Wednesday, September 17, 2014

“Inventory is Evil”… Well done Tim, Apple Is Yours.

"You kind of want to manage it like you're in the dairy business. If it gets past its freshness date, you have a problem" says Tim Cook, CEO of Apple Inc.

Albeit not really a “product visionary” like his predecessor, Tim Cook more than makes up for it with his impeccable inventory management and operation skills. In 1998, when he joined Apple Inc. as Head of Operations, the distribution of the company was a mess. One of the major steps taken by Cook and Jobs initially was to exit the manufacturing business and begin outsourcing the production. A bold move, one would say, considering Apple was going through a decline in revenues and dwindling profits made it harder to invest in new ventures. Accumulated inventories worth $1,775 million were lying around in Apple warehouses in 1995.

Another step, bouncing off the outsourcing the manufacturing, was to cut down on the number of component suppliers from 100 to 24, a masterstroke in hindsight. It made companies compete for Apple’s business and gave Apple leverage in component pricing negotiations. Additionally, warehouses were reduced from 19 to 10. He focused on cutting down the inventory in a big manner and by the end of his third quarter at Apple, the inventory was down by 80%! Cook’s strategy of “slash inventory, shut warehouses, run manufacturing close to the bone” worked wonders for Apple and immediately had Steve Jobs looking at Tim Cook to succeed him. In 1998, Apple Inc’s profits rose to $309 million, compared to the $1045 million loss it made two years ago. The Macintosh was a particular gainer of this strategy, and Cook cut the production process for making an Apple computer from four months to two.

Today, although most people credit Apple’s success to their revolutionary products, few know that a key role in it becoming a leader is its exceptional inventory management. A study released by Gartner shows that Apple turns over its inventory about 74.1 times a year, which is once every 5 days. 




In terms of “Inventory Turnover” (indicates how many times the current inventory could be sold and replaced in a certain period) The higher the Inventory Turnover, the better.



A second indicator is “Days of Inventory” i.e. how many days would it take for a company to sell off all its inventory. In other words, it is the amount of inventory that a company holds. The lower the Days of Inventory, the better.



In terms of both these vectors, Apple rules the roost. Dell comes in second despite the fact that it prides itself as working on a build-to-order model.




Having inventory on the shelf is of little use to a corporation. It loses its value (about 1 to 2 % every week) and eventually needs to be discarded. Learning from the case of Apple and Tim Cook, we can conclude that efficient supply chain management is key to companies reducing avoidable costs and in turn increasing profit margins. 


REFERENCES:

1) http://blog.tradegecko.com/apple-had-the-best-supply-chain-in-the-world-for-the-last-four-years-here-is-what-you-can-learn-from-it/

2) http://cporising.com/2012/09/19/the-strategies-that-propelled-tim-cook-from-cpo-to-ceo-1/

3) http://appleinsider.com/articles/12/06/18/under_tim_cook_apple_cracking_down_on_supply_chain_management

Real Life Bayonne Experience

As I was writing up this week's case study on Bayonne, I kept having flashbacks to a previous job. I served as the Greek Manager and later sales manager for a local photography company. The company (who I won't name out of respect) took youth sports photos, fraternity and sorority composite and bid day photos and graduation photography. The owner was attempting to break into the school photo market, which was exceedingly tough due to the presence of well established national companies like Lifetouch.

Over the course of five years working for this company I made a number of observations on improvements that could have been made. We needed a true CRM client system, not spreadsheets. We really could have used actual Microsoft Office, and not tried to get by with OpenOffice. Access to a computer with photoshop was a real issue for me to get my work done. We frequently had soccer or hockey photos that coincided with the Greek Schedule, and I'd have to work across 3 computers that were shared by other employees (2 of them with poor computing power) to complete my work. Our office was cramped (old, 2 story victorian house that had been converted to an office) and everyone was constantly underfoot everyone else as we tried to get orders out the door. The walls were a depressing grey color, and the carpet was stained.

Some would have helped production timelines. Some would have just made morale better, but I also came to understand while some of these ideas were easy for me to make, they were not easy for the company's owner to invest in, especially given the shifting and more challenging market the photography business found itself in more regularly. Digital photography cut into huge parts of our markets. My position as Greek Manager used to involve many more duties, and our company would frequently "party pic" at formals and other special events. With the advent of smart phones and Facebook, the market for candid event photography had completely disappeared.

Formal Bid Day photos became more and more of an issue, especially ensuring that we were under contract annually. Nice, 8"x10" formal photos that took 3 weeks or more to get started to become an issue for the girls. But as manager, I had to do data entry on all of the orders off of handwritten cards. That took time. as did ensuring that these large groups (upwards of 140 members) had their orders batched properly at our printer we contracted with (located in another state).

When it came to the composite boards, batch production became a fine art or a total disaster. 4+ photos of each girl, 140 members per group had to be edited and uploaded for them to order. I needed to batch the "chosen" photo for the board in a particular way for the board producer (we didn't build the boards, another company did). Mock ups were made and would go back and forth, back and forth with the chapter contacts to ensure for no errors before production. Shipping was at least $100 each shipment, so my boss wanted as many boards as possible shipped together. Then I had to arrange with the photographers to borrow the van to deliver the boards or coordinate with them to drive the boards to chapters located in other parts of the state. I eventually got so frustrated and overwhelmed by the lack of resources and chaotic nature of the position that I quit.

Like the situation at Bayonne, the company I worked for had production capacity issues, upper management inserting themselves into the production process, and clients that were overly demanding/unreasonable in their expectations for product delivery and notoriously slow in responding to emails. It was a really frustrating experience and while it was valuable work experience, it really made me understand what kind of work I did not want to spend my time doing.

Inventory ‘Auto Replenishment’ Management

What is the one thing customers of  retail space are disappointed to see? To see that the favorite item  they are willing to purchase is ‘Out of Stock’. Retail vendors need to frequently replenish their inventory to make sure they don't run out of products listed in their website of store. However, with a recent trend in ‘Auto Replenishment’ , there has been a new trend set to deliver the products to the customers at frequent intervals and at a much subsidized price.

Let us take an example of goods we use very frequently. In this case, we know how often we use it and could plan around the ordering of this product. With the new trend of ‘Auto Replenishment’, E-retailers are able to sell the product to customers at a much lower prize for items ordered in bulk. This in turn is giving them the benefit to contact manufacturers and set expectations for sales. It is a perfect arrangement for all the parties involved in the supply chain network.


Dollar Shave Club is a Venice, CA based company that delivers razors and other personal grooming products by mail. The company positions itself as a cost-effective and convenient alternative to retail chains. It delivers razor blades on a monthly basis and offers additional grooming products for home delivery. How does a company like this manage its inventory?


As stated by the CEO of the company, he believes that the strategy to manage your inventory should go hand in hand with the growth of the company. As a startup or a growing company, the challenges can be divided into three stages.

Stage 1 - Launch:
In this stage, the company focussed on managing everything out of their office. For a company, which received around $350k funding, they were gearing up to start shipping their first customer products.. In this stage, it was worthwhile for them  to assort the product based on the target customer.
Stage 2 - Survival
When the company was in the survival stage and was shipping to customers, they outsourced this process to a warehouse and worked with a third party logistics partner to do this. Since, this is the growing stage of your business, it was important for the company to focus on other aspects.
Stage 3 - Growth
When the company was finally established and shipping to various customers, with demand forecasting techniques, they will be able to assess demand. In this stage, with the flowing customer orders it helped establish themselves as a serious customer to the third party logistics and in the process, drove down costs.

With the above strategy, the startup with bare minimum resources is able to ship tens of thousands of razors to customers in the entire North America region.

References:
http://www.dollarshaveclub.com
http://lifehacker.com/5903771/forget-dollar-shave-clubbuy-the-same-high-quality-razors-for-a-third-of-the-price
http://en.wikipedia.org/wiki/Dollar_Shave_Club
http://www.forbes.com/sites/gregpetro/2013/04/02/next-gen-retail-hointer-bonobos-and-dollar-shave-club/

Inventory management in retail industry : Store Clustering ?

Inventory Management in Retail Industry.

Walmart article tells us how companies measures success in terms of inventory management. Walmart focused more on reducing the operating costs instead of continuing to deliver high service to the customers.

Walmart has one of the most efficient and sophisticated supply chain management system. It has high level of automation for managing inventory orders. The article tells us that no matter how sophisticated the automated system is, there is no replacement to the limit of manual labor involved in stocking the shelves from basement/ back stores.
Analyst says that Walmart might lose $1.29 billion to $2.58 billion if they do not increase the staff. Walmart is banking on the hope that they can catch a break with stocking the shelves at night time when sales are comparatively low. It is interesting that Walmart thinks that saving  around $740 million in operating expenses is a better trade off than foregoing $1-2 billion sales.

Every company has its won inventory management system. But I believe that in the retail industry, companies who deal with Fashion genre are the ones who have to constantly alter their inventory management strategy. Since, the market demands can be erratic for fashion stores. For example, how many different varieties of sweaters do you keep in the stores? And how many of each of these products do you keep in the stores? How do you manage inventory for such products with fluctuating demands?   

Consider a company called “The Limited”. The company deals with women fashion apparel. It has 242 stores all over US. All theses 242 stores fall under Brick and Mortar category of operations. Inventory management for this company depends on how they cluster their stores. I believe “Store Clustering” is another vital element that affects inventory management strategy. Common questions for such company which deals in multiple stores is how do they segment their products among these stores. Should they focus on volume based clustering?  As of now their business is run on a volume based clustering or grouping stores based upon store sales by department.  While this approach can help sales and margin by eliminating slow selling product from lower volume stores and added elevated assortments in high volume stores it may be missing potential of product and location attributes that are below the department level. 

To avoid this problem should they focus on another way to cluster their stores? Should they try key attributes like demographics and locations to cluster their stores? 


References:

An “Apple” Inventory Management lesson a day, keeps the competitor away!

Inventory management is a significant factor in deciding whether you have an edge over your competitors or not. If you move your inventory quickly i.e. reduce the days in inventory or increase the inventory turnover, you can increase the free cash flow. Because you can get your inventory moving at a faster pace, you can charge less, which in-turn increases velocity and lower costs more.

When you talk about Apple, you think of Steve Jobs, engineering precision and perfection, compact and beautiful packaging and products that redefine categories. But, in the backend there is an extremely efficient inventory management process that gets the products to the customers while incurring Apple the lowest cost possible. 


Apple had a very messy supply chain. Tim Cook stepped into the picture in 1998 and its supply chain has kept on improving since then. Their “Days Inventory" in September 1999 was about 4.0. It decreased for a few years to 2.5 in 2002. Then it again started increasing because of addition of products in apple’s collection. And now in the September of 2013, it was again decreased unto 4.37 days! They beat Dell at their own game. It performed twice as better as Dell and 5 times better than HP in this front.

Source: http://www.aaii.com/objects/get/93.gif

Source: http://financials.morningstar.com/ratios/r.html?t=AAPL&region=usa&culture=en-US

This means, at any given time, Apple only had about 4.5 days worth of inventory on hand at its stores. That is a magnificent figure for a tech company. Only 1 more company, McDonalds was beating it at the Inventory Turnover rate, which is quite obvious since McDonalds seeks perishable goods.

So, the question here is “How do they do this?”

Technology inventory loses its value as it becomes old. If a competitor announces a better new product and if you have lots of inventory on hand, it is going to take a hit. According to Tim Cook, inventory loses its value about 1-2% value each week. So he wanted to move the inventory faster, which would also save storage costs. He believed that “inventory is evil”.

To alleviate this problem, he cut the number of suppliers from 100 to 24. This increased competition amongst the suppliers to get business from Apple. Moreover, he also shut down 10 out of the 19 warehouses that Apple had at that time. This reduced the stocking costs. Inventory dropped from a month to six days in just a few months.

Moreover, instead of manufacturing their own products, they outsource it to China to its main manufacturer Foxconn. The huge amount of labor availability not only reduces the cost, but also reduces the time to manufacture. Once manufactured, Apple ships products to its customers directly through the manufacturer. This saves time and money.

Moreover, Apple also has a few other “tricks” up its sleeve that it has been using since the Steve Jobs era to take on its competition. Apart from making its suppliers compete amongst themselves for providing cheaper and higher quality materials, it also buys out inventories of important technology components to create shortages in the market and during holidays seasons or peak periods, it also buys out all available air freight and thereby leaving its competitors starving. 

In 1997, to make sure Apple’s new blue iMacs reach its customers in time for holiday season, Steve Jobs bought out all the available holiday air freight space by paying $50 million. That is the kind of muscle that Apple has the audacity of using!

Apart from this, it also takes a fair amount of forecasting for Apple to balance the supply and demand. But, Apple has built such a reputation that even if it gets the numbers off, people are still willing to wait weeks to get their hands on an Apple product. Apple is always ready for unexpected fluctuations in demands. Especially during new product launches when they don’t know how the customers will react.

The iPhone 6 sold out in a couple of hours of the start of pre-booking! People will now have to wait a few weeks to get the new iPhone 6. Apple must be beefing up their factories in China, maxing out on its capacity to make sure all its customers get their iPhones delivered on time. With such a stellar ecosystem in place for Apple, it is going to take another company a lot more effort than they can imagine to compete against Tim Cook and his army!


References/Sources:










The “ABC” of Inventory Management

A blog post by Preeti Havaldar

The Pareto principle (also known as the 80-20 rule) states that – 80% of the effects come from 20% of the causes. This rule can be applied for product sales as well. As per studies, 80% of a company’s sales come from 20% of its products. From an inventory management standpoint, it is important for a company to maintain inventory for these popular 20% of the products that account for the most sales.

ABC Analysis
ABC analysis is the inventory control technique that builds up on the Pareto’s principle. It involves dividing the products in 3 categories – “A”, “B” and “C”, where category A contains most popular or profitable 20% of the products and category B and C contain the rest (can be divided as per the company’s preferences). While using ABC analysis, the company should focus more on managing inventory for category-A products to ensure they fulfill the demand.

The A-B-C classification
Many successful businesses use the ABC inventory management principle to classify products in order to stock them up for prompt sales. Let us look at how General Electric classifies its products into categories. The first attempt at classification was made by H. Ford Dickey in 1951, when Ford suggested that category of a product should be based on sales volume, lead-time and cash flow. Category A would include items with largest sales and longest lead time and category C would include items with low sales.

Suggested policy guidelines for A , B & C classes of items
Category A
Category B
Category C
Very strict cons. control    
Moderate control
Loose control
No or very low safety stock
Low safety stock
High safety stock
Phased delivery (Weekly)
Once in three months
Once in 6 months
Weekly control report
Monthly control report
Quarterly report
Maximum follow up
Periodic follow up
Exceptional
As many sources as possible
Two or more reliable
Two reliable
Accurate forecasts
Estimates on past data
Rough estimate
Central purchasing /storage
Combination purchasing
Decentralised
Max.efforts to control LT
Moderate
Min.clerical efforts
To be handled by Sr.officers
Middle level 
Can be delegated


ABC inventory management
The ABC classification also allows the company to apply different management techniques depending on the categories. For instance, the A-inventory should be counted regularly counted to ensure availability whereas C-inventory can be counted less often as it has items of lower importance. Also most of the storage costs should be used for A-inventory, whereas the least selling items from C-inventory can be removed to reduce storage overhead.

Role of demand forecasting in inventory management
Demand forecasting techniques can provide powerful insights to predict the demand for products and the products can be reclassified based on the forecast. For instance, if in a retail store, a torch is classified as category C today, in case of emergency, the torch can be reclassified as category A as the sales would spike up suddenly.

Inventory management is a crucial part of any supply chain as it accounts for internal costs to the company. Hence planning inventory is the most important phase of supply chain. Information systems and software can be leveraged to achieve inventory management efficiency.


Assessing Company Health with the Inventory Turnover Ratio

Assessing Company Health with the Inventory Turnover Ratio

Among other measures of company success, a high level of inventory turnover is indicative of a firm that effectively manages its supply chain by minimizing the level of excess stock at any given time. The benefits of a high turnover rate are twofold: first, there is a high opportunity cost associated with keeping revenue invested in inventory as opposed to other, more profitable financial instruments.  A company that invests 25% of its revenue in keeping inventory is making a relative loss to a company that can keep only 15% of its revenue in inventory and invest the 10% differential in stocks or bonds. Second, in rapidly evolving industries —like technology or healthcare— inventory may quickly become obsolete. This rapid depreciation of held inventory, especially in the face of disruptive innovation, can be crippling for companies that fail to adapt to shifting market conditions.[1]

To dig a little deeper into the validity of the inventory turnover ratio as a measure of company health, we have to examine its correlation to other health indicators. We will examine the eight largest firms by revenue in the information technology sector in the US.[2][3] For the reasons outlined above, the IT sector is often touted as the poster child for an extremely high average industry turnover ratio. [4] To make our assessment will consider year-over-year operating income percentage, year-over-year free cash flow growth percentage, and operating margin percentage as our basic indicators of company health. While there are a myriad of potential metrics to choose from, these all do a good job of capturing company growth, while controlling for size.

Before diving into the numbers, it is worth noting that Apple is recognized for having not only one of the best turnover rates in the Information Technology sector, but one of the best turnover rates of any company in any sector.[5] While Apple is obviously an industry leader in many aspects of the Information Technology sector, is its high level of turnover correlated to our selected measures of company health more than for other tech industry giants?

Indicators of Company Health


Company
Turnover Ratio (avg. '04-'13)
Turnover Rank
Operating Income %
OI% Rank
Avg. FCF Growth %
FCF rank
Avg. Operating  Margin %
Rank
Average Rank (b)
Apple
68.74
1
56.3
1
116.8
1
21.69
4
2
Amazon.com
10.61
6
15.64
4
No Data
N/A
3.65
7
5.5
Google
48.2 (a)
2
48.4
2
61.48
2
29.77
2
2
HP
11.85
5
20.55
3
14.89
3
5.64
6
4
IBM
20.71
3
7.05
6
3.87
6
15.73
5
5.67
Intel
4.89
7
6.36
7
8.37
5
25.7
3
5
Microsoft
12.55
4
14.1
5
8.62
4
35.53
1
3.33


a) Google only has turnover ratio information for 2012 and 2013.
b) Average Rank is the mean of all non-Turnover Ratio ranks.



Corporate Culture in Inventory Management: Walmart vs ALDI

Corporate Culture in Inventory Management: Walmart vs ALDI

The article “The Trouble Lurking on Walmart’s Shelves” speaks to the issues around Walmart’s culture and work environment and how these areas are influencing what Walmart is known for, supply-chain management. As an organization so powerful it can mandate its suppliers to move to Northwestern Arkansas or else lose a contract, the superstore continues to be in the news for its poor wages, as well as its job-cutting practices that lead to further bad news for the company.
As discussed in “Why Aldi is Giving Walmart a Run for its Money,” while Walmart cuts jobs and focuses on lowering overhead cost, another low-price retailer is making significant gains in the industry. ALDI, a German-based discount food-retailer, is offering starting salaries at $75,000 for District Managers with incredible additional perks, including leadership development for recent graduates. These District Managers are expected to learn fast and endure a year-long training practice, where they learn all the jobs within the store including operational details and inventory management. While learning these skills, District Managers also internalize and learn how to turn the broad expansion strategy that ALDI is focusing on into a daily operation.

ALDI understands that with strong leaders, comes strong growth patterns. People who will work harder and smarter when they are compensated for it. District Managers, after 4 years, can earn a salary of up to $100,000. That’s an incredible incentive to offer for recent graduates who are looking to build a career and learn skills along the way. Though Walmart’s delivery system is still considered one of the most advanced supply-chain systems internationally, if the product cannot make it onto the shelf, does that matter? Walmart’s culture of cheap prices and beating the competition, coupled with their exceptionally efficient supply-chain system, has made short work of competitors in the past. But is Walmart becoming inefficient in its market to beat out the competition at all costs? If the ALDI culture values its workers more, does that also mean that in the long-run, they could value their customers more highly as well?

Forbes Online - "Why is ALDI giving Walmart a run for its money" http://www.forbes.com/sites/derosetichy/2013/08/13/why-aldi-is-giving-walmart-a-run-for-its-money/