Ep. 90: Andy Kettlewell - Volatility of Supply and Demand
Andy Kettlewell, VP of Inventory & Analytics at Walgreens, joins Count Me In to talk about the recent volatility of demand due to COVID-19 and the impact of volatility in supply when it comes to answering the question, "How much inventory can/should I procure?". During the last few months, many look at the consumers when exploring various demands, but it is important to recognize the effects on supply chain, too. Andy, who has over 15 years of experience working in supply chain and inventory, talks about how your accounting and finance team can shape its budget to take into consideration the various volatility factors and make better business decisions through the use of technology. Download and listen now!
"Reimagining Supply Chains to Navigate a Pandemic and Beyond" with the Chicago Council of Global Affairs: https://youtu.be/zAGPc9vlaxU
Andy Kettlewell video for Satya Nadella, CEO, Microsoft, Inventory Management: https://youtu.be/vkSNW6CJN7Q?t=570
FULL EPISODE TRANSCRIPT
Welcome to episode 90 of Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong, and I'm here to introduce you to our featured guest speaker for today's conversation, Andy Kettlewell. Andy is the Vice President of Inventory and Analytics for Walgreens after serving many years prior in various supply chain and inventory management roles with the company. He spoke to my cohost, Adam, about all the disruption across business and how he has managed to handle the volatility in the marketplace. Andy addresses the impact of supply and demand budgeting for these unexpected factors and how technology has enabled him to make better business decisions. Keep listening as we head over to their conversation now.
Andy, COVID-19 has been disruptive across all aspects of business. How have you handled the demand volatility in the marketplace, and then in turn its impact on operations?
It's a very important question for where we are in a post COVID-19 economy. So we've seen dramatic changes in not only the magnitude of demand changes and demand volatility, but also the frequency and the pace of those changes. And, and to make that real and what we've all experienced in our lives, it's everything from, you know, the run on toilet paper, and you've probably experienced those shortages firsthand and how the news media kind of helped to extrapolate and share that story widely, thus creating a run in a panic situation to other commodity items like hand sanitizer and masks and other items that were needed for a shift in consumer behavior, right? With, with COVID-19 that the marketplace has had to respond to, but what we're also seeing is a shift, in everyday items. So with the traffic patterns and how, how's it impacted all of our lives. So likely you're not going to your office right now. So that means you're not passing the convenient Duane Reade in Manhattan, or your Walgreens, you know across from your office in downtown Chicago and that's changed our consumer behavior away from maybe those instant consumption items to more of those take-home items, right? That as we shift our behavior. There's been a couple of other interesting transformations here across all aspects of the business. So Satya Nadella, the CEO of Microsoft, in their last earnings call, likened the digital transformation of two years of digital transformation that happened in two months. McKinsey and Company's research has shown that we've seen 10 years worth of growth in eCommerce penetration in only three months. And so we're, eCommerce penetration is now North of 30% across all of retail. These are dramatic shifts in consumer behavior that, you know, our organization at Walgreens and every retailer is having to accommodate to. So in the reaction and the operationalization of that, right first and foremost, every firm is having to keep their team members safe and so when within a global supply chain, right, that means, you know, new protocols, new efficiency measures, but everything from how we keep our distribution center team members safe, to our truck drivers, to our store team members to keep operations moving was, was point number one. And that means everything from personal protective equipment to new policies, procedures, different shifts in labor management, to help keep our employees safe, to then keep the product moving. And then from there, very tactical impacts within our supply chain that we've had to address including, we've redesigned all of our demand, forecasting and replenishment algorithms. Now what that means is right, all those consumer behaviors, the systems that go behind that, that use artificial intelligence and machine learning to identify what you're going to buy in Walgreens tomorrow, have to be much more dynamic. I liken this to a, for most firms like a sand mandala, if you're familiar with that term.The Tibetan Buddhist monks, you know, spend hours and days, you know, building the perfect sand mandala and then they have to wipe it away and then start fresh. That's exactly what most firms are doing with their forecast models across their entire end to end supply chain to become more adaptive and responsive to consumer demand. And then sourcing, right. you know, at the heart of COVID-19, we found areas within the end end supply chain that were very efficient, but didn't have many redundant sources. And what I mean by that, right. is that, I think about that toilet paper example, right? A very efficient supply chain, the factories run 24 by seven to spit out the exact right amount of product that matches demand usage for commercial toilet paper and consumer toilet paper. With everybody not going to their offices or to sports stadiums anymore, the demand for consumer product goes up, that's manufactured on different machines and, and requires, you know, sourcing new partners and, and the capabilities to build that new product. And then lastly, I kind of on the business of response to the demand volatility is around longterm planning, right? A lot of what we do to figure out what consumers will buy and needis really sociology at the end of the day. Right. and we have to predict how consumers are going to behave in the future, and so that means longterm planning, right? In March, we were trying to figure out gosh are public pools going to be open. And are we going to sell many swim toys at Walgreens to our consumers, to trying to predict whether or not trick or treat is going to happen right now, coming up with, Halloween season. You know, Walgreens is the number two Candide retailer in the United States and whether or not trick or treat happens is a very big deal that has massive balance sheet and cash flow impacts if, those sales don't happen as they normally would, that we have to work through in plan, and to do that, you know, we're trying to tap into new and novel data sources to, you know, try to predict what the next big thing is going to be for consumers or how our consumers behavior will change, versus, you know, the past precedence that's been is that over the number of years.
So you've talked a lot about how you know, consumers are effective in your operations, and one of the examples you mentioned was like the toilet paper, the great toilet paper shortage that happened when the pandemic started, you know. Can we talk a little bit more about the volatility of the supply impact, especially on the balance sheet, because, you know, you need that supply to be able to sell the products to the consumers.
Yeah, absolutely. I would, I would suggest that what we've seen through COVID-19 is the most volatile and widespread supply disruption that most supply chains have seen in the last several decades. And the difference here is, is most supply chains are built to withstand normal levels of volatility, and this is everything from gosh, the semi had a flat tire, right, and arrived a day or two late to, you know, if we're doing manufacturing, operations in areas that are prone to getting hurricanes in the Caribbean or in Florida or in Texas, you know, we're, we're, we're prepared to have redundancy in manufacturing or planning to be able to shift assets around in the supply chain to accommodate those very short term disruptive events. And what's different about COVID-19 versus many of those short term disruptive events like hurricanes typhoons, earthquakes, even the volcano explosions that that happened to release ash into the atmosphere is that they're usually very localized and they're very limited in duration of immediate impact. Sometimes longer term impact when destruction happens with this pandemic impacting the entire globe, it's been very different and it's across our manufacturers, you know, they've really had to adapt and to, to manage through the, this impact, and so it's everything from reduced manufacturing throughput because of absenteeism, because there's a greater part of the population that's sick or has to quarantine, and how do you deal with that? To having to realize that I have lower throughputs, so how do I prioritize my manufacturing? And you see this on store shelves today with, tyou might not have every scent or flavor of a product.. You can have any flavor of Clorox wipe that you want right now, as long as it's lemon scented, because to increase manufacturing throughput, we rationalized down the skews that can be produced. But also we're seeing, you know, natural logistical challenges, it takes human beings to, to move product through boats, airplanes, trucks, and, and that does create constraints within logistical networks. But also on the financial side, right? All of these constraints that COVID has cause greater investments in operational spending, right? It costs more money to provide your employees personal protective equipment. It costs more money to run overtime in your factories, right? Because you might have be able to have fewer folks, you know, shoulder to shoulder factories safely. and with that increased operational spending, right, it's pushing, putting some compression on margins, across many firms. and for, for many suppliers that are, that are smaller in nature, it does provide some liquidity challenges that they're going to have to navigate through from, from a capital investment standpoint. The other bit that's impacting supply that I don't want to be dismissive of is external factors, especially governmental factors, right? So we saw at the heart of the pandemic, the government's shutting down nonessential workplaces, and that does impact parts of the supply chain that, at points manufacturer components that go into other products, right, or what are deemed non essential supplies during that period. There were, for example, in our business cosmetic suppliers who had to shut down manufacturing for several weeks deemed non-essential, and that puts another strain on the overall economy, but also, puts some shortages on, on some raw materials as it relates to, you know, pharmaceutical ingredients globally. Additionally, I saw a bit more nationalization and governmental protections policies that happened. you know, so for example, China, and, a number of other Southeast Asian countries look to protect their own workforce and their own citizens first, and put some restrictions on exports of personal protective equipment or pharmaceutical ingredients at the height of the pandemic, to take care of their citizens and their economy ahead of the export channels. And so this, this global connectivity, around the entire supply chain flowing through with these external dynamic factors, are really, making it a challenge on supply across many, many commodities and markets to, to keep up with and putting strains on, and requiring new investments. And, you know, lastly in my role, right, in, in helping to lead inventory management for a very large retailer, right, that means we have to make different investments in inventory and stock holdings because of that dynamic nature, which if done thoughtfully, might not have an impact on the balance sheet, but, but in the short term, well, right, you know, we've provided guidance that there will be an inventory increase as we increase our stock holdings to maintain continuity of supply for our customers and our patients, so that we can ensure we have that supply, knowing that there's more volatility happening in supply base right now, and being realistic that in some cases we're going to have to spend a little bit more money to be able to accelerate how we get those goods to market. Might be more air freight versus, you know, ocean carrier shipments, which is at a significant premium to make sure that we can drive that product availability. So it's going to affect both that, that operational costs that OPEX spend as well as the, the inventory on the balance sheet as we migrate through this. But as the market settles down, right, as the new ways of working, continue to cement themselves into the supply base, and as those longer term capital investments in the factories and the machinery come on to bring more capacity, you'll see a waning in this come through. But it could take several years when you think about building more capacity into certain parts of the global supply chain.
Definitely. So we've mentioned, you mentioned a lot of different factors, and I can only think about the accounting and finance team is probably having a crazy field day, just trying to work on a budget and trying to take all these factors into account. How have you worked with that team to kind of create a budget to take into account all these different things?
Yeah, I would say the importance of the forecast versus the budget, you know, is becomes very important in this and our partnership with our internal finance and accounting teams is critical to make sure that we're putting the jet fuel into the company, right? When you think about a retailer, I can only sell the inventory I have, right? And so we have to make very thoughtful inventory investments that meet that dynamic consumer demand that we had talked about, and so we need to not only free up the working capital of the, the less productive inventory, or the, the items that our consumers aren't buying, so that we can invest into the, the items that we expect our consumers to really need. And so we've actually moved to a more granular budgeting and forecasting process as a result, right? To capture those nuances of where we think we're going to have to make spot investments, and that's really helped us to help tell the story, you know, as I meet with our CFO and all of our finance partners for the division to help folks understand where the thoughtful investments are, how long we expect to sustain those investments and the drivers that are those risk factors that I mentioned in the supply base, or the demand volatility are causing us to make those investments. And so, you know, we're, we're more frequently forecasting our inventory and receipt flows as well as our demands. So moving from monthly processes to weekly. Moving from high level categories. So example of paper goods versus toilet paper, and, you know, facial tissue and paper towels, and really breaking that down to a very finite, granular levels, and even regionally has been critical for us so that we can track where we're waiting on those investments and those bets that we're making with inventory and where we're losing as well, and we to take quicker action to, exit out of some of those businesses and reinvest into where we expect the demand to go so that the inventory investments don't just kind of run out of control on us. And so it's been a very good partnership with, with our finance partners, but it's required us to revisit those processes. It's also required our finance and accounting team members to get closer to the business drivers. And I would say that that's the advice that I would put out to all of our, you know, management, accounting and finance professionals out there is really embed yourself with your business partners to learn about the risk factors, right? Those external factors that are impacting the business decisions like I talked about in supply and demand volatility is going to help you understand, you know, those, those forecasting biases or the, the range of accuracy that, you know, we may or may not have in such a dynamic environment and your business partners would have, and this kind of environment.
So to kind of round out our conversation, you know, you've mentioned a couple of times the different technologies you use, and I'm sure that AI and RPA have come into play, to help make better, better decisions in your supply chain. So how has the digitalization of the supply chain helps you as a retailer, but also flown down to your consumers as well?
Yeah, it's we couldn't have responded to COVID-19 without the digitalization of our supply chain. It's critical. What we do at Walgreens is, the, the non-pharmaceutical, so the non-prescription side of the business is we have to forecast and replenish 200 million items store combinations every day, and try to predict that demand there. And, and we do that as a central function and to, to be able to process through that much data and it ingests, what are the data around what our consumers are telling us they need and want and don't need, and don't want at any given time it's critical. You know, we've invested heavily in tools like RPA to automate more of the repetitive tasks to operate the machine. I like in the supply chain machine that most firms are using, like one of those great Rube Goldberg devices, right? We've got the bird that you're not over the glass and moves the marble down. You know, we can automate a lot of those tasks so that we can free up our human capital into tuning that machine and making it as agile and responsive as possible. And the RPA has been a great investment there, but when where see a lot of growth is in the machine learning and the artificial intelligence space, right. You know, gone are the days where you might increase a forecast for a category by 30% and let it aggregate to every store or for every item in that category. Our consumers don't shop that way. You know, we don't supply that way. And so we need to ensure that we're micro tuning every note in the supply chain to be as responsible as possible. So if we see a trend that, you know, a certain category say, hand sanitizer is spiking in a college town, right? Because that, that college town went back to school, and then two weeks later that the, you know, the campus, you decided to go to full e-learning. We need to be able to capture that in real time, and from disparate external data sources, news feeds social media to be able to influence those micro forecasts that thus drive all of the orders and all of that inventory flow and the millions and billions of dollars of inventory that's flowing through these supply chains. So that that's responsive to how quickly the market can move, especially during a pandemic, but also through the growth in the digital and the e-commerce economy, because we see a lot of shifting happening there so that we can, utilize that customer data to put the best offer in front of our customer. And sure we have the availability and can meet those needs as they change.
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