Orchestro State Inventory Management 2015

7/21/2019 Orchestro State Inventory Management 2015

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The State of nventory

Management - 2015


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The State of Inventory Management 2015

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Despite significant advances in reporting and analysis capabilities -- and evidence of a

direct tie between inventory productivity as a predictor of future stock returns

i

-- inventory

management remains a major issue for CPG companies and retailers.

Wal-mart, the worlds largest retailer, missed out on an estimated $3 billioniiof sales due to

out-of-stock products in 2013. At major grocery stores across the U.S., the estimated cost of

employee time spent looking for out-of-stock items is more than $800 million annuallyiii.

These lost sales are roughly equal to the annual GDP of Fijiiv-- the country.

Introduction

The current state of inventory management can be described as

inadequate, or at the very least requiring more attention from CPG

companies and retailers at the highest levels to better serve customers. At

worst, dollars are literally walking out the door, and fueling competitors

revenue. At best, sales are stalled.

But why? How are CPG companies currently managing on-shelf

availability and inventory exceptions and what are they missing? What

types of forecasts are being used? And what types of improvements would

help them move the needle and move inventory management to

a function that is seen as a thought-leader internally?

With the goal of answering these questions, and in partnership with

8th& Walton,Orchestrosurveyed a collection of small, mid-sized, and

large CPG companies to investigate inventory issues, levels of

satisfaction with existing processes, and where theyd like to see

improvements.

Most of the respondents work in sales or supply chain perhaps unsurprising

for a survey around inventory management.
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Setting the Stage: Aligning Goals

Both CPG companies and retailers manage inventory with three main

goals in mind: improve product availability, lower costs and reduce

excess inventory. These three goals are layered, intertwined, andoften contradictory. While higher inventory generally improves

availability and reduces transport costs, thin margins mean inventory

carrying costs cannot be absorbed easily. To find the right balance,

CPG companies must work closely with retailers to find the right

balance and identify key indicators or triggers for change and

reevaluation.

When asked to prioritize these three goals,75 percent of the CPG companies surveyed indicated

that improving availability was the number one goal for inventory management teams

,

indicative of the continued focus on growing the topline first, and optimizing cost second. Lowering costs

and reducing inventory were ranked second and third respectively by over 50 percent of respondents

each.

The Data Problem

CPG companies face a variety of challenges in dealing with On-Shelf Availability (OSA), but the core problem boils

down to one problem: a lack of accessible, meaningful and actionable data. 54% of survey respondents say that it

is a major challenge to understand which items are out-of-stock and which stores or distribution centers areaffected. More importantly, theyd like to understand whether the issue is a one-time event or a regular or

frequent occurrence.

Making matters more challenging, an out-of-stock item is rarely a singular

problem, especially if the product might not be replenished on a timely

enough basis, leading to further loss of revenue. Lack of availability can

also lead to mis-orders, poor inputs into subsequent forecasts and loss of

customer loyalty.

CPGs are not generally made aware of the root cause of an out-of-stock

item. Being able to identify root cause can also help with prioritization and

resolution. The inability to identify root cause means that CPGs are

repeatedly reworking processes or implementing stop-gap solutions, such

as rushing shipments, rather than solving the problem.

More from the Survey:

50% of respondents

identify lack of

information around the

root cause of availability

shortages as a critical

issue.


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This approach means issues are often recurring and are reworked, over and over again a vicious and unproductive

cycle. For example, an out-of-stock caused by a weather delay in shipment should be handled differently than one

caused by in-store inventory not being properly shelved.

Other Issues cited by respondents included:

lack of cleansed or harmonized data. 30% of respondent overall dont have access to clean data. Smaller

companies are even more prone to this problem.

The lack of predictabilityof internal and external OSA models. This may largely be due to the first bullet and

not having harmonized data as the input into the predictive models.

Concern about their ability to actually impact availability. For example, one respondent noted their lack of

belief in our ability to effect change. Another was concerned about knowing whether actions taken would

only temporarily affect OSA or permanently correct it.

CPG companies currently use several different techniques often in combination to monitor on-shelf availability.

Physical audits are used most often, closely trailed by POS-based models. Retailers also identify availability

problems for their suppliers. Some companies are using system audits against historical sales or comparisons

between forecast and actual orders.

When OSA problems are identified, most CPG companies go on-site to meet with internal resources or make

corrections at the distribution center. Nearly 40 percent of our survey respondents use third-party brokers to

address OSA issues. Some use smaller case pack quantities. This may seem counter-intuitive, but can be an

effective mechanism to deal with OSA because in some situations the case is too big to fit on the shelf so it goes to

the backroom where retail operations are at their worst.

CPG companies want to avoid OSA problems, without creating undue burden on retailer customers, while reducing

overall costs whether related to transportation, safety stock or rush shipments.

Identifying and Managing Operational Issues

OSA is only one operational issue, or exception, requiring immediate attention that CPG sales and supply chain

teams deal with on a daily basis. According to our survey, 44 percent of CPG companies are dissatisfied with their

ability to identify exceptions. The numbers suggest that these companies are not leveraging the data and analytics

available to pinpoint daily exceptions. However, the results vary significantly by job role.

Those in supply chain roles are far more dissatisfied with their ability to identify exceptions than others. Those in

sales roles were evenly split between satisfied and dissatisfied, while all other roles were far more satisfied than

dissatisfied. Those who work in supply chain and sales are managing these issues in real time so their ability to

swiftly identify and resolve exceptions is central to their job. Those in other roles may learn about exceptions only

after they have been resolved, which is reflected in their level of satisfaction.


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While identifying exceptions is a wide-spread

problem, there are even bigger problems in terms

of managing them. Therefore, its not enough to

know that an operational issue exists: CPG

companies need clear insight into the nature of the

problem so they can take action to resolve it.

27 percent of respondents said they needed better data to identify issues. Of these, three-quarters are dissatisfied

or very dissatisfied with their ability to identify exceptions. Those in supply chain roles are more focused on better

data, while those in sales roles are more concerned about the actionability of information.

Better Servicing Retailers by Predicting Exceptions

As it relates to increasing service levels, there are a range of critical metrics that CPG companies identified asrequiring daily monitoring. CPG companies are also interested in the ability to predict exceptions which might

occur in the near future. In particular, they would like to be able to

predict out-of-stocks, phantom inventory, zero scans and days of

supply. All of these exceptions point to the critical nature of

maintaining the right level of product on the shelf at any given time.

CPG companies were also interested in exceptions related to

promotional activity, such as display implementation and post-

promotional inventory.

When asked to rank the metrics that required daily monitoring, in-

stock percentage was ranked in the top three by 63 percent of survey

respondents, with nearly 30 percent ranking it as most important.

Additionally, low sales and zero scans were the second and third

choices for Most Important. Respondents also cited Turns, Promotional Activity, and Forecast Accuracy as other

exceptions they would want to monitor daily.

Forecast accuracy is probably one of the most critical improvements that would have a major impact on daily

operations. CPG companies would also like to monitor for over-supply, particularly for perishables, promotional or

seasonal items. Larger CPG companies are also looking for improved metrics related to on-shelf availability and

out-of-stocks particularly for case packs or more detailed store level data.

More From the Survey:50% of

respondents and 63% of those

in smaller companies (


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Creating the Strategy for Managing Exceptions

Once service-level exceptions are identified, internal teams need to prioritize their resolution. Without a

prioritization system, only those exceptions that are easy to fix may be

resolved, leaving more difficult problems to fester. The most desired way

to prioritize exceptions (nearly 60 percent) is by expected revenueimpact, thus minimizing potential losses due to exceptions. The

difficulty of this approach lies in determining the revenue impact of

exceptions.

Interestingly,20 percent of respondents prioritize by product group

.

Presumably, these companies are focused on critical categories where

an exception could cause long-term brand impact or have other

implications. Examples include entering a new, high-growth category or

an iconic product where an out-of-stock situation would be severelydamaging.

Forecasting

In order to drive high on-shelf availability and determine when an exception should be triggered, CPG companies

largely rely on forecasts to establish a baseline expectation. CPG companies use a variety of methods to forecast

sales, including point-of-sale, orders, promotions, or the prior years sales. While all of these forecasting methods

are viewed as comparably by CPG companies, satisfaction in their performance is not.

This disconnect between importance and performance was alsoreflected in the other forecast methods. Those in supply chain roles

were particularly dissatisfied with Order and Promotional forecasts,

while sales people were generally satisfied with all types of

forecasts. Annual Account-Level forecasts are perceived as more

important by executives, likely because some portion of their

compensation is dependent on performance relative to these

forecasts.

While most CPG companies, nearly 80 percent, reference historical POS data and seasonal factors to developforecasts, nearly one quarter of respondents currently integrate demographic information as well. Going one step

further, and showcasing a high level of forecast sophistication -- some organizations are incorporating weather

events, CDC and health news, and social sentiment data.

How often a CPG company updates its forecasts is quite dependent on the size of the company and the aggregate

level of the forecast. Distribution center forecasts are more common, with nearly half of companies doing weekly

Expected Revenue Impact 59%

Recent Product Launch 5%

By Region 11%

By Product

20%

Other

5%

How Do You Determine Which

Exceptions Should Be

Handled Immediately

More from the Survey: Order

forecasts, which were seen as

important by nearly 80 percent of

survey respondents, had the lowest

performance rating with 43

percent dissatisfied.


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forecasts, and roughly a quarter performing them daily. At the store level, nearly 40 percent of companies perform

weekly forecasts, and a little over 10 percent daily.

Small CPG companies generally only

perform weekly forecasts, whether at the

distribution center or store level. This is

likely due to the combination of the

analytical demands of forecasting and

the ability of the internal organization to

manage the resulting activities.

CPG companies want more accurate

forecasts, so they can more efficiently

drive operations at the store and DC

level. More efficient forecasts can also

improve S&OP processes, demand

planning and other internal systems

reducing waste and lowering costs.

Conclusion

Anticipating consumer demand is a quickly moving and elusive target.

While inventory management is a mission critical function for CPG companies of all sizes, many of them are stillunsatisfied with their ability to forecast demand, manage on-shelf availability and quickly resolve inventory

exceptions.

In order to accomplish these tasks, CPG companies need better data, but establishing key mechanics is equally

critical:

Demand-based forecasts with a high degree of accuracy to predict actual results

Analytics that pre-empt of out-of-stock situations and drive high on-shelf availability

Exception alerts to show actionable intelligence on root cause, resolution revenue impact


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About Orchestro

Over 110 global brands rely on Orchestros proprietary demand

orchestration platform to seamlessly execute on their omni-

channel strategy. We increase speed-to-insight by harmonizing

disparate demand data and applying adaptive analytics to

execute profitable actions. Our clients can proactively analyze

and act on business exceptions to dramatically reduce lost sales

opportunity, improve revenue, and enhance service levels.

Visitwww.orchestro.comfor more information.

To learn more about how Orchestro can help you pinpoint, prioritize and prevent inventorymanagement problems, please visit our website atwww.orchestro.com

or [email protected]

RESOURCES

iDoes Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective,Yasin Alan, George P.

Gao, and Vishal Gaur, Management Science 201460:10 , 2416-2434

iiWalmart company meeting March 2014 as reported in Bloomberg, Forbes and many other sources

iiiA Comprehensive Guide to Retail Out-of-Stock Reduction In the Fast-Moving Consumer Goods Industry, Thomas

W. Gruen and Daniel Corsten

ivhttp://data.worldbank.org/indicator/NY.GDP.MKTP.CD

Ultimately, CPG companies want a

mechanism that will help them

quickly pinpoint exceptions to

standard operations and their root

cause, prioritize based on revenue

impact, and prevent those exceptions

from recurring in the future.

-- PV Boccasam, Orchestro CEO
http://htttp//orchestro.com/http://htttp//orchestro.com/http://htttp//orchestro.com/http://www.orchestro.com/http://www.orchestro.com/http://www.orchestro.com/mailto:[email protected]:[email protected]:[email protected]://pubsonline.informs.org/doi/abs/10.1287/mnsc.2014.1897http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2014.1897http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2014.1897http://data.worldbank.org/indicator/NY.GDP.MKTP.CDhttp://data.worldbank.org/indicator/NY.GDP.MKTP.CDhttp://data.worldbank.org/indicator/NY.GDP.MKTP.CDhttp://data.worldbank.org/indicator/NY.GDP.MKTP.CDhttp://pubsonline.informs.org/doi/abs/10.1287/mnsc.2014.1897mailto:[email protected]://www.orchestro.com/http://htttp//orchestro.com/

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Orchestro State Inventory Management 2015