Case Study

Supply Chain Strategy

Assessment
(Health & Beauty)
(Full/Long Version)

Jay Martin May 2012 Supply Chain [Link] 1

Supply Chain Assessment & Strategy Consumer Products Company

Global Consumer Products and Health & Beauty Company

Jay Martin May 2012 Supply Chain [Link] 2

Supply Chain Assessment & Strategy Situation

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.

Jay Martin May 2012 Supply Chain [Link] 3

Supply Chain Assessment & Strategy Assignment

The client asked Chief Innovation to complete a Supply Chain

Assessment that would answer a variety of questions.

• 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.

Jay Martin May 2012 Supply Chain [Link] 4

Supply Chain Assessment & Strategy Definition

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.

Jay Martin May 2012 Supply Chain [Link] 5

Supply Chain Assessment & Strategy Examples

One way to think of this is using the balance of Operational

Effectiveness and Responsiveness, and below are six examples.
Operational Effectiveness
Continuous Flow Efficient Fast
• Competitive cost and continuous
• Primary focus is for low working capital • Lowest cost mode portfolio renewal
delivered to customers. • Able to support multiple strategies • Short time-to-market and low costs are
• Primarily ‘make-to-stock’ • For commoditized products two primary deliverables
• Market demand drives production to • Make to forecast • Demand is a ‘push’ by forecast
replenish to predefined inventory levels • Continuous production or ordering • Primary strategy for fashion and
beauty products

Responsiveness
Custom Configured Agile Flexible
• Respond to unpredictable demand
• Focus is on the end-user • Solving customer problems is major
• Exclusive, short-lifecycle products
• Products designed to have common thrust of this strategy
• Asset utilization not highly relevant
components and customized later • Usually used for products which have
towards total costs
• Smooth forecasting at front end a high level of service involved
• Common components/materials
• Fulfillment/meeting customer needs is • Flexible processes
• This strategy used to support
critical • Price insensitive customers
companies with Industrial customers

The examples fit the needs of many companies, but not everyone.
Source: Supply Chain Quarterly, though believe original concept was from A.T. Kearney

Jay Martin May 2012 Supply Chain [Link] 6

Supply Chain Assessment & Strategy Difficult Questions

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 /
Should I have dedicated warehouses or let a 3PL handle it?
Inventory

Warehousing /
At what cost is perfect fulfillment worth it to me? What is acceptable?
Inventory

Warehousing /
What ‘tail’ products will we keep, for how long, and at for what order levels?
Inventory

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.

Jay Martin May 2012 Supply Chain [Link] 7
Supply Chain Assessment & Strategy Approach

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

1 2 3 4
Interview
Gather Data Analysis Final Report
Program

• Confirm objectives • Review documents • Conduct interview • Develop Final Report

• Provide request for supplied by client program Structure
information needed • Review metrics and past • Structure analysis • Review with client
• Review past projects performance, confirm • Confirm feedback • Populate analysis
• Create and agree on • Research competitors • Compare to data and section
detailed work plan • Identify interview targets documents provided • Review master list of
• Start building cost • Map/analyze processes • Develop issues lists issues to build
model from 10-K • Build interview guide • Follow-up To Do lists recommendations
(income) • Continue on cost model • Create new process • Consolidate and match
• Identify competitors strawmen recommendations into
• Analyze inventory implementation plan
• Select key suppliers • Analyze product losses • Finish competitor
profiles • Review with COO
• Analyze transportation • Present / deliver to
and 3PL contract/results • Discuss metrics and
dashboard drafts Senior Executive Team

• Supply Chain Assessment Report

Deliverables • Supply Chain Strategy & Recommendations
• Metrics / Dashboard Structure

Jay Martin May 2012 Supply Chain [Link] 8

Supply Chain Assessment & Strategy Master File for Project

At the start of assignments like these, it advantageous to create a

Master file to compile and track key project/client information.

Section / Worksheet Contents / Purpose

Excel Master File
Maintain and takes notes on who you meet or
Rolodex the key people inside the client, as well as
people you’d like to meet / interview.
This is the heart of the project. Keep a giant
long running list with everything you learn from
meetings, interviews, the annual report, old
Issues / Notes 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)
Running list of all documents received, file
Files Received / Status names, format (xls, doc, ppt, pdf), dates (if
they have them) and who provided them
Build a cost model for Supply Chain using
Cost Model / Income either recent year end Income Statement or
Statement recent quarter. Ask client for preference.
Compile a list of each division and respective
Products and Divisions products (with brands and names) to fully
understand the scope of their operations.
List of all countries and facilities for client.
Sites & Countries

Jay Martin May 2012 Supply Chain [Link] 9

Supply Chain Assessment & Strategy Project Scope

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.

Jay Martin May 2012 Supply Chain [Link] 10

Supply Chain Assessment & Strategy Document Structure

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

Jay Martin May 2012 Supply Chain [Link] 11

Supply Chain Assessment & Strategy Where is the money?
1
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
Product products (materials and labor)
Development Reduced payments
Reduce how much you pay to purchase
your products or Raw Materials to Suppliers
Reduce how much it costs to have your
Planning products delivered to your DCs

Reduce the time your inventory spends in

your hands (i.e. working capital)
Sourcing Minimize the costs of handling your Reduced payments
products for employees
Reduce the amount of products that expire
Manufacturing or become obsolete/written-off/discounted

Minimize the costs of delivering your

products to your customers
Reduced waste of
Transportation Minimize the amount of products returns product

Minimize the cost of the return process

Inventory
Management Optimize facility and operating costs

Lower working
Operate with minimal tolerable overhead capital costs
Delivery
Ensure optimal sales thru availability

Jay Martin May 2012 Supply Chain [Link] 12

Supply Chain Assessment & Strategy Operational Losses (Money)
1
A highly outsourced system bleeds money across the spectrum of
functions in easily identifiable/ quantifiable manners.

Overpay for product Expedite fees Extra picking fees ClientCo pays delivery

Planning Sourcing In-Bound Warehouse Delivery

Poor quality Air freight Inventory carry costs Sales comp on cancellations

Sub-optimized lots Inventory write-offs Product losses in-transit

Too much Too little

inventory inventory

Poor execution in Demand Planning creates costs on both extremes.

Jay Martin May 2012 Supply Chain [Link] 13
Supply Chain Assessment & Strategy Competitors – Top Level
2
Using publicly available sources, the client can be compared to its
major competitors using annual reports and 10-Ks.

ClientCo

The data above (and some row names) are all illustrative, and though
each competitor has a unique business model, it can be very valuable.
Jay Martin May 2012 Supply Chain [Link] 14
 Supply Chain Assessment & Strategy Competitor Profile
2
As part of the project, CI completed Supply Chain focused profiles of
the client’s top competitors in the United States.
Headquarters Revenue / Income Ownership / Leadership Marketing (Customers/Products)
14,875 MM USD • Public: NYSE: ZXY
London, UK • Sold in 12,300 retail stores
2,528 MM • CEO – Michael Freedman
• Partnered with other British
Founded Employees • President – Diana Jax
companies and key charities
• COO – Richard Guha
1960 23,400 • Heavy into sports partnerships
• CFO – John Simpson
Supply Chain Information Product Segments

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

• Juice and Soda (43.6%),
• New plant recently opened in Argentina (500k sqf)
• Sanitary (36.1 %)
• 760 Distribution ‘points’
• Haircare (5.3%)
• Most French sold products are contract manufactured
• Skincare (6.8%)
• 40% of products purchased from the largest 5 manufacturers
• Heavily expanding self-manufacturing
International
• 60-65% of products will be self-produced once AL plant ramps up
• Bought DebCo (Chula Vista, CA) in 2006 • Products sold and distributed in 65
countries. Revenue breakdown:
Additional Information
• Europe 35%
• July 2014 – The EU begins looking at trade issues • N.A. & Mexico 25%
• Hedge funds are shorting the stock in the U.S. and Europe • Latam 20%
• Continued accusations relating to rashes caused by diapers in Hungary • APAC & China 15%
• Warren Buffet reduced his position by over $300 million • Africa 5%

Note: Used most recent and best sources from the internet. Timing may vary.
Jay Martin May 2012 Supply Chain [Link] 15
Supply Chain Assessment & Strategy Sourcing Cost Reduction Options
2
In focusing on Sourcing, costs can be primarily reduced via four
different venues (not including design and other changes).

Changing Suppliers A

Suppliers

Renegotiating with Existing Suppliers B

Optimizing Existing Agreements C

Manufacturing (bring in-house) D

For each one of these, the relevant options, additional research

needed and decisions needed should be spelled out for the client.
Jay Martin May 2012 Supply Chain [Link] 16
Supply Chain Assessment & Strategy Top Suppliers
2
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

• TastyTreats
1 Supplier A Paris, France • Chewy Packs for Kids 58.027 29.0
• Chewy Bars

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

• PrettySkin
3 Supplier C Essex, UK • YouAintaHag 40,592 20.2
• Skin Droppers

• Yumsters
4 Supplier D Atlanta, Georgia
• Besties Candies
28,919 14.9

• Headachers
5 Supplier E Shenzhen, China
• MightzFines
25,430 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)
Jay Martin May 2012 Supply Chain [Link] 17
 Manufacturing D

Supply Chain Assessment & Strategy Sourcing – Manufacturing Logic

2
The client was reviewing whether to begin manufacturing in some of
their divisions where all was currently contracted out to others.
Should we
manufacture for
ourselves?

What are our risks in

Do we have the How easily could our
What would our raw the event of a
skills or can they be IT and Financial
material costs be? downward demand
easily acquired? systems support it?
spike?

What equipment / Do we have any Could we

facilities would be risks that our manufacture for
required? Suppliers would not? others?

• Factory space
• RM/WIP/FG holding
• Climate control, etc. Is there market Would the market
• Processing equipment demand for these (e.g. competitors)
• Packaging (if internal) services? source from us?

Regardless of a decision to do so, much of the analytical work and

research could be used to become a ‘smarter’ purchaser.
Jay Martin May 2012 Supply Chain [Link] 18
Supply Chain Assessment & Strategy Forecasting
2
Demand Planning – or Forecasting – is an area that is very critical for
any Consumer Products company, especially those who outsource.

Examples of Considerations Why it is important? (Impacts)

• Past customer demand • Sales

• Price • Profit
• Promotions • Customer satisfaction
• Events • Financial forecasting
• Inclusion in multi-packs • Shipping costs
• Related product impact • Inventory levels
• Competitive products • Optimal working capital
• Retailer count/growth • Expiration risks
• New product • Optimal purchasing
introductions • Lot size benefits
• Seasonality (minimal) • Transportation planning
• Recent press • Back-order coordination
• Public perception • Internal coordination
• Regulation changes • Effective planning
• Prior unmet demand
• Product sunset plans The financial impacts of doing this
• Other factors…. ‘right’ (or not) can be enormous.

Jay Martin May 2012 Supply Chain [Link] 19

Supply Chain Assessment & Strategy Forecasting Components
2
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
Owner of Forecasting is Dre Bruni. Team and J-C need to clarify
1 Owner & Roles
overall roles of Marketing, Supply Chain and others (e.g. International)
Francois will develop a new process with Jay’s help. Process will not
2 Process
change as much as the activities inside of existing steps/meetings
MAPE will be a key metric for overall forecasting performance, though
3 Metrics
other supporting ones may be used to assess forecasting’s impacts
Calculations on available data showed real forecast error was 9%, but
4 Targets
that was end of 2012. Will need to assess current actuals first.
An overall Supply Chain Dashboard is being developed, and will
5 Dashboard / Reporting
incorporate metrics from this process. Jean-Claude will decide.
A bi-weekly (or possibly) weekly meeting with Marketing and Supply
6 Meetings
Chain will be the core of the interaction. Moscow input is critical.
Ownership of ‘orders’ and ‘inventory’ needs to be established. We
7 Decisions
propose putting all responsibility and performance with one function.
A variety of input and output forms need to be developed to facilitate
8 Documentation/Forms
input, provide a paper trail and help understand when we are ‘off’
International Input from other markets is key and critical, and expectation is that
9 Coordination Marketing or International will play this role and obtain input/feedback.
Process documentation should be easy to understand and not require
10 Training
‘manuals’, but on-boarding/confirmation of understanding is key.

Jay Martin May 2012 Supply Chain [Link] 20

Supply Chain Assessment & Strategy Demand Planning & Profitability
2
For ClientCo, Forecasting will have positive impacts on performance
across the company, and will improve profitability.

Fewer missed orders

More reorders (due to confidence in

Increased Product Sales
delivery)

Higher sales rep satisfaction (e.g. higher

attrition and engagement)

Reduced expedited and air freight costs:

Supplier to DC

Reduced expedited delivery costs: DC to

Customer Reduced Transportation Expenses
Increased
Reduced shipping charges to customers
paid for by ClientCo due to missed
shipment or partial shipments
Profitability
Reduced product loss from lower
Reduction of product waste
obsolete product lots

Reduce product costs from optimal lot

Reduced spend on product
sizes and ordering

Reduced office labor for back order

Reduction in non-value added labor
processing and coordination

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.
Jay Martin May 2012 Supply Chain [Link] 21
Supply Chain Assessment & Strategy Failure of ‘too much’ vs. ‘too little’
2
The basic premise of forecasting is the attempt to best estimate
required customer demand. Being over or under both have costs.

Why this happens

• Poorly forecast our requirements
Excessive Inventory
• Purchasing orders too much
• Write-offs-expired product • Shelf-life too low for fluctuations
• Discounting to push through
• Working capital inefficiency

How much “Perfect Forecast”

This NEVER happens.
The goal is to financially
product do optimize the errors
we need?
Why this happens
• Poorly forecast our requirements
Back-orders
• Purchasing orders too little
• 3PL makes mistakes
• Lost sales
• Sub-optimal lot ordering • Manufacturer/supplier issues
• Management distraction • Transportation issues
• Expedite / air shipment fees
• Company paid shipping expense
• Customer satisfaction

‘Forecasting’ is a general term that refers to ‘making statements

about the future’, and in these terms it is reference to product needs.
Jay Martin May 2012 Supply Chain [Link] 22
Supply Chain Assessment & Strategy Cost Balancing
2
For a successful Supply Chain, the balance on both sides of the
inventory equation are needed to be understood.

Excessive Inventory Back-orders

Cost of Excess Inventory Estimate Cost of Insufficient Inventory Estimate

Risk of product being written-off 1% per year Lost profit from missed sale +70%

Working capital cost of inventory 8% per year Wholesaler fine for late delivery $12 per case

Increased chance of discounting n/a Air shipping & expedite fees n/a

Sub-optimal lot ordering n/a

Total Cost of Excess Inventory 1% per month Staff labor to process back-order n/a

Customer dissatisfaction n/a

These percentages show back-orders
are a far greater cost than excess 3PL additional pick/packing fees n/a

inventory. This is ‘until’ inventory levels

Total Cost of Back-order TBD
are so great that obsoletes become
inevitable, then 1% a month becomes
Note: All % are in terms of COGS of the item.
‘100%’, direct to the dumpster.
Jay Martin May 2012 Supply Chain [Link] 23
Supply Chain Assessment & Strategy Demand Variability
2
For an outsourced manufacturing operation, the planning and reorder
points are critical and must be monitored and lead-times understood.
Analyzed demand Promotion Planned

Order Order
Quantity Quantity

Re-order Re-order
Point Point

Safety stock Safety stock

Time Time

Order Lead-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.

Jay Martin May 2012 Supply Chain [Link] 24

Supply Chain Assessment & Strategy Inventory Summary
3
Our assessment addressed all three areas of inventory needing to be
managed, and below is a top level view with the recommendations.

Types of Inventory Issues Proposed Action Areas

Continue current inventory

level reduction process
Raw Materials (RM) Write-offs
launched in Belgium in 2009
already in progress

Promotional & Marketing Write-offs Marketing team ownership

Materials Transportation Costs Local foreign sourcing

Forecasting resources
New demand planning tools
Write-offs
Write-off investigations
Finished Goods (FG) Carry Cost Excess
New Sunset process
SKU proliferation
New cost metric/dashboard
Stock-out investigations

Jay Martin May 2012 Supply Chain [Link] 25

Supply Chain Assessment & Strategy Inventory – Write-offs
3
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.

Jay Martin May 2012 Supply Chain [Link] 26

Supply Chain Assessment & Strategy Inventory – Write-off Causation
3
Detailed analysis on causes, products and locations should be
completed, with corrective action plans developed for future mitigation.

Damages
$196 k

TBD $371 k

Top W/O ($000) % of total

5 645.5 29.5%

$2,138 K
10 957.7 43.6%

Expired FG $1,577 k 20 1,218.8 60.5%

Top 5 etc. SKUs in terms of losses

A few percent of this client’s SKUs represented over 60% of their losses,
with most concentrated in a few product lines and markets.
Jay Martin May 2012 Supply Chain [Link] 27
Supply Chain Assessment & Strategy Inventory – Investigate Highest Losses
3
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.
Jay Martin May 2012 Supply Chain [Link] 28
Supply Chain Assessment & Strategy Inventory – Raw Materials
3
A historic oversupply of certain raw materials was being corrected,
and much of these legacy issues were drawing to a close.

Used In Balance
Raw Material Notes
(Products) ($ thousands)

Products being phased out, doing a

Gumsters promotional to move the rest in Eastern
1 Food Base - Gum Chewy Bots 3,840 Europe

Replacing grape flavor with a new

No longer used supplier, working to repurpose stock.
2 Soda Syrup - Grape (was Grape Soda) 2,194

Currently at risk on expiry date for the

Italian stored items. Looking to move
3 Skin Base Jay Skin 2,322 back into France

Prior hair quality issues from India,

Extensions looking to sell wholesale into a market
4 Raw Hair Wigs 1,114 where our products are not present.
Brokers are being evaluated.
Moving up end product production given
expiration date of raw materials is
5 Hair Base Hair Jay 1,065 approaching soon. Minimal impact.

Total 10,631

Jay Martin May 2012 Supply Chain [Link] 29

Supply Chain Assessment & Strategy Inventory – Holding Cost
3
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 to your company for the lack of Major item. Assumption is

Cost of Capital
access to the capital used to buy the item. between 3-4% of cost/year.

Average chance that product could Major item. Risk currently

Obsolescence Risk
become expired or obsolete. 2.5%. Was much higher.

Theft, damage or other negative result Not a major issue other than
Shrinkage
while inventory is in your possession. major crime events (e.g hijack)

The cost of inspection, storage and

Handling Costs 3PL fixed costs
movement while in inventory.

Any special considerations required to

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

Fixed costs and allocation of storage, Fixed cost, minimal incremental

Facility Costs
including site maintenance. costs

Taxes incurred on company assets Unsure, but expected to be

Asset Taxes
specifically related to inventory. (if any) 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.
Jay Martin May 2012 Supply Chain [Link] 30
Supply Chain Assessment & Strategy Inventory – Long Tail ($s)
3
For these types of projects, Chief Innovation likes to create a graphic
picture of the long-tail by revenue and by units (below).

Bottom 40 Products Sales Volume Bottom 20 Products

5.3% 2013 0.6%
2

25.8%
52.1%

94.7% 99.4% 74.2%

47.9%

% 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.
Note: % of Products refers to the percent the Bottom 20 or 40 are of the total
of 73 different product lines across all the countries, i.e. 40/73=54.8%
Jay Martin May 2012 Supply Chain [Link] 31
Supply Chain Assessment & Strategy The Bottom SKUs by Revenue
3
An analysis by revenue, market and volume is very useful per below.
Candidates for sunset (elimination) can become very apparent.

Rank Product Name % of Total Sales

Units Cum %
Sold

Note: These values are believed to be a consolidation of all markets for the given products.
Jay Martin May 2012 Supply Chain [Link] 32
Supply Chain Assessment & Strategy Inventory - Sunset Process
3
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 • Obsolete inventory risks

• Item Master creation • Occupies warehouse space
• Distraction of Marketing
• Product introduction resources
• Risk for returns or recalls
• Product introduction alerting
• Increased out-of-stock risk
• Creation of warehouse location • Product costs for low volumes
• Setting up vendor (if new) • 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.
Jay Martin May 2012 Supply Chain [Link] 33
Supply Chain Assessment & Strategy Inventory - Sunset Logic
3
The decision to Sunset a product or SKU should follow a logic tree.
Should we
retire this
SKU/product?

Are the Have the sales Does MOQ Are there new It is a
overall sales been create an products that complimentary
low? declining? expiration risk? replace it? product?

Are there Can we retire Will it Is there

good reasons all the SKUs of eliminate a potential for it
to keep it? the product? Supplier? to rebound?

Does it use Will key Is it a key Does it fail to Is the profit

any of our raw Retailers get heritage support our impact from it
materials? upset? product? positioning? very small?

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

Jay Martin May 2012 Supply Chain [Link] 34

Supply Chain Assessment & Strategy Dashboard & Metrics
4
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.

Link to Provide
Establish Base Drive
Supply Access /
Strategic Metrics on Supporting
Chain Create
Goals Real Data Actions
Metrics Dashboard

• Revenue • Fulfillment • SAP or JDE / Oracle • Develop a • Assign new staff to issues
• Growth • COGS • Financial reporting dashboard format • Alter safety stocks
• New markets • Sourcing costs • Physical inventory • Assign an owner • More carefully manage Air freight
• Overhead costs • Logistics costs • 3PL reporting • Assign each metric • ……….
• Working capital • Expedite levels • Marketing data and owner
• Equity value / stock • Inventory/sales
• New products • Inventory aging
• Wholesalers • Out-of-stocks
• Retention • Returns / costs
• Dollars / order • SCM staffing
• Revenue mix (new
products or
customers vs. old)

We identified all of the options, and then jointly with the Supply Chain
Team, and then created a new comprehensive metric as the focus.
Jay Martin May 2012 Supply Chain [Link] 35
Supply Chain Assessment & Strategy SCM Dashboard
4
A top level metric showing excess costs created by Supply Chain was
developed with an interim dashboard structure for ease of focus.
Client Co

The premise of this metric is that “a perfect Supply Chain would cost
‘X’ dollars to operate, and this number is everything above that.”
Jay Martin May 2012 Supply Chain [Link] 36
Supply Chain Assessment & Strategy Results – Original beliefs
5
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 Lost profit from missed orders,

Possibly over $37 million for
profitability, but we are not sure along with obvious excess costs
2013.
just by how much. in shipping and inventory.

2% was our forecast error for the Prior calculation was made
last quarter of 2012 when we did Over 13% was the reality. without including key data that
an analysis. We are doing okay. impacts accuracy.

A balance between inventory The cost of a back-order dwarfs

Four turns is our goal. control and fulfillment is required, the savings from managing
with fulfillment being the priority. inventory, though both are critical.

Finished Goods write-offs were The one bit of good news.

Inventory losses are in the
under a million in 2013, down Losses in Raw Materials and
“tens of millions”.
from a little more in 2012. Promos were not included here.

Actual demand outside the U.S. ‘Smooth’ or predictable demand

Our Forecasting should be ‘easy’
shows enormous fluctuation is not the norm, especially in 28
given how the wholesalers.
period to period. of 43 markets outside France

With an outsourced Supply

Supply Chain needs to worry P.O. order date optimization fixes
Chain, kicking off the start is the
about many things. the bulk of expensive problems.
key to supporting profitability.

Jay Martin May 2012 Supply Chain [Link] 37

Supply Chain Assessment & Strategy Results
51
Where were over 50 recommendations from this effort, with four
major areas encompassing the majority of recommendations.

Inventory
Demand Planning
Management
• New Forecasting staff • New Sunset selection parameters
• New Demand Planning tool • Inventory holding changes
• Evaluation of SAP usage • Write-off investigation
• New forecast measures • Stock-out flagging evaluation
• Review Demand variability

Metrics & Sourcing &

Dashboard Supplier Mgt
• Comprehensive SCM Metric
• Reinvestigate manufacturing
• Top-level new dashboard
• Collaboration & communication
• Country-level metrics
• Supply base research
• Balancing of B/O & FGI
• Standard back-order cost

Jay Martin May 2012 Supply Chain [Link] 38

Supply Chain Assessment & Strategy Results - Recommendations
51
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

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

Implement and build out a new item the process, which is where you currently are stopping.
11 Inventory Sunset process. One method is to set a bar to ‘keep’ a SKU/item, and then
force any failures to be defended against deletion.

A quick analysis was already performed, but a thorough

Complete a further Deep Dive analysis investigation with ‘how to avoid’ each type of occurrence
12 Inventory on FGI write-offs should be completed. Ask the each Country Manager
‘what happened’ and figure out how to avoid repeating.

Objective is to ensure that FIFO is being used in the

Add LIFO checking to Cycle Count
13 Inventory process each month
Warehouse by the 3PLs and that the correct lots are
being pulled from so as to avoid pre-mature expiration.

Many 3PLs have online systems that provide client facing

Inquire to 3PLs and Wholesalers on
transportation information. This could help with
51 Transportation In-Bound Transport visibility tools or
understanding arrivals better given your broad reach
reports, particularly for Europe land.
across the world and manufacturing complexities.

A concern is that stock-outs are not being properly

addressed given the new warehouse system and that
52 Warehouse ‘One Day Hold’ for flagged stock-outs
other warehouses are not fulfilling them when they could
be so as to improve order fulfillment to wholesalers.

Jay Martin May 2012 Supply Chain [Link] 39

Supply Chain Assessment & Strategy Results – Implementation Plan
5
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

Decide what level the person who will

Latest to
1 lead this will be, who they will report Start
complete
to and then hire them

Assign someone to build and utilize Complete

16 this. Design the functionality. Build and rolled
in Excel. Utilize for Date estimating. out

SAP evaluation, decision on

17 functionality, understanding of cost Start SAP upgrade?
and then inclusion into SAP upgrade

Decide on Forecasting evaluation

Create
timeframes, trial analysis using
18 MAPE, review, assess errors, take
Start yearly
schedule
corrective action

Complete Post-mortem on the failure Create Analysis

in Demand Planning of issues during form, completed,
19 2013 to better understand issues and assign to Reviewed
avoid them in the future team by Execs

Institute a form to be completed

whenever a product goes on Back- Create
20 order requiring an explanation and form, trial
Roll-out
corrective action to avoid recurrence

Analyze Auto-Orders and Demand

Analyze, discuss and
Variability, identify policies that may
23 drive Wholesaler order variability,
propose changes to Sales
Operations
decide to keep/change

Identify all market impacting activities, Consolidate list, assess past impacts and
Workshop
evaluate past impacts on actual then roll-out a system to the countries
24 demand, create a form and system to
to create
where they provide the information back
list of all
obtain from country MDs to Paris for forecasting implications

Item # - this is a reference number per the recommendations at the front of this deck
Jay Martin May 2012 Supply Chain [Link] 40
Supply Chain Assessment & Strategy Contact Information

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

Contact Details
Any questions, please contact:
Jay Martin
Chief Innovation, Inc.
Dallas, Texas

Please contact me via the LinkedIn profile below:

[Link]/in/jaymartindallas
[Link]
(214) 520-8019

Jay Martin May 2012 Supply Chain [Link] 41