finished goods inventory metrics

Finished Goods Inventory ManagementNew Views on an Old Issue

Supply Chain ConsortiumBenchmarking & Best Practices

July 30, 2010www.supplychainconsortium.com

Hot Topic ReportHot Topic Report

2Copyright © 2010 Supply Chain Consortium. All rights reserved. Confidential and Proprietary

Finished Goods Inventory Management

28Processes for Inventory Management

13Accountability for Finished Goods Inventory Levels

32Report Authors

26Areas of Change For Finished Goods Inventory

15Charged For or Owns Inventory

10Geographical Responsibility

30Comments from Survey Participants

3Introduction

24Finished Goods Inventory Improvement Potential

31Closing Thoughts

22Customer Satisfaction Changes

21Reasons for Finished Goods Inventory Changes: 2009

20Finished Goods Inventory Dollars as a Percentage of Sales

17Finished Goods Inventory Metrics

11Setting Finished Goods Inventory Targets

8Organizational Responsibility

4Survey Participant Demographics

PageTable of Contents


Introduction

Finished Goods Inventory Management

The Finished Goods Inventory Management Hot Topic Survey received the highest number of responses since the Consortium began these types of surveys. Clearly, the inventory topic is important to all industries and market segments, particularly with the financial conditions that exist today. The goals of this survey were to understand:

How companies organize to manage finished goods inventory;

Who has responsibility for finished goods inventory;

How finished goods inventory targets are set and by whom;

What performance metrics are used;

How finished goods inventory and customer service were impacted in 2009;

What potential improvements are being considered; and

Details about specific practices used for finished goods inventory management.

The responses have been analyzed in aggregate for each key point and presented by industry to provide a more detailed assessment. The conclusions page outlines the most significant findings from the survey, but the data is presented throughout the report so that readers may draw their own conclusions.

Tompkins Supply Chain Consortium thanks everyone who took the time to complete the survey.


Survey Participant Demographics

Seventy percent of the survey respondents are from manufacturing companies, and 30% are from retail and distributor organizations.

However, roughly the same number of manufacturing and retail organizations were asked to complete the survey.

Percentage of Survey Respondents by Industry

Manufacturer70%

Retailer / Distributor

30%



Throughout the report, the number of responses and the percentage of companies answering each question varies depending on the topic and question, but in general, the distribution of responses across industry segments in the figure above hold true for the results in this report.

Percentage of Respondents by Industry Segment

1.9%1.9%

2.9%4.8%4.8%4.8%4.8%

6.7%

9.5%16.2%

17.1%

7.6%

5.7%5.7%5.7%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Service ProviderSpecialty

Consumer GoodsApparel, Fabric and Accessories

Beauty, Health and WellnessHome Products, Furniture and Appliance

PharmaceuticalHardware and Home ImprovementHealthcare and Medical Products

Hobby, Toys, Arts and Crafts, and Sporting GoodsDepartment and Discount

Automotive, Truck and VehicleElectronics

Food and BeverageIndustrial Commercial


There is a good distribution of respondents across supply chain titles, representing all organizational levels of the supply chain.


Percentage of Respondents by Title

VP and Above35%

Manager25%

Supervisor and Below4%

Director36%


There is an obvious bias toward companies based in the U.S.

However, Canada represents nearly 7% of respondents, and there is 1% from each of the other four countries identified.


Percentage of Respondents by Country

1.0%

89.5%

6.7%1.0% 1.0% 1.0%

0%10%20%30%40%50%60%70%80%90%

100%

USA Canada UK Belgium Brazil Germany


Organizational Responsibility

Planning inventory needs, determining inventory levels and distributing inventory are most often performed company-wide. Controlling inventory is commonly completed by a division-wide organization.

1.0%25.7%40.0%33.3%Controlling Inventory

1.0%24.8%34.3%40.0%Distributing Inventory

0.0%18.1%39.0%42.9%Determining Inventory Levels

1.0%14.3%39.0%45.7%Planning Inventory Needs

Did not AnswerGeographicallyDivision-wideCorporate-wide

How Responsibility for Finished Goods Inventory is Segmented Organizationally in Respondents’ Companies


Organizational Responsibility

Automotive – The automotive industry is split between corporate and divisionresponsibility.

Consumer Goods – Responses for the consumer goods industry are dispersed among corporate, division and geographic responsibility.

Retail – Retail companies are weighted heavily toward corporate responsibility for all aspects of inventory management.

High Tech – High tech is split between corporate and geographic responsibility.

Industrial Commercial – The industrial commercial industry is divided between corporateand division responsibility for all aspects of inventory management.

Food and Beverage – Generally for food and beverage companies, responsibility is division-wide – except for planning, which is a corporate responsibility.

Pharmaceutical – The pharmaceutical industry places responsibility geographically for planning, but divisionally for all other aspects of inventory management.

Industry Analysis – Corporate, Divisional or Geographical Responsibility


Geographical Responsibility

In a majority of companies that have an international component for finished goods inventory, there is one organization that handles both domestic and international finished goods inventory.

This applies to all industries.

4.8%58.1%0.0%37.1%Controlling Inventory

2.9%63.8%1.0%32.4%Distributing Inventory

3.8%59.0%1.0%36.2%Determining Inventory Levels

1.9%61.9%1.0%35.2%Planning Inventory Needs

Did not answerDomestic and InternationalInternational OnlyDomestic Only

How Responsibility for Finished Goods Inventory is Segmented Geographically in Respondents’ Companies


Setting Finished Goods Inventory Targets

Not surprisingly, the inventory management organization in many companies is responsible for setting finished goods inventory targets either by themselves or as a shared responsibility.

Several other functional areas are involved in setting finished good inventory targets. This implies that the sales, inventory and operations planning (SI&OP) process is being used with cross-functional representation for setting inventory targets.

21.9%5.7%Logistics and Transportation32.4%6.7%Executives26.7%4.8%Finance / Accounting / Controller19.0%2.9%Sales9.5%1.0%Retail Operations21.0%3.8%Marketing29.5%9.5%Forecasting43.8%20.0%Inventory Management13.3%2.9%Customer Service25.7%4.8%Distribution Operations32.4%3.8%Manufacturing13.3%5.7%Merchandising36.2%9.5%Procurement / PurchasingShared100%

Areas of Respondents' Companies that are Primarily Responsible for Setting Finished Goods Inventory Targets


Setting Finished Goods Inventory Targets

Industry Analysis – 100% of Responsibility vs. Shared Responsibility

Auto – The auto industry is twice as likely to share the responsibility of setting finished goods inventory targets across multiple functions than have one group 100% responsible.

Consumer Goods – Consumer goods companies are three times more likely to share responsibility.

Retail – Retailers are four times more likely to share responsibility than to have one organization responsible for setting inventory targets.

High Tech – The high-tech industry is two and a half times more likely to share responsibility across the organization.

Industrial Commercial – Industrial commercial companies are five times more likely to share responsibility for setting inventory targets.

Food and Beverage – Food and beverage companies share the responsibility for inventory targets 90% of the time.

Pharmaceutical – Pharmaceutical companies are eight times more likely to share responsibility than not.


Accountability for Finished Goods Inventory Levels

Several different organizations within companies have responsibility for the levels of finished goods inventory. The inventory management department is most likely to be a accountable for the inventory level, but many functional areas are also involved in managing finished goods inventory.

Surprisingly, executives also play a significant role in managing finished goods inventory levels.


Areas of Respondents’ Companies that are Primarily Accountable for Levels of Finished Goods Inventory


Accountability for Finished Goods Inventory LevelsIndustry Analysis

ProcurementDistribution Operations

Inventory Management

Pharmaceutical

Distribution Operations

ProcurementManufacturingFood and Beverage

ManufacturingInventory Management

ProcurementHigh Tech



MerchandisingRetail

ManufacturingProcurementInventory Management

Consumer Products



ProcurementAuto

3rd Choice2nd Choice1st ChoiceIndustry

This chart identifies the functional areas most selected as being accountable for finished goods inventory levels by industry.


Charged For or Owns Inventory

Areas of companies that get charged for or own finished goods inventory are spread out among several functional areas with inventory management, manufacturing, procurement and distribution operations being selected most frequently in the survey.

Executives also are charged with ownership of finished goods inventory in approximately one out of 12 companies.


Areas of Respondents’ Companies that Get Charged for or Own Finished Goods Inventory


Charged For or Owns Inventory

Industry Analysis



Pharmaceutical

ManufacturingSalesInventory Management

Food and Beverage

ManufacturingExecutivesInventory Management

High Tech


MerchandisingRetail OperationsRetail


ProcurementConsumer Products

ProcurementDistribution Operations


Auto


This chart identifies the functional areas most likely to be charged for or own finished goods inventory levels by industry.


Finished Goods Inventory Metrics

Percentage of Respondents Utilizing Finished Goods Inventory Metrics

83.8%

81.0%

75.2%

66.7%

64.8%

61.9%

47.6%

36.2%

35.2%

35.2%

25.7%

17.1%

9.5%

7.6%

1.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Inventory Turns

Inventory Balance (units, dollars, lbs, etc.)

Days of Supply

On-time Shipment

Order Fill Rates

Inventory Accuracy

Out of Stocks

SKU In-stock Percentages

Backorders

Shrinkage (all causes)

Gross Margin Return on Investment

Holding Costs

Percentage of Inventory in Acounts Payable

Other

Did Not Answer



Not surprisingly, the inventory turns metric is the most commonly used measurement for finished goods inventory.

Companies also frequently track the actual balances of dollars, units or pounds of finished goods inventory.

The next most popular metric is days of supply, which is also growing in use across several major industries – particularly with retailers – as a good indicator of demand changes.

The service metrics of on-time shipment and order fill rates are regularly utilized as well.

Inventory accuracy was also selected as an important metric by more than 50% of survey participants.

Detailed Analysis



Industry Analysis

Inventory BalanceDays of SupplyInventory TurnsPharmaceutical

Inventory TurnsInventory BalanceDays of SupplyFood and Beverage

Order Fill RateOn-time ShipmentInventory TurnsHigh Tech

Days of SupplyInventory BalanceInventory TurnsRetail

On-time ShipmentInventory TurnsInventory BalanceConsumer Products

On-time ShipmentOrder Fill RateInventory BalanceAuto


This chart indicates the most selected inventory metrics by industry.


Finished Goods Inventory Dollars as a Percentage of Sales

More than 40% of companies experienced a 1-9% decrease in finished goods inventory as a percentage of sales between 2008 and 2009. During the same time period, nearly one-quarter of respondents noticed a reduction greater than 10%. Thus, these results indicate a significant decrease in finished goods inventory during 2009.

From 2007 to 2009 there were also major reductions in finished goods inventory, leading to a trend that continued through 2009.

While the overall results show a decrease in finished good inventory relative to sales, there are individual companies that did not see this effect. Reasons for this may include that they were not strongly impacted by economic conditions, they did not reduce inventories proportionally with the sales movement, or that some organizations saw declines in sales beyond the amount of inventory that they could reduce.

6.7%8.6%12.4%41.0%22.9%Year-end 2009 vs. Year-end 2008

5.7%9.5%6.7%37.1%34.3%Year-end 2009 vs. Year-end 2007

>10% Increase

1-9% IncreaseNo Change

1-9% Reduction

> 10% Reduction

Percentage of Respondents Experiencing a Change in Finished Goods Inventory Dollars as a Percentage of Sales


Reasons for Finished Goods Changes: 2009

Better planning practices helped a large percentage of respondents reduce their finished goods inventory. Likewise, a drop in sales forced numerous companies to reduce inventory.

During the slowed economic conditions of 2009, management turned their attention to reducing finished goods inventory to maintain profitability, causing management focus to be one of the top reasons for the changes.

1.3%1.3%1.3%1.3%

2.6%2.6%

5.3%5.3%

6.6%10.5%

19.7%21.1%21.1%

0% 5% 10% 15% 20% 25%Percentage of Respondents

Buying LessTechnology

Market ChangesEnd of Life Management

Fill Rate ChangesInventory Shrink

No ImpactInventory Mix

Lower Stock LevelsSales Growth

Management FocusDrop in Sales

Smarter Planning

Reasons for Finished Goods Inventory Changes


Customer Satisfaction Changes

Customer satisfaction levels increased for nearly half of the companies, remained the same for 32%, and declined for 18%.

Clearly, reduced inventory levels did not have a major negative impact on service levels.

Changes in Customer Satisfaction Levels from Year-End 2008 to Year-End 2009 (Measured by Order Fill Rates or the Equivalent)

2.9%

15.2%

32.4%39.1%

6.7%3.8%

0%

10%

20%

30%

40%

50%

> 10%Reduction

1-9% Reduction No Change 1-9% Increase >10% Increase No Response

Perc

enta

ge o

f Res

pond

ents


Customer Satisfaction Changes

Industry Analysis – Increased vs. Decreased Service Levels

Auto – The auto industry shows a similar response to the overall average percentages; approximately 50% have increased service levels.

Consumer Goods – Consumer goods companies have the same amount of positive service level responses as negative service level responses.

Retail – Retail’s levels are comparable to the industries overall.

High Tech – The high-tech industry is the only industry with a higher percentage of companies that saw a decrease rather than an increase in service levels.

Food and Beverage – Food and beverage is highly skewed toward increased levels of customer service over the past year.

Pharmaceutical – Nearly all companies have experienced an increase, with only a few companies indicating no change in service performance.


Finished Goods Inventory Improvement Potential

Focusing on the amount of opportunity for finished goods improvement in the future, responses are somewhat conservative. The majority of respondents indicate a moderate or minor opportunity.

Also, a surprising number of survey participants did not answer this question, possibly indicating that they are uncertain of the improvement potential or believe it to be negative.

9.50%12.40%29.50%48.60%Customer Satisfaction

7.60%17.10%48.60%26.70%Inventory Turns

7.60%7.60%27.60%57.10%Holding Costs

6.70%21.90%47.60%23.80%Inventory Dollars

Did not answerMajorModerateMinor

Amount of Improvement Potential for Finished Goods Inventory


Industry Analysis – Minor, Moderate or Major Improvement Potential

Finished Goods Inventory Improvement Potential

Auto – In the auto industry, approximately 11% of companies are optimistic about future improvements.

Consumer Goods – For the consumer products industry, less than 5% see favorable improvements.

Retail, High Tech and Pharmaceutical – The retail, high tech and pharmaceutical industries have more than one-fifth of respondents with major optimism for improvements.

Food and Beverage – For food and beverage, 15% are optimistic about future finishedgoods improvements.


Areas of Change for Finished Goods Inventory

A process change is by far the most often identified area that needs improvement for finished goods inventory.

The second area that needs the most changes depends on the metric:

– Suppliers impact inventory dollars;

– Inventory policies impact holding costs;

– Technology impacts inventory turns; and

– People impact customer satisfaction.

32.4%61.0%38.1%34.3%56.2%35.2%32.4%Customer Satisfaction

25.7%45.7%50.5%32.4%72.4%47.6%42.9%Inventory Turns

16.2%29.5%34.3%34.3%45.7%38.1%36.2%Holding Costs

32.4%45.7%43.8%23.8%67.6%46.7%54.3%Inventory Dollars

CustomerPeopleTechnologyLogisticsProcessesPoliciesSuppliers

Areas of Change Needed for Finished Goods Inventory Improvement


Areas of Change for Finished Goods Inventory

Industry Analysis

Processes

Processes and Technology

Processes

Processes

Processes

Processes and Policies

Inventory Turns

PeopleProcessesProcessesPharmaceutical

PeopleProcesses and Suppliers

ProcessesFood and Beverage

PeopleProcesses and Logistics

ProcessesHigh Tech

ProcessesProcessesProcesses and Suppliers

Retail

ProcessesSuppliersProcesses and Suppliers

Consumer Products

PeoplePolicies and Processes

PoliciesAuto

Customer Satisfaction

Holding CostsInventory Dollars

Industry

This chart indicates the most selected areas of change needed for given performance metrics by industry.


Processes for Inventory Management

31.4%Have Declining Net SKU Base

32.4%Determine Optimum Safety Stock Working Capital vs. Lost Gross Margin

47.6%Do Replenishment and Forced Allocations

51.4%Do Forced Allocations

53.3%Do Returns and Markdowns

53.3%Have Internal Reverse Logistics Process

55.2%Have Formal Process to Forecast New SKUs

60.0%Do Markdowns

62.9%Have Product Hierarchy to Increase Forecast Accuracy

63.8%Have Access to POS Information

69.5%Have Formal S&OP (or SIOP) Process

69.5%Have Formal Process for SKU Discontinuation

87.6%Replenish Inventory When it Runs Low

Percentage of ParticipantsInventory Management Process


Processes for Inventory Management

Most of the inventory management practices identified by respondents are being performed by more than 50% of the survey group.

Many people are now discussing Sales and Operations Planning (S&OP) processes, and surprisingly, a number of companies already have a process in place. However, the success level of their processes is unclear.

SKU discontinuation has long been a source of problems for operations, yet a large percentage of companies say they have a process in use.

Contrary to the expectation that point of sale (POS) data would be difficult to obtain, a large percentage of survey respondents are using POS information for finished goods inventory management. Again, it is not clear how effectively this data is being used.

Detailed Analysis


Comments from Survey Participants

Below are specific comments from respondents regarding other finished goods inventory practices and barriers that they felt were important:

SKU Expansion – The main challenges are the number of finished goods inventory SKUs – this company has more than 10K SKUs – and slow responsiveness of the factory. SKU expansion is out of control; sales is driving huge marketing efforts and SKUs are growing.

Line and Merchandise Planning – Line and merchandise planning are key, along with understanding market potential and channel segmentation.

Forecast Accuracy Improvements – Forecast accuracy is the greatest opportunity for improvement.

Technology Applications – One company is leveraging SmartOps MIPO™ (Multistage Inventory Planning and Optimization) with robust input and performance monitoring to drive improvements.

Lean Processes – Putting the remaining parts on Kanban, lean principles are being applied more. Finished goods are being driven by a single major process.

Business Condition Challenges – Being prepared for change is important. One company notes that they were not prepared for the sharp decline in business that began in 2007, which is now very apparent.

Organizational Issues – Many of the processes are in place; the organization is dysfunctional.


Closing Thoughts

Conclusions

In general, finished goods inventory management is performed at the corporate level. However, if the organization is very large, then division-wide management is most often found.

An inventory management department is often responsible for setting finished goods inventory targets, but the responsibility is typically shared by several supply chain functions.

Inventory turns, inventory balances and days of supply are the top three measurements used for finished goods inventory.

Overall, companies indicate that they saw reductions in finished goods inventory dollars as a percentage of sales in 2009. The primary reasons associated with this performance improvement are smarter inventory planning, drops in sales that forced major inventory reductions, and increased management focus on finished goods inventory.

Customer satisfaction levels (as measured by fill rates) also increased, indicating that cutting finished goods inventory did not negatively impact customers.

The supply chain areas in which changes are most needed with respect to finished goods inventory are processes, people and inventory policies.


Report Authors

Bruce TompkinsExecutive Director

6870 Perry Creek RoadRaleigh, NC 27616

(919) 855-5527 Office(919) 345-0479 Mobile

[email protected]

SUPP

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HA

IN E

XCEL

LEN

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A S S O C I A T E S

Chris FerrellAssociate Director

6435 Hazeltine NationalSuite 105Orlando, FL 32822

(407) 362-0369 Office(919) 624-3947 Mobile

[email protected]

PPLY

CH

AIN

EXC

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NC

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A S S O C I A T E S

To learn more about finished goods inventory management, as well as benchmarking and best practices, additional resources are available to members through the Supply Chain Consortium: www.supplychainconsortium.com.

Qualified companies may join the Supply Chain Consortium’s LinkedIn or Xing Group: www.supplychainconsortium.com/rc/connections.asp

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