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September 13, 2012 - Supply Chain Newsletter

This Week In SCDigest

bullet Taming the Long Tail
bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic of the Week and Supply Chain by the Numbers bullet This Week In "Distribution Digest"
bullet Cartoon Caption Contest Continues This Week! bullet Trivia
bullet New Expert Contributor bullet Feedback


Retail Supply Chain Special Reports, A No-Cost Opportunity Assessment from Experienced Supply Chain Practitioners, 2012 VCF Annual Fall Conference and more...

first thought

Taming the Long Tail

For as long as I have been in supply chain, companies have been trying to reduce SKU counts - with carrying degrees of success, but most commonly on the less successful side of the ledger.

One of my favorite supply chain quotes comes from Fred Berkheimer, formerly head of logistics at Unilever NA, who told me about a decade ago that "We're killing slow moving SKUs as fast as we can, but marketing keeps adding new ones back even faster," like the proverbial hydra.

I am sure Fred is not the only one with such an experience. Cut one head off, and two grow back.


"Many of the rest in the Long Tail should continue to be built to order, but (importantly) a broad swath should be "candidates for elimination," Simchi-Levi said, as they are eating away at profitability."


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More recently, a term called "the Long Tail," has entered the lexicon. It was coined by Chris Anderson of Wired magazine back in 2004, and had then to do with the potential of e-merchants to do very well selling SKUs that have relatively little demand locally but large enough demand overall to be successful on the web. The "tail" part came from charts plotting SKUs (x-axis) against sales volume (y-axis), with the lowest volume SKUs to the right. For web merchants, there might be large numbers of SKUs with very low volumes, making an expanding tail on the right side of the x-axis. "Selling Less of More" was the title of Anderson's later book.

The problem: Anderson as basically saying that supporting this Long Tail could only make sense on the web. But SKU proliferation, driven by increasingly specific customer demands and related "micro-segmentation" strategies, rages across the supply chain. Walmart, in fact, famously pulled thousands of SKUs from its stores in 2009 to increase supply chain efficiencies. It brought them all back and more, some 8500 in total, in 2011 after the move was in part seen as the cause for slumping store sales. And in fact, coincidence of not, Walmart's performance has improved ever since.

With that, some ideas on the Long Tail from two friends and experts, Dr. David Simchi-Levi, a professor at MIT and chairman of consulting firm OPS Rules, and Joe Shamir, CEO of software provider ToolsGroup, who has been focused on this Long Tail challenge for more than a decade.

Simchi-Levi recently addressed this challenge on a Videocast on our Supply Chain Television Channel (See Videocast: Managing Supply Chain Complexity through Long Tail Analysis).

As always, Simchi-Levi covered a lot of ground, but here I will focus on two of the ideas: (1) you need to use supply chain segmentation techniques to reduce complexity and better manager the Long Tail; and (2) the Long Tail has many hidden costs that make them even more of a financial drain than most companies understand.

On the first point, Simchi-Levi used a real example of a steel company with a two-stage manufacturing process: a furnace operation that produces steel slabs of various types, and then a rolling operation that produces finished products from the slabs. The company operated in a sense on a "make to order" model in both production phases - lead time from the furnace to the rolling operation was 8-9 weeks, while rolling in turn took 3-4 weeks to fulfill end customer orders.

Simchi-Levi has a gift for finding the right way to analyze a given business challenge. Here he simply plotted the demand variability of each of the SKUs produced by the furnace (y-axis) against the sales revenue. As usual, more than the Pareto Principle was in play. Just 9% of the 300-something SKUs accounted for more than 50% of the revenues - and certainly even more of the profit.

So Simchi-Levi recommended a two-level segmentation strategy (I have sometimes seen him use three or four), in which the 19 fast movers with low levels of variability would be built to stock, likely reducing production costs but also enabling the company to improve total competitiveness through faster total lead time.

Many of the rest in the Long Tail should continue to be built to order, but (importantly) a broad swath should be "candidates for elimination," Simchi-Levi said, as they are eating away at profitability.

Some companies don't really measure the profitability of individual products. A growing number of companies use a technique called Gross Margin Return on Inventory (GMROI) that basically calculates the return received from the investment in inventory at a SKU by SKU basis. The results, as I have seen first hand many times, are often eye opening. (More on this soon.)

But even GMROI isn't enough, Simchi-Levi says. The approach is a start, but doesn't nearly capture all the supply chain costs associated with managing the long tail, many of which are "hidden." When you add in total supply chain costs (inventory carrying cost, the costs associated with forecasting and managing these high variability products, engineering effort, etc.), a significant portion of the Long Tail will actually be negative margin products, Simchi-Levi says. Of course, marketing will usually make the argument that the products are needed for other reasons, and maybe they are, but the analysis of the cost must be comprehensive and clear to guide a more informed decision.

The takeaways: (1) dealing with the Long Tail effectively requires supply chain segmentation strategies; and (2) there are better ways to show the true financial impact by detailing the direct and hidden costs of Long Tail SKUs comprehensively.

Joe Shamir agrees with Simchi-Levi that the first place to start is determining whether long tail SKUs can be pruned, but believes in the end that for many companies most of the long tail will remain.

"David is right, companies need for sophisticated tools to better understand and manage the trade-offs" between the cost of carrying slow movers and the impact on sales, customers, and other reasons for keeping many Long Tail SKUs. But in the end, many/most companies will still carry lots of them. And "the only way to manage them effectively," Shamir told me, "is to use optimization."

Shamir adds that the growth in SKU counts has a companion trend, which is that demand is also getting "lumpier," or more inconsistent. He notes for example that for many slow movers, demand in any given period is likely to be zero, especially (and this is important) as the point of demand that is being forecast keeps moving down the supply chain. For instance, in the consumer goods sector that means we are now starting to forecast at the individual store level, not the retailer's upstream DC. Parallel examples are occurring in other sectors.

"So, with lumpy demand, it is really just as much about the frequency of orders as it is the quantity," Shamir says.

He makes a persuasive case that traditional forecast and inventory planning models that dominate the landscape today can't do the job very well in serving the intermittent demand in the Long Tail. Specifically, he says that traditional approaches, which I will characterize as first calculating the forecast with one of the algorithms of the many available, and then using the forecast error to calculate the safety stock that will deliver the desired service level.

But he says, one cannot "serve" the intermitted demand of the tail by producing accurate forecast. "It must be served with adequate inventory," he says. That traditional approach "works OK for fast moving SKUs," but Shamir argues that a fundamentally different approach is needed for slow movers.

That involves modeling demand and inventory stocking requirements using "stochastic" techniques. That may sound like an overly techie term, and I will dive into this subject in more detail soon, but just consider it this way - it's all about probabilities. The forecast and associated inventory requirements needed to meet target service levels shouldn't really be a single number (inaccurate as it usually is), but rather the volatile demand behavior should be modeled statistically, in order to simultaneously provide both the forecast and the information required to calculate the correct inventory to guarantee service.

Shamir says that this probabilistic approach is simply the right way not only to manage uncertainty generally, but especially to address the challenge of modeling both quantity and frequency of demand. He can show you lots of math and real-world examples that support his thesis.

Supply chain segmentation, hidden cost analysis, probabilistic optimization: some weapons to take on the Long Tail.

What are your thoughts on these strategies for managing the Long Tail? Let us know your thoughts at the Feedback button below.


Supply Chain Graphic of the Week:

Are US Truckload Rates Headed Much Higher?

This Week's Supply Chain by the Numbers for September 14, 2012:

  • P&G Sees "Beautiful" Results with Inventory Optimization
  • Truck Drivers Going AWOL
  • US Becoming Advantaged in Manufacturing
  • Sun Shining Bright on US Solar Installations


September 5, 2012 Contest

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Weekly On-Target Newsletter:
September 12, 2012 Edition

Gilmore, Holste on Distribution, VICS and GS1 Merge, Transportation Trends and more


Retail Supply Chain Special Reports, A No-Cost Opportunity Assessment from Experienced Supply Chain Practitioners,
2012 VCF Annual Fall Conference and more...

Holste's Blog:

Protect Your Material Handling System Investment from Operational Obsolescence


TOP STORY: Gilmore and Holste Tackle Audience Questions on Logistics Technology and Material Handling Systems

TOP STORY: Continues to Up the Fulfillment Ante with Nascent Locker Strategy

TOP STORY: Key Trends in WMS and Supply Chain Execution Technology (Part 2)


The Challenges of a Global S&OP Roll-Out

By Karin L. Bursa
Vice President of Marketing



What percent of total US freight movement by tonnage is carried on private fleets?
Answer Found at the Bottom  of the Page

Tuesday's Videocast Series:

Predictive Analytics and Perfect Logistics Execution -
The Future of the Consumer Goods to Retail Supply Chain

Part 1: Understanding Predictive Analytics in the Consumer Goods to Retail Supply Chain

Featuring Mark Krupnik of Retalon and
Greg Holder of Compliance Networks

Videocast Series:

Supply Chain Advanced Analytical Tools That Facilitate Cross-Functional Strategic Planning

Part 1: How to use Advanced Analytics to develop the Optimal Strategic Supply Chain Design across all Operations

Featuring Dr. Jeff Karrenbauer,
President of INSIGHT, Inc.


Introduction to Automated Procurement

Changing the TMS Game with Advanced Carrier Sourcing

Featuring Aditya Desai, Product Management, B2B Commerce Supply Chain Applications, IBM and
Jeff Robbins, Product Management, Sourcing, IBM

Tuesday, September 18, 2012

Tuesday, September 25, 2012

Wednesday, September 26, 2012


We are catching up on some recent feedback, starting with some letters on Gilmore's column on the Seven Habits of Highly Effective Supply Chains, written a few weeks ago, upon the passing of Stephen Covey. We add a letter on a new Supply-Demand Chain Model from the analysts at IDC, and one on JC Penney's aggressive new RFID program, which one reader thinks is going to be hard to pull off.


Feedback of the Week: On Seven Habits of Effective Supply Chains
commaA useful and thought provoking essay.

In recent years I have spent a great deal of time with defense related supply chains - those in the USA and UK are surely the most complex in the world. In doing so I have read up on military history and whilst not claiming in any way to be a proper historian my take is that two things wins wars. You need better trained forces and better logistics than the other guy. Having better technology does help but it is not the final determinant in conventional warfare. Surely there are lessons here for commercial organizations. In any campaign you need the best trained people on your side and the best supply chain - then you'll beat the opposition.

David MacLeod

More On Seven Habits of Effective Supply Chains:


Covey stressed the need to address the circle of influence where an individual (company) can make a difference, in contrast to dissipating one's energy in the circle of concern, where one can have little or no effect

Perhaps "Focus on your circle of influence and not on your circle of concern" should be a Supply Chain rule

Blair Williams

On New Supply-Demand Model:


One more circle needs to be added: "Supply Volatility."

Many supply/geographical markets are changing, and changing dramatically.

More manufacturers/producers are relocating from high cost environments (California for example) to areas of higher quality labor/management, lower costs of raw materials and energy and overall living conditions (Idaho, Texas, etc).

This has taken an already volatile market(s) where the foundation of freight volume is dictated by "seasonality," both import and domestic.

Thanks for the information - good stuff.

Bob Farrell
Vice President, Sales & Business Development
Henderson Trucking/Logistics

On JC Penney RFID Program:


I have been involved with the tech side of the retail supply/demand chain for many years.

In previous pilots, the issue wasn't the tag cost, it was the cost and reliability of the scans and scanning equipment.

I am at a loss about how JCP will practically manage it's suppliers (or virtually any DC) to get the right tags on the right items. But maybe they have figured something out.

If they want to use NFC and the consumer's mobile phone, that seems to be a good vector for attacks into the mobile since the process is not transparent.

Steve Kohler




Q:What percent of total US freight movement by tonnage is carried on private fleets?

A: A surprising 33% in 2011, according to the American Trucking Associations, about equal with common truck carriers, both well above number 3 rail at 14%.

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