How much inventory do you really need??Target setting 2.0

Prof.dr. Bram Desmetbram_desmet@solventure.eu

+32.497.58.28.60

be.linkedin.com/pub/bram-desmet/1/788/823/

@bram_desmet

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

How much inventory do we really need??

Company 2: strong in inventory turns but

out of balance

Company 3: betterbalanced but did not

recover to pre-crisis levels

Company 1: betterbalanced & good

rebound after crisis

STRENGTH

BALANCE

RESILIENCE

e.g. reduce cost bysourcing in far East

e.g. increase market share by extendingproduct portfolio

e.g. reduce inventoryby lowering safetystocks

Focus/incentives in a typical productioncompany …

Resulting pressure in the triangle

Aligning the triangleis about maximizingROCE

Top-line

EBIT

ROCE

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

Product Leadershiphighest cost in R&D, marketing, supply chain

Customer intimacythe extra mile comes at an extra cost

Operational Excellencecost leader in every fibre of the organization

service

inventory cost

Higherturns

Lowercost

Higherservice

Product Leadershiphighest complexity, highest risk

Customer intimacycontrolled complexity

Operational Excellence simplicity drives efficiency

service

inventory cost

Higherturns

Lowercost

Higherservice

Product Leadershipemotion beyond functional service

Customer intimacyan extra mile for a premium

Operational Excellenceexcel in the basics

service

inventory cost

Higherturns

Lower cost(excl.COGS)

Higher serviceAs measured by

Gross Margin

Product Leadershiphighest risk with highest potential payoff

Customer intimacyan extra mile at an extra cost and premium

Operational Excellenceexcel in cost and the service basics

service

inventory cost

Higherturns

Higher serviceAs measured by

Gross Margin

Lower cost(R&D + SG&A)

Product Leader

Product Leader

Indirect cost 32-33%gross margin 42-43%

� EBIT of 10%

Indirect cost 32-33%gross margin 39-41%

� EBIT of 7-8%

Product Leader

Indirect cost around 32-33%For a gross margin 42-43%

� EBIT of 10%

Product Leader

Turns of 3 for an Indirect costaround 32-33%

For a gross margin 42-43%

� EBIT of 10%

Notice Company 3:

Indirect cost around 18-19%For a gross margin 35%

� EBIT of 16-17%… because of underspending!

service

inventory cost

Higherturns

Higher serviceAs measured by

Gross Margin

10%

20%

30%

42%

36

9 16%24%

32%

Lower cost(R&D + SG&A)

Example Benchmark for Technology Companies

Product Leader

� EBIT of 10%

Cost Leader

CostLeader

Indirect cost 22-27%gross margin 25-30%

� EBIT of 3%

Indirect cost 23-25%gross margin 21-23%

� EBIT of -2% to 0%

Cost/Opex Leader

Indirect cost 22-27%gross margin 25-30%

� EBIT of 3%

Opex/Cost Leader

Turns of 6-8 for …an indirect cost 22-27%

gross margin 25-30%

� EBIT of 3%

Product Leader

Turns of 3 for an Indirect costaround 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

>>

Product Leader

Turns of 3 for an Indirect costaround 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%

Product Leader

Turns of 3 for an Indirect costaround 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%

service

Higherturns

Higher serviceAs measured by

Gross Margin

30%

36%

42%

34,5

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

Product Leader

Turns of 3 for an Indirect costaround 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%

Product Leader

Turns of 3 for an Indirect costaround 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%

service

inventory cost

Higherturns

Higher serviceAs measured by

Gross Margin

30%

36%

42%

34,5

9 26%29%

32%

Lower cost(R&D + SG&A)

Benchmarking Approach

1. Analyse grossmargin 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 byensuring the same

EBIT/Inventory$ performance

Gross Margin SG&A R&D Strat

High High High Product

Medium High Low Customer

Low Low Low Cost

• 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 comparableROCE

Thank You!!

Prof.dr. Bram Desmetbram_desmet@solventure.eu

+32.497.58.28.60

be.linkedin.com/pub/bram-desmet/1/788/823/

@bram_desmet