier Mgt

• New Forecasting staff

• New Demand Planning tool

• Evaluation of SAP usage

• New forecast measures

• Review Demand variability

• New Sunset selection parameters

• Inventory holding changes

• Write-off investigation

• Stock-out flagging evaluation

• Reinvestigate manufacturing

• Collaboration & communication

• Supply base research

• Comprehensive SCM Metric

• Top-level new dashboard

• Country-level metrics

• Balancing of B/O & FGI

• Standard back-order cost

15Supply Chain Assessment & Strategy Results


For each of the more than 50 recommendations, we provided some details and then a brief explanation. For some, we had more details.

# Area Recommendation Rationale

11 InventoryImplement and build out a new item

Sunset process.

This report has details of how to execute the front part of

the process, which is where you currently are stopping.

One method is to set a bar to ‘keep’ a SKU/item, and then

force any failures to be defended against deletion.

12 InventoryComplete a further Deep Dive analysis

on FGI write-offs

A quick analysis was already performed, but a thorough

investigation with ‘how to avoid’ each type of occurrence

should be completed. Ask the each Country Manager

‘what happened’ and figure out how to avoid repeating.

13 InventoryAdd LIFO checking to Cycle Count

process each month

Objective is to ensure that FIFO is being used in the

Warehouse by the 3PLs and that the correct lots are

being pulled from so as to avoid pre-mature expiration.

51 TransportationInquire to 3PLs and Wholesalers on

In-Bound Transport visibility tools or

reports, particularly for Europe land.

Many 3PLs have online systems that provide client facing

transportation information. This could help with

understanding arrivals better given your broad reach

across the world and manufacturing complexities.

52 Warehouse ‘One Day Hold’ for flagged stock-outs

A concern is that stock-outs are not being properly

addressed given the new warehouse system and that

other warehouses are not fulfilling them when they could

be so as to improve order fulfillment to wholesalers.

15Supply Chain Assessment & Strategy Results - Recommendations


A top level implementation guide was prepared to include each item. Definitive tasks for each were spelled out with some rough timing ideas.

Item # Task(s) Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

1Decide what level the person who will

lead this will be, who they will report

to and then hire them

StartLatest to

complete

16Assign someone to build and utilize

this. Design the functionality. Build

in Excel. Utilize for Date estimating.

Complete

and rolled

out

17SAP evaluation, decision on

functionality, understanding of cost

and then inclusion into SAP upgrade

Start SAP upgrade?

18

Decide on Forecasting evaluation

timeframes, trial analysis using

MAPE, review, assess errors, take

corrective action

Start

Create

yearly

schedule

19

Complete Post-mortem on the failure

in Demand Planning of issues during

2013 to better understand issues and

avoid them in the future

Create

form,

assign to

team

Analysis

completed,

Reviewed

by Execs

20

Institute a form to be completed

whenever a product goes on Back-

order requiring an explanation and

corrective action to avoid recurrence

Create

form, trialRoll-out

23

Analyze Auto-Orders and Demand

Variability, identify policies that may

drive Wholesaler order variability,

decide to keep/change

Analyze, discuss and

propose changes to Sales

Operations

24

Identify all market impacting activities,

evaluate past impacts on actual

demand, create a form and system to

obtain from country MDs

Workshop

to create

list of all

Consolidate list, assess past impacts and

then roll-out a system to the countries

where they provide the information back

to Paris for forecasting implications

Item # - this is a reference number per the recommendations at the front of this deck

Supply Chain Assessment & Strategy Results – Implementation Plan5


For any questions or clarifications, please feel to contact us.

Contact Details

Any questions, please contact:

Jay Martin

Chief Innovation, Inc.

Please contact me via the website or LinkedIn

(email usually provided here to clients)

Supply Chain Assessment & Strategy Contact Information

Supply Chain Strategy Assessment

Business

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