The 2020 Mid-Year Economic Update_long

Case Study: Inventory Efficiency

reviewing graphic displays of sales order histories by channel, the group could adjust the statistical forecasts for items affected by market trends.


Promotion calendar by key account: How did promotions affect demand item and region? Special attention was paid to top accounts, which made up 80 percent of the company’s revenue and/or was strategically important. Forecasts were adjusted accordingly.


Top accounts’ gains and losses by SKUs: How did a change in demand affect the forecast? For example, a gain occurred when a key account decided to start buying an item that was not purchased previously from the distributor. Because this incremental demand was not accounted for in the total demand plan, the plan itself had to be adjusted to include the timing and volume required to fill the customer’s demand, as well as any expected ongoing volume. The reverse was a loss: A key customer decided to stop buying an item. The demand plan for that item needed to be adjusted down to reflect the loss of those sales.


Product portfolio (i.e., items sold by the distributor) changes: How did the plan adjust for new introductions (i.e., new items), transitions (i.e., phasing out an old model for a new one), substitutions (i.e., an item with similar properties filling in for a product in short supply), and discontinuations (i.e., an item that is no longer offered for sale by the distributor)? As sales and marketing changed, the portfolio of products, statistical forecasts, and demand plans were adjusted. Before implementing global planning and sourcing, the distributor could not communicate clearly the what (i.e., items), when (i.e., date of introduction or discontinuation), and how much (i.e., volume) of each portfolio change.


After the collaborative planning sessions, the global group incorporated intelligence into the forecast; that is, adjustments became fact-based and knowledge-driven. The team met with key suppliers to review changes in the global demand plan from the prior week’s plan. Special attention was paid to changes made within the suppliers’ lead time, which occurred less frequently than before.


Collaboration resolved issues of capacity and supply (e.g., if new changes in demand outstripped a supplier’s capabilities, the team negotiated either to adjust the timing of the demand for the new order or to decrease the demand parameters for less critical items). This process change allowed suppliers to become more efficient and reliable (e.g., some of the savings were passed on to the distributor), and it also helped the distributor to take advantage of volume discounts from suppliers (e.g., buying globally means larger orders, which, in turn, gave the distributor more leverage).


The Results
With the new organization and process in place for one year, the distributor achieved these results:



  • $100 million in cash was freed up by reducing finished goods inventory.
  • Inventory carrying cost was cut by almost 30 percent.
  • On-time, first-pass fulfillment to customers improved from 87 percent to 96 percent.
  • Average forecast error reduced from 80 percent to 53 percent (see figure 4-8). More improvement is anticipated.
  • Improved operating efficiencies and lower costs (5 percent to 7 percent) for suppliers were realized.

This publication is available from NAW at http://www.naw.org/dvm or by calling Vicky Walsh at NAW:202-872-0885.


 


The following case study is excerpted from Driving Growth and Shareholder Value: The Distribution Value Map, published by the National Association of Wholesaler-Distributors.


A large distribution company of kitchenware had some serious operating inefficiencies, including a decentralized demand forecasting model, poor leverage in negotiating pricing and terms region by region, conflicting priorities in meeting demands, and supply chain redundancy (i.e., suppliers who lacked a view of total demand produced smaller, more-frequent runs of the same items).


The Problem
The company sourced about 85 percent of its goods from Asia and South America and then moved these goods through six distribution centers: three in North America, two in Asia, and one in Australia. Each distribution center had its own demand planning and procurement function working independently and demanding the same items from the same suppliers.


In effect, the distribution centers competed against each other for a supplier’s attention and service. This internal conflict continued under the radar until the COO, who wanted to free up cash, reduce inventory carrying costs, and improve customer service in all the regions, decided to take a closer look.


The Solution
Recognizing the lack of internal and supply chain collaboration, the COO charged a cross-functional team of sales and marketing, forecasting and demand planning, and procurement with three tasks:



  1. Improve customer service and, thereby, increase customer retention.
  2. Free up cash by reducing excess and obsolete inventory and, thereby, improve asset efficiency.
  3. Improve relations with suppliers by becoming easier to do business with and, thereby, reduce COGS.

The team performed rigorous analyses to find the root causes for the company’s poor customer service; the large amount of slow-moving and obsolete inventory, which was nearly 40 percent of total inventory dollars; and the decreasing COGS, which came from poor pricing and terms from vendors.


Was there a common thread? As it turns out, yes. It was poor forecasting and demand planning. Average forecast error during the 12 months prior to the team’s analysis had been greater than 80 percent, which was a dramatic number compared to the distributor’s industry segment average of 45 percent and the distributor’s aspirational goal of 25-30 percent. As noted in the key to figures 4-7 and 4-8, the three bars per month represent the error percentage for each of the three product lines distributed by this organization. The company was not particularly better at forecasting any one of the three lines.


Perhaps the most telling challenge was that only 87 percent of the distributor’s orders to customers were delivered on time; not surprisingly, the company had problems with customer retention. Compensating behaviors included increasing safety stock across all items continuously, which led to slow-moving and obsolete inventory, and constant replanning and order expediting, which led to price increases and poor terms.


The Changes
Armed with these facts, the team recommended the generation of a unified global demand signal. To achieve this, the company implemented the following process and organization changes:



  • The forecasting and demand planning and procurement functions were consolidated into one group with global responsibilities: Global Supply Chain Planning and Sourcing.
  • Planning was now weekly, cross functional (e.g., sales and marketing, forecasting and demand planning, and procurement), and collaborative. For all regions, the newly formed, global group analyzed and reviewed the following trends and measurements:

Market trends by sales channel: Which were flat, trending up, or trending down?


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