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ISC europe 2016 - how much inventory do you really need? Inventory Target Setting 2.0

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Information about ISC europe 2016 - how much inventory do you really need? Inventory...

Published on June 1, 2016

Author: BramDesmet

Source: slideshare.net

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1. How much inventory do you really need?? Target setting 2.0 Prof.dr. Bram Desmet bram_desmet@solventure.eu +32.497.58.28.60 be.linkedin.com/pub/bram-desmet/1/788/823/ @bram_desmet

2. My name is Bram … • Business – 1998 - 2003: IT manager, Arcelor-Mittal, Gent (Sidmar) – 2003 - …: Consultant Strategy – SupplyChain – Operations, MÖBIUS – 2009 - …: Managing Director, Solventure, S&OP software and software based services – Sector experience: aftermarket, chemical/pharma, consumer goods, discrete/high-tech, metals, retail, recycling, SME's (+50 companies) • Academic – 1998, Master in Mathematics, Gent University – 2002-2004, Executive MBA, Vlerick Business School – 2006-2009, PhD in Operations Research, Gent, Multi-Echelon Inventory Optimization – 2010-…, Adjunct Professor at the Vlerick Business School, Supply Chain and Operations • Contact info – bram_desmet@solventure.eu, +32.497.58.28.60 – be.linkedin.com/pub/bram-desmet/1/788/823/ – @bram_desmet

3. How much inventory do we really need??

4. Company 2: strong in inventory turns but out of balance Company 3: better balanced but did not recover to pre-crisis levels Company 1: better balanced & good rebound after crisis

5. STRENGTH BALANCE RESILIENCE

6. e.g. reduce cost by sourcing in far East

7. e.g. increase market share by extending product portfolio

8. e.g. reduce inventory by lowering safety stocks

9. Focus/incentives in a typical production company …

10. Resulting pressure in the triangle

11. Aligning the triangle is about maximizing ROCE Top-line EBIT ROCE

12. Market leaders are ‘extremely disciplined and focused’ on 1 of 3 strategic options Treacy & Wiersema, 1995 Operational Excellence Product Leadership Customer Intimacy • ‘Best price’ and/or • ‘Best access’ (‘fast, easy, painless’) • ‘Best product’ • ‘Best service’ and/or • ‘Best connectivity’ (‘relationship orientation’) • Efficiency through process thinking • Zero-defect service • Best product through continuous product innovation • Clear innovation strategy: where to place the bets? • Understanding the broader problem • Having expertise about the customer’s business • Customers carefully selected • The operations department drives the company • Attention is paid to process speed and quality • R&D is key: idea management • Marketing is also key: educate people with a missionary zeal • Get engineers, designers, and marketers systematically together • Demonstrate expertise and experience • Strengthen the relationship • Build loyalty: focus on customer retention

13. Product Leadership highest cost in R&D, marketing, supply chain Customer intimacy the extra mile comes at an extra cost Operational Excellence cost leader in every fibre of the organization service inventory cost Higher turns Lower cost Higher service

14. Product Leadership highest complexity, highest risk Customer intimacy controlled complexity Operational Excellence simplicity drives efficiency service inventory cost Higher turns Lower cost Higher service

15. Product Leadership emotion beyond functional service Customer intimacy an extra mile for a premium Operational Excellence excel in the basics service inventory cost Higher turns Lower cost (excl.COGS) Higher service As measured by Gross Margin

16. Product Leadership highest risk with highest potential payoff Customer intimacy an extra mile at an extra cost and premium Operational Excellence excel in cost and the service basics service inventory cost Higher turns Higher service As measured by Gross Margin Lower cost (R&D + SG&A)

17. Product Leader

18. Product Leader

19. Indirect cost 32-33% gross margin 42-43% EBIT of 10%

20. Indirect cost 32-33% gross margin 39-41% EBIT of 7-8%

21. Product Leader Indirect cost around 32-33% For a gross margin 42-43% EBIT of 10%

22. Product Leader Turns of 3 for an Indirect cost around 32-33% For a gross margin 42-43% EBIT of 10%

23. Notice Company 3: Indirect cost around 18-19% For a gross margin 35% EBIT of 16-17% … because of underspending!

24. service inventory cost Higher turns Higher service As measured by Gross Margin 10% 20% 30% 42% 3 6 9 16% 24% 32% Lower cost (R&D + SG&A) Example Benchmark for Technology Companies Product Leader EBIT of 10%

25. Cost Leader

26. Cost Leader

27. Indirect cost 22-27% gross margin 25-30% EBIT of 3%

28. Indirect cost 23-25% gross margin 21-23% EBIT of -2% to 0%

29. Cost/Opex Leader Indirect cost 22-27% gross margin 25-30% EBIT of 3%

30. Opex/Cost Leader Turns of 6-8 for … an indirect cost 22-27% gross margin 25-30% EBIT of 3%

31. Product Leader Turns of 3 for an Indirect cost around 32-33% For a gross margin 42-43% EBIT of 10% Product Leader tGrossProfi-1 urnsInventoryTEBIT% NetSales sCostofGood urnsInventoryTEBIT% urnsInventoryT sCostofGood NetSalesEBIT% Inventory$ EBIT ⋅ = ⋅ = ⋅ = 52,0 %421 3%10 Inventory$ EBIT = − ⋅ = Opex/Cost Leader Turns of 6-8 for … an indirect cost 22-27% gross margin 25-30% EBIT of 3% 29,0 %271 7%3 Inventory$ EBIT = − ⋅ = Opex/Cost Leader >>

32. Product Leader Turns of 3 for an Indirect cost around 32-33% For a gross margin 42-43% EBIT of 10% Opex/Cost Leader Turns of 6-8 for … an indirect cost 22-27% gross margin 25-30% EBIT of 3% Product Leader tGrossProfi-1 urnsInventoryTEBIT% NetSales sCostofGood urnsInventoryTEBIT% urnsInventoryT sCostofGood NetSalesEBIT% Inventory$ EBIT ⋅ = ⋅ = ⋅ = 52,0 %421 3%10 Inventory$ EBIT = − ⋅ = 29,0 %271 7%3 Inventory$ EBIT = − ⋅ = Opex/Cost Leader = 51,0 %301 9%4 Inventory$ EBIT = − ⋅ = Opex/Cost Leader Turns of 9 for … an indirect cost 26% gross margin 30% EBIT of 4%

33. Product Leader Turns of 3 for an Indirect cost around 32-33% For a gross margin 42-43% EBIT of 10% Product Leader tGrossProfi-1 urnsInventoryTEBIT% NetSales sCostofGood urnsInventoryTEBIT% urnsInventoryT sCostofGood NetSalesEBIT% Inventory$ EBIT ⋅ = ⋅ = ⋅ = 52,0 %421 3%10 Inventory$ EBIT = − ⋅ = Opex/Cost Leader 51,0 %301 9%4 Inventory$ EBIT = − ⋅ = Opex/Cost Leader Turns of 9 for … an indirect cost 26% gross margin 30% EBIT of 4% 49,0 %361 5,4%7 Inventory$ EBIT = − ⋅ = Customer Intimacy Leader Turns of 4,5 for … an indirect cost 29% gross margin 36% EBIT of 7%

34. service Higher turns Higher service As measured by Gross Margin 30% 36% 42% 3 4,5 9 26% 29% 32% Lower cost (R&D + SG&A) Example Benchmark for Technology Companies Product Leader EBIT of 10% EBIT/Inventory$ = 0,5 Opex/Cost Leader EBIT of 4% EBIT/Inventory$ = 0,5 Customer Intimacy EBIT of 7% EBIT/Inventory$ = 0,5

35. Product Leader Turns of 3 for an Indirect cost around 32% For a gross margin 42% EBIT of 10% Opex/Cost Leader Turns of 9 for … an indirect cost 26% gross margin 30% EBIT of 4% Customer Intimacy Leader Turns of 4,5 for … an indirect cost 29% gross margin 36% EBIT of 7%

36. Product Leader Turns of 3 for an Indirect cost around 32% For a gross margin 42% EBIT of 10% Opex/Cost Leader Turns of 9 for … an indirect cost 26% gross margin 30% EBIT of 4% Customer Intimacy Leader Turns of 4,5 for … an indirect cost 29% gross margin 36% EBIT of 7%

37. service inventory cost Higher turns Higher service As measured by Gross Margin 30% 36% 42% 3 4,5 9 26% 29% 32% Lower cost (R&D + SG&A) Benchmarking Approach 1. Analyse gross margin of different competitors 3. Analyse Inventory Performance for Product / Customer / Cost 2. Analyse R&D + SG&A expenses of different competitors 4. Balance the targets by ensuring the same EBIT/Inventory$ performance Gross Margin SG&A R&D Strat High High High Product Medium High Low Customer Low Low Low Cost

38. • Don’t benchmark in 1 dimension, but in multiple dimension • Make sure to look at Service, Cost and Cash aspects (the Supply Chain Triangle) • Different strategies lead to different targets • Always define targets for a combined set of metrics • All strategies should enable a comparable ROCE

39. Thank You!! Prof.dr. Bram Desmet bram_desmet@solventure.eu +32.497.58.28.60 be.linkedin.com/pub/bram-desmet/1/788/823/ @bram_desmet

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