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  • 1. February, 2012 Inventory Optimization - Impact of a Multi-Echelon ApproachWhat does Inventory Optimization mean in your Business? Even for supply Analyst Insightchain professionals, the term "Inventory Optimization" conjures up many Aberdeen’s Insights provide themeanings depending on each individuals background, training, discipline and analyst perspective of theeven type of business. For C-level executives, when they hear research as drawn from an“optimization” they think “minimization”. To a sales person, optimization aggregated view of the researchmeans having enough of a product in stock. Manufacturing professionals surveys, interviews, andwould rather avoid inventory altogether because it means more capital data analysisemployed, and that has a negative impact on the return on investment(ROI). Amongst these many and diverse views, the question is "what areyou trying to accomplish with inventory optimization?"There does seem to be some common ground that can be summed up inthe following rules:  Rule 1: Always have enough!  Rule 2: Never have too much!  Rule 3: Never let Rule 2 overrule Rule 1!!!These simple rules capture the essence of inventory management andoptimization. The goal of todays supply chain professional must be to findthat fine point of balance between service and investment, while balancing allthe moving parts in a given business. With this thought in mind, we take thedirection that Inventory Optimization means “right-sizing” the inventorybased on the service required and constraints affecting the business.A second consideration is to define the scope of inventory optimization. Acommon approach is to look only at finished goods and the customerservice level required at a given distribution center or ship from location,and set the model based on that. For most manufacturers, and somemultiple step distributors, the single-level approach does not address theend-to-end challenge. With supply chain complexity increasing, the challengeof managing the end-to end responsibility will only continue to grow.The preferred method is to take a holistic view of inventory optimizationand consider all levels and all inventories within an enterprise, rather thanjust finished goods. This type of holistic view is referred to as a "multi-echelon" approach. The multi-echelon approach, properly executed,provides deeper insight into the challenges from top to bottom in the supplychain, including manufacturing, distribution centers, suppliers and "in transit"product. The value of this approach is to address the issues at each level,including demand variability from above and supply variability on theinbound side.This document is the result of primary research performed by Aberdeen Group. Aberdeen Groups methodologies provide for objective fact-based research andrepresent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc.and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.
  • 2. Inventory Optimization - Impact of Multi Echelon ApproachPage 2The question then is whether a "multi-echelon" approach uses conventionalapplications or a specific "multi-echelon" solution to accomplish its mission.An advanced Multi-Echelon solution allows companies to evaluate inventorylevels methodically, resulting in the shrinking of the "rule of thumb" bufferswhile identifying constraints that require critical buffers to be maintained. Inthis review, we will concentrate on the holistic view and divide thepopulation of respondents into companies that have chosen a multi-echelontool set and those that have not.Business ContextOur CSCO research identified Inventory Optimization as one of the topthree actions to transform the supply chain (Jan 2011).This is likely drivenby the increasing complexity of the supply chain and the need to maintain orimprove service levels. Looking at inventory optimization specifically (Figure2), we see that cost and service top the list. This report will show that, formulti-echelon users, service is the underlying key pressure behind theiractions. Carrying CostsFigure 1: The Top Pressures Driving Inventory Optimization The expenses associated with having and maintaining the inventory. They are not the Need to reduce inventory carrying 57% value of the inventory itself. costs 56% Generally these costs are primarily the cost of money 43% (interest expense) or Need to improve service levels opportunity costs associated 43% with money being tied up in Market pressure to reduce product 21% inventory. They can be price 16% significant when discussing the "brick and mortar costs" tied Corporate need to improve return on 18% Multi to inventory storage, but invested capital 22% unless the physical reduction of Non-Multi inventory can eliminate storage Global sourcing or selling is increasing 18% assets entirely, such as closing inventory carrying costs 16% a warehouse, carrying costs are more generally construed 0% 10% 20% 30% 40% 50% 60% to be tied to the cost of money Percent of Respondents n=160 and the costs associated with maintaining and managing the inventory research surveys, Source: Aberdeen Group, December 2011 interviews, and data analysis.Cost is always a top pressure within all supply chains. Carrying cost is anelement commonly referred to when discussing inventory, but this term isnot always understood (see sidebar). Carrying costs do not represent thetotal cost of inventory since they typically do not include service andobsolescence costs. From a cost reduction perspective, most companiesaddress carrying costs indirectly by concentrating on reducing the level ofinventory investment, thereby reducing the borrowing cost of money.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 3. Inventory Optimization - Impact of Multi Echelon ApproachPage 3However, service improvement is often a more critical factor for thebusiness overall, since it can mean market share gain or loss, and addressesthe total cost of inventory issue. If service issues are not constantlyaddressed, companies will lose ground, because the competition neverrests! In addition to market pressures, there are also hidden costs ofreacting to service challenges that show up as part of operating variances.These hidden costs often outweigh the carrying costs by themselves.Actions to Improve Inventory OptimizationA review of the actions prioritized by the multi-echelon users (multi) vs.non multi-echelon (non-multi) show interesting differences (Figure 2). Thefact multi users are focused on improving inventory replenishmentstrategies by a factor of 2.3 to 1 highlights their concentration on addressingservice.Figure 2: The Top Actions Improve inventory modeling, 54% safety stock setting, etc. 65% Improve inventory 43% replenishment strategies 19% Improve demand forecasting 29% accuracy 56% Improve inventory visibility 21% (including in-transit) 19% Multi Non-Multi Move to lean manufacturing 14% 15% 0% 15% 30% 45% 60% 75% Percent of Respondents n=160 Source: Aberdeen Group, December 2011Interestingly, multi users are less likely to focus on improving demandforecasting accuracy than the non-multi users (52%). That may stem fromseveral factors.  Multi companies may have already addressed demand forecasting accuracy as part of their improvement process.  Multi users are trying to focus on one initiative at a time as a priority that would impact a lot of the same resources.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 4. Inventory Optimization - Impact of Multi Echelon ApproachPage 4  The solution addresses demand variability as part of the holistic view of the multi-user approach to optimization (most likely).Conversely, non-multi users appear to be addressing the demandforecasting issue as the priority and are not nearly as driven byreplenishment strategies (multi users are 2.3-times as likely to employreplenishment strategies compared to non-multi users). Their focus mightindicate that demand volatility is a larger factor in their business, andrequires more immediate attention, or they too are focusing on onebroader initiative before moving to another.Case Study: From Stalled Initiative to Better Servicewith Less InventoryThe CDIY division of Stanley Black and Decker is slightly less than $6 billionin size and is the largest division within Stanley Black & Decker, serving theConstruction and Do-It- Yourselfer markets. Products range from handtools to power tools, with several well-known brand names such as Stanley,Black & Decker, DEWALT, and Porter Cable.Prior to the merger, the Black& Decker operation had an initiative toimprove return on investment through inventory reduction, whilemaintaining or improving service. This initiative was stalled in 2003 due toresourcing issues, but rejuvenated in 2008.The approach was to start withfinished goods, set targets statistically, and then go to the manufacturingoperations and set targets for the raw material and component parts.Initially these targets were set using a statistical approach, and althoughtargets were established at two different levels in the supply chain (finishedgoods and raw material), project manager Michael Martin was quick to pointout that; “…you can clearly achieve great improvement from justformalizing the approach and using statistics to set your safety stock targets,but you cannot unlock all the benefits without the use of a multi-echelonsolution, which allows you to see the end-to-end view and the linkagesbetween the different levels in the supply chain. Modeling and running“what-if scenarios” taking into account service levels are hugeimprovements that are enabled by the features a multi-echelon toolprovides.”The Black & Decker team continued their approach pre- acquisition untilthey had addressed 80% of the finished goods inventories and 50% of themanufacturing operations inventories. Post-acquisition (March of 2010),they have continued to roll out the project across the CDIY division, toinclude 95% of the finished goods and 75% of the manufacturing plantsthrough the end of 2011. They are aiming for 100% by year end of 2012.The team tackled North American sites initially, then rolled out the processinternationally. When completed, the process will include the entire CDIYdivision, consisting of 30 manufacturing sites.The results achieved are remarkable. Use of the multi-echelon solution ledto a dramatic improvement in both inventory and service levels, including:© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 5. Inventory Optimization - Impact of Multi Echelon ApproachPage 5  20% to 30% reduction in finished goods (varied by business unit)  17% to 20% reduction in raw material and component pars  Improvement in service level (no negative impacts to service)One of the key points from a structural perspective was that the analyses ofall targets were performed by a core team that was well versed in thesoftware, and were rolled out to planners and other stakeholders ascustomers of the process. This approach made the “buy-in” at the user leveleasier, since it did not require extra work and learning at various sites.Mr. Martin said that there were many challenges and lessons learned alongthe way. There was clearly a need for management support - required in anyenterprise wide project. Since inventory optimization is about “right sizing”the inventory and not just minimization, in several instances, the businessunits needed to add inventory to achieve the right service level andinventory level at each node in the supply chain and not just finished goods.This was sometimes in conflict with the business goals of the operatingunits. In one smaller, but high potential growth, market, the teamrecommended to add inventory in the short term, to manage service levels,and to work off excesses which would take more than a year to achieve.Because this conflicted with the financial targets that business unit wasexpected to achieve, the business unit pushed back and was reluctant toproceed. Fortunately management support provided "air cover” to ensurethe necessary changes were implemented. Mr. Martin highlighted thissupport as a key to ensuring success.Data presented another challenge. Before the acquisition, Black & Deckerhad two SAP instances and 2 advanced planning instances, andharmonization of the data was a challenge. Items that were initially differentneeded standardized names and part identifiers. Post-acquisition, evengetting and harmonizing data was a challenge, due to the increased size,scope and complexity of systems.The payoff was well worth the effort. In addition to the hard benefits ofinventory reduction and improved service levels, there was tremendousvalue gained by having the ability to answer “what-if” scenarios quickly andshow the impact on operating capital. The speed with which the team wasable to respond to questions about., for example, facility consolidation,enabled them to be part of the strategic planning phase of a decision ratherthan reacting after the fact. Mr. Martin said:“We utilized the Logility tool in our solution, which was a key enabler toour speed and success. It required little support from Logility in these whatif scenarios because of its ease of use.”In addition to the “what if” benefits, the team could view their supply chainin ways they had not previously considered, which brought about furtherimprovements. The ability to see moving bottlenecks and the benefits ofpostponement strategies added further gains to the bottom line of 2%-5%.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 6. Inventory Optimization - Impact of Multi Echelon ApproachPage 6End users should be aware of the level of integration in deployment. Mr.Martin considered their solution to be “non-integrated,” which means thatupdates to targets were not automatic. This was a deployment decision tomove the data from live systems into the solution tool, perform analyses,and then move the changes back to the tool after the fact. The benefit ofthis approach was to support the offline “what-if” analyses the team wasasked to provide. The targets are updated monthly, as required.CapabilitiesMulti-echelon users have very different capabilities at their disposal thannon-multi echelon users. Knowing what the multi-echelon tools can deliverdefines the capabilities the multi users have adopted. There are 5 capabilitiesidentified as more than 70% more likely (Figure 3) to be employed by themulti users. The number of differences and the significant percentages areclear indicators the multi user view of the "inventory vs. service" challenge ismuch more comprehensive than the non-multi user view.Figure 3: The Top Capabilities Determine safety stock targets 75% for inventory at critical nodes 44% Replenish inventory into 71% distribution buffers based on… 40% Availability of end-to-end 64% inventory data 30% Multi Respond quickly to market 64% Non-Multi events 30% Segment inventory based on 64% customer service requirements 37% 0% 20% 40% 60% 80% Percent of Respondents n=160 Source: Aberdeen Group, December 2011The insight gained from evaluating the capabilities identified in Figure 3 isthat they all address challenges and issues surrounding service managementand performance.  Safety stock points at nodes help address response time. Properly sizing inventory at each node will improve (decrease) response time by shortening the lead time to pull inventory forward.  Replenishment strategies are a service driven term - again aimed at decreasing response time. Replenishment is typically referred to only in the context of addressing service. The question being addressed is "how fast do I need to replenish my stock in order to© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 7. Inventory Optimization - Impact of Multi Echelon ApproachPage 7 serve the customer? For example: If the product or service in question is a commodity, then availability must be almost immediate. If the product or service is somewhat unique or differentiated, then a customer might be willing to wait some amount of time to get that benefit. The answer will vary by company and even by product within a company.  End-to-end views are required when making commitments. If a commitment is necessary, it implies the product is not readily available and a "promise date" must be given. It is possible to guess and be correct using a rule of thumb, but to be consistently correct, visibility to upstream inventories and constraints are a requirement.  The ability to respond quickly to market events is a service driven issue. A market event could be many things, but would in some form result in an increase or decrease in demand or timing at the product or organization level. The more quickly the organization can adapt to the specific change at all levels, the better prepared they will be to capitalize on it if it is positive or minimize the damage if it is negative. This agility would translate into captured demand or minimization of costs due to a loss.  Segmentation based on service requirements is clearly service related. The term "segmentation" refers to the policies around groups of products utilizing different criteria such as cost, size, margin, importance, etc. All of the capabilities above help address service activities or challenges, and demonstrate the focus of multi echelon users on resolving service related issues. This emphasis on these 5 key service capabilities is the clear differentiator between multi echelon users and non multi echelon users.Inventory Optimization EnablersMulti echelon users adopt the capabilities identified in Figure 3 because theyunderstand the capabilities of multi echelon tools. The technologies beloware even more likely to be in place for the multi users compared to the nonmulti users than the capabilities identified in Figure 3. This commitment toput more robust tools in place to address the multi-echelon complexityreflects the maturity of an organization to address the "inventory vs.service" challenge.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 8. Inventory Optimization - Impact of Multi Echelon ApproachPage 8Figure 4: The Top Technology Enablers Inventory replenishment 93% 64% Inventory segmentation 89% 45% Responsive execution 78% 42% Extended inventory visibility 64% 25% Multi Event management 61% 22% Non-Multi 0% 20% 40% 60% 80% 100% Percent of Respondents, n=160 Source: Aberdeen Group, December 2011The following bullet points referencing Figure 4 are indicative of the higher Best-in-Class Performancematurity of multi user organizations compared to the non-multi user Definition:organizations.  Cash to Cash Cycle - Best-  93% of the multi-echelon users have replenishment in place in-Class companies had cash compared to the non-multi users (71% identified it as a capability to cash cycle of 58.6 days and even a higher percentage have put the enabler in place)  Finished Goods Inventory  89% of multi-echelon users have inventory segmentation, nearly 2 Turns - Best-in-Class times the commitment rate of non-multi users. 64% of multi users companies averaged 15.1 have extended inventory visibility, nearly 2.6 times the adoption rate turns per year of non-multi users  Change in perfect Orders -  61% of the multi-echelon users have event management capabilities, Best-in-Class companies increased their perfect nearly 2.8 times the adoption rate of non-multi users order rate by 3.1%As in the capabilities section, multi users are clearly committed to thesecapabilities, being more likely than non-multi users to adopt them by afactor of greater than 2 to 1 in some cases. The sharp contrast suggests thenon-multi users are addressing service issues almost entirely throughimproving forecast accuracy.Case Study: From “Rule of Thumb” to StrategicAnalysisOne large multinational chemical company started more than 10 years agoon the journey to concentrate on inventory management to reduce theircapital employed. The following points summarize their starting position asof 1998:© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 9. Inventory Optimization - Impact of Multi Echelon ApproachPage 9  Little understanding of and experience with setting inventory target levels using scientific methodologies.  Previous efforts only concentrated on finished goods, not a multi echelon approach.  Complex supply chains - Some products move from South America, to the United States, to Asia, to Europe.  Local stores along the way in each country.  Thirteen instances of ERP systems.After examining several options within their existing systems the companyfinally settled on a best-of-breed solution. As they began to implement, theyimmediately encountered challenges they needed to overcome.  “Learning 101” – the company did not have the basics down in terms of what they were tackling and all the drivers behind it.  Data quality  Discipline and timeliness of input to provide system accuracy. Lack of discipline for cutoffs and planning created errors in the numbers.  Resistance to change regarding the discipline. “Rule of thumb targets” were being used by the planning community.They started with finished goods and set targets statistically, beginning withnon- proprietary formulas from textbooks in an Excel spreadsheet. Theinitiative, “shined the light on the challenges and highlighted the disciplineissues affecting the process and data." Using the multi-echelon solution, theproject team identified process areas that needed help, through the COPQanalysis (Cost of Poor Quality) offered by the best-of-breed solution.Unreliable suppliers and logistics providers were key culprits. Thosesituations were corrected, and as of two years ago the company has a fairlywell balanced inventory across their network.The actual results achieved once the multi-echelon solution was deployedwere 20% inventory reduction initially, followed up by an incremental 17%.However, the ability to see their business in different ways and understandthe linkages from end to end was just as important as the overall inventoryreduction. The ability to evaluate “What if” scenarios via the multi-echelonsolution has proven to be one of the solutions most valuable benefits.For example, after deploying the multi-echelon solution, the company facedthe closing of several manufacturing locations in their global network.Rather than just looking at the differences in cost and transit rates, the teamcould model the incremental working capital required to support the newsupply chain for the markets served.Another benefit of the new system was the total view, which let thecompany see the benefits of postponement strategies and tradeoffs betweenstocking finished goods or stocking more product at a raw material level ata lesser cost.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 10. Inventory Optimization - Impact of Multi Echelon ApproachPage 10The company currently considers itself a “non-integrated” solution—analyses are done offline and fed back into the planning tools. This was adeployment decision, not a requirement, motivated by the benefits gainedfrom the “what-if” capability and the continued need to cleanse andnormalize data inputs. Targets are set annually, but monitored and reviewedmonthly as part of the S&OP process. Adjustments are made on anexception basis. After implementation, the company has continued tochallenge their target levels and their network assumptions through “what-if” analysis.In summary, the multi-echelon solution provided a robust inventoryevaluation across their supply chain network plus a scenario modeling toolthat did more than mere inventory reduction. The insight into their businessand scenario modeling has continued to deliver value. The capabilities thiscompany employed, and the results they demonstrated, are consistent withthe Best-in-Class results in our research.Performance MetricsThree metrics clearly show a higher level of proficiency for the multi-echelon users.Table 1: Performance Metrics Performance Metrics Multi Non-Multi Cash to Cash Cycle 65.4 days 76.9 days Finished goods inventory 12.8 turns 10.0 turns turns Change in Perfect order 3.1% percentage (on time and 1.0% increase increase complete) to customers Source: Aberdeen Group, December 2011The 3.1% improvement in service among multi users is equal to Best-in-Class performance. This 3.1% improvement is significant when reviewed inthe context of big box retailers like Wal-Mart and Home Depot, which arein the high 90s as far as acceptable service level requirements areconcerned.The cash-to-cash cycle is 11.5 days better (a 15% reduction), a strongindicator of the total inventory turnover. Given the 28% improvement infinished good turns, sellable items are turning over faster, and therefore Cash to Cash Cycle Definedinvoicing more frequently. One might ask why the cash-to-cash cycleimprovement is not as great as the finished goods improvement. This is Cash to Cash Cycle is the timeeasily reconciled when considering that the multi-echelon approach from when you pay a supplierconcentrates on "right sizing" the inventory across all levels. Finished goods to the time you collect cash from a customermight well be reduced, but due to strategies such as "postponement", moreinventory might be kept upstream at a lower value.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 11. Inventory Optimization - Impact of Multi Echelon ApproachPage 11Carrying cost was slightly higher (0.7%) for multi users than non-multi users.This is strictly a cost measure, not directly related to service, so the right-sizing behind the multi user approach may have led to some upwardadjustments. However, given the cash-to-cash improvement, other factorscould be affecting this metric.Taken collectively, these performance improvements indicate the value of amulti-echelon approach: a Best-in-Class level of service improvement, and areduced inventory investment.Key Takeaways1. The multi-echelon approach presents a holistic view of inventoryoptimization. Multi-echelon users have identified the need for robustcapabilities and have made the commitment to implement them.2. Multi-echelon provides deeper insight into the service impact andreplenishment strategies of inventories at various nodes. Multi echelonusers achieve a Best-in-Class service level improvement of 3.1% whilereducing overall inventory investment, as indicated by the 15% reduction incash-to-cash cycle.3. Multi echelon users are:  Twice as likely to tie target-setting to S&OP process (48% - 22%)  Three times more likely to review targets quarterly or better (64% to 27%)  Twice as likely to set targets statistically rather than relying on a rule of thumb (44% to 22%)  More likely to have targets driven by service requirements (89% to 58%)Inventory optimization is a matter of right-sizing inventory investment for agiven service target. For multi-echelon users, the performance improvementover non-multi users is significant: they can turn finished goods 28% faster,and achieve Best-in-Class service improvements. Multi-echelon inventoryoptimization drives better service performance, while reducing inventoryand providing a better capability to manage market and supply chain changesvia modeling. As supply chains become more complex, companies will needto address end-to-end challenges with multi-echelon solutions. Thisresearch demonstrates that multi-echelon users have captured the balancesuggested by the three rules; they have enough - but not too much - and, asthe service results indicate, they dont let Rule 2 overrule Rule 1!For more information on this or other research topics, please visitwww.aberdeen.com.© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897
  • 12. Inventory Optimization - Impact of Multi Echelon ApproachPage 12 Related Research Outsourced Logistics vs. In-house: Supply Chain Visibility: Fostering Security, Comparisons and Strategies, October Resiliency, and Efficiency, February 2011 2011 Collaborative Inbound Transportation: Integrated Transportation in a Capacity Managing Inbound Product Flows from Constrained Global Market, August Source to Consumer , December 2010 2011 International Transportation: Optimize Transportation Procurement Cost and Service in a Global Market , Management: Best Practices for the New July 2010 Normal, June 2011 Author: Bryan Ball, Director, Supply Chain Management Practice, (bryan.ball@aberdeen.com)For more than two decades, Aberdeens research has been helping corporations worldwide become Best-in-Class.Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provideorganizations with the facts that matter — the facts that enable companies to get ahead and drive results. Thats whyour research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% ofthe Technology 500.As a Harte-Hanks Company, Aberdeen’s research provides insight and analysis to the Harte-Hanks community oflocal, regional, national and international marketing executives. Combined, we help our customers leverage the powerof insight to deliver innovative multichannel marketing programs that drive business-changing results. For additionalinformation, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call(800) 456-9748 or go to http://www.harte-hanks.com.This document is the result of primary research performed by Aberdeen Group. Aberdeen Groups methodologiesprovide for objective fact-based research and represent the best analysis available at the time of publication. Unlessotherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not bereproduced, distributed, archived, or transmitted in any form or by any means without prior written consent byAberdeen Group, Inc. (2011a)© 2012 Aberdeen Group. Telephone: 617 854 5200www.aberdeen.com Fax: 617 723 7897