CPG Supply Chain

Where Optimization is a Part of the Package

Sensitivity to inventory is higher at consumer packaged goods (CPG) manufacturers than in almost any other industry due to the high customer service level targets (often 98% or more). Evaluating demand variability is made more complicated by promotions and seasonality, and SKU proliferation of identical materials in different packages opens up both the potential as well as the pitfalls of risk pooling.

Inventory is not only difficult to calculate for CPG manufacturers, but tens and sometimes hundreds of thousands of SKUs make it virtually impossible to manage without a tool — no spreadsheets here. Many ERP systems have built-in single-stage safety stock calculators which take a few shortcuts to try and keep the situation under control, but these shortcuts end up overstocking inventory at some locations while allowing stock-outs at others. Firefighting can overcome this in the short term, but performance and confidence in the supply chain suffers.

How should you develop inventory plans that meet global customer demand while balancing financial and operational constraints?

A Real Model for Better Planning

With SmartOps Enterprise Inventory Optimization (EIO), CPG companies like yours can deliver as good or better customer service using significantly less working capital. With SmartOps EIO you can:

Plan Granularly Against Supply, Production and Demand Uncertainty. Uncertainties; disruptions; variances in forecasts, lead times, and capacity over time. These are critical to the performance of your supply chain, but vary significantly from one SKU to the next. Often, your planning group will aggregate their performance across SKUs, warehouses, and time periods. They often demonstrate that on average the plan was correct, but in reality the performance of your supply chain suffered at every single location, with slow-moving inventory in some places and stock-outs in others.

EIO’s stochastic process engine uses advanced algorithms to account for uncertainties in inventory drivers — customizing the calculations all the way down to the item, location, and time period level. It’s like ABCD classification… where every SKU has its own analysis. An analysis that is updated continually to take advantage of the most recent forecasts and network structure changes.
Analyze and Optimize — Even in Complex, Multistage Supply Chains. It’s never easy to keep a supply chain optimized across multiple stages on a continuous basis. Each has its own mix of raw materials, production, assembly, postponement, packaging, and inventory-planning-distribution-retail stages, but there’s significant interaction. To what degree should you postpone inventory to take advantage of risk pooling, or is it more effective to hold additional safety stock towards the customer? Companies not using SmartOps either manually set internal safety stock targets, or use an all-or-nothing to deliver 100% service levels or hold no internal safety stock. Clearly this isn’t much of an improvement from decades-old rules of thumb.

SmartOps EIO uses a multistage modeling approach that considers and calculates the relationships among your inventories, service levels, capacity, and costs — across all stocking locations and stages/ echelons. This makes it easy for planners and analysts to focus on where to create the most impact.
Consider Capacity Constraints in Inventory Planning For Added Efficiency. There are a variety of capacity constraints you’re not considering today. Perhaps some items can only be delivered in pallets or full trucks. Perhaps certain product lines with periods of high demand mean inventory is pre-built. Perhaps similar products in your supply chain need to be run in sequence, due to production changeover costs. Traditional approaches ignore batch sizing, not recognizing that some of the batch can do double-duty as safety stock.

SmartOps EIO helps you determine optimal target inventory positions. It breaks inventory down based on purpose — safety, cycle, in-transit, pre-build, and merchandising stock requirements — and understands when and how inventory can do double-duty. EIO coordinates capacity, inventory, demand, lead time, and product availability variables — making EIO the most robust inventory optimization solution on the marketplace.
Take it up a Notch with Balanced Customer Service Levels. CPG companies are often measured and compensated using very explicit customer service targets. In the past, service level targets have been set across the board, holding all SKUs to the same target. But isn’t it “cheaper” to deliver higher service with items with lower demand variability? And how should volume, value, and margin play a role?

Leading CPG companies like Kellogg’s are using SmartOps to balance customer service levels, setting high targets at “cheap” SKUs and lower targets at the more “expensive” ones. They deliver a blended service level that exceeds customer requirements, and use significantly less working capital than setting the same targets across the board. These service level optimizations are blended with their enterprise inventory planning to deliver even better financial and operational results from their supply chains.

SmartOps Enterprise Inventory Optimization (EIO) fills a persistent gap in the supply chain planning landscape for CPG companies. It generates improved inventory targets into existing business processes:

Across all components and end-items/ finished goods
For all locations
For each time period
For the reasons you might need to carry inventory (safety stock, cycle stock, pre-build inventory, in-transit/pipeline stock, merchandising/ dealer stock)