This Week on SCDigest:
The Great Inventory Deleveraging
Supply Chain Graphic of the Week and Supply Chain by the Numbers
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SCDigest On-Target e-Magazine
Expert Insight: Churchill Leadership Series Part 2
Expert Insight: Compliance Risks Can Be Too Costly to Ignore
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Supply Chain Graphic of the Week: Peak Season Inventory Strategies

This Week’s Supply Chain by the Numbers for March 25, 2010:
Kimberly-Clark Just Starting to get Lean; Measuring DC Complexity; the Four Key Metrics for Procurement; Capital Spending to get a Boost - at Last


Cartoon Caption Contest

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Each Week:

Global Supply Chain
Trends and Issues

Expert Insight:

Behavior 2 -- Depend On A Strong And Loyal Support Staff

by David K. Schneider


Churchill Leadership Series:

Behavior 2 -- Depend on a strong and loyal support staff

Expert Insight:

Compliance Risks Can Be Too Costly to Ignore

by Nathan Pieri

Compliance Risks Can Be Too Costly to Ignore


HolsteHolste's Blog: Material Handling System Performance May Depend On How It Is Measured

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By how much did US truckload rates fall in the first five years of trucking deregulation (1977-1982)?

Click to find the answer below
The Great Inventory Deleveraging

Inventories are finally coming down. Wonder why it took so long?


Last year, I published an article on Supply Chain 2015, listing 10 specific changes in supply chain practice that I expect to happen by that time, and have given the related presentation at a number of events. Number three on that list is this: “Inventory Levels will move Sharply Downward for most Companies.”


It’s actually kind of interesting – clearly, the focus on supply chain and its place in the corporate hierarchy have markedly improved over the past decade. We’ve been in the “supply chain era” for nearly three decades now, and if there is anything more central to the practice of supply chain than inventory management I don’t know what it could be.


Well, I supposed you could say the real focus is customer satisfaction/service, and maybe that’s why despite the centricity of inventory management to the practice of supply chain we haven’t really moved the inventory needle very much.

Gilmore Says:

"I may not be the first to say it, but you can bet by 2015 there will be a substantial shift downward in the inventory levels across virtually every industry sector."

What do you say?

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your Feedback here

 Just for example, below is a chart we produced last year, showing the average inventory levels from 2004 to 2008 for some selected industries. It was pulled together from the annual CFO magazine working capital study, and neither they nor we have put together anything for the 2009 numbers, which should be interesting. The numbers in the chart indicate average Days Inventory Outstanding (DIO) for various industry sectors. (Note: the data uses revenue as the divisor rather than cost of goods, which many argue is the more appropriate value.)

Larger image

As you can see, not a whole lot of progress (the lower the number, the less inventory a company holds). In fact, it is really only in some healthcare related areas such as pharmaceuticals that any substantial inventory reduction was seen across all sectors in the time period.


At one level this is puzzling, given the many stories of individual companies greatly reducing inventories over the past years. Were these the exceptions? Or does it only last for awhile, so that before long the company reverts to old ways and heads back towards the industry mean? Probably some of both.


One of my favorite SCM anecdotes came from a discussion I was having with a group of consumer packaged goods supply chain execs in the early 2000s when the conversation turned to inventory. Fred Berkheimer, recently retired VP of Logistics at Unilever NA, started laughing and said something like, “My CEO says if we achieved every inventory reduction we promised him from different programs and investments, we’d have hugely negative inventory levels by now. But the reality is we have more inventory than ever.”


Why? The iconic Bud La Londe from Ohio State University wrote a few years ago that the data showed steep drops in work-in-process inventories, but little or no progress in finished goods inventories over some number of years.


SKU proliferation certainly played a role in that. I enjoyed the presentation John Bermudez used to make when he was at AMR Research (he’s at Oracle now, I believe). He had had the bright idea to begin collecting various flavors, formulas and packaging for Crest toothpaste over the years. He’d come with a large grocery bag filled with dozens of different SKUs collected over not that long a time frame. It certainly drove home the point about SKU complexity, micro-segmentation and more.


But that is at last changing. Just as we are in an economy where businesses and consumers are “deleveraging,” most businesses are deleveraging inventory levels as well.


Even Walmart was caught up in the inventory surge, famously letting inventory growth rise to some 90% of sales growth in 2004-05. Then came Inventory DeLoad and other programs from Bentonville, to great effect.


Caught up in a manufacturing strike in 2006, tire maker Goodyear discovered, to its apparent surprise, that it could actually manage just fine with the inventory levels much lower than it was used to carry. Necessity is the mother of invention.


But the recession will turn out to be the real catalyst. First, inventory levels were dramatically cut in most companies to drive cash flow. Worried about the impact on sales, many manufacturers and retailers looked around and said: “Maybe the easiest way to do this is to cut back on SKUs rather starve our best sellers with across the board cuts,” or something along those lines.


In the consumer goods to retail supply chain, the retailers may actually have picked up on this first. As we reported last year, many leading retailers are looking to reduce SKU counts by 15-20% over the next few years (see Will Large Retailers Help Manufacturers Drive Out Supply Chain Complexity?).  It turns out that Target, as just one example, is rethinking whether they really need the 88 varieties of Pantene shampoo that some of its stores offer.


Target is testing stores that carry 50% fewer SKUs to see what the reaction is. That is an astounding, game changing concept. Frito-Lat cut SKU counts by some 29% last year. Este Lauder SKU counts were down 10% at the end of last year versus 2008. Kroger is said to be testing stores with 30% fewer SKUs, etc.


These are all retail/consumer goods examples, but it’s happening in other sectors too, my conversations tell me.


What else is happening to drive this, besides what I have discussed above? 

  • Continued industry consolidation in most markets frankly means smaller brands can be squeezed out, and/or the larger players have more freedom to call the shots
  • Consumers and B2B customers may in some cases find less is more. Frito-Lay, for example, is seeing total sales rise with smaller SKU assortments.
  • The “new normal”  relentless focus on price by customers of all types means more will choose low cost over having exactly what they want. Being caught in a high SKU count, higher cost position may not be a good place to be.
  • Technology is really providing some answers now. “Inventory optimization” solutions really do enable a more supply chain-wide view of inventory (see video Shifting the Inventory Curve at bottom of page); new store-level DRP solutions have the potential to dramatically improve the flow of inventory throughout the chain (see The Past and Future of Distribution Requirements Planning (DRP)
  • The growth of Sales, Inventory & Operations Planning (SIOP), especially with this new mindset, will be more relentless about driving down SKU counts and inventory levels.
  • New fulfillment models (DC Bypass, drop shipping) are merging that will lower inventories.

So, I may not be the first to say it, but you can bet by 2015 there will be a substantial shift downward in the inventory levels across virtually every industry sector. That will largely represent true supply chain progress, and it will be real and permanent, at least to some new plateau well below where we have been the last decade or so. As always, there will be ramifications pro and con for companies and individuals.


The Great Inventory Deleveraging is coming.


Do you think we will see at last some real drops in inventory levels starting now and for the next few years? Why despite the seeming progress over the past decade did overall inventory levels seem not to improve? Do you think this current focus on inventory reduction will last, or again creep back? Let us know your thoughts at the Feedback button below.

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We received a number of good letters on our On-Target article on SKU and activity profiling in the DC. That includes our Feedback of the Week from David Armstrong of Inventory Curve, who offers some great real life examples to make his points.

We also received a few letters on the new concept of "Vested Outsourcing."

You will find Amstrong's letter and all the Feedback below..

Feedback of the Week: On SKU and Activity Profiling in the DC:

This is important information to capture and review.

Also important is to do a unit (packages/cases) per order distribution.  I have found many companies that have never done this and it opens up a whole new level of insight in system design choices and costs.
Here are three real life examples:

Example 1:

A major CPG manufacturer designed its distribution systems and operations and made many product/order pricing, pricing decision based on an average order size of 26 units based on total units shipped divided by total orders.  When a units per order size distribution was performed, it showed that order size of 1 unit was the mode (most frequent), the median size (50% break) was 3 units and the mean was 26 units.  
The small orders had high fixed costs and low variable costs per order while very large orders (several hundred units or more accounted for few ord
ers but were the bulk of the unit volume and low fixed order costs but accounted for high variable costs.

Warehouse and distribution operations were changed so that there were 2 separate and distinct processes, for for the small orders (the bulk of the orders) and on for large orders (the bulk of the volume).  Warehouse throughput improved and costs were reduced.   Changes were also made to order level product pricing strategies.

Example 2:

A major CPG product produces semi-custom make to order products.  Due to low density and the need to have order ship complete to the ultimate consumer, as each unit was manufactured it was sent to a staging area to be held until each total order was complete and could be shipped.  With over several hundred units being produced per day, this holding area was a major bottleneck in the process.

A unit per order distribution was performed and showed that almost 40% of the orders were for one unit.  A simple change was made to the production work order for each unit that showed the total units on the order.

Product that had a unit count of "1" was sent directly to the packing area and shipped.  This took one day out of the process.  

In the staging areas, additional changes were made to accommodate and streamline orders of size "2" and "3".

By getting these orders out of the way, space, clutter and time was freed up to allow larger sized orders to be handled much more effectively, again taking time and space out of the process.

Example 3:

A wholesale/distributor made daily deliveries to customers on flexible routes.  Planning and costing was based on average dollar order size.

When a distribution by order dollar size was done, it showed that large numbers of orders were for small revenue dollars.  In this pricing and commission changes were implemented so that the true costs of handling small orders in the pricing strategy.

David Armstrong


Inventory Curve

More On SKU and Activity Profiling in the DC:

There is no question that right now (or within a couple months) is a good time to consider SKU and Activity profiling. 

Right now, there are macroeconomic effects on product demand and order patterns.  These are the effects of a depressed economy that has changed buyer behavior in terms of increased or, most likely, reduced outbound demand.  This behavioral change is perhaps significant enough that SKU and Activity profiling would provide a noticeable reduction in cost of product selection at the warehouse. 

Microeconomic factors are also influencing outbound demand right now.  These involve product movement fluctuations due to holiday periods and change of seasons, and they affect different operations in various ways.  For example, demand for certain grocery items like pumpkin pie mix and cranberry sauce will spike during the Thanksgiving/Christmas holiday season and then tumble as we leave that season/holiday period. 

There is great value in making sure seasonal items like these are SKU Profiled correctly during the holiday season (to avoid stockouts) and then re-SKU Profiled after the holiday season (to not use up valuable high velocity pick slots). 

Similarly, regarding Activity Profiling, these two grocery items might be ordered together quite often (order commonality) during the holidays and then not ordered very often together during the rest of the year, suggesting that the items might need to be slotted near each other (and in larger slots) for a short period of time during the holidays and then moved after the holidays.

We normally recommend three to four annual SKU Profiling reviews (with minor slot assignment changes happening on a regular basis).  This activity is especially important in the midst of this economy, as the macroeconomic influence on warehouse productivity will magnify the benefits of the normal SKU Profiling exercise.


Dan Basmajian

Thanks for a good summary article.  Another key facet is the replenishment methodology.  Slot size and easy of replenishment comes into play a great deal at my sight.  We are experimenting with mixed lot number IT solutions and multiple prime locations for the same product so that pickers face fewer exceptions and disruptions.

Ray Tribe

Director of Operations


On "Vested Outsourcing":

I think the article is spot on.  The relationship if managed well allows you to avoid having the arrangements fail because the “contract” did not cover the particular problem that has come up.  Of course if relationships are important then we should measure them … how many Supply Chain leaders actually do this? 

Interesting that the DoD funded this because the research mirrors that done in the UK several years ago in Defense Procurement, see .  It seems all governments have problems with making outsourcing work!

Andrew Downard

AD Supply Chain Group Pty Ltd

I really like this article.  It seems to me that a relationship based on trust is fundamental to achieving vested outsourcing.  When I worked at Helene Curtis in the 90's, we built trust with the suppliers who were part of our outsourcing strategy.  And since almost 30% of our unit volume was outsourced, we did not want win-lose relationships.  

Herb Shields, CMC
HCS Consulting


By how much did US truckload rates fall in the first five years of trucking deregulation (1977-1982)?


About 25%.