uploads/2015/07/Inventory-ratio1.jpg

Analyzing the Cogs in Colgate’s Supply Chain

By

Updated

Inventory turnover metric compared to peers

Colgate (CL) markets its products in over 200 countries and territories. Its supply chain function is complex as a result. Colgate owns or leases 360 properties throughout the world, which include manufacturing, distribution, research, and office facilities.

The inventory turnover metric for Colgate for 1Q15[1. Quarter ending March 31, 2015] declined to 4.9x from 5.1x in 1Q14. The decline was primarily due to negative currency impact resulting from a higher US dollar. ~77% of Colgate’s revenue came from its overseas business in 2014.

Article continues below advertisement

Compared to Colgate, peers Procter & Gamble (PG) and Clorox (CLX) indicated improvement in the inventory turnover ratio for 1Q15 coming in at 6.1x and 7.2x, respectively. CLX has the highest inventory turnover ratio indicating higher sales for 1Q15. This was primarily due to innovations in CLX’s disinfecting wipes and toilet cleaners, which resulted in higher shipments.

Changes in the supply chain network

In order to improve its supply chain network, Colgate has trimmed down on its own manufacturing facilities by shifting work to contract manufacturers and co-packers. This is aimed at reducing complexity and improving efficiency.

Colgate also implemented a transportation management system (or TMS). This helps fill information gaps in shipment consolidation, tracking and tracing, and reporting. Initially, Colgate handled consolidation opportunistically, but after the implementation of TMS, Colgate could not only identify opportunities, but also improve carrier relationships.

Growing need of alternative distribution channels

Distribution channels are continuously shifting and evolving, and Internet sales are growing. Colgate’s funding-the-growth initiative is designed to reduce costs associated with direct materials, indirect expenses, and distribution and logistics, and encompasses a wide range of projects.

Also, with growing urban centers in Asia, distribution assumes an even greater marketing significance. Online shopping has gained momentum in India and China, as well as other developing markets. According to a UBS report cited in Livemint, online retail will contribute ~6% of revenues for consumer staples (XLP) firms in India by 2020.

Colgate and Kimberly-Clark (KMB) are included in the holdings of the SPDR S&P Dividend ETF (SDY) with a combined weight of 2.5%[2. Updated as on July 14, 2015].

Advertisement

More From Market Realist