Winning the Inventory Battle in the Consumer Products Industry

The Consumer Products Industry experienced a 32% growth in active items in 2015 and that trend has accelerated over the last 18 months.¹ As product life cycles shorten, product portfolios expand and the channels through which products are sold continue to increase. In the US alone, there are 30,000 new consumer products launched every year. Depending on the source, it is widely reported that anywhere from 50 to 85% of new products fail to achieve success. According to an article in the Harvard Business Review, many of those failures are due to initial misreads of market conditions (Why Most Product Launches Fail).

From a supply chain standpoint the battle for new product profitability relies largely on two key capabilities, developing accurate new product forecasts and optimizing new product inventory. Mastering these two capabilities can yield large benefits. Gartner² recently reported that for every 1% of forecast improvement a CP company can achieve:

• A 2.7% reduction in finished goods inventory (days)
• A 3.2% reduction in transportation costs (percent of sales)
• A 3.9% reduction in inventory obsolescence (percent of inventory value)

While Nucleus Research found that companies that have the capability to optimize inventory across their multiple echelons of their supply chain can reduce inventory holdings in the range of 10% to 30%[1].

Capability 1: Accurate New Product Forecasts

New product forecasting has always been difficult but solutions available today can help improve your chances to capture that early product profit margin. What is often overlooked is the need to apply different forecasting techniques at different stages of a product’s lifecycle. For instance, new products are rarely completely new. Often new products have similar characteristics to existing products or are a full or partial replacement for existing products. In these cases, it is often beneficial to base the new product’s early launch forecasts on launch profiles of previously introduced products. This form of forecasting is called Derived Modeling. Grouping similar products based on product and market attributes can lead to the generation of a set of demand profiles that can be used as a starting point for the introduction of new products. As demand signals come in during the launch phase curve amplitude can be adjusted or, when demand takes a different path, a completely different curve can be selected. Once there is enough demand history, the forecasting technique can be switched to a statistical model.

Capability 2: Optimize New Product Inventory

Multi-Echelon Inventory Optimization (MEIO) allows a planner to model inventory across the end-to-end supply chain in whatever form that inventory takes (raw, WIP, finished goods). Often the hardest part of a new product launch is to determine the best locations to pre-position product. MEIO will determine how much inventory to position and where. As actual demand comes in, MEIO will recommend how to adjust inventory positions to maximize new product availability while minimizing the total required system inventory.

Right-sizing inventory is critical both during and after product launch. Too much inventory can create excessive discounting, obsolescence and write-offs. Too little inventory or inventory in the wrong location can cause missed sales opportunities. Both have a direct negative impact on revenue. To prevail over demand uncertainty, planners must confidently build and position the optimal amount of inventory.

Traditional rule-of-thumb, ERP or spreadsheet-based approaches to inventory are error-prone, static and don’t take variability into account. MEIO can adjust based on real-time demand signals and recommend holistic inventory adjustments across the entire network by recognizing the interrelationships between supply chain stages. Only an inventory optimization solution can “process the uncertainty” of demand in a time-phased forecast spanning months, with different phases displaying different levels of uncertainty.

Winning the inventory battle, especially in the area of new product introductions, comes down to two foundational but critical capabilities: forecasting and inventory management. Do you have a hard time accurately forecasting demand for new products? Does your inventory management for new products tend to go through overbuy and overcut cycles leading to suboptimal profits?

Related Content:

• eBook: The Consumer Products Supply Chain of the Future
• eBook: The Advanced Inventory Optimization Handbook
• White Paper: Eight Methods that Improve Forecasting Accuracy

[1] Consumer Products Industry Supply Chain Outlook, 2016, Gartner, July 6, 2017 (https://www.gartner.com/document/3188320)

[2] Win the Business Case for Investment to Improve Forecast Accuracy, Gartner, May 3, 2017 (https://www.gartner.com/document/3701817)

[3] IO Technology Value Matrix 2017, Nucleus Research, April 2017 (https://nucleusresearch.com/research/single/io-technology-value-matrix-2017/)