In a previous posting, I wrote about how Kraft leverages downstream data to drive supply chain collaboration, based on a talk given by Ron Volpe, Customer VP of Supply Chain at Kraft Foods, at the CSCMP Annual Global Conference last September. In that article, I briefly mentioned that Kraft has truly audacious inventory reduction goals, which is what I want to focus on today.
Kraft’s goal is to reduce its extended supply chain inventory down from 80 days to 40 days of inventory within 5 years. What Kraft means by the extended supply chain, and where that inventory resides, is shown below.
Further, Ron believes Kraft can cut inventory across the extended supply chain in half without making major changes to manufacturing or product line depth, like cutting production line changeover speeds or reducing the number of stock keeping units. Leveraging downstream data will be critical to achieving this goal.
In standard consumer goods to retail supply chains, the manufacturer has safety stock in its warehouse based on historical demand as represented by shipment data. The retailer does the same. If the two companies can move to a vendor managed inventory arrangement, then that inventory slush fund can be substantially cut. Now the safety stock targets reflect historical demand placed only at the retail distribution center.
But there is still a safety stock trigger that exists at the retail DC. Instead of reacting to true consumer demand, retailers may well be shipping to stores that do not need the inventory. How can that be? Why would a store place an order on the DC if it did not need the product?
The sad truth is that inventory accuracy at the store level is frequently appallingly bad. The store level category manager walks around with a clipboard, sees voids on the shelf, and assumes that the shelf would be stocked if there was inventory in the backroom. But, finding inventory in a cluttered store storage area is not easy. It is often the case that a consumer goods manufacturer with visibility to inventory in the retailer’s DC and the store level sell-through data, has a better understanding of what the true inventory situation at the store level is.
Using downstream data allows supply chain partners to cut inventory across an extended supply chain in new ways. But it is not easy. And to truly get to a situation where the bullwhip effect has been tamed, retailers also need to do their share of the heavy lifting.
As we have always said, what gets measured is worked on and how it gets measured will determine the solution. Today, a manufacturer gets “credit” for a sale whether the sale is at the wholesale, retail, or safety stock level. Therefore, there is always pressure to make a sale beyond needs or, as some would call it, “stuffing the channel”.
So, what if we turned the measurement on its head. No one in the value chain gets credit for the sale until it is sold to a using consumer? With that measurement, the great work Kraft is doing above would get accelerated and immediately supported.
Not sure how that would work with GAAP etc. but I do know it would align goals and objectives of inventory management across the extended supply chain!