Chainalytics helped a global food manufacturer optimise its inventory levels for a number of SKUs in India and China resulting in reduced working capital requirements and less product waste.
Since food and beverage products have a short shelf life, there’s a big upside to getting inventory levels just right. So when our client, a Fortune 500 food manufacturer, noticed that their days of on-hand inventory for some SKUs was encroaching upon the shelf life of those products, they knew inventory levels were too high, and they needed to improve their inventory planning process.
Specifically, regional executives wanted to understand how to calculate reasonable inventory targets, identify the impact of certain structural and operational parameters on achieving those inventory levels, and implement and sequence the necessary changes. They also wanted a framework to support this inventory decision-making process on an ongoing basis.
Crunching the numbers
The first step in the project was to collect, assess, and validate the company’s current inventory performance. This baseline assessment uncovered key areas where service levels were falling short due to a variety of operational inefficiencies as well as inventory overstocks and sell-outs. Chainalytics then leveraged its proven inventory planning methodologies and product segmentation framework to identify optimal inventory levels across the different product segments and channels.
Getting hypothetical
To help the company fully understand what was driving its recommended inventory targets, Chainalytics developed a custom tool with “what if” capabilities which allows users to change inputs like demand, lead time, and service levels (i.e., fill rates) to see the potential impact on cost, and working capital.
The what-if tool has an MS Excel front-end and uses the R programming language for data processing and computation. This combination of open source and commercially available tools provides a familiar user experience for the planner and is easy to maintain internally by the company’s IT department. Working with the manufacturer’s planning team, Chainalytics supported an initial showcase/pilot of the tool to later roll-out to the rest of the planning group.
Problem solved
This inventory target setting engagement delivered many benefits for the manufacturer, including:
- Product Segmentation: The client company is now able to set custom break-points for velocity and understand variabilities as well as segment based on unit standard costs. With full visibility into how SKU demand behaves based on velocity, variability and cost, the manufacturer can set its desired case fill rate setting in each individual product segment.
- Inventory Target Setting: The most important output of the tool developed by Chainalytics is the calculation of Target Stock. Intelligence into ideal levels of inventory to meet demand is broken down into “cycle stock” — which is the required level to fulfill demand—and a “safety stock”—which buffers against volatility in demand or supply. Together, these numbers ensure the manufacturer will be able to satisfy demand without running out of stock or carrying excess inventory.
- What-if Reporting: Chainalytics’ solution gives the manufacturer the ability to compare scenarios by location, segments, SKUs, etc. and to create waterfall/bridge reporting for sensitivities. The company can now easily calculate how to achieve desired output by making changes to multiple inputs. Variances in that output can easily be explained by identifying which inputs were altered.
- Ongoing Analysis: The tool delivered by Chainalytics can be used at regular intervals to account for changes in the future. This allows the company to recalculate inventory targets several times throughout the year based on the planning cycles to keep its operations optimised for changes to real-world scenarios as they occur.
Working with hundreds of distributors across India and China to deliver products to retailers requires accurate and reliable insights into the drivers of inventory. Our client is now equipped to plan inventory for efficient distribution without waste.
