Benchmarking Success - Inventory Management KPI's

It’s been a while I have not updated the blog. It has been a crazy couple of weeks with work commitments but I’m back on board. To keep in the same vein of Supply Chain Metrics, I would like to today post an article on some Inventory metrics.

Inventory management is one very important and often overlooked part of a business. Inventory can be the greatest investment a business makes and if managed astutely it can prove to be a very powerful tactic in outdoing the competition.

Consider this. The last 5 retailers delisted from the stock market by venture capitalists in Australia cited inventory management as one of the areas they can improve to make the business more profitable. One of the biggest contributors to Apple’s profitability as mentioned in my blog titled “Tim Cook - Supply Chain Guru and Acting CEO Apple Inc” is their ability to only have a few of their older products when launching their new products. This ensures reduced obsolescence, inventory holding costs including opportunity costs.

Different businesses based on the industries in which they operate need to develop different inventory metrics. This article will provide an overview of the most popular ones which managers can then use to adapt to their own businesses.

Before you get into measuring inventory performance, stratify your inventory

1.  Calculate the 12 month dollar usage for all of your products (volume * cost).
2.  Rank the items in descending order by the dollar usage.
3.  The "A" items are the top 80% of the total annual usage dollars.
4.  The "B" items make up the next 15% of total annual usage.
5   The "C" items are the remaining items are the remaining 5% with >0 usage in the past 12 months
6.   Label zero-usage items can be labeled as "D".

By stratifying your inventory you are ensuring that you are managing each product according to it’s importance to the business. You should aim not to run out of “A” items and ensure sufficient management capacities are built into achieving this.

After stratifying your inventory ensure you know your inventory on hand relative to usage. Inventory on hand can be measured in weeks or days of stock. By understanding your inventory on hand relative to usage, you can set target availability/stockholding according to your business environment for each category and deem stockholding above the target availability as excess stock.

Inventory turnover is also a very good indicator of inventory performance. Inventory turnover can be calculated by dividing (annual COGS by average Inventory level). This commonly used metric is an indication of the number of times inventory is sold and replaced over a period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

This is it for today folks. Please start looking at stratifying your inventory before starting any other kinds of measurement. Good luck and please keep me posted regarding your progress.

Supply Chain Metrics and KPI's - Part 1

Hello and thank you for tuning in. As promised, I will for the next few weeks elaborate on some Supply Chain (Key Performance Indicator) KPI’s and Metrics.

A KPI allows you to measure your performance over a period of time. A very common KPI is your pulse. Almost every time you go to the doctor, he/she will check your pulse and then decide if there is cause for concern. A Supply Chain KPI’s if used correctly can have the same effect and be the source of some very interesting insight.

I recently wrote an article for MEXA for which I would like to thank Danielle Wong. I received a copy of the magazine last week and have to admit that those guys are doing a fabulous job promoting the importance of Logistics and Supply Chain Management in Mauritius. It was interesting to see so many contributors with so much knowledge to share.

Reading through the magazine also made me realize that many of us are still very focused on the external aspects of SCM and Logistics. We are and rightly so, very concerned about road infrastructure, port infrastructure and national information technology capabilities however we are failing to see the more important aspect of the subject which is company logistics and SCM. This aspect is one that we can directly influence unlike government policy and big capital expenditure projects. Focus on company logistics and SCM can deliver great competitive advantage if properly managed.

Please remember that everyone will enjoy the same external benefits. If the port is more efficiently run or if the road network is upgraded, while it is helping your company against international competition, it is not providing you with a competitive advantage against your local competitor. When you deploy a successful SCM strategy or any other internal strategies for that matter, it is contained within the four walls of your organization and cannot be copied by your competitors thus giving you true competitive advantage. I strongly recommend that at the same time of thinking of SCM at a national level that you also think of it as tangible company specific strategy.

Back to our topic of the day – Supply Chain KPI’s and metrics. I will offer several KPI’s over the next few weeks. They will be categorized in the below SCM functions.

• Logistics KPI’s
• Procurement and Supplier Management KPI’s
• Inventory Management and Forecasting KPI’s
• Warehouse / DC KPI’s
• Transport KPI’s
•  Customer Service KPI’s

Today’s KPI is Total Supply Chain Cost. It is the most important and relevant KPI to any Supply Chain. If you can understand your Total Supply Chain cost, which is a mind-numbing task in itself, you can understand it as a % of gross profit or COGS or turnover. This then allows you to set a target to reduce your total supply chain cost %. I will constantly refer back to the “Supply Chain Blueprint” table which I posted in the “Innovate your Supply Chain – The Mauritian CEO’s perspective” because it gives a fairly detailed picture of what activities and processes belong to the supply chain. If you also refer to that table we can deduce that 

Total supply chain cost = Cost of sourcing and procurement (Not Cost of Goods) + Supplier Quality Cost + Cost of Planning (demand planning and forecasting) + Cost of all transportation (inwards and outwards, sea, air, rail and road) + Cost of Storage and Warehousing + Cost of Carrying Inventory + Cost of Inventory Obsolescence + Opportunity cost of Inventory + Cost of Supply Chain Related Technology

Place you company performance on the below diagram and set short medium and long term goals as to where you want to see it. The work tirelessly towards achieving this goal. 

All of the above are cost centers and if your organization practices Activity Based Costing, these figures could be accessible. If this is too big a task to accomplish right now you can start by breaking this down a bit further and concentrating on the Logistics cost part of the business only. Because it is debatable as to what belongs to Logistics (I see Inventory Management as a Logistics discipline while other can see it as a merchandise function), start by focusing on Transportation and Warehousing costs only and see what that costs you.

I assure you that as soon as you start putting perspective to these very important metrics, insights that were previously obscure to you, will be a lot more forthcoming.

Next week I will focus on Inventory KPI’s. Please stay tuned.

Regards

Girish

Transform your freight forwarding business into a 3rd Party Logistics Provider

You are the CEO of a good performing freight forwarding business. You are well aware of the need to grow the business further however before considering takeovers, acquisitions or mergers you want to see what if there are other ways available to you. The market is saturated with freight forwarding services are you are cutting deep into margin to differentiate yourself from you competitors on price because operationally and service delivery wise the industry is quite uniform.

You know that taking away business from your competitors is proving to be too costly and you are looking for a way to grow the market rather than only competing for existing market. Becoming a 3^rd party logistics provider is the answer you are looking for. While freight forwarding services are readily available the same cannot be said for 3^rd party logistics providers and this is your opportunity for organic growth.

As a CEO you want to be across your company’s organic growth as it represents the true growth for the core of your company. It is a good indicator of how well management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business.

The main difference between a freight forwarder and a 3PL is that the freight forwarder does not actually touch the freight. A freight forwarder is in essence a non asset based service provider while a 3PL is an asset based service provider.

Now to why 3PL is the way forward. Many companies are today choosing to focus on their core activities and to outsource non core activities. For many businesses, warehousing and distribution is non core and if they find a reliable partner, they are keen to outsource the activity. Let’s say I own a manufacturing business in Australia that produces powdered milk. I want to export onto the Mauritian market due to the booming consumption of this product. I however neither want to go through a distributor because the cost of doing so will render my product uncompetitive nor do I want to setup an office in Mauritius. I just want to deal with a company to which I will send my goods to in Mauritius. That company will stock and distribute the stock on my instructions. I will hold most of the functions in Australia with the warehousing and distribution part completely outsourced. The same could be said for a Mauritian company exporting its products overseas. Millions of businesses want to be able to focus on their core activities today which is why there is unprecedented demand for 3PL service providers.

An important strategy to transform your freight forwarding business into an asset based 3PL is to ensure it is approached in phases.

Phase 1 – Get the basics right

Þ    Offer the most basic service which is storage and distribution of goods while still offering freight forwarding services

Þ    You can choose between leasing or buying a warehouse and trucks with leasing being by far the better option.

Þ    Excel in doing this before contemplating phase 2

Phase 2 – Start offering value adding services

Þ    Start offering value adding services such as packaging and product transformation

Þ    Provide real logistics expertise in procurement, inventory management, order management and demand planning and forecasting options

Þ    Provide cost containment strategies. You where the inefficiencies of you client lies and proactively recommend corrective actions.

Phase 3 – Become a partner in business to your client

Þ    Provide consultancy services

Þ    Provide system support

Þ    Share proven best practices

Þ    Provide actionable business intelligence

Becoming a 3PL is one of the best ways to grow your market rather than fight for the saturated existing market. Align your business to the concept of making Mauritius a logistics hub for trade between Africa and Asia. In 20 years China will be too expensive for mass production and next in line for competitive labour is Africa. Africa will at some point become the manufacturing base of the world and when that happens, given Mauritius’s natural hub position between Africa and Asia, many businesses trading between the two continents will use Mauritius as the hub for consolidation and expedition of products. Even today South East Asian countries and India have identified Africa as an untapped market with whom trade must be increased. Being a 3PL can certainly be attractive to those Asian manufacturers looking at entering the African market. Please share your thoughts

Tim Cook - Supply Chain Guru and Acting CEO Apple Inc

Isn't this wonderful news for the global Supply Chain community that a Supply Chain Management guru is at the helm of the most valuable company in the world?

After all these years of struggle for recognition, after fighting to be present at board level, operational excellence has risen to the top of priorities and that too at again at the world's most valuable company.

While not a lot is known about Tim Cook, he is the man credited with dramatically increasing margins at Apple. After spending 6 years as VP for Corporate Materials at Compaq, he was hired by Steve Jobs to join Apple. Cook is credited with pulling Apple out of manufacturing by closing factories and warehouses around the world. This helped the company reduce inventory levels and streamline its supply chain. 

He is a master of inventory management. In his first few years resellers watched Cook change how Apple ran its business. Inventory on hand, a crucial measure for a company that indicates how fine-tuned its supply is to market demand, went from weeks to sometimes 16 hours, says Kevin Langdon, CEO of Crywolf, an Apple Specialist reseller firm, indicating a far more responsive company. 

Cook helped perfect inventory management to the point that Apple, which regularly launches big new products, has few of the older ones left at the end of each cycle. It helps the company avoid the trap of having to significantly discount older products.

Apple's supply chain has been voted No 1 for the 3rd year running in The AMR Supply Chain Top 25 for 2010 (http://www.gartner.com/DisplayDocument?ref=clientFriendlyUrl&id=1379613) outdoing Procter and Gamble, Cisco Systems and Wal-Mart stores

While time will judge whether Tim Cook has the creative genius of Steve Jobs, he sure is a Supply Chain genius.

Innovate your Supply Chain - The Mauritian CEO's Perspective

I am sure you have all heard of Supply Chain Management (SCM), however, after having had conversations with many Mauritian entrepreneurs, CEO's, COO's and middle managers it is clear that SCM's definition, purpose and scope are somewhat unclear. The confusion seems to be around Transport Management, Logistics Management, difference between trade and company logistics, and Supply Chain Management where each is sometimes mistaken for the other. 

In light of this I decided that I will do my best to clear up any confusion I can by writing the below article which focuses on “What functions belong to the modern supply chain?”. I will expand on each of the categories in the table in subsequent articles however for right now I would encourage you to look at the blueprint carefully and determine whether you are moving your company in the right direction or whether there are significant improvements that could be made.

I have thought of different ways to start this topic and each time I thought that I had it right, something was coming up as not quite right. I want to address the topic of the importance of Supply Chain Management in the modern economy. I however don't want it to be too scientific yet; we will have time for that. I want something that every business can relate to and I think I may have found it in addressing 'The symptoms of bad Supply Chain Management'

I will try to keep it simple and not exaggerate what SCM can achieve for a business but at the same time however please bear with me if you see some signs of fanaticism or as I like to call it...passion.

Let me start with a quick case study

Coles Supermarket, the second largest supermarket chain in Australia and 23rd by revenue in the world was recently taken over by Wesfarmers. The belief by Wesfarmers was that the powerhouse of the 1990's could be awakened again and make ground against its biggest rival Woolworths. The issue with Coles before the takeover was that customers were fed up of Coles substandard "fresh" produce and empty shelves that for years were a hallmark of the Coles shopping experience.

Coles Chief Executive Ian McLeod decided he would focus on the basics. Retailing 101. He decided there were 4 areas he wanted to improve to get the business right for future, sustainable growth. They are

1. Competitive pricing

2. Stock Availability

3. Store Presentation

4. Communication of all of the above

He has to date probably scores big A's in all 4 areas. Ok maybe an A- on availability of fresh produce however its only 3 years into the transformation and Coles has recently beaten Woolworths for the 6th consecutive quarter on comparable store sales growth, reversing a well established trend.

Ok, why did I start with this case study? The reason is because the above tells us the story of a business that was losing customers because compounded with other issues, it was not managing it's supply chain optimally. Some telling signs of bad supply chain management are

1. Unhappy customers hence shrinking customer base

2. High operating cost

3. Low margin

4. High or sub-optimal stock holding

5. Low stock availability

6. Higher that average obsolescence

7. Inability to quickly react to competition

8. Too much cash tied into unproductive inventory

9. Cannot supply on time or accurately to customer (you are a supplier)

10. Constantly find it a struggle to cope with peaks in demand

If we go back to the 4 tactics Ian (Coles Chief Executive) decided to focus on, we can see that 2 of the main areas are supply chain related. 

1. Competitive pricing - There are 2 ways a business can do this. The easiest is to reduce margin for volume. The other is to reduce COGS and operating cost, keeping margin at or close to the same level and betting on volume to deliver incremental sales and margin (Retailing's holy grail). It is estimated that reducing the cost of your supply chain by 1% can be equivalent to increasing revenues from 4 to 12% (we can debate that in the comments section which is why I strongly advocate leaving comments). Coles for example wants to occupy the 'lower cost'space in consumers heads.

2. Stock Availability - Define Logistics Management - Right product at the right place at the right time, in the right quantity and at the right price. Difficult to argue that this area of improvement does not belong to SCM.

We've got to give credit to our Merchandising and Marketing friends without whom things would be very different. They do a great job and creating a market and ensuring its viability. 

I think a catchphrase is now overdue. We need one word that encompasses the purpose of this whole exercise. The one word that allows us to achieve a much simpler, optimised, flexible and responsive supply chain - Lean

'Lean' is the 'art of creating more value using similar levels of or less resources' and many would agree that this is the basis of any successful business. One of the (better) ways of achieving 'Lean' is by adopting supply chain principles.

I have included the below figure to demonstrate what's on the top of the concerns facing supply chain professionals today. I am sure many of our readers will agree that while it may be slightly different for each of us, the underlying findings can be applied to your organisation. 

Your supply chain blueprint

Over time many people have told me that while they understand the principles of Logistics and Supply Chain Management, they were unclear about what functions belong to SCM. The below table aims to shed light on what belongs to the modern supply chain, whether it fits at a strategic, tactical and/or operational level and which functions it previously was sitting under.

	Industry	Strategic/ Tactical/ Operational	Primary owner	Supported by	Supported by	Improvements	Previous Owner
New Products	Retailing/ Manufacturing/ Services	Tactical	Merchandise	Marketing	Logistics	More efficient new products introduction and support	Merchandise
Sourcing and Procurement	Retailing/ Manufacturing/ Services	Strategic/Tactical	Supply Chain Management	Merchandise	Marketing	More efficient and cost effective procurement	Purchasing
Supply Chain Collaboration –(suppliers, intermediaries, third party service providers, and customers)	Retailing/ Manufacturing/ Services	Strategic	Supply Chain Management	-	-	Better information flow leading to more precise inventory management	No Previous Owner
Demand Planning and Forecasting	Retailing/ Manufacturing/ Services	Tactical and Operational	Logistics Management	Merchandise		Better inventory control	Marketing
Order Management	Retailing/ Manufacturing/ Services	Operational	Logistics Management	Merchandise	-	Better end to end visibility of order	Operations
Storage and Warehousing	Retailing/ Manufacturing/ Services	Operational	Logistics Management			Reduced storage and warehousing cost	Transport Management
Manufacturing Planning and Execution	Manufacturing	Tactical/Operational	Operations	Supply Chain Management		Better visibility of supply chain leads to better execution	Operations
Inventory Management	Retailing/ Manufacturing/ Services	Operational	Logistics	Merchandise		Increased performance visibility	No Previous Owner
Product Life Cycle Management	Retailing/ Manufacturing/ Services	Strategic and  Operational	Logistics	Merchandise		Better product life cycle and quit cycle management	Marketing
Distribution Management	Retailing/ Manufacturing/ Services	Strategic and Operational	Logistics			Reduced distribution costs	Transport Management
Transport Management	Retailing/ Manufacturing/ Services	Tactical and Operational	Logistics			Optimise transport resources	Transport Management
Reverse Logistics	Retailing/ Manufacturing/ Services	Tactical and Operational	Logistics			Better managed Reverse Logistics Process	Transport Management
Supply Chain Related Systems Technology	Retailing/ Manufacturing/ Services	Strategic	Supply Chain Management	Business Systems/IT		More efficient processes supported by decision critical information	No Previous Owner
Promotional Events Management	Retailing/ Services	Strategic/Tactical	Merchandise	Operations	Logistics	Optimise inventory returns	Merchandise
Network design	Retailing/ Manufacturing/ Services	Strategic	Supply Chain Management	Operations		Optimal DC network design	Operations
Process Improvement / Re-Engineering	Retailing/ Manufacturing/ Services	Tactical	Owning department	Supply Chain Management			Owning department

Developed by Girish Ramjuttun. This table cannot be reproduced without prior permission of the author.

As previously mentioned, I will be updating this blog with much more over time including videos and would love it if you could regularly check on updates. More importantly your views and comments are so important to me so please let me know what you think (feel free to offer constructive criticism) and how we can all further advance understanding of this critical business strategy.  

[1]. Aberdeen Group Research White Paper Strategic Supply Chain Planning, Three key Priorities of the Chief Supply Chain Officer

About Mauritius: The Mauritian economy is today at crossroads. It has changed from a monocrop economy based on production and export of sugar through a protection and subsidised based three pillar economy to a diversified service based economy strongly supported by agriculture and manufacturing. Since 2000, protection and subsidies have gradually been eroding leaving Mauritius to compete unsupported on the international market.

Mauritius is and will remain an export orientated economy for revenue generation purposes in the foreseeable future driven by the service industry. Local consumption is small and will find it difficult to support economic growth on its own. While agriculture's and manufacturing's contribution to economic growth will gradually dilute, they will remain important economic and social pillars as they keep generating employment and add to GDP.

 Mauritius is also in the process of diversifying its economic activities adding to existing pillars other activities such as the Sea Food industry, the tertiary education industry, the pharmaceutical Industry, the IT industry, the financial services industry, the logistics industry and the renewable energy sector