Sales Guides: September 2012

Monday 24 September 2012

Order Optimization: Smaller (standard) order quantities, more full-pallet orders AND reduced retailer inventory

If you work in the Supply Chain between CPG and Retail this probably sounds too good to be true, but stick with me and I'll show you a win:win opportunity.

Background

When CPG product leaves a manufacturing facility, much of it is packed into corrugated cardboard cases. Multiple cases of the same product are placed tightly together into layers on top of (typically) wooden pallets. (To hold them together in transit they are then completely wrapped in a stretch-film not unlike the plastic film you may use to cover leftovers in your refrigerator)

Ideally, this is the last time the CPG company wants to touch these cases as manual handling is expensive. If customers order whole pallets, the product can be quickly and cheaply shipped by operators using lift-trucks and just as cheaply unloaded at the customers facility.

When a customer orders in quantities other than full pallets some additional handling is required. There are varying levels of automation available though much of this is manual: a warehouse operator will physically "pick" individual cases and "pack" them onto new pallets. When the customer receives this product they have a more difficult, expensive and error-prone job to figure out what they have received and put it away.

So, why do customer not just order full pallets? Imagine that they average weekly demand for a product at a customer warehouse is 4 cases. The pallet pictured above actually has 48 cases on it, so a full pallet has enough inventory to last about 12 weeks. That's a lot of inventory and the amount of money a Retailer has tied up in their inventory is a big driver of their profitability and stock price.

So, the standard order quantity agreed between a Retailer and a CPG is a big driver of handling costs and Retailer inventory cost.

The CPG wants to ship more orders as full pallets (and reduce their cost of handling).
The Retailer might appreciate a reduction in handling costs when receiving full pallets but they are heavily focused on reducing their own inventory; a key driver for their financials and stock price. They can't do this by ordering more than they need.

This lack of alignment means that discussions around "standard order quantity" ( I'll call it "SOQ" from here onwards) often end with a win:lose situation.

Finding a win:win

So, how do you find a win:win? There are 2 keys to this:

Demand variability: simply put, the Retailer sometimes needs less product than average and sometime they need more. This variability can be large - individual orders can easily be double or even triple "average" demand. Ignoring this variability is causing a big problem.

Ordering in multiples: Let's look at how the order processing system handles orders when demand is greater than the SOQ. In many systems they will order multiples. If the SOQ is set to 3 cases the only orders you can ever see are for 3, 6, 9, 12, 15 etc.... (FYI - You can make a very good guess as to what the SOQ is even if you don't know for definite by looking at order history and calculating the "Highest Common Factor".)

Now with these 2 keys in mind, consider a product with not quite enough average demand to justify full pallet ordering:

Typically CPG's will push to round-up to full-pallets (a "win" for the CPG but a "lose" for the Retailer). The Retailer may well stand their ground and insist on SOQ being no more than X days of average demand (a "lose" for the CPG).

Consider this option: what happens if instead you reduce the SOQ to a half pallet ?

sometimes demand is low and orders actually are for half a pallet.
often demand will be higher, triggering the order processing system to order multiples of the SOQ, probably a full pallet, or possibly 1.5 or even 2 pallets.
as the ordered quantities more closely match demand, retailer inventory goes down.

The difference between setting an SOQ that will easily (and often) round-up to full pallet quantity and routinely ordering "almost a full pallet" can be significant both in handling and retailer inventory costs.

Smaller (standard) order quantities, more full-pallet orders AND reduced retailer inventory. Sounds like a win:win doesn't it ?

Monday 10 September 2012

Inventory modeling is not "Normal"

We can build models to know how much inventory we need to hold of each product in each location. Do this well and you improve service levels AND reduce inventory. I've posted on this topic before including an online calculator from a relatively simple Excel model to help you visualize the relationship between uncertainty, lead-time and case-fill rate. (Check out How much Inventory do you really need ?).

I wrapped up that post with a warning/disclaimer that the spreadsheet model was really too simple for real life use, but I didn't tell you why. Now here's the kicker: many packages appear to have the same problem and can cause you to severely underestimate your inventory needs and lose sales.

Just so you know, we are going to dip a toe into statistics here, but if you are a supply chain manger and you need to optimize your inventory usage, you need to know this - stick with it. I'll be gentle, it won't hurt, I promise.

The key problem is that models assume uncertainty in demand follows a Normal distribution. Something like this:

"Bell-shaped curve" - a Normal distribution

Let's take a simple example to see why this is a problem. Let's say your forecast for the next month is for 100 units. The normal distribution for your sales then would be centered at 100 units

You could sell more than 100 or less, but just how much more? What if this is a hard-to-forecast product that could sell much more or much less. Let's add in the rest of the horizontal axis.

Sticking with visual analysis for now, it looks as though you expect to sell around 100 units (your forecast) and you could sell as much as 300 (yeah !!) and as little as -100... excuse me ? How exactly are you going to sell -100? Despite the widespread practice of representing returns as negative sales (not a good idea) that is not what this means. This result is a physical impossibility that cannot ever happen in reality. We really need a distribution that understands that negative sales are not possible. Something like this:

The green line tells us that worst case sales are 0 (phew) but could go up to.. about 400 ? Now what I know that you can't tell visually is that both of these distributions have exactly the same average and the same variability (standard deviation), either one could be used to model the same level of forecast and demand uncertainty...but... the green one shows a realistic possibility of much higher sales, sales that you may want to protect by having extra safety stock. Set your safety stocks based off the Normal distribution and you will miss that peak demand when it does happen. How do you feel about cutting 100 units from total demand of 400? Using the Normal distribution here can seriously damage your wealth. (FYI - The green line in this case is from a LogNormal distribution. It's not the only option available to us but I'll hold that detail for another post.)

BTW - If you want to get into Inventory optimization, modeling this correctly will be much more effective in helping you balance inventory and fill-rates.

If it's dangerous then, why is the Normal distribution so heavily used in practice? Well, if your uncertainty around what you are going to sell is much smaller, it does a good job. The chart below shows the same Normal and LogNormal distributions for a product with much less demand uncertainty

The 2 distributions are practically the same, though the LogNormal still predicts slightly higher sales at the upper end - the end we are trying to protect with safety stock.

(It's also true that it's just easier to program the math to use the Normal distribution.)

In my experience, demand uncertainty is often, even normally (pun intended), big enough that using the Normal distribution will cause you to severely underestimate safety-stock and lead to more cut orders (and lost sales) than you planned for.

Does your inventory model have this problem?

Inventory modeling in action

Inventory modeling and inventory optimization attempt to drive out unnecessary inventory from your systems, to improve service levels to your customers. This does work and can drive very significant reductions in inventory, but, if you lack discipline around execution you will not get as much value as you should.

The list of 10 watch-outs that follows is based on my experience. Some of these are mistakes I've made and learned from, others are mistakes I have observed.

You do need a good model. I've seen a lot of inventory models, some are more "unique" than useful. This is an area with a solid analytic/statistical framework available that has been real-world tested. Here's a link to my online calculator [How much inventory do you really need] or check out this Wikipedia entry for a basic introduction http://en.wikipedia.org/wiki/Safety_stock You are not going to build something with common-sense or street-smarts in Excel that can come close. Do the necessary learning, hire someone that already has it or buy into one of the commercially available packages.
Better models yield better results. If inventory really matters to you, you may want to invest in a more rigorous level of modeling. A basic, statistical model will generate results if used well. A model that better fits your reality will let you cut deeper/faster. For a simple example check out: [Inventory modeling is not "Normal"]. Some other areas that may warrant extra work/investment:

fitting the most appropriate distributions of uncertainty
capturing demand uncertainty effectively
handling multi-level distribution networks

You need people who know how the model works. This does not have to be everybody that ever touches it, but someone either in your organization or that you have easy access to must understand this. I've seen system-implementers (consultants in this case) hamstring a perfectly good commercial package because they did not understand how the models worked and set it to provide bad recommendations. ("Garbage in - Garbage out")
Integrate inventory recommendations into your planning system. With good models you will generate unique targets by product and location. To make this part of the planning process this data must be integrated in to the planning systems: it's completely unreasonable to ask planners to keep this amount of information "in their heads" and to act on it appropriately.
Get supply planners involved. Don't ignore one of your best assets - the people that work with product supply every day. Their intuitive sense of what works is probably not far wrong, whereas computers have no intuitive sense. The model should help them challenge their ideas and refine them it does not replace sense. Get them involved! Teach them to work the model inputs, to understand why the model does what it does and create ownership of the answers. If you implemented months ago and you're still hearing "Your targets aren't right..." you need to work on this.
Measure compliance. You will, I'm sure, be measuring what happens to your aggregate inventory and service levels. These should be moving steadily in the right direction. You need to look down in the weeds though to know if you are getting full value. Excess inventory mounts up a with few cases here, a weeks extra supply over there and it all adds up. Exception based reporting to find item:locations that are not under control drives deeper/faster results.
Use the right target for each decision. Your system probably has just one place to embed a safety stock or replenishment point value for each [product:location] combination. If you have done your modeling work effectively this value will represent your primary replenishment process. But, what happens if you have alternatives? Perhaps sourcing from another (expedited) supplier or re-deploying inventory from another facility? The assumptions you made to generate your target are wrong for this alternative option. Ignore this and you can spend a lot of money very quickly. Check out [Balancing safety stocks across DCs]
Continually update/revise. Let's assume that your system will automatically record and update statistics around demand uncertainty so you do not have to touch every model every week. Even so, things change: manufacturing constraints change over time, your understanding of your own supply chain improves, your willingness to take risks shifts, ... things happen. If you lock in your inventory targets once a year and forget them your supply chain will under-perform. Continually tweak and revise the models. these targets drive your supply systems, the better they are the better you will look.
Resist the temptation to react to one-off events. It is the nature of uncertainty in your supply chain that most of the time, most orders for most products are filled completely. When there is a failure, orders get cut, service level for that product drops and it becomes the center of attention for a period of time. Understandably, this can become uncomfortable. However, if your aggregate service-level metrics are in-line and this appears to be a one-off event, reacting to it by pushing up inventory achieves only that - it pushes up inventory.
Be tough on inventory AND tough on the causes of inventory. Your inventory models are not just a way of setting accurate inventory targets. They are key to understanding what changes to your supply chain would drive lower inventory. What is the value of:

5 points of improvement in forecast accuracy?
a 25% reduction in lead-time from production?
replenishing once a week rather than once a month?
a delayed deployment strategy for hard-to-forecast products
reducing service levels by 0.5 points
stratifying service targets for different groups of products (typically based on volume and/or demand uncertainty)
allowing service levels for individual product:locations to float in a wider range and using optimization to minimize the overall inventory while maintaining the aggregate service level target

A successful inventory modeling/optimization project does need a good model but it also needs great execution.

Friday 7 September 2012

The Differences Between Financial Accounting And Management Accounting

By Jackie, Researcher

Topic: Types of Accounting (Terminology & Concepts)

The objectives of this research are to find out what are the major differences between financial accounting and management accounting.

Management Accounting sometimes is also known as 'Managerial Accounting'.

First and foremost, management accounting is concerned with the provision of information to people within the organization or ‘internal parties’ (i.e. managers inside the organization) to help them to make better decisions and improve the efficiency and effectiveness of existing operations, whereas financial accounting is concerned with the provision of information to ‘external parties’ outside the organization (e.g. shareholders, creditors, tax authorities, regulators, potential investors, and etc). Thus, management accounting could be called ‘internal reporting’ and financial accounting could be called ‘external reporting’.

Secondly, there is a statutory requirement for public limited companies to produce annual financial accounts regardless of whether or not management regards this information as useful. It must be done as it is ‘mandatory’. Management accounting, by contrast, is entirely optional and information should be produced only if it is considered that benefits from the use of the information by management exceed the cost of collecting it. Thus, it is not ‘mandatory’. A company is completely free to do as much or as little as it wishes.

Thirdly, financial accounting reports describe the whole of the business whereas management accounting focuses on small parts of the organization such as the cost and profitability of products, services, customers and activities. In addition, management accounting information measures the economic performance of decentralized operating units, such as parts, segments, divisions or departments.

Besides, financial accounting statements must be prepared to conform with the legal requirements and the generally accepted accounting principles established by the regulatory bodies such as the Financial Accounting Standards Board (FASB) in the USA, the Accounting Standards Board (ASB) in the UK and the International Accounting Standards Board (IASB) to ensure the uniformity and consistency that is required for external financial statements are achieved so that the inter-company and historical comparisons are possible. Thus, financial accounting data should be objective and verifiable. In contrast, management accountants are not required to adhere to generally accepted accounting principles when providing managerial information for internal purposes. Instead, the focus is on the serving management’s needs and providing information that is useful to managers relating to their decision-making, planning and control functions.

Furthermore, financial accounting reports what has happened in the past in an organization, whereas management accounting is concerned with future information as well as past information. Decisions are concerned with future events and management therefore requires details of expected future costs and revenues. In other words, financial accounting is past-oriented (eg. Reports on 2010 performance were prepared in 2011) and management accounting is future-oriented (eg. Budget for 2011 was prepared in 2010).

In addition, a detailed set of financial accounts is published annually and less detailed accounts are published semi-annually. Management requires information quickly if it is to act on it. Consequently, management accounting reports on various activities may be prepared at daily, weekly or monthly intervals.

Summary

Additional readings, related links and references:

Differences between financial and managerial accounting

http://www.accounting4management.com/financial_accounting_vs_managerial_accounting.htm

The Differences between Financial Accounting & Management Accounting

http://smallbusiness.chron.com/differences-between-financial-accounting-management-accounting-3985.html

Financial and Managerial Accounting Information

http://www.youtube.com/watch?v=ZlvzdxhjfXw

Financial Accounting Vs Managerial Accounting (Cute cartoon illustration)

http://www.youtube.com/watch?v=aVcs5CgsnfI

Dennis Ensing, CA of WiseMentorCapital, discusses the differences between financial and managerial accounting. Visit StartMeUpRyerson.com for more resources to help turn your ideas into reality.

http://www.youtube.com/watch?v=qmVlPmjbs7Q

Saturday 1 September 2012

Job Interview Tips, Preparation And Advice

By Jackie, Researcher

Topic: Employment skills (Interview)

The objectives of this research are to highlight what and how a fresh graduate should prepares for a job interview. This preparation is basically divided into three stages: before the interview, during the interview, and after the interview. Hopefully, the tips below will increase a job seeker’s confident and aid them to excel better in an interview session.

Introduction

Ideally, making all the right moves at the interview is crucial to leave a positive and lasting impression on potential employers. Besides, securing a job interview means you are now having the chance to show a potential employer why you are the best candidate for the job. However, the interview itself could be a daunting experience for the underprepared. Here are some tips and guides on how to maintain your composure and impress your prospective employers.

Before the interview

When you get call for the interview, make sure you obtain the correct date and time of your appointment, as well as the exact location (including building, floor and room). It is also good to know the name of your interviewer and his or her designation.

Doing some "homework" before actually going to the interview like researching the company and understand what are the company objectives, short-term and long-term goals will definitely help a candidate in his or her interview session later.

Research the company

Find out as much as you can about the company in terms of products or services, market position, competitors and challenges so that you can speak knowledgeably during the interview. Find out also if the company has been in the news recently and if it runs any community projects. If you are unfamiliar with the location, do a trial run to avoid getting lost on the actual day. It will also help you gauge how long it takes to get there.

Research the position

Research the daily activities or tasks of the job on offer so that you know what you are really getting yourself into. Then try to match your own qualifications, experience and personal traits to those activities or tasks. It is also a good idea to think of questions to ask the employers to reiterate your interest.

Role-play rehearse

As silly as you may feel, rehearsing an interview with a friend or family member can help to overcome a bad case of the nerves. While rehearsing, think of difficult questions you may get asked and prepared suitable responses. If you are still in university, check with the career placement centre to find out if they conduct mock interview training. Career counselors are more than happy to help students practice interview skills.

On the interview day

Make sure you have all the necessary documents with you before you leave home. This includes all degree certificates and letters of references (and their photocopies), passport-size photos, and a portfolio of your previous work or projects (if any). Also don’t forget to bring at least two copies of your resume.

Sometimes an interview session might be a little bit "uneasy" for a candidate, especially when there are more than one interviewers in the interview session. It could be quite "uncomfortable" when people staring right in your eyes and hear carefully what are you going to say. Anyway, constant practice can overcome this problem.

Dress to impress

Statistics by recruitment specialists Sarina Russo Group indicate that more than 90% of the impact we make comes from how we dress, walk and talk, and not from what we actually say. Dress appropriately for the job you are applying for. Jobs in banking and financial services sector usually require formal wear. Here are some ground rules to dress for interviews:

Solid, muted colours such as black, white, dark blue, brown, grey are generally accepted.
Business attire: long pants, shirt, tie and jacket for men; long pants or skirt (at least knee-length), blouse and jacket for women.
Clothes should be clean and neatly ironed. Jewellery and accessories should be minimal and not flashy.
Shoes should be formal-looking yet comfortable to wear, and also well polished. Flip-flops and sneakers are a definitely no-no, along with extremely high heels.
Hair should be neatly combed and styled. Avoid dying hair in shocking colours. Men should preferably be cleanly shaved but if they have a moustache or beard, it should be neatly trimmed and groomed.

Punctuality matters

You should never be late for an interview. If you are running late, call the interviewer before the schedule time to let him or her know. Try to get there at least 15 minutes ahead of the appointment to freshen up and mentally prepare. Arriving early also helps if you need to fill up any forms.

Courtesy and composure

You are being assessed the minutes you walk into the interview room. Remember to be courteous at all times. Introduce yourself to all the interviewers, shaking their hands gently yet firmly. Your posture and body language are equally important in making a good first impression, along with regular eye contact. Always wait until the interviewer finishes asking a question before responding. Listen attentively and look for opportunities to point out how your capabilities match the employer’s requirements.

After the interview

Remember to shake hand after interview. It symbolizes 'respect'.

Don’t forget to shake the interviewers’ hands and thank them for their time once the session is over. It is also a good idea to send a thank-you note or email to reiterate your interest in the job. You may follow up with a phone call a week later if you have not heard from them, but avoid flooding them with calls or emails or you will be perceived as pushy or desperate.

Conclusion
All in all, getting to the interview stage of the recruitment process is akin to having one foot in the door to the hiring company. Make sure you go fully prepared, put your best foot forward and do your best.