THE SUPPLY CHAIN DIGEST LETTER The Supply Chain Digest

THE SUPPLY CHAIN DIGEST LETTER(Continued from Page 1):Inventory Optimization“. the companies that can come closest to reaching the illusive InventoryOptimization goal will have a substantial market advantage over those that can onlyachieve middling performance – or worse.”(Continued from Page 1): Holy Grail.A lot easier said than done – and a goal that requiresupgrades to strategy, process and technology.So just what is “Inventory Optimization?” It’s a goal– operating at the least possible inventory that maintainstargeted customer service levels. It’s also a new categoryof software that takes traditional inventory planning toa whole new level. Either way, with today’s inventorymanagement challenges, the companies that can comeclosest to reaching the illusive Inventory Optimizationgoal will have a substantial market advantage over thosethat can only achieve middling performance – or worse.Inventory Pressures MountA number of factors are combining to put upwardpressure on inventory levels for many companies.The number one factor by far is the growth of offshoring.Almost by definition, this lengthening of supply chaintransit times from days to weeks will add to a company’sbuffer inventory stock. Add to that even longer orderto-delivery cycles, the need to fix production orderssometimes months in advance, and increased variability,and it’s no wonder inventories are rising by mostestimates.For example, in its annual analysis of working capitalpractices, CFO magazine found that the largest 1000publicly traded companies had inventories rise by 2.1%in 2006, the last year for which data was available atSCDigest Letter press time. Offshoring is cited as a keyfactor, as “companies searching ever farther afield forcheap goods and labor found it prudent to carry moreinventory as a guard against potential supply-chaindisruptions.”A supply chain executive from Newell Rubbermaidnoted a couple of years ago that the company “wasbuilding more warehouses than ever” to store all theproducts coming in from offshore suppliers.In addition, the dramatically rising price of fuel andtransportation costs are actually causing inventory levelsto increase, as the trade off between transportationand inventory swings back to holding higher levels ofinventory based on pure economics.In the 2008 State of Logistics Report from CSCMP,author Rosalyn Wilson notes “the move to regionalizeddistribution centers continued in 2007, with many morefirms announcing plans to relocate or open new DCsserving smaller markets. These changes are being madeto shorten delivery times and length of haul to savefuel,” even if the overall result is increased networkinventory levels.A number of companies have also stated in the past yearthat they were reducing the amount of air freight in favorof ocean to reduce transport costs – again at the expenseof increased inventory levels.continued - page 5 July 2008Your Monthly Digest for Supply Chain Informationwww.scdigest.com/letter

THE SUPPLY CHAIN DIGEST LETTER(Continued from Page 4): Holy Grail.At the other end of the spectrum, CEOs, CFOs, andWall Street analysts are placing more focus than ever oninventory levels. Part of that is the impact of inventorylevels on working capital and cash flow. The other partinvolves concerns that high levels of inventory can leadto large write downs of obsolete inventory or profitkilling discounts.Finally, those inventory concerns are also directly relatedto the increasing challenge of shorter product lifecycles,which make the penalties for out-of-stocks (lost profit inthe early part of the lifecycle) and excess and obsoleteinventories (markdowns, write-offs late in the cycle)much greater today than in the past era of longer productmaturity curves.Understanding Inventory DriversWhat factors drive inventory levels? There are asurprisingly large number, which is why inventorymanagement is so challenging.At a recent Retail Industry Leaders Association (RILA)Logistics conference, Wal-Mart’s Johnnie Dobbs(executive VP of Logistics and Supply Chain) noted thateven Wal-Mart was challenged with managing inventorylevels, due in part to the fact that “there were so manypaths that could lead to inventory in the DC.” Indeed,Wal-Mart, legendary for its inventory managementskills, actually had a period where for several years itsinventory growth was much faster than its historicalcontinued - page 6Inventory Levels - Selected IndustriesInventory management practices, requirements and effectiveness vary considerably between different industrysectors.The table below shows the median level (half industry above, half below) of Days Inventory Outstanding (DIO) from anumber of leading industry groups in the US. DIO is really just another way to look at the “inventory turns” number thatis more commonly used by supply chain professionals.DIO is calculated by taking year-end inventories and dividing them by an average day of sales, or Total Inventory/TotalRevenue/365. To turn DIO into inventory turns, divide 365 by the DIO level. So, for example, a DIO of 36.5 means acompany has 10 inventory turns per year (365/36.5).Industry SectorMedian DaysInventoryOutstandingIndustry SectorMedian DaysInventoryOutstandingAerospace and Defense46Food Manufacturers45Apparel/Luxury Goods51Grocery and Drug Retailers26Auto Parts and Components31Household lding Products36Medical Devices and /Network Products27Paper/Forest Products39Computers and Peripherals27Personal Care Products43Containers and Packaging40Pharmaceuticals46Department Stores/Mass Merchants63Semiconductors42Electrical Equipment45Specialty Retail57www.scdigest.com/letterYour Monthly Digest for Supply Chain Information July 2008

THE SUPPLY CHAIN DIGEST LETTER(Continued from Page 5): Holy Grail.levels of about 50% (see graphic below). That patterncaused the company to launch its “Inventory DeLoad”program, which has started to pay big dividends.In 2007, for example, the Wal-Mart Stores divisionreversed the trend, with inventory growth of just 0.7%versus a sales increase of 5.8%.A large food company recently launched an investigationinto why its levels of inventory were consistently higherthan its competition. As part of that effort, SCDigesthelped compile the following list of inventory drivers,roughly from the highest level variables to the mostgranular: Supply Chain Organization: Is there anintegrated approach to the supply chain andinventory decisions, or functional silos? The lessintegrated, the more inventory problems (shortagesor overages) are likely to occur. Supply Chain Network Design: The greater thenumber of stocking points, all things being equal, thehigher the level of inventory. The longer the supplychain (e.g., goods produced offshore), the higher thelevel of inventory. Customer Service Policies: A company’sstrategies and goals related to customer service,both generally and at an A, B, C category level, willgreatly impact inventories. Safety Stock Policies: Relatedly, how aggressiveor not a company wants to be with safety levels,and how frequently a company revisits safetystock assumptions and SKU-level targets, are keyvariables. Degrees of Freedom for InventoryDecisions: The more individuals that have theability to add inventory into the supply chain, thehigher the levels are likely to be. Management of Trade-Offs: Companyspecific decisions about the traditional inventory,transportation, and unit cost trade-offs. The lowesttotal cost will usually have higher inventories thanthe lowest inventory cost option. Forecast Accuracy: The greater the level offorecast inaccuracy, generally the lower levels oftotal inventory.continued - page 8Even Wal-Mart Struggles with InventoryWal-Mart, a company known historically for its inventory management prowess, let inventory growth get out of controlfor a few years.The chart below shows the company’s inventory growth versus sales growth. As can be seen, from 2001 to 2005 (atrend which continued through 2006), the company let inventory growth reach far above its target of 50% of salesgrowth, reaching almost 100% of sales growth in 2004, meaning the company was gaining almost no inventoryleverage from its increased sales. That situation drove the company to launch its “Inventory DeLoad” program in2007, which seems to have paid big dividends in terms of inventory reduction, as inventory growth slowed way down.100%90%80%70%60%50%40%30%20% 10%0%July 20082001200220032004Your Monthly Digest for Supply Chain Information2005www.scdigest.com/letter

THE SUPPLY CHAIN DIGEST LETTERResponding to CustomerDemand with Advanced InventoryOptimization & ManagementSolutionsInventory OptimizationSolutioN ProfileBy David Johnston, Vice President JDA SoftwareConsumer goods manufacturers are no strangers to cyclicaldemand volatility, exacerbated by a challenging economy,with shortening product life cycles, rampant promotionsand markdowns, and a proliferation of purchasing options.Manufacturers have high stakes in inventory management andoptimization, with minimal margin for error or complacency.In today’s global environment, manufacturing successdepends on the ability to operate with a global view. How canmanufacturers effectively synchronize demand, logistics andproduction to mitigate out-of-stocks and excess inventory andrespond successfully to consumer demand volatility?A responsive supply chain is critical in today’s market; realtime data and accurate forecasting fuel supply chain efficiency.Companies relying on fragmented and outdated information,processes and technologies are at risk of losing ground.Forward-looking companies are seeking to strike a balancebetween demand, capacity and profit across their entireorganization. Furthermore, many are making the shiftfrom consensus demand management to profit and revenueoptimization. For this reason, companies are rethinkinghow they approach sales and operations planning (S&OP),including taking a global approach to S&OP rather than adisparate and decentralized process.Increasingly, companies are investing in advanced IT solutionsthat support and elevate S&OP to enable integrated businessplanning. Moreover, they’re selecting solutions that will helpthem adjust to demand shifts and more accurately source,produce and deliver products. This includes fully integrated,scalable solutions proven in an array of applications—frominventory optimization, forecasting and demand planning,logistics and transportation management.Many companies have already deployed sophisticatedtechnology to improve demand forecasting, product lifecycle management, achieve procurement economies of scale,and ensure consistently responsive manufacturing practices,including: The largest meat processing company in the worldrecently leveraged inventory optimization software todeal with consumer demand spikes and generate one viewof demand across its supply chain, sales and marketingoperations.A leading manufacturer of consumer productsimplemented a transportation and logistics managementsoftware that helped reduce transportation costs by 7 to 10percent.A consumer goods supplier to a leading warehouse clubdeployed software to reduce inventory levels, increasesales, boost inventory turn-around and improve forecastaccuracy.www.scdigest.com/letterJDA Software Group, Inc. is focused on helping companies realize real supply chain and revenue management results – fast. JDA Software delivers integrated merchandising as well as supply chain and revenue management planning, execution, and optimization solutions for the consumer-driven supply chain and services industries. Throughits industry leading solutions, leading manufacturers,distributors, retailers and services companies around theworld are growing their businesses with greater predictabilityand more profitably.JDA’s Network & Inventory Optimization solution providesstrategic, end-to-end capabilities to evaluate, design and optimize your supply chain network, whether you are looking toexpand your production and distribution network, or optimizeyour current network and inventory policies. JDA InventoryPolicy Optimization is a multi-echelon solution that helpscompanies determine safety stock levels at various locationsin retail and distribution supply chains so as to achieve theuser-specified fill rate or in-stock targets.Key Customers:Anheuser Busch, Campbell Soup Company, H.J. Heinz,Church & Dwight, Macy’s , K-Swiss, Kraft Foods,L’Oreal, Johnson & Johnson,Kimberly-Clark Corporation, Tyson Foods Inc.BJ’s Wholesale Club, Federated Department StoresCharlotte Russe, Vitamin ShoppeWebsite and Contact Detailswww.jda.com Email: info@jda.comPhone: 800-479-7382Collateral: White Paper: Optimizing Consumer Goods Manufacturingwith Constraint-Based Supply Chain Synchronization JDA Assortment Planning Solution Overview JDA Manufacturing Solutions OverviewAvailable at www.scdigest.com/letterEnterprise-wide architecture can provide 360 degree globalvisibility, whether to factories on-shore or off, logisticssuppliers, distribution centers, and retailers. Intelligentinvestments in global enterprise planning can enablecompanies to gain greater visibility into their entire supplychain and the consumer-centric market, so planning andexecution decisions are accurate demand data. Manufacturersare coming to expect and demand software solutions thatprovide the complete picture—an end-to-end overview ofsupply chain to retail partners.Your Monthly Digest for Supply Chain InformationSCD July 2008

THE SUPPLY CHAIN DIGEST LETTER(Continued from Page 6): Holy Grail. Demand Variability: Highly dynamic demand ingeneral leads to greater inventory levels to maintaincustomer service targets. Supply Variability: The more variable the supply,the more buffer inventory that needs to be held.Obviously, this is a potential issue with offshoring.In general, variability of supply is worse than a longsupply chain in terms of the impact on inventory. SKU Counts: The higher the number of SKUs, thehigher the level of inventory will generally be for thesame dollars in sales.Total Cycle Times: The faster the cycle times,the lower levels of inventory required. Procter &Gamble, for instance, is trying to make its factorymore flexible, with much quicker set-up times, inpart to reduce inventory levels. Level of Supply Chain Collaboration: Themore integrated a company is with suppliers andcustomers to jointly manage inventories, the lowerinventories are likely to be. Vendor Relationships: Companies that havesupplier-owned inventory programs, or just-in-timesupplier logistics centers, will have lower totalinventories on the raw materials/components side. Level of Supply Chain Visibility: The bettervisibility a company has to its network-wideinventory, the lower its total inventory should be.This is part of the promised potential of RFID. Inventory Accuracy: The more accurate acompany maintains its levels of raw materials andfinished goods inventories, the lower the levelof inventory, as planners have better trust in thenumbers upon which they are planning. Order Patterns (Seasonality): Less consistentdemand patterns can lead to higher inventory levels.As an extreme example, some wrapping papermanufacturers build inventory all year to ship onlyin the couple of months before Christmas. Metrics: What gets rewarded? Metrics drivebehavior, and it is no different with inventory. Havea plant that is driven primarily by yield and cost perunit metrics? Expect more inventory, for example.That’s a big list – which explains just how toughinventory optimization really is – and why technologyis so important for inventory optimization leaders.The sheer scope of the variables is more than the bestplanners with the best spreadsheets can manage (SeeUnderstanding Inventory Optimization Technology onpage 1).Nonetheless, using the above list of inventory drivers toassess your level of capability and level of excellencein people, process and technology can help you movefurther towards the goal of optimized inventorymanagement. S DCInventory OptimizationResourcesYou’ll find a wealth of resources on our web site: www.scdigest.com/letter.Including:White papers Video Case studiesExpert columns Supplier brochuresYou’ll find the information and insight you need to betterunderstand Inventory Optimization! Resource web site: www.scdigest.com/Inventory Optimization Resources.phpJuly 2008Your Monthly Digest for Supply Chain Informationwww.scdigest.com/letter

THE SUPPLY CHAIN DIGEST LETTERInventory Optimization: Creating aGreen Supply ChainInventory OptimizationSolutioN ProfileBy Robert Byrne, CEO, Terra TechnologyWhen going “green”, companies frequently focus on easyinitiatives like recycling or reducing packaging material.Despite its popularity, recycling has proven very difficult andthe results of studies looking at its environmental impact areconflicting. Although it reduces landfill and raw materialsconsumption, energy consumption can be as high or higherthan using virgin raw materials. Companies who focus onperipheral approaches are missing the real opportunity, whichis to look for more efficient ways to operate. Efficiency is thekey to maintaining the current quality of life while reducingenvironmental impact and product cost. Avoiding consumingresources up front is far better for the environment and thecompany than figuring out the most efficient way to dispose ofthe products afterwards.In the United States in 2006 there was 1.9 trillion of businessinventory, or about 6,000 for every person in the U.S. Morethan half of this inventory was safety stock, inventory that isheld because companies do not know what their customerswill want on any given day. A second major componentwas goods that were supposed to sell but did not becausesales were not as high as anticipated. Using the advancedmathematical modeling in inventory optimization softwareto determine inventory requirements ensures that only thosegoods that will be purchased are actually produced.To achieve true inventory optimization, consumerproducts companies must model the entire supplychain, end-to-end, to ensure that inventory strategiessimultaneously optimize inventory at all echelons of thesupply chain. Multi-Enterprise Inventory Optimization(MIO) optimizes inventory across all companiesand products in the supply chain, from suppliers tomanufacturers to retailers.By modeling the entire supply chain, MIO generatesan inventory strategy that decreases safety stockrequirements by 10 percent or more withoutcompromising service levels. Easy to use and scalable,MIO also provides root cause analysis for changes insafety stock and simulation capability for improvedplanning and analysis.Key Customers:Procter & GambleJM SmuckerCampbell’s SoupTo achieve true inventory optimization manufacturers mustmodel the entire supply chain, end-to-end, to ensure thatinventory strategies simultaneously optimize inventory atall echelons of the supply chain. Modeling only your ownfacilities ignores the valuable information about demandvariability and inventory policy at your customers andsuppliers and delivers sub-optimal results. Having visibilityto downstream variability minimizes inventory held becauseof the bullwhip effect, and allows you to understand the costsof your customers’ inventory policies.Optimizing the entire supply chain enables manufacturersto create an inventory strategy that reduces safety stockrequirements, decreases unnecessary production of goods,lowers inventory targets and reduces inventory in everyechelon of the supply chain. Inventory is produced as needed,without excess, so inventory lost to spoilage, shrinkage andobsolescence decreases and unnecessary products are notproduced. Materials no longer need to be recycled; they arenot consumed at all.The financial benefits to inventory optimization aresignificant. Employing multi-enterprise inventory optimizationgenerally reduces safety stock by more than 10%, decreasingmanufacturing costs, transportation costs and carrying costs.Profits increase as less inventory is lost to spoilage, shrinkageand obsolescence. If safety stock was reduced by 10% in 2006, 95 billion in inventory would not have been produced and theenergy, raw materials, and emissions required to produce thatinventory would have been saved. S DWebsite and Contact Detailswww.terratechnology.comMarybeth J

Your Monthly Digest for Supply Chain Information THE SUPPLY CHAIN DIGEST LETTER