Monitoring inventory pressure in a FastMoving Consumer Goods system

Abstract: Issues relating to inventory capacity resulting from high fill rates (inventory pressure) have been identified as a major problem for growing Fast-Moving Consumer Goods firms. The implications of these capacity problems include increased costs of working capital and cost-inefficient rental of external storage space. The study is focused towards the food retail segment and aims to address the lack of a detailed SKU-level KPI for inventory pressure and a model for identifying its root causes. The research design is based on a review of literature and a live case study at the Swedish food retailer Axfood, including qualitative interviews in addition to the collection and analysis of inventory data. The inventory turnover ratio was determined to be an accurate KPI in this case, where lower ratio values tend to correspond with high inventory pressure, and vice versa. With the KPI established, a regression analysis was performed, in order to find critical determinants of the problem in the Axfood case. The regression analysis yielded a number of highly influential factors for inventory pressure, mainly low order frequencies, high variability of demand and prolonged supplier lead times, in addition to a number of less influential determinants. The study also included the identification of key drivers of inventory pressure within various Axfood product segments, where private label product stands out as a particular product segment of interest. A numerous of segments were identified as particularly problematic, however private label products where not found to influence the overall level of inventory pressure in any significant manner. While the study is in no way exhaustive about the highly complex nature of the researched problem, the establishment of a KPI and use of a regression model has provided a basis for discussion regarding the problem. In addition, the proposed framework is applicable for future similar studies on other FMCG cases, in addition to more detailed case studies into inventory capacity issues.