Monitoring Inventory Pressure in A Fastmoving Consumer Goods System

DEGREE PROJECT IN THE FIELD OF TECHNOLOGY
INDUSTRIAL ENGINEERING AND MANAGEMENT

AND THE MAIN FIELD OF STUDY
INDUSTRIAL MANAGEMENT,
SECOND CYCLE, 30 CREDITS
STOCKHOLM, SWEDEN 2019
Monitoring inventory pressure in a

Fast-Moving Consumer Goods
system
A regression-based explanatory case study at
Axfood
OLOF HOLMBERG
HAMPUS ÖSTERLIND
KTH ROYAL INSTITUTE OF TECHNOLOGY

SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
Monitoring inventory pressure in a Fast-
Moving Consumer Goods system
by
Olof Holmberg
Hampus Österlind
Master of Science Thesis TRITA-ITM-EX 2019:349

KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
Mätning av lagertryck för snabbrörliga
konsumentvaror
Olof Holmberg
Hampus Österlind
Examensarbete TRITA-ITM-EX 2019:349

KTH Industriell teknik och management
Industriell ekonomi och organisation
SE-100 44 STOCKHOLM
Master of Science Thesis TRITA-ITM-EX 2019:349
Monitoring inventory pressure in a Fast-Moving

Consumer Goods system
Olof Holmberg
Hampus Österlind
Approved Examiner Supervisor
2019-06-05 Jannis Angelis Thomas Westin
Commissioner Contact person
Axfood / Dagab Mathias Jönsson
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.
Keywords
Fast-Moving Consumer Goods, Food retail, Inventory management, Inventory pressure,
Performance measurement, Regression analysis
Examensarbete TRITA-ITM-EX 2019:349
Mätning av lagertryck för snabbrörliga

konsumentvaror
Olof Holmberg
Hampus Österlind
Godkänt Examinator Handledare
2019-06-05 Jannis Angelis Thomas Westin
Uppdragsgivare Kontaktperson
Axfood / Dagab Mathias Jönsson
Sammanfattning
Lagerkapacitetsproblem som härrör från höga fyllningsgrader (lagertryck) har
identifierats som ett avgörande problem för växande företag verksamma inom
snabbrörliga konsumentvaror. Konsekvenserna av sådana kapacitetsfrågor är bland
annat ökade kostnader för rörelsekapital och kostsam inhyrning av externt
lagringsutrymme. Denna studien är inriktad mot livsmedelsbranschen och syftar till att
adressera bristen på ett detaljerat mätetal för att följa upp lagertryck på artikelnivå, samt
en modell för att identifiera dess underliggande orsaker. Forskningsmetodiken är
baserad på en litteraturstudie och en fallstudie hos den svenska
livsmedelsåterförsäljaren Axfood, som innefattar kvalitativa intervjuer samt insamling
och analys av lagerdata.
Lageromsättningshastigheten ansågs vara ett tillförlitligt mätetal i denna fallstudie, där
lägre värden tenderar att motsvara högt lagertryck och vice versa. Med detta mätetal
som grund utfördes en regressionsanalys för att finna kritiska förklaringsfaktorer till
problemet i Axfood-fallstudien. Regressionsanalysen gav ett antal starkt inflytelserika
faktorer för lagertryck, främst låg orderfrekvenser, hög varians av efterfrågan samt
långa ledtider från leverantörer. Även ett antal mindre inflytelserika determinanter
hittades. Studien innefattade också identifiering av kritiska faktorer för lagertryck inom
olika produktsegment hos Axfood, där egna märkesvaror utmärker sig som ett segment
av särskilt intresse. Ett flertal segment identifierades som särskilt problematiska, egna
märkesvaror visade sig emellertid inte påverka det totala nivån av lagertryck på något
avgörande sätt.
Denna studie utger sig inte för att vara uttömmande om forskningsproblemets mycket
komplexa natur. Upprättandet av ett mätetal samt tillämpandet av en regressionsmodell
har dock legat till grund för en diskussion om problemet. Det i studien föreslagna
ramverket är applicerbart för liknande studier på andra FMCG-fall i framtiden, samt mer
detaljerade fallstudier av lagerkapacitetsproblem.
Nyckelord
Snabbrörliga konsumentvaror, Livsmedelshandel, Lagerhantering, Lagertryck, Mätetal,
Regressionsanalys
Royal Institute of Technology
Monitoring inventory pressure in a

Fast-Moving Consumer Goods system
A regression-based explanatory case study at Axfood
Olof Holmberg
Hampus Österlind
June 2019
Contents
Contents
1 Introduction 1
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Problem statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Purpose and research questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Delimitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Theoretical contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.6 Empirical contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Research method 7
2.1 Choice of methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Context study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Theoretical framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Axfood case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 KPI & Model construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.7 Segment analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.8 Research quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3 Theoretical framework 17
3.1 Inventory management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.2 Inventory control models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.3 Industry metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.4 Linear regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.5 Multiple linear regression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4 Axfood case study 31

4.1 Company and case background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2 Product flow control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3 Interview findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.4 Case-specific metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5 KPI & model construction 37

5.1 Designation of the inventory pressure KPI . . . . . . . . . . . . . . . . . . . . . . 37
5.2 Regression model construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.3 Regression model evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Contents
6 Segment analysis 53
6.1 Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.2 Scoring of predictors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
6.3 Main product families . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
6.4 Private label products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.5 Imported products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.6 Inventory volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.7 Product value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
7 Conclusion 61
7.1 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
7.2 Reflection of study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.3 Recommendation to Axfood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
7.4 Limitations of study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
7.5 Sustainability aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.6 Ethical considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
References 67
Appendix I
A Interview material I
B Summary of conducted interviews II

List of Figures
List of Figures
1 Flow chart of research method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2 Inventory levels over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3 Main product flow control functions . . . . . . . . . . . . . . . . . . . . . . . . . 32
4 ABC classification matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5 Descriptive statistics of predictors . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6 Pearson correlation matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7 Stepwise model summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8 Collienarity diagnostics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9 Final selection of predictors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
10 Distribution of residuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11 Scatter plot of residuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12 Residuals statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
13 Model summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
14 Beta coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
15 Colour-coding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
16 Main product family segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . 55
17 Private label vs. label segmentation . . . . . . . . . . . . . . . . . . . . . . . . . 56
18 Import vs. non-import segmentation . . . . . . . . . . . . . . . . . . . . . . . . . 56
19 SKU level volume segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
20 Supplier level volume segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . 58
21 ABC segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
22 ABC classes and service level targets . . . . . . . . . . . . . . . . . . . . . . . . . 58
List of Tables
List of Tables
1 Size of data sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 Work flow of the regression analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 Overview of interview findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4 Regression metrics and units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5 Final regression model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6 Segmentation metrics and units . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Abbreviations/ Key terminology
Abbreviations/ Key terminology

B2B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business-to-Business
B2C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business-to-Consumer
CAGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compound Annual Growth Rate
FMCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fast-Moving Consumer Goods
KPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Performance Indicator
SKU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Keeping Unit
Automatic ordering . . . . . . . . . . . . Function for continuous replenishment of goods towards stores

Discount offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Limited price-drop campaign for a particular SKU
Fill rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of total inventory buffer spots used
Dependent variable . . . . . . . . . . . . . . . .A variable whose value can be predicted by other variables
Inventory pressure . . . . . . . . . . . . . . . . . . . . . . . .Inventory capacity issues arising from high fill rates
Label product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Products sold under a producer brand
Linear regression analysis . . . . . . . . . . . . . . Statistical method for establishing causal relationships
Predictor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent variable affecting a dependent variable
Private label products . . . . . . . . . . . . . . . . . . . . . . . . Products sold under the retailer’s own brand(s)
Service level (FMCG context) . . . . Percentage of customers (retail stores) supplied satisfactory
Acknowledgement
Acknowledgement
We would like to thank all of the people who have supported us during this master’s thesis.
First and foremost, we would like to thank our supervisors at the case company Axfood, Math-
ias Jönsson and Linus Bergqvist, as well as our academic supervisors Thomas Westin and Jannis
Angelis at KTH for making the thesis possible and for providing guidance throughout the entire
research process. Furthermore, we would like to thank all involved interviewees and employees
at Axfood for contributing with time and knowledge and thereby adding valuable input to the
thesis. Finally, we would like to thank all of our seminar peers and fellow students for providing
us with much needed feedback on our work.
Olof Holmberg Hampus Österlind
Stockholm, Sweden
June 5, 2019
1 Introduction
1 Introduction
This section serves as an introduction to the background of study’s topic, in addition to a for-
mulation of the main problem areas, the research purpose, and the research questions. The de-
limitation principles under which the study will be conducted are also stated here. Furthermore,
the theoretical, as well as academic contribution areas are presented at the end of the section.
1.1 Background
The global market for food and groceries is larger than ever before and the market is expected
to grow at a yearly rate of 6.9 per cent, reaching a total market size of over USD 12 trillion in
2020 [29]. This market would then correspond to around 13 per cent of the global economy [32].
Food retail is generally considered a sub-segment of the Fast-Moving Consumer Goods (FMCG)
industry, defined as the sale of goods that are produced in high volumes, have low margins,
extensive distribution networks and are characterised by high rates of inventory turnover. At
the same time, the products are sold cheaply, with frequent consumer purchases and a fast rate of
consumption. In general, consumers do not put significant weight in the decision-making process
when purchasing a certain FMCG product. FMCG is often divided into three subgroups, drinks,
food and household items [3].
FMCG typically falls under the B2C category even if large deliveries are only made to wholesalers
or retailers. For this, it is particularly important to distinguish between the customer and the
consumer. In this logistics application, the customer refers to the retailer (supermarket), whereas
the consumer refers to the end user. In the grocery trade, it is the consumer who values the
product, thus FMCG is classified as a B2C business. In many FMCG industry cases, there
are considerably more producers than retailers, and thus the retailer is given significant pricing
power, creating a price-competitive FMCG market. [3]
Private label products constitute an ever increasing share of the FMCG market. The share of
private label products concerning the European market is continuing to grow on at a year to
year rate of 4 per cent, with a market share of 39.4 per cent 2017 and a unit share of 48.2 per
cent [2]. This can be compared to 23 per cent market share in 2009 [34]. By country, United
Kingdom has the largest market growth with a private label share of 52.5 per cent followed by
Spain (42.6 per cent) [2]. Based on a study of the private label market in the Czech Republic
[30], the reason behind the private label market’s growth can be linked to a change in how
consumers think when comparing different products and purchases. Nowadays, consumers tend
1
1 Introduction
to value a lower price over a well-known label to a broader extent, while still considering the
quality aspect, in line with general characteristics of private label products. This aspect is also
highlighted in IRI’s report, which states that private label products have developed into being
more consumer-focused and with a finely balanced price-quality ratio, which has been a identified
as a primary driver of growth [2].
Due to the low-margin nature of the FMCG business, value is primarily generated through
well-negotiated supplier contracts as well as large sales volumes (economy of scale), increasing
the need for efficient supply networks and logistics [5][20]. In price-competitive FMCG business
such as food retail, customers are often able to choose from a wide variety of options. Thus,
maintaining a reliable supply flow is essential for these firms, as empty store shelves would cause
customers to look towards competitors. To ensure significant customer satisfaction, FMCG firms
typically dedicate large resources into the follow-up and maintaining of service levels from the
storage facility to individual stores [31]. However, firms holding unnecessarily large amounts of
inventory in order to maintain service levels are bound to incur capacity issues, increased costs
associated with working capital and may in some cases require rental of external, more expensive
storage space. In the context of the even-increasing scale of the business, the inventory capacity
issues relating to high fill rates (henceforth referred to as inventory pressure), are expected to
only increase in magnitude, increasing the need for efficient management of inventory.
While the focus on service levels is an integral measure for FMCG firms, there does not exist a
widely accepted KPI to monitoring the compromising effects this may have in terms of increased
inventory pressure. With no established method for measuring, identification of the root causes
of the problem is next to impossible.
1.2 Problem statement
The problem to be investigated in this study can be expressed as follows: The continuing
growth of the volume and capital intensive FMCG industry will undoubtedly lead to an increase
in capacity-related inventory costs. With no established method for the active monitoring of
inventory pressure, the problem is a difficult one to identify and address. The specifics of this
problem area are summarised below:
• The FMCG market is growing in line with the overall global economy, and this development
is expected to continue in line with ever-increasing global consumption. This is bound to
incur larger costs associated with inventory holding, working capital, rental of space, in
addition to other costs associated with high capacity utilisation
• The continuing growth will require even larger storage facilities or more efficient inven-
2
1 Introduction
tory strategies. Building larger inventory facilities are capital intensive investments, while
improving inventory management would address the problem directly
• Currently, there is no uniform definition for inventory pressure on SKU level, and thus no
industry standard KPI for measuring it. With no method for monitoring the problem on a
detailed level, efforts to reduce it by identifying problem areas (such as product segments)
are difficult to implement
• Sources from Axfood, one of Sweden’s largest food retailers, have indicated that some
particular product segments, such as their own private label products, may contribute to
inventory pressure to a larger extent than label products. This due to the nature of the
supplier contracts, involving a limited number of suppliers, a high degree of foreign import,
and typically prolonged and unpredictable lead times [5]
1.3 Purpose and research questions
The overall purpose of the study is to determine how FMCG firms should use KPIs and inventory
control in order to facilitate a low inventory pressure strategy, while maintaining a satisfactory
service level. As there is currently no uniformly accepted definition and metric for inventory
pressure, the initial aim is to define such a KPI quantitatively, and thereafter to apply the metric
to the actual case study. Furthermore, the aim is to provide a basis for discussion regarding
which particular product families are associated with increasing inventory levels. Private label
products in particular, have been identified by the case study subject (Axfood) as a product
family that may be linked to higher levels of inventory pressure. By performing the statistical
method of linear regression, key characteristics that drive inventory pressure can be identified.
Characteristics which can later be used as a basis for discussing the root causes of inventory
pressure, and furthermore to be better equipped to handle the problem in the future. The
research questions to be investigated and discussed throughout this report are defined as follows:
1. What KPI metric should be used to evaluate inventory pressure levels on SKU level?
2. Which product characteristics are instrumental in causing high inventory pressure?
(a) What are the measurable predictors of inventory pressure?

(b) To what degree do these predictors contribute?
3. Are any particular segments associated with significantly larger inventory pressure levels,
either on product level or supplier level?
(a) Should private label products in particular be regarded as a cause of high inventory
pressure?
3
1 Introduction
1.4 Delimitation
The conducted study is limited according to the following principles:
• The study is limited to the Fast-Moving Consumer Goods (FMCG) industry and in partic-
ular to the food retail vertical. This is exemplified by a case study at a large-scale Swedish
food retailer (Axfood)
• The study is oriented toward diagnosing and modelling inventory capacity issues, along
with their possible underlying factors. However, no potential solutions to these problems
presented in this report as any such solutions lies outside of this study’s scope
• The primary method for identifying problems is quantitative in nature and revolves around
finding general patterns within a large inventory data set. Therefore, no specific incident
is analysed in further detail. Only measurable and quantitative data is used in the analysis
• While supplier factors are being considered in the final analysis, inventory data is mainly
analysed on the SKU level
• The subject of inventory pressure is being investigated as a static phenomenon, i.e. no

year-over-year changes or trends are being analysed
• The data analysis is based on data pertaining to the full year 2018, therefore any potential
changes in the first months of 2019 will not be considered. All inventory data on SKU
level refers to Axfood’s Jordbro storage facility
• Only the upstream supply chain activities from case company’s central inventory facility
are considered
• While inventory pressure issues are bound to incur increased costs, these costs and their
potential implications are not being analysed in detail
1.5 Theoretical contribution
The literature review revealed that there does not exist a uniform definition for inventory pressure
on the SKU level, and thus no industry standard KPI for measuring it. Responding to this gap,
this master thesis aims to suggest a KPI-based framework for measuring inventory pressure
in the FMCG industry, including a quantitative model for identifying products characteristics
that drive inventory pressure. The study results in a dynamic and easily applicable model for
inventory control and classification. The model could potentially be applied on other FMCG
cases, possibly with the use of another inventory pressure KPI.
4
1 Introduction
1.6 Empirical contribution
The large-scale Swedish food retailer Axfood currently lacks a detailed measurement tool for
inventory pressure, which is sought for due to increased inventory fill rates and expected further
growth in demand. The master thesis’ empirical study therefore aims to provide Axfood with a
suitable KPI metric for measuring inventory pressure (complementing the current service level
KPI) along with a detailed deep-dive into which SKU and Supplier segments that may be to
blame for increased inventory pressure issues. The study includes a method for identifying
the product characteristics that drive inventory pressure, as well as the identification of key
drivers that affect the level of inventory pressure at Axfood the most. The result comes in the
form of finding the underlying determinants for Axfood’s increasing inventory pressure and the
identification of specific key drives in various product segments.
5
2 Research method
2 Research method
The purpose of the research method section is to orient the reader regarding the methods and the
motivations behind the chosen research approach. A literature study in addition to a case study
form the primary basis of the study. The empirical analysis consists of the construction and eval-
uation of a model, and the findings make up a basis for discussion. The methods for all these com-
ponents are explained below. This section also includes a discussion regarding research quality.
2.1 Choice of methodology
The research questions as presented in section 1, revolve around designating a quantitative metric
for inventory capacity issues, and furthermore to use the KPI for the purposes of investigating
underlying causes. According to Yin, such research questions (originating from statements how
or why), revolving around a contemporary phenomenon and investigated in a real-life context,
are optimally suited for the application of a case study approach [36].
Furthermore, the research questions are mainly explanatory in nature, with the purpose of
identifying underlying causes for a certain parameter (inventory pressure). Thus, following the
recommendations as presented by Yin, a case study approach was chosen, with the subject being
the case company Axfood [36].
2.2 Research design
Figure 1 outlines the chosen research design and the overall process flow of the study, along with
corresponding section titles for each step, for the reader’s reference.
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2 Research method
Figure 1: Flow chart of research method
The study is based upon an academic literature review in addition to a live case study at the
Swedish food retailer Axfood. The purpose of these two components was to provide inputs for
synthesising a quantitative KPI pertaining to the phenomenon of inventory pressure. Meanwhile,
a large inventory data set collected from the Axfood case study was used in a regression analysis
in order to identify potential determinants of inventory pressure. The KPI metric for inventory
pressure was then applied on Axfood’s various product segments in order to score and rank these,
and by also applying the findings of the regression model, key drivers of inventory pressure
in these particular segments could be identified. While the context of the research questions
required a quantitative approach, the case study included qualitative methods such as interviews.
2.3 Context study
After defining the research topic and main research questions, a context study was conducted
with the purpose of defining the key academic theories upon which the study and the method
would be based. This included wide searches of literature in order to point the researchers in
the right direction regarding which research context was relevant.
The context study also served as an introduction to the Axfood case study. Prior to the start of
the project, a number of informal interviews and meetings were conducted on-site at the Axfood
headquarters in Stockholm, as well as at the company’s main logistics facility. These meetings
also included a tour of the storage facility, as well as the various departments within Axfood.
Additionally, the various internal systems being used for storing company data were introduced
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2 Research method
to the researchers. The purpose of this process was for the researchers to acquire significant
insight and knowledge into the different departments of Axfood as to be able to carry out the
study as independently as possible, as well as to receive a broad overview of the organisational
structure and company functions that were deemed relevant for the study.
2.4 Theoretical framework
Based on the initial context study, four (4) key theoretical areas were identified as being able
to serve as the theoretical framework for answering the research questions. These areas were as
follows:
1. Inventory control
2. Inventory classification
3. Inventory and logistics key performance indicators (KPIs)
4. The statistical method of linear regression analysis
All of these four areas were then studied by a literature review to get an overview of the current
knowledge in the research area. The literature mainly consisted of scientific articles and books
and were collected using the online databases Google Scholar and Web of Science. During the
search of relevant literature, some specific keywords, in addition to the previously stated aca-
demic areas were used, primarily; FMCG, Supply chain Management, Inventory management,
Inventory pressure, FMCG, Food retail. The articles’ relevance was determined by the respective
journal of publication, year of publication, in addition to the number of citations. Only publi-
cations in English or Swedish were used as source material. The key findings from the literature
review were then investigated further and synthesised in the study’s theoretical framework.
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2.5 Axfood case study
The qualitative component of the empirical study consisted of a live case study at the Swedish
food retail group Axfood. The case study was made up of discussions and formal interviews with
employees, in addition to the collection of inventory data to be used in the quantitative model.
2.5.1 Interviews
Purpose
Due to the numerical nature of the to-be constructed model, a series of interviews were held
with relevant Axfood employees, with the purpose of providing an initial qualitative basis for
choosing correct and relevant metrics to be used in modelling. Conducting qualitative interviews
is a proven method for the purpose of initial variable selection [18].
Selection of interviewees
The interviewees were chosen as to include as many different internal perspectives as possible. In
order to find relevant managers to be included as interview subjects, Axfood’s internal contact
network was utilised. The selection of subjects, in addition to the codified interviews can be
found in table 4.3 in the case study section.
Interview method
Interviews were held on-site at the Axfood headquarters at Torsplan, Stockholm, at the Axfood
logistics facility in Jordbro, or via conference call. The interviewees were first given a brief
introduction to the study, its main purpose and the research questions being investigated. The
interview outline was designed with a combination of semi-structured and structured questions
(see Appendix section A for the interview outline). The semi-structured questions were used to
provide further qualitative insights into the underlying problems and root causes of inventory
pressure. During these segments, the researchers allowed for the interview subjects to elaborate
on the answers and potentially address unforeseen problems from their part. In order to cap-
ture as many different views of the inventory pressure issue as possible, the interviewees were
specifically asked to evaluate the questions from their personal point-of-view. These questions
generally resulted in extended discussions.
The structured section of the interview was used as quantitative data for choosing inputs for the
KPI as well as its predictors. Interviewees were handed a form with the choice of parameters in
order to evaluate these in terms of relevance for the analysis, subjects were also asked if any of the
metrics should be removed, or if any should be added (when conducted via conference call, this
material was sent to the interviewee via email). In general, structured questions provide more
easily scored data which suits the purpose of modelling [9]. The interviews were conducted in a
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2 Research method
personal and non-formal manner where everyday language was used. This type of interview is
suitable for situations where the interview’s purpose is to explore and generate theories regarding
a particular phenomenon, and where the objective is to achieve technical/process knowledge. [9]
During the interviews, notes were written down and the conversations were summarised in text
(see Appendix section B - Summary of conducted interviews). All interviewees were given the
option to read through the collected material prior to the publication of this study, in order
to minimise the potential effects of interviewees hesitating to provide their opinions on subject
matters. [9]
2.5.2 Data collection
The main assumption made in the study is that due to the fact that Axfood has a very broad
product assortment, the inventory data collected in the case study should be applicable to
generalise theories across the entire food retail industry, namely a KPI for inventory pressure in
addition to identifying its main predictors. All points of data used in the model and analysis
were retrieved from company sources or directly from internal systems, such as SAP. For reasons
of unity, all quantitative data points used henceforth are subject to the following definitions and
limitations:
• All data refers to the full year 2018 as unit of time, and to the same set of SKUs, all from
the storage facility in Jordbro, Stockholm
• Order frequencies and order volumes refer to inbound orders made by Axfood to the
storage facility in Jordbro, Stockholm. Supplied orders are defined as orders delivered by
Axfood’s Jordbro storage facility to various Axfood stores. All order and inventory levels
are stated in terms of number of pallets, and when necessary, unit figures were recalculated
into pallets for comparability
• Perishable goods, in addition to SKUs pertaining to special offers from suppliers (referred
to by Axfood as klipp) were excluded, due to having extraordinary inventory properties
and thus deemed non-significant in this research context
• Categories of data only available for a limited number of SKUs or time periods were
excluded from the analysis, with the exception being the internal ABC classification, were
data from four different points of classification were used to determine the most common
class for each SKU during 2018
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2 Research method
2.6 KPI & Model construction
Originating from the literature review and the resulting theoretical framework, in addition to the
case study, a model was constructed. The aim was to decide on a KPI in order to classify products
according to their respective impact on inventory pressure. Furthermore, a linear regression
analysis was performed in order to identify relevant predictors of the inventory pressure KPI.
All collected data points from the case study were consolidated in a Microsoft Excel model, as
this platform provided a simple and dynamic tools for overseeing a very large set of data. The
excel model was given raw inventory data (on individual SKU level) as input, and then provided
a consolidated output sheet to be used in the regression model.
Using a regression model was determined to be in line with the overall explanatory research
methodology, as presented in section 2.1. The purpose of the model was to identify a series
of significant cause-and-effect relationships between various inventory/supply chain parameters,
and inventory pressure (according to the chosen KPI metric) [36]. The model creates a mathe-
matical equation and assigns different weights, or coefficients for each parameter, according to
its relative importance, and is thus a suitable method for testing cause-and-effect hypotheses
[7]. This method was utilised in order to complete the qualitative case study with a quantitative
basis and to test the assumptions originating from the interviews against actual company data.
For the execution of the regression analysis, the IBM statistics software SPSS was used. This
program was considered a feasible option for the purposes of this study, enabling all the required
functionality necessary for conducting the quantitative analysis [7].
2.7 Segment analysis
Upon completion and evaluation of the regression model, all SKUs were classified according to
the inventory pressure KPI, and a segment analysis was performed, where various segmentation
criteria was applied to the data set. These segments were then ranked according to the main
inventory pressure KPI, in addition to its primary determinants (as calculated by the regression
model). The segment analysis based on the KPI and identified predictors, was performed in
Microsoft Excel as this process primarily consisted of aggregation and ranking of SKU data in
data tables.
2.8 Research quality
The dimensions as outlined by Collis and Hussey, originating from the distinction of positivism vs.
interpretivism, is used as a the primary framework in the following paragraphs when discussing
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2 Research method
the various aspects (sample, location, data quality, reliability, validity and generalisability) af-
fecting the level of quality in the case study. In order to discuss the quality of research, the
relevant paradigm first has to be defined. In summary, the chosen research method for this
study mainly falls under the category of interpretivism, with a high emphasis on validity and
somewhat lower on reliability. [11]
2.8.1 Data sample and removal of outliers
Table 1: Size of data sample
Stage SKU sample

Initial data set 22,081
Exclusion of SKUs not in storage -11,665
Listwise exclusion of data gaps -3,308
Exclusion of outliers (top 2-percentile in each category) -824
Final data set 6,284
The initial sample of 22,081 SKUs was decreased by 11,556 SKUs due to these SKUs not being
physically present in storage during the time period in question (2018) and therefore not being
relevant.
Gaps in the data set were excluded listwise, meaning that if any data point was missing, all
remaining data points for that particular SKU were disregarded. The listwise method guarantees
the highest level of data consistency, since no incomplete data points are used in the analysis,
the primary drawback is that listwise deletion compromises the size of the data set [19]. The
method was utilised in order to ensure the highest possible accuracy for the data used in the
analysis and to be able to accurately analyse all potential aspects of the data points. Listwise
deletion further limited the data set to 7,108 SKUs.
The method of linear regression analysis is particularly sensitive to the occurrence of outlying
data points and this poses a significant quality issue in the quantitative analysis that needed to
be addressed, since these data points can have a potentially large effect on the model fit. Editing
of data (such as removal of outliers) is an applicable method of handling such influential points
when there is a large likelihood of reading errors in the data set[33]. In this particular case, due
to the very large amount of data in the set, outlying data points could not be evaluated on a case-
to-case basis. Instead, a more general approach was deemed necessary. An exclusion criteria for
data points was determined to be a viable option, and the basis for this criteria was made with
qualitative input from the conducted interviews. The exclusion criteria was discussed with the
specific interview subjects that were considered to have significant insight into the characteristics
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2 Research method
of the inventory data. With the qualitative interviews as basis, an exclusion criteria of the top
2-percentile in each category was determined a viable course of action, in order to handle the vast
amounts of outlying data points in the set (not including the binary variables). This measure
served to decrease the final data set used in the analysis to 6,284 SKUs. This data set was then
used for both the regression model and the product segment analysis.
2.8.2 Location of research
The research was conducted as a live case study on-site at Axfood as opposed to being made at
an artificial location, which is in line with the interpretivist paradigm. [11]
2.8.3 Quality of data
The main analysis is primarily based on statistical methods, which would fall under the positivist
paradigm. However, the initial data set for the quantitative research includes over 22,000 SKUs
and this large set could pose issues regarding the quality of data which cannot be practically
checked case-by case. Instead, the quality relies on the exclusion of outlying data, as to not
produce an unreliable model. Regarding the actual results of analysis, the emphasis instead
lies (aligned with the interpretivist paradigm) on producing results that are rich in detail and
nuance (i.e. to include and discuss as many relevant contributing factors to inventory pressure
as possible). While individual points in the data set may have varying degrees of quality due to
not being verifiable, the overall result of using such a large set should be of sufficient quality to
generalise useful theories.
The large amount of data may also incur quality issues relating to the loss of certain extreme
values. The study subject, namely inventory pressure, may in some cases be a momentary
phenomenon subject to seasonal effects and isolated incidents such as improper orders and
unforeseen supplier delays. While such individual peaks in inventory pressure may be vital to
study for a FMCG firm, they do not fall under the scope of this study, which is to generalise
results from a large data set. The aim to objectively identify patterns within this a sample, with
no preconceptions of the end results, is in line with the interpretivist paradigm. [11]
In summary, this study that is conducted under the interpretivist paradigm may compromise
some degrees of data integrity, i.e. some individual data point may not reach the desired quality
in favour of higher results currency defined as the total relevance of the achieved results across
settings, methods, paradigms and time. [11]
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2 Research method
2.8.4 Reliability of results
Reliability refers to consistencies in the measurement of data, should the study be repeated. As
this study only uses data from the full year 2018, a separate study conducted on 2017 data would
undoubtedly yield slightly different results. However, the primary differences in data patterns
do not occur year-to-year, but rather during the course of one year, since food retail generally
display seasonal patterns (e.g. some SKUs could be more popular during the summer season)[5].
Furthermore, the aim of the analysis is not to draw conclusions on the actual data points, such
as the average inventory levels of 2018, but rather to investigate patterns and causality between
the parameters. Therefore, the assumption was that limiting the analysis to data from 2018
would be sufficient for the stated purposes. [11]
Discussions and interviews constituted vital components of the study. Another reliability issue
could arise from the possible bias of the company representatives involved in the process. Their
personal opinions and perceptions could have an effect on the researchers’ perception of the
problems under investigation. To control this issue, the researchers maintained an interpretivist
mindset when meeting people who could have potential bias. Interview questions were formu-
lated as e.g. "What is in your opinion the greatest issue involving X" and the answers were in
turn, perceived as the interviewees point-of-view as opposed to hard facts.
2.8.5 Internal validity of results
Internal validity refers to how well the conducted study was able to measure and explain the
desired phenomenon. One of the main challenges in this study was to ensure sufficient relevance
of the conducted tests. This is reflected in how well the designated KPI could accurately measure
the phenomenon of inventory pressure, as well as if the choice of predictors were relevant in
explaining different levels of the KPI. In order to ensure validity in the quantitative study,
the study relied on qualitative measures in choosing the input metrics. This was done by
conducting interviews with relevant employees within the organisation, who could verify that
all of the metrics that were eventually used had relevance in this research context. A total of 7
subjects from the company were interviewed, mainly from the product flow control organisation.
The limited number of interview subject could constitute a compromising factor in terms of
internal validity, due to the subjectivity of interview subjects. If additional subjects from other
organisations within the company had been included in the case study, the results may have been
different. However, the product flow control employees were the only ones considered to possess
significantly detailed insights into the research topic to be able to contribute to the study in a
meaningful way. Regarding the quantitative analysis, the listwise deletion of data mentioned
in section 2.8.1 could compromise internal validity to some degree, as data points have been
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2 Research method
deleted in a manner that may not be fully random. [36]
2.8.6 External validity of results
External validity refers to the study’s findings being suitable to generalise outside of the case
study. Blomkvist & Hallin argue that statistical generalisability is compromised by only includ-
ing a single company in a case study, and this fact could potentially constitute a compromising
aspect of this study [8]. However, while the data being used as input to the analysis is limited
to Axfood’s Jordbro facility, one of the general conclusions of the study relate to identifying
patterns and determinants that can serve to explain high levels of inventory pressure as defined
by the KPI. With this as basis, particular drivers of inventory pressure in various SKU/supplier
groups are identified. The KPI in itself, is not limited to only this case, but could be applied on
other FMCG cases. While the result in the form of the identified drivers could differ on a case-to
case basis and may not be the same if an Axfood competitor was analysed, the framework for
identifying these patterns via regression analysis is still feasible and could be applied on other
FMCG industry cases if the inventory conditions are somewhat similar (a large FMCG system
with a vast assortment of SKUs stored in a centralised inventory facility). [36]
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3 Theoretical framework
In this section, the literature review is summarised, and the main academic theories to be used
as a basis for the theoretical aspects of the study are presented. These theories primarily relate
to the academic subject of inventory control and relevant inventory metrics. Since the statistical
method of linear regression is an integral part of the study, relevant regression tools and an
outlined work flow are also included in this section. In summary, the theories and concepts
presented here will constitute the research context under which the analysis will be performed.
3.1 Inventory management
The American Production and Inventory Society defines inventory management as the branch
of business management concerned with planning and controlling inventories [12]. The role of
inventory management is to make sure that for each product, there exists a sufficient stock level
that meets all requirements of the primary function; to serve the customer. To understand the
requirements, the customer viewpoint needs to be taken, considering such factors as availability
at the right place, at the right cost, in the right quantity and at the right time. Customer
needs are never constant and always involve a degree of uncertainty on different levels. Safety
inventory serves a vital function here, by ensuring that for each point in time, there exists a
level of buffer inventory to counter the potential effects caused by uncertainties such as demand
variance, lead time variance and forecast errors. Thus, the risk of a potential stock-out can be
minimised. [35]
However, since inventory requires working capital and increases the total capital requirements of
the firm, having unnecessarily high levels of inventory is inefficient from a financial standpoint
[14]. The main goal of inventory management is thus to minimise inventory investments while
still meeting the functional requirements, including customer needs and operational constraints
such as inventory space [35]. If service levels are higher than necessary, the safety stock should
be reduced in order to meet the goal of minimising inventory investments. As mentioned in the
previous paragraph, variance is one of the key drivers of safety stock. If the fluctuation can be
reduced by improving forecasting and process reliability, inventory investments can be reduced
while still maintaining the requirements. Minimising inventory investments in the cycle stock
also plays a key role since that accounts for the majority of the space allocation [35]. The size of
the cycle stock depends primarily on the order quantity and the order frequency, which in turn,
depends on the ratio between setup cost and holding costs. Therefore, minimising the setup
cost is also a key component of inventory management [35]. To achieve these goals, a continuing
17
inventory management effort is required where all types of waste and non value-adding activities
are eliminated, in line with the principle of lean [3].
Figure 2: Inventory levels over time [35]
A visualisation of inventory level over time is shown in figure 2 above. When inspecting the
visualisation, it is clear that one of the key measures in effective inventory management is to
reduce safety inventory by reducing fluctuations and to minimise cycle stock by increasing order
frequency while reducing order quantity. [3]
3.2 Inventory control models
In order for firms to categorise a large number of stock keeping units (SKUs), various quantitative
classification methods have been developed by the industry during the past decades, originating
with the ABC classification model, which has later been expanded upon in order to include
a wider variety of different parameters. The main classification models in use as of today are
summarised in the paragraphs below.
The ABC inventory classification process is an analysis method where products are analysed
according to their relative value to the firm. The SKUs are then sorted in three main categories,
with respect to their relative importance and contribution to the ongoing business of the firm:
• Category A items - Characterised by outstanding importance, these are often rigorously

controlled and frequently analysed
• Category B items - SKUs of average importance that are less tightly controlled
• Category C items - Relatively unimportant to the firm, with only the simplest degree
of control
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The category boundaries are often based upon the Pareto principle. For example, category A
typically make about 70 per cent of the company’s business but only taking up 10 per cent of the
inventory. Category B typically make up about 20 per cent of the company’s business and take
up about 20 per cent of the inventory. Category C items only contribute with about 10 per cent
of the company’s business while taking up about 70 per cent of the inventory. The traditional
ABC classification has generally only been based on one criteria with respect to the value to the
firm, i.e. annual dollar usage of the items, however the most important criteria with respect to
inventory items can change depending on the nature of the SKUs and on the organisation [13].
Other criteria that can be considered as crucial for inventory management purposes are lead
time, product obsolescence, availability, substitutability, criticality, repairability, commonality,
certainty of supply, impact of stock-out, inventory cost, number of requests for the item per
year, scarcity, durability, order size requirements, stock ability, as well as demand distribution
[28].
To be able to consider different criteria in a ABC classification, Multi-Criteria Inventory Classi-

fication (MCIC) was introduced by Flores and Whybark in 1986 [13]. However, this model was
only designed to consider two criteria and hence, their proposed methodology is a bi-criteria
rather than multi-criteria method. Cohen and Ernst introduced a cluster analysis which could
conduct the ABC categorisation on multiple criteria [10]. The drawback with their proposed
model is that the clusters have to be re-evaluated whenever a new SKU is added to the inven-
tory, resulting in previously categorised SKUs sometimes being reclassified differently each time
a new SKU is added.
Another expansion of the traditional ABC model was introduced by Ramanthan in 2006, who
proposed a weighted liner optimisation method for classifying inventory items with multiple
criteria [27]. The model aggregates the performance of an SKU in terms of different criteria to a
single score, called the optimal inventory score of an item. The score and the underlying weights
are calculated from an optimisation method with a maximisation objective function under the
constraints that the weighted sum for all items must be less than or equal to one. In 2007, Zhou
and Fan presented an extended version of Ramanthan’s model, instead of only using one objective
function that aims to maximise the aggregated score, this version also incorporated an objective
function that sets the least favourable weights for each item [37]. One drawback with this linear
optimisation is the processing time, since all SKUs needs to be optimised separately, it can be
problematic for a very large number of SKUs. Partly due to this problem Lung Ng developed an
alternative to the weighted linear optimisation [25]. Ng introduced a transformation technique
that can obtain the solutions of weights without a linear optimisation.
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3.3 Industry metrics
In order to be able to improve performance and efficiency levels within any given supply chain
system, one first has to evaluate the current state of the system. Within inventory management,
performance metrics are primarily focused towards the goal of minimising costs associated with
high stock levels. These costs can be related to capital tied up in stored goods, as well as costs of
requiring extra storage capacity due to extraordinarily high inventory levels. At the same time,
the constraint of maintaining an acceptable service level needs to be satisfied. In the FMCG
context, the service level corresponds to the share of products that the firm is readily available to
deliver to customers in order to satisfy the given demand within a satisfactory window of time,
as designated by the firm itself. This poses a conflict of objectives and thus, one of the main
objectives within inventory management is to manage the constant trade-off between inventory
utilisation and service level. [21]
3.3.1 KPI framework
The industry has designated a number of best practice Key Performance Indicators (KPI). To be
able to provide a balanced picture of the situation, a wide variety of metrics are required, as well
as a framework for choosing which metrics are relevant in a specific case. Gunasekaran, Patel,
and Tirtiroglu have proposed a two-dimensional framework that categorises KPIs according to
the dimension of financial vs non-financial metrics, in addition to whether the metrics measure
strategic, tactical or operational aspects of supply chain management, with increasing level of
operational detail for each category [15]. For optimal visibility using KPIs, the input parameters
should be easily measurable (aided by functioning high-quality data platforms), and preferably
as mutually independent as possible [15]. Previous research within the subject has shown that
financial KPIs are optimal for external reporting and strategic decision-making, while non-
financial metrics are more suitable for operational day-to-day follow-up measures [15].
Strategic KPIs cover a wide variety of managerial aspects including delivery lead times, prof-
itability, productivity, product range etc. Tactical KPIs mainly cover aspects related to planning,
such as accuracy of forecasts, planned cycle times and order reliability. Operational KPIs deal
with the efficiency of the supply chain such as cost per operation hour, capacity utilisation and
quality of delivered goods. [15]
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3.3.2 Overview of metrics
In the continuing analysis and case study, the following key metrics have all been identified and
suggested as relevant when analysing inventory performance, in particular for this case study.
These metrics are widely accepted and frequently utilised within the FMCG industry, and will
furthermore provide inputs to designing a more general KPI for the aspect of inventory pressure.
Service level: In the context of inventory management, the service level measures the number
of orders delivered to customers in a satisfactory manner, particularly in regard to time, in
relation to the total number of orders. The service level indicates the inventory performance
towards satisfying customer demand. [21]
Satisfactory supplied orders

Service level = (1)
Total orders
Inventory volume: A measure of the total average inventory level of a particular SKU during
a designated time period, in number of items or pallets. [15]
Inventory turnover ratio: A financial measure of how fast the firm manages to sell its
complete inventory of any given SKU during a designated time period. The ratio shows how
fast (or efficiently) the SKU is moving through the system and gives an indication of the economic
success in selling the SKU, in relation to the total stock-keeping level. [28]
Value of total SKU consumption

Inventory turnover ratio = (2)
Value of average SKU inventory
Average order volume: Measures the average inbound batch size from the supplier of a SKU
during a designated time period, in number of units. [15]
SKU units delivered

Average order volume = (3)
Total SKU deliveries
Order frequency: Measures the average inbound frequency of deliveries from the supplier of
a SKU during a designated time period (e.g. one year), in number of units. Note that average
order volumes and order frequencies are often closely related. As the order frequency increases,
average order volumes typically decreases. [15]
Total SKU deliveries

Order frequency = (4)
Unit of time
21
Shelf life: Measures the amount of time that a SKU can be stored without becoming unfit for
consumption, or delivery to a store. In a FMCG context, the dimension of shelf life poses a
significant constraint for inventory management, as goods may not be stored indefinitely. If this
is not managed efficiently, the costs of waste may be significant. [15]
Supplier lead time: The expected time consumption of delivery of the SKU from the supplier.
Longer lead times generally requires higher safety inventory. [23]
Contribution margin: The difference between the selling price per unit, and the variable
cost per unit (the purchase price from the supplier). The metric can be calculated e.g. per
unit, as a total for a particular SKU, or as a total for an entire product family or firm division.
The contribution margin serves as a key profitability metric within the FMCG industry, as this
margin is the source of the firm’s profits. [17]
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3.4 Linear regression analysis
Linear regression analysis is used to describe the relationship between a set of predictors and a
dependent variable. The objective can either be to predict a certain outcome based on known
data for some other parameters (predictors), or to define the relationship between parameters
and the specific outcome (dependent variable). A linear regression analysis can for example
be used when analysing a customer satisfaction survey, but also e.g. for a study that aims to
predict stock values based on financial historic data. The outcome from a regression analysis
is an equation with coefficients that represent the weighted relationship between each predictor
and the dependent variable. From the analysis the researcher can understand to what extent
a variable influences a certain variable and hence, also confirm or reject the hypothesis that a
certain parameter influences an outcome. This makes regression analysis useful in both academia
and as a commercial use. [18]
3.4.1 Regression models
There exist several types of regression models, who all have both drawbacks and advantages
depending on both the type of study and on the type of variables. Simplified, one can divide
dependent variables into three groups; continuous, categorical and count data. In the case of a
continuous dependent variable, which is the most common, linear regression is the first model to
consider, also known as ordinary least squares (OLS) model [24]. Linear regression describes the
mean change in the dependent variable when changing each predictor one unit. The development
of the equation is structured around minimising the sum of squared errors. If only one predictor
is used, a fitted line plot provides an intuitive understanding of the model. If multiple predictors
are used, several automated methods can be used to identify which predictors to include in the
model. The most commonly used methods are stepwise, backward and forward selection. If the
linear regression does not result in a sufficient fit, one can perform a nonlinear regression model
that provides a more flexible curve-fitting functionality. The main downside is the challenge
in choosing a proper nonlinear function that results in a good fit, and this process often takes
considerable effort. [24]
If the dependent variable is categorical, a linear regression model cannot be used, instead logistic
regression is preferable. Logistic regression does not use least square to estimate parameters,
instead it transforms the dependent variable and uses maximum likelihood estimation. In the
last case, when the dependent variable is a count of terms with a low mean, it tends to be skewed
and not normally distributed. In these cases, linear regression will find it hard to fit the model,
since one of the assumptions for OLS is that the dependent variable is normally distributed. To
solve these types of regressions one can use poisson regression, which like the logistic regression
23
uses maximum likelihood estimation. [24]
3.5 Multiple linear regression
Multiple linear regression refers to a regression formula where multiple predictors are combined
into one function for a dependent variable, the mathematical equation takes the form:
Y = 0 + 1 X1 + 2 X2 + ... + p Xp + ✏, (5)
where Y represents the dependent, Xj represents the jth predictor and j quantifies the associ-
ation between predictor Xj and the dependent Y . ✏i refers to the error term that remains when
the dependent variable has been calculated (or predicted ) from the other terms. [18]
3.5.1 Ordinary least squares (OLS)
The method of ordinary least squares is used to predict and estimate the regression coefficients
, which describe the relationship between a dependent variable Y , a set of predictors Xi and
the error term ✏i . The regression coefficient i is decided under the constraint of minimising the
square sum of the error term kêk2 . The coefficient is estimated by solving the normal equation,
where ê = Y X ˆ [24].
To be able to achieve reliable regression results when using the OLS method, a set of assumptions
need to be satisfied, which are listed below. [18]
1. The dependent variable is described with a linear function of predictors in addition to

an error term. The OLS will estimate the betas, factors for each predictor, as well as a
constant
2. The error term has a population mean of zero, E[ei ] = 0. The error term accounts for the
variation of the predictor that the predictors can’t explain. If the error term does not have
a population mean of zero, the model is biased and systematically under- or overpredicts
the observed values. In other words, the error term can in some extent be predictable
3. All predictors are uncorrelated with the error term. If there exists a correlation between a
predictor and the error term, it can be used to predict the error, which violates the notion
that the error term represents an unpredictable random error
4. Observations of the error term are uncorrelated with each other. If there exists a pattern
between when the observation was collected (which can be detected in a graph where each
24
observation residual is ordered based on when the data were collected) the model is likely
missing a predictor that captures this information. In the event where this assumption is
not satisfied, the precision of the OLS estimates will be negatively affected
5. The error term has a constant variance, V ar(ei ) = 2, in other words, homoscedasticity
exists and there does not exist a pattern between the size of the fitted value and the size
of the residual. The opposite of homoscedasticity is known as heteroscedasticity
6. No predictor is a perfect linear function of other predictors. If it exists a correction

between predictors OLS cannot distinguish one variable from the other and the model will
not provide a sufficient fit. In this case, one or more of the variables need to be removed
7. (Optional) The error term is normally distributed: This assumption is not required for
performing OLS, but if the assumption is satisfied it allows the researcher to generate
confidence and prediction intervals
3.5.2 Relationship between dependent and predictors
To evaluate whether there is a relationship between the dependent variable and a predictor, one
can simply check weather i = 0. In the multi linear regression setup with p predictors one need
to ask if all of the regression coefficients are zero. To answer the question, a null hypothesis is
used:
H0 : 1 = 2 = ... = p = 0,
Versus the alternative:

Ha : at least one j is non-zero
This hypothesis test is done by computing the F-statistic:
(T SS RSS)/p
F = (6)
RSS/(n p 1)
Where TSS represents the total sum of squares, RSS the residual sum of squares, p the number
of predictors and n the sample size. If the F-statistic takes a value close to 1, H0 is true, i.e.
there is no relationship between the predictor and the dependent variable. [18]
3.5.3 Purpose of regression
To be able to evaluate the regression model, one need to first define the objective of the study.
Whether the objective is to (1) define the relationship between the predictors and the dependent
25
variable, or (2) to predict the dependent variable, will alter the process of how to best evaluate
and decide on the optimal model.
3.5.4 Occurrences affecting model fit
The following items are key occurrences that could have a significant effect on the model’s overall
fit, and should thus be checked for.
Over-fitting: Refers to the inclusion of too many predictors in the model. The optimal re-
gression model should offer the simplest possible explanation for a particular phenomenon, and
should thus not include any more terms than necessary. Doing so may result in an overly complex
model with high levels of variance, decreasing the model’s practical usefulness. [16]
Multicollinearity: A key factor for an accurate regression analysis is that the set of predictors
has no significant relationship between each other, which can be verified by a correlation table.
With this criterion fulfilled, the regression coefficient will represent the mean change in the
dependent variable when the predictor changes with one unit while all other predictors are held
constant. [24]
Interaction effect: Although there does not exist a perfect correlation between two predictors
in the model, an interaction effect can still be present. This means that a third variable influences
the relationship between a predictor and the dependent variable. For example, consider a case
where strength is the dependent variable, and temperature and material are two of the predictors.
In this case, the variance in temperature will likely depend on the third variable (material).
In the regression model, an interaction effect is represented as the product of two (or more)
predictors. The best way to interpret the interaction effect is by studying an interaction plot.
The interaction term should also be evaluated like all other predictors. [24]
Heteroscedasticity: Occurs when there exist sub-populations within the data set where vari-
ability has a different behaviour than the rest, and where this could be explained by some other
factor than statistical dispersion. The model would be less applicable in such a sub-population.
[26][18]
3.5.5 Regression tools
In order to ensure sufficient model fit, and to control the phenomenon mentioned in the previous
section, the following tools and metrics should be utilised during the course of the regression
analysis.
26
Definition of variables: While statistical measurements are useful, a certain degree of subjec-
tive judgement also needs to be incorporated in order to achieve an accurate regression model,
since the automated models for predictor selection (such as the stepwise method) do not take
the variable characteristics nor the objective of the analysis into account. If each variable is
clearly defined and analysed before the regression, that knowledge is useful when evaluating
each regression model. [18]
p-value: The probability that the null hypothesis is true, and that the predictor cannot explain
the variance of the dependent variable. The p-value can vary between 1 and 0, lower values
indicate greater evidence against the null hypothesis, and vice versa. If the p-value is less than
the decided significance level, the null hypotheses can be rejected, and the variable is strong
enough to be used in the regression model. A significant level is often set to 0.05. [18]
R-squared: R2 reflects the percentage of variance of the dependent variable that the regression
model can explain, hence, a value close to 1 indicates that the model explains a large portion of
the variance in the dependent variable. How high the R2 value needs to be depends on the study
area, some research questions have a large amount of variability that cannot be explained. For
example, human behavioural is much harder to predict than e.g. a physical process and hence, a
study that aims to predict human behavioural tends to have R- squared values less than 50 per
cent while studies conducted in another research context could expect values higher than 90 per
cent. If the R2 is too low, the prediction by the model is to imprecise to be useful. However, the
requirements for R2 also depend on the objective of the study. If the regression model aims to
predict an outcome, the R2 is much more important compared to the case where the objective
is to define the relationship between a set of predictors and a dependent variable. [18]
Adjusted R-squared: The R2 always increases upon adding a new predictor, therefore, one
also need to study the adjusted R2 , in order not to overfit the model by adding too many
predictors. The metric adjusts for the number of predictors in the model and only increases if
the added term actually improves the model in a sufficient manner, otherwise the value decreases.
Therefore, one should be observant if an added term decreases the adjusted R2 . [24]
Mallows Cp: Another measurement that considers the number of predictors, and each pre-
dictor’s contribution to the prediction of the variance of the dependent variable, which helps to
detect over fitting. Mallows Cp compares the precision and bias of the full model, to models
with a subset of the predictors [22]. If the Cp is close to the number of predictors, plus a positive
bias term, the model is determined to have good fit. When deciding the optimal subset of the
regression, the different models can be ranked according to their Mallows Cp values, based on
how close they are to the ideal value. [24]
27
Residual standard error (RSE): Measures the lack of fit, with respect to the actual outcome.
RSE does not have a strict interval between 1 and 0 as R2 , instead the value needs to be related
to the data and a set models. [18]
Residual plots: To evaluate if the regression model is reasonable, the residual plots should be
examined, which show the error of each single observation. The residual represents the difference
between the observed value and the fitted (calculated) value from the model. The residual plot
should generally be randomised around zero for the entire range of fitted values. If the plot follows
a pattern and the error is predictable, the predictors do not capture the entire deterministic
component, which is the portion of the variation in the dependent variable that the predictors
explain. This can be due to missing predictors or interaction term, heteroscedasticity etc. Thus,
residual plots are vital in verifying that the model does not suffer from heteroscedasticity.
VIF: The variance inflation factor (VIF) identifies in what degree it exists a multicollinearity
between the predictors. The VIF value for each variable starts with 1 and has no upper limit.
Values between 1 and 5 indicates only a moderate correlation between the predictor and the
others. If the VIF takes a value greater than 5, the level of multicollinearity is considered critical
and the beta coefficients may be poorly estimated, as well as the p-value.
3.5.6 Selection of predictors
To decide a set of predictors, the following three methodologies are usually considered:
• Forward selection: Starting with a model containing no predictors, and then fitting a
simple linear regression and adding the predictor that results with lowest Residual sum
of Squares (RSS) to the model. Continuing with adding a second predictor which results
in the lowest possible RSS for the new two-variable model. This process is repeated until
some stopping condition is satisfied [18]
• Backward selection: Starting with a model that contains all predictors, then removing the
variable with the largest p-value, correlating with the variable that is the least statistically
significant. This process is repeated until some stopping condition is satisfied, such as
when all remaining predictors have p-value above some threshold (e.g. 0.05) [18]
• Stepwise selection: A combination of forward and backward selection. Staring with a

model containing no predictors and then adding the predictor that provides the best fit,
one-by-one, as with forward selection. After adding a variable, the model tests if any
predictor’s p-value has raised above the certain threshold, if so, that predictor is removed
from the model. This continues until all predictors in the model have significantly low
28
p-values, and all predictors outside the model would have large p-values if added to the
model [18]
3.5.7 Process and work flow
With the academic theory regarding linear regression analysis as basis, the work flow as out-
lined in the table below was synthesised in order to achieve the highest possible model fit, and
to accurately evaluate the model.
Table 2: Work flow of the regression analysis
Process Metric Action

1. Selection of predic- Correlation Are all correlation values less than 0.5?
tors
Stepwise vs.
Do the approaches show similar results?
backward/forward
p-values Are all p-values less than 0.05?
Multicollienarity (VIF) Are all VIF values less than 5?
Is the residual plot randomised with a men of

2. Evaluation of model Residual
zero?
Residual standard error Sufficient RSE values for the purpose of the
(RSE) study?
R2 Sufficient R2 for the purpose of the study?
Does the last added term increase the adjusted

Adjusted R2
R2 and is it close to R2 ?
Is the Cp close to the ideal value?
Mallow’s Cp
Which model comes closest?
Do the -values correlate with the theory in a

-values
reasonable manner?
29
4 Axfood case study
4 Axfood case study
In this case study section, the qualitative aspects of the case study are presented, including the
characteristics and identified problems of the studied company (Axfood) as well as a summary
of the findings from the conducted interviews and discussions with company employees. Further-
more, a number of case-specific metrics that were established during the course of the study are
presented.
4.1 Company and case background
Axfood is the second largest food retail group in Sweden with an approximate 20 per cent market
share and revenues of SEK 48 billion in 2018 [5] [4]. The company is a part of the Axel Johnson
Group and is listed on Nasdaq OMX Stockholm, with the majority owner being the founder
Ax:son Johnson family. Axfood itself consists of 13 different food retail brands, mainly the store
chains Hemköp, Willys, Snabbgross, in addtion to online services such as mat.se. All purchasing
and logistics functions within Axfood are handled centrally by the subsidiary Dagab, although
for reasons of simplicity, only the name Axfood will be used henceforth in this report. [6]
On the company level, Axfood is growing at a yearly rate (revenue CAGR) of 5 per cent [4].
Meanwhile, the current inventory facility in Jordbro has an average fill rate of 81 per cent [5].
The company’s overall growth is bound to cause further capacity issues relating to the inventory
facility. The company has recently identified inventory pressure as a key problem that is deemed
to have a significant impact on the company’s inventory costs in the future, and one that needs to
be addressed. A new storage facility is currently planned for completion in 2023. Meanwhile, the
service level target poses a key constraint as Axfood actively pursues an average company-wide
service level target of 97 per cent (the exact figure depends on the specific SKU), and this metric
remains the primary inventory control KPI that is currently being followed up. The reason for
why this KPI is prioritised above all other metrics is that for a food retail group, ensuring a
sufficient and reliable supply to stores is essential for maintaining customer satisfaction and the
market position as a leading retailer. Therefore, any efforts to reduce inventory pressure cannot
interfere with maintaining this target. [5]
In regards to actually measuring inventory pressure, Axfood currently only monitors the level
of available inventory space as a percentage of total inventory space, however this metric fails
to capture inventory pressure on the level of product families or individual SKUs. At the same
time, individuals within the company believe that certain product segments could be the cause
31
4 Axfood case study
of the increasing inventory pressure, addressing the need for a more specific KPI and a more
detailed method for analysis. The initial hypothesis was that the ongoing increase in the share of
private label products could be a causing factor for increasing inventory pressure, due to the fact
that these SKUs in general are often imported and are associated with higher unpredictability
in regards to lead times. [5]
4.2 Product flow control
The product flow control function at Axfood is the primary unit used in the case study. The
unit is responsible for (1) planning the product assortment by analysing market demand, ne-
gotiating supplier contracts and planning product campaigns. Thereafter, the unit (2) handles
the operative purchasing, monitors ongoing orders, and is responsible for receiving goods at the
point of delivery. Furthermore, the product flow control unit is responsible for (3) handling and
following up the continuous order flow to the individual Axfood stores. [5]
Figure 3: Main product flow control functions
4.3 Interview findings
In the table below, the main findings of the conducted interviews are presented in a codified
manner. These include the identified main causes of inventory pressure, the suggested optimal
metric for measuring inventory pressure, as well as suggested predictors for inventory pressure
(from the interview subject’s point of view). The interviews as whole are summarised in text in
Appendix B - Summary of conducted interviews.
32
4 Axfood case study
Table 3: Overview of interview findings
Interview(function) Main problem Optimal KPI metric Predictors

- Order frequency
Pallets placed in buffer Avg. number of allocated - Supplier lead time
1. (Logistics negotiations) consume inventory buffer spots in combination - Lead time variability
space with a time metric - Variability of demand
Pallets placed in buffer

Inventory turnover ratio
2. (Product flow control) consume inventory - Service level
- A metric of value
space
- The human factor Inventory turnover ratio, - Number of manual or-
3. (Prognosis coordination) - Manual purchasing complemented by a metric der alterations
behaviour of SKU space requirement - Service level
Optimisation of given
4. (Product flow analysis) Inventory turnover ratio - # of SKUs/supplier
space constraints
Supplier contract terms
Inventory turnover ratio
5. (Prognosis specialist) limiting efficiency in - Min. order quantity
(supplier level)
purchasing
- Lead time variability
6. (Automatic ordering) Forecast quality Inventory turnover ratio
- Forecast accuracy
- Nature of contracts - High order quantities
7. (Private label purchasing) Inventory turnover ratio
- SKU prioritisation - Assortment changes
4.4 Case-specific metrics
In addition to the aforementioned industry metrics (section 3.3.2), a number of case-specific

metrics were constructed in order to capture various other perspectives to be included. These
parameters were added during the course of the case study, and were decided upon or suggested
during discussions with relevant managers at Axfood, including the formal interviews. The KPIs
are presented below, along with descriptions and motivations for their potential inclusion:
Allocated buffer spots: Measures the discrete number of allocated buffer spots in the storage
facility. A buffer spot is physical space on a pallet rack where a pallet of a specific SKU is placed
before being moved to a picking spot. The metric captures the critical space consumption in
the logistics facility.
Buffer spot turnover ratio: The ratio of how fast the firm is selling a particular SKU (in
units), in relation to the number of allocated buffer spots for that SKU. These pallets vary in
degree of filling, however the space consumed is always one full pallet. Thus, one pallet should
be considered a full pallet (even if not), as to put the storage consumed in relation to sales, and
33
4 Axfood case study
to reflect an inefficient use of pallets.
Total SKU sales

Buffer spot turnover ratio = (7)
Allocated buffer spots * Number of units per pallet
SKU space requirement: Measures the theoretical amount of storage space consumed by
one unit if all pallets are completely filled. Space requirement is estimated to have a significant
impact on inventory utilisation.
1
SKU space requirement = (8)
Number of units per pallet
Variability of order volume: Measures the standard deviation in ordered SKU quantity
during a designated time period (in this case, on a weekly basis for a full year) in relation to
the average order levels for the same period. Comparing the standard deviation to the average
value is called a coefficient of variation metric, which is suitable due to generating a comparable
percentage metric between SKUs with different order sizes. High variations in order volumes
can potentially cause a strain on the inventory facility. [1]
Standard deviation of order quantities

Variability of order quantities = (9)
Average order volume
Variability of demand: Measures the standard deviation in delivered SKU quantity during
a designated time period (in this case, on a monthly basis for a full year) in relation to the
average levels for the same period. The metric is useful for capturing the effects of e.g. seasonal
variations. Variability is measured as the coefficient of variation (as defined previously). High
variations in demand can potentially lead to inventory pressure, as this increases the need for
safety inventory.
Standard deviation of deliveries

Variability of demand = (10)
Average delivery size
Private label: Binary variable; 1 if the SKU is an Axfood Private label product; 0 if not. In
general, Private label SKUs are subject to higher lead times, and may require higher levels of
safety inventory.
Imported SKU: Binary variable; 1 if the SKU is imported from a foreign country; 0 if not. In
general, imported SKUs are subject to higher lead times due to the transport factor, and may
require higher levels of safety inventory.
34
4 Axfood case study
Discount frequency: Measures the frequency of discount offers that include the SKU. In
this case, this was represented by the number of discount offers during the full year of 2018.
These offers generally cause a spike in SKU volumes during the time periods in which the dis-
count campaigns are active. In some cases, when campaigned goods are not fully sold out, these
volumes can remain in storage for a longer duration of time.
Service level margin: Measures the difference between the actual service level, and the tar-
geted service level (approximately 97 per cent for most SKUs). A significant overshoot in service
level would constitute a wasteful activity.
Service level margin = Actual service level Targeted service level (11)
Manual order alterations: The number of manual alterations to automated order sugges-
tions provided by internal systems. Too many alterations could have an effect on the efficiency
of purchasing and in turn, on the inventory pressure.
Minimum order quantity: Due to terms stated in the contracts with certain suppliers, some
SKUs can only be ordered in larger batches, with a designated minimum order quantity. In
some cases, these conditions can cause unnecessarily high order volumes, posing an inefficient
purchasing pattern.
Lead time variability: The variability of lead times from suppliers. Measured as the coefficient
of variance. Higher lead times may require additional safety inventory in order to prevent a
stock-out.
Standard deviation of lead times
Lead time variability = (12)
Average lead time
Prognosis accuracy: The degree to which internal forecasts regarding campaigns and the auto
order flow, correlate to the actual result. A high degree of inaccurate projections could cause
inefficient purchasing behaviour and thus lead to inventory pressure. Is optimally measured as
a percentage value.
Accurate projections (as defined by limit)

Prognosis accuracy = (13)
Total projections
Axfood ABC classification: Axfood utilises a two-dimensional classification system based on

the following parameters:
• Volume value is the value of the total turnover volume for a specific time period, calculated
as the total sales volume multiplied by the unit value (when purchased from the supplier).
35
4 Axfood case study
This indicates the level of working capital that is tied up in a specific SKU. A-items have
the highest volume value, and C-items have the lowest
• Frequency in the number of inventory pickups, e.g. how many times the SKU is being
moved onto a pallet in the storage facility when being shipped. The frequency measures
the amount of inventory labour resources that are allocated to handling a specific SKU.
Since this is an indirect function of customer demand, the frequency also approximates
the SKU’s customer importance. H denotes high frequency, M medium frequency and L
low frequency
Figure 4: ABC classification matrix
These two dimensions result in nine (9) product classes, presented in the table above. From this
perspective, the CH product class can be considered the most important, with minimum capital
tied up in physical goods, and with the highest frequency of deliveries. As an effect of the nine
classes having varying degrees of inventory managerial priorities, different service level targets
are set for the classes, this is further explored in section 6.7.
36
5 KPI & model construction
This empirical section addresses research questions one and two, and provides numerical results
in addition to evaluating these. After defining the inventory pressure KPI, the numerical inven-
tory data set collected from the Axfood case study was used to develop a regression model, with
the purpose of identifying relevant predictors to the KPI in a quantitative manner. Furthermore,
these predictors provided the basis for pointing out key inventory pressure drivers in the various
product segments (section 6).
5.1 Designation of the inventory pressure KPI
A metric needed to be designated in order to answer research question one: What KPI metric
should be used to evaluate inventory pressure levels on SKU level?. The process of defining the
relevant KPI was partially based upon the academic/industrial metrics presented in the literature
review (section 3.3.2). In addition to these metrics, a number of case-specific metrics were
also introduced during the course of the case study, that were deemed significant after various
discussions and interviews with relevant employees within Axfood’s organisation. Together, all
of these metrics constituted a basis for establishing the optimal KPI. The main criteria for
choosing the KPI were as follows:
1. A parameter that is deemed reasonably indicative of inventory pressure, based on the

interviews conducted during the qualitative case analysis
2. An easily-measured metric with readily available data points for the majority of SKUs in
the Axfood data sample
3. A comparable metric between SKUs of varying sales volumes and average inventory levels
4. A metric taking both volume and time dimensions into account
5.1.1 Buffer spots
The two metrics allocated buffer spots and buffer spot turnover ratio (see section 4.4) were both
considered viable KPIs for inventory pressure, as the space consumed by the buffer spots in
storage had been identified as a main inventory capacity indicator during the interviews. The
buffer spots are utilised for all SKUs, therefore constituting a comparable metric (criteria 3).
37
Furthermore, it was concluded that the usage of buffer spots would also correlate with the total
number of units in storage for the SKU in question and that a buffer spot metric would capture
the inventory situation in a satisfactory manner (criteria 1). The buffer spot turnover ratio was
determined to be s suitable KPI for measuring inventory pressure in the Axfood case, as this
KPI would include the time aspect, as well as the space consumption effect of not utilising
pallets fully (criteria 4). However, due to the fact that data relating to buffer spot allocation
and turnover was not being recorded on a regular basis by Axfood at the time of this study.
Thus, none of these metrics were deemed adequate to be used in the case, in accordance with
criteria 2 of the limitations stipulated earlier.
5.1.2 Inventory turnover ratio
Due to the unavailability of data relating to the buffer spots in this case, another KPI had to
be used. Based on the conducted qualitative case study consisting of various interviews and
discussions, the inventory turnover ratio was selected as the KPI for inventory pressure to be
used in this particular case, as a strong majority (6 out of 7) interview subjects suggested this
(see table 3).
The ratio captures the dimension of how fast a SKU flows through Axfood’s inventory, deter-
mined by the rate of sales in relation to inventory levels, including dimensions of both volume
and time (criteria 4). Various factors and phenomenon could slow down this rate and would
then serve to contribute to inventory pressure by halting the pace and efficiency of the overall
system (criteria 1). It was thus determined that the ratio corresponds to inventory pressure
in an inverse manner, i.e. low inventory turnover is indicative of high inventory pressure, and
vice versa. Being a ratio, the metric is suitable for purposes of comparison between SKUs of
different scope, e.g. sales volumes and inventory levels (criteria 3). In the Axfood case, the
metric was readily available for the majority of SKUs (criteria 2) and thus satisfies all of the
necessary criteria for serving as a KPI in the study.
5.1.3 Dimension of product value
During the process of the case study, it was suggested (by 6 out of 7 interview subjects) that the
dimension of product value to the firm should be included in the inventory pressure analysis.
The motivation for which is that some products should be allowed to cause larger strain on
the inventory system than others, determined by product value to the firm. A value metric for
individual SKUs was required. The contribution margin would serve as the natural choice of
value (profitability) metric in the context of the FMCG industry (section 3.3.2). Due to the
38
sensitive nature of information relating to contribution margins of individual SKUs, this data was
unavailable during the study of the Axfood case. As a substitute for actual margins measured in
monetary value, the internal ABC classification as presented in section 4.4 was used in order to
capture product importance to the organisation. This framework assigns one of nine (9) classes
to each SKU in the data set based on tied up capital and frequency of item pick-ups. The
ABC framework was deemed suitable since it provided valuable insights into the utilisation of
the firm’s capital resources in addition to the dimension of products’ customer importance, and
thus constituted a basis for product segmentation. Since the product value, as determined by
the ABC classification, is not directly related to inventory pressure in any reasonable causality
relationship, it was not used as a predictor in the regression analysis. The purpose of including
the classification was to relate inventory pressure to a dimension of value. Thus, the classification
framework is used as a segmentation variable, further presented in section 6.7.
39
5.2 Regression model construction
A number of inventory pressure predictors were identified and ranked according to their contri-
bution using a multiple linear regression model, in order to evaluate potential cause-and-effect
relationships and answer the second research question: Which product characteristics are instru-
mental in causing high inventory pressure?
5.2.1 Variable selection
After determining a relevant KPI for inventory pressure to be used as a dependent variable, the
remaining industry metrics mentioned in section 3.3.2, as well as the metrics defined in section
4.4 Case-specific metrics were all evaluated and considered as possible predictors of inventory
pressure to be used in the regression analysis. The KPI framework introduced in section 3.3.1
was used in classifying these KPIs, ensuring that as many aspects as possible were being covered.
In addition to this, the main criteria for choosing the initial set of predictors were as follows:
1. Parameters that are deemed reasonably possible root causes of inventory pressure, after
the completion of the qualitative case analysis
2. Parameters that are not considered mutually dependent, for the purposes of a satisfactory
regression, (this was later tested during the course of the regression analysis)
3. An easily-measured metric with readily available data points for the majority of SKUs in
the Axfood data sample
4. A comparable metric between SKUs of varying sales volumes and inventory levels
5. In total, an array of metrics capturing the strategic, tactical and operational aspects of
inventory management, as stipulated in the chosen inventory KPI framework (section 3.3.1)
In table 4, the full range of variables are presented out along with units, in addition to the
parameters’ categorisation according to the chosen KPI framework. Relevance and plausibility
along with data availability determined the parameters’ inclusion as predictors. For the included
parameters, the designated variable name is also included for reference.
Only numerical variables were used in the regression analysis. Nominal and binary parameters
were deemed more suitable to be used as segmentation variables, and are presented in section 6.
40
Table 4: Regression metrics and units
Metric Type Unit Inclusion Variable name
DEPENDENTS
Consumption
Operational
Inventory turnover ratio Inventory Yes IT
Financial
Tactical No
Allocated buffer spots Number of pallets (avg.) -
Non-financial (Unavailable)
Tactical Consumption No
Buffer spot turnover ratio Potential inventory -
Financial (Unavailable)
PREDICTORS
No
Operational
Inventory volume Number of pallets (avg.) (Not relevant) -
Financial
Strategic
Supplier lead time Number of days (avg) Yes LT
Non-financial
Strategic Coefficient of variation No
Lead time variability -
Non-financial (%) (Unavailable)
Strategic Coefficient of variation
Variability of demand Yes demand_COV
Non-financial (%)
Strategic No. of discount offers in disc_offers_2018
Discount frequency Yes
Non-financial 2018
Strategic No
Minimum order quantity Number of units -
Tactical Margin above target (%)
Service level margin Yes SL_margin
Non-financial
Tactical No
Manual order alterations Number of alterations -
Non-financial (Unreliable)
Tactical Accurate projections (%) No
Prognosis accuracy -
Operational
Order frequency Orders per day (avg.) Yes order_freq
Non-financial
Operational Coefficient of variation
Variability of order volume Yes OV_COV
Non-financial (%)
1 No
Operational space_req
SKU space requirement Units per pallet (Not relevant)
Non-financial
Operational
Shelf life Number of days (avg.) Yes shelf_life
Non-financial
LT * demand_var Combined Combined Yes LT_demand
41
As displayed in table 4, the dependent variable is classified as a financial and operational metric.
The occurrence of inventory pressure is deemed to have significant financial impact on a FMCG
firm, however its root causes can be found in strategic, tactical as well as operational aspects
relating to the SKUs or the suppliers, and all of these dimensions are represented in this selection
of variables. The predictors are all classified as non-financial, as these metrics do not have a
significant financial impact by themselves in this context, however the financial impact arises in
the form of costs of working capital associated with inventory utilisation.
Adjusted or excluded metrics
• The variable Inventory volume was excluded as the average inventory levels by themselves
provide no significant insight into the problem when not being related to the sales volumes
(inventory turnover ratio)
• The variable SKU space requirement was excluded from the study. Data for this metric
was available, however the metric was not deemed to have any significant impact on the
inventory turnover ratio. While product sizes are an important part of inventory manage-
ment, these values differ extensively within the data set due to the varying characteristics
of the various SKUs, with a coefficient of variance of 102 per cent, with the top 2-percentile
of outliers excluded. Thus, this metric was not considered to be comparable in the context
of comparing the full data set
• The variable minimum order quantity was excluded due to data only being available on
supplier level, which is defined as being outside the main scope of this study
• The variable lead time variability was excluded due to data not being readily available
• The variable prognosis accuracy was excluded due to data not being readily available
• The variable manual order alterations was considered a viable predictor for inventory
pressure, it was however excluded at this stage due to data only being available for a
smaller subset of the data set
• The variable average order volume was replaced by variability of order volume as this
percentage metric was deemed more suitable for comparison between SKUs of varying
inventory turnover ratios. Additionally, the variance itself was considered a more significant
contributor to inventory pressure than the actual volumes.
• The service level targets varies between different SKUs and thus, using only the variable
service level would not serve as a comparable metric. Instead, service level margin was
determined to be more suitable for purposes of comparison
42
• The two metrics supplier lead time and variability of demand are both considered viable
predictors. However, based on the case study, the main contribution to inventory pressure
is believed to be high variability in combination with prolonged lead times, a phenomenon
which creates an urgent need for safety inventory. To fully capture this dynamic it was
decided that a combination variable supplier lead time * variability of demand should also
be included as a predictor, in order to test the hypothesis
5.2.2 Selection of predictors
The selection of predictors was made according to the framework outlined in section 3.5.7, orig-
inating from the following selection (excluding IT which was used as the dependent) presented
below in figure 5.
Figure 5: Descriptive statistics of predictors
Predictor correlation
Evaluation of all predictor correlations and further investigation of predictors that have a larger
correlation than absolute value 0.5. These parameters can either be combined or in some cases
removed from the model.
Figure 6: Pearson correlation matrix
As visible in Figure 6, all inter-correlations between the predictors fall within acceptable bound-
aries (not including LT_demand which is a combined predictor and highly dependent on its two
43
predictor components). Thus, no particular action is required and no predictors are removed at
this stage.
Stepwise selection
Adding predictors to the model one by one, excluding predictors with p-values larger than 0.05.
Figure 7: Stepwise model summary
The stepwise selection resulted in 6 different models, which are shown in figure 7. In the final
model (6) at the bottom, the predictors variability of order volumes and service level margin
are excluded, due to p-values larger than 0.05, indicating that the predictor cannot explain the
variance of the dependent variable in a significant manner.
Apart from the stepwise approach for predictor selection, the forward and backward selection
methods were also tested, showing similar results with the same set of predictors in the final
model.
Test of multicollienarity
Using VIF to evaluate multicollienarity, if the VIF value is larger than 5.0, there is believed to
exist critical levels of multicollinearity between the predictors.
44
Figure 8: Collienarity diagnostics
As visible in the table, none of the predictors display VIF values above the limit (5.0), and there-
fore the model shows no indication of multicollienarity to the degree that any of the predictors
would have to be removed from the set. The combined predictor LT_demand shows the highest
VIF value (3.643), which is expected due to it being a combination of two other predictors.
Final selection of predictors

The predictor LT_demand, a product of LT and demand_COV, was removed at this stage for
two main reasons:
• The predictor added a very small contribution to the model’s R2 value (of only 0.001)
• While the predictor’s VIF value was below the set limit of 5, it was the highest among the
predictor set due to the interaction effect with the two predictors LT and demand_COV
Inclusion of this predictor was believed to capture the phenomenon of high supplier lead times
in combination with high variability of demand. However, due to the fact that the predictor
adds to the model in a non-significant manner, while introducing new layers of variance in the
model, it was removed from the set. The final selection of predictors is presented in figure 9
below.
45
Figure 9: Final selection of predictors
46
5.3 Regression model evaluation
When evaluating the regression model, the work flow established in section 3.5.7 was utilised in
order to quantify model fit as accurately as possible.
5.3.1 Residuals
In this section the following questions related to residuals are examined: Are the residuals
normally distributed with a mean of zero? Is the residual plot randomised or does there exist
homoscedasticity? Are the RSE values sufficient for the purposes of the study?
Figure 10: Distribution of residuals
As visible in the figure, the residual mean is indeed zero and does follow a normal distribution
with a standard deviation of 1.003, however with a slight skew towards the positive.
47
Figure 11: Scatter plot of residuals
The scatter plot is randomised to a large extent, however it is also somewhat positively skewed
which is shown in the plot’s Y-axis as a high density of data points with slightly negative residuals
and more wide spread along the positive axis. Additionally, the residuals’ absolute values do
increase to a small extent when moving from the negative predicted values to the mean of the
predicted values, while more strict homoscedasticity is present on the right side of the mean.
The reason for the patterns in figure 10 and figure 11 is likely the positive skewness in the
dependent variable of approximately 1.7 and the large range between the largest and smallest
observed values, as visible in figure 5.
Figure 12: Residuals statistics
The residual standard error (RSE), stated as Residual in figure 12 is the average amount that
the dependent variable will deviate from the true regression line. Since the RSE is quite large
(1.168) in relation to the mean value of the dependent variable (2.657), the confidence interval is
large and the model is not appropriate for predictions. However, the objective of the regression
is to define cause-and-effect relationships between the predictors and the dependent variable,
48
rather than to make predictions, and therefore a larger RSE value is tolerated.
5.3.2 Model correlation and over-fitting
In this section the following questions related to model correlation and over-fitting are examined:
Does the model explain a sufficient amount of the dependent variable’s variance? Does the last
added variable increase adjusted R2 and is it close to R2 ? Is the value of Mallow’s Cp close to
the ideal value?
Figure 13: Model summary
Since the objective is to define the relationship between the predictors and the dependent vari-
able, R2 is not as important as it would have been if the objective was to predict an outcome.
However, the R2 does still contribute to the evaluation of the model, by defining the degree to
which the model can explain the variance in the dependent variable. A R2 larger than 0.5 is
sufficient and relatively large when the dependent variable depends on a wide range of opera-
tions and constraints, as well as when the difference between each data item’s characteristics
are large (according to the theory stated in section 3.5.5). Both of these statements are true for
this case, as inventory pressure is caused by a complex system of cause-and-effect relationships,
49
and the difference in parameter values between SKUs can differ widely due to varying product
characteristics. Thus, the achieved R2 of 0.543 is considered sufficient for the purpose of the
continuing study.
The adjusted R2 is increasing for each added variable, hence the model is not over fitted by the
last variable. The delta for the last 3 predictors, especially between model 4 and 5 is very small,
however the variables still improve the model and should therefore be included. The adjusted
R2 (0.542) is also very close to the non-adjusted value (0.543), which indicates that the model
does not fit a lot of random noise.
When comparing each model’s Mallows Cp with its ideal value (the number of predictors +1)
it’s clear that the last model with 5 predictors performs the best due to its value being very
close to the ideal. This indicates that the model is relatively unbiased in estimating regression
coefficients and predicting future variance. Based on this criteria, model 5 should be used, going
forward.
5.3.3 -values
Do the -values correlate with the theory in a reasonable manner? Comparison of all -values
with the theory and case study. Verification that all predictors have a reasonable and plausible
impact on the dependent variable.
Due to different scaling between the predictors, the standardised -coefficients are optimal to use
in the context of comparing the predictors’ relative effect on the dependent variable., Note that
due to the inverse correlation between inventory pressure and the KPI used as the dependent
variable, high inventory pressure is discussed in terms of the term low inventory turnover in this
section. Below, the implications of the coefficient -values are discussed, in descending order of
relevance. This section refers only to the final model (5).
Figure 14: Beta coefficients
50
• Order frequency (order_freq): The average order frequency constitutes the highest -
value, and thus the single most influential predictor in the set. A positive correlation
between order frequencies and inventory turnover is quite reasonable, implying faster flow
times as the average order frequency increases. This high value is also supported by the
theory (section 3.1) and by several interviewees, who shared the opinion that larger orders
of lower frequency contribute to a significant degree (section 4.3). The case study showed
that this is often an effect of conditions stipulated in supplier contracts that state minimum
order volumes, limiting the degrees of freedom in purchasing and thus increasing inventory
pressure (section 4.3).
• Variability of demand (demand_COV): A negative correlation of demand variability is

reasonable, and in line with both the findings of the case study (section 4.3) as well as
the academic theory (section 3.1). Variations in demand cause uncertainties in terms of
optimal purchasing behaviour and inventory planning, due to the difficulty associated with
forecasting. An uneven flow is bound to drive safety inventory and furthermore have a
negative effect on inventory turnover.
• Supplier lead time (LT ): A negative correlation of average supplier lead times is reasonable
and in line with the academic theory (section 3.1). Longer supplier lead times may require
longer forecasts with lower accuracy, which can lead to unnecessarily large orders and a
increased safety stock.
• Discount frequency (dics_offers_2018 ): The positive correlation of discount frequency is

reasonable from the standpoint that SKUs frequently sold at a discount could be associated
with higher sales volumes and faster turnover ratios. One could however also argue the
opposite (based on the phenomenon described in case study section 4.4) that these periodic
offers can in some cases cause inventory bottlenecks when goods are not sold out. However,
since this is only bound to happen occasionally, it is reasonable to assume that the positive
correlation is an effect of the faster flow times cancelling out the effect of inventory hick-ups
due to failed campaigns. In the end, due to the relatively small -value, the effect should
in either case be quite small when looking at the average for a large data set.
• Shelf life (shelf_life): The negative correlation of shelf life is reasonable from the standpoint
that SKUs with higher shelf life can generally be stored for a longer duration of time, thus
decreasing the inventory turnover ratio for these items.
In summary, regarding the two most influential predictors order frequency and variability of
demand, academic theory pertaining to inventory management (as mentioned in section 3.1)
states that fluctuations in demand along with high lead times drive the need for safety stock,
and that order volumes drive cycle stock. These parameters, primarily order volumes, will to a
51
large extent determine average inventory volumes, and therefore influence the rate of inventory
turnover. Since cycle stock is generally much larger in volume (number of units and pallets)
than safety inventory, is it reasonable that order frequency, being a function of order volumes,
should be the single most influential predictor and the demand variance should follow as the
second most influential predictor, as shown in the model.
5.3.4 Final model
The final multiple regression model is stated according to the mathematical form below, and
the model inputs are summarised in table 5.
Y = 0 + 1 X1 + 2 X2 + ... + p Xp + ✏, (14)
Table 5: Final regression model
Variable name Metric Type Standardised

Y IT Inventory turnover Dependent - -
0 - - Constant - 2.313
X1 order_freq Order frequency Predictor 0.569 10.688
X2 demand_COV Variability of demand Predictor -0.201 -0.643
X3 LT Supplier lead time Predictor -0.105 -0.067
X4 disc_offers_2018 Discount frequency Predictor 0.064 0.018
X5 shelf_life Shelf life Predictor -0.062 -0.000
✏ - - Error term - -
52
6 Segment analysis
6 Segment analysis
This empirical section aims to investigate research question three. Originating from the previous
definition of inventory turnover ratio as a KPI for inventory pressure, along with the predictors
determined statistically significant in the regression model, the data set is segmented according
to various parameters. Each product segment is then classified and ranked according to KPI and
predictor values, respectively. The purpose of the segment analysis is to find critical segments
and furthermore to identify and discuss key drivers of inventory pressure within the individual
segments.
6.1 Segmentation
In table 6 below, the parameters used for segmenting the data from the Axfood case study are
displayed. These variables include internal classification of SKUs, the metric for value (ABC
classification), as well as volume-based variables.
Table 6: Segmentation metrics and units
Metric Type Unit Inclusion
SEGMENTATION
Main product family - Discrete Yes
Strategic
Private label (EMV) Binary Yes
Non-financial
Strategic
Imported SKU Binary Yes
Non-financial
Operational Number of pallets (avg.)
Inventory volume Yes
Financial Discrete (groups)
INVENTORY VALUE
Strategic
ABC classification Nominal Yes
Financial
Strategic No
Contribution margin Nominal / %
Financial (Unavailable)
53
6 Segment analysis
6.2 Scoring of predictors
The regression analysis from the previous section resulted in an explanatory model with five (5)
predictors for inventory turnover. Since this section aims to compare and rank various segments
of the total set of SKUs, a comparable score for these predictors was required. In the following
sub-sections, each main product segment’s average value for each of the five predictors were
multiplied with the unstandardised -coefficients resulting from the regression analysis. This
yielded a comparable score (between all product segments and data categories) for the underlying
determinants of inventory pressure within each segment, that incorporates the dimension of
different weighting between the predictors. The score indicates the effect of the respective
predictor for each segment, and is also useful for comparisons within each data category. A
positive score indicates positive contribution to inventory turnover. A negative score indicates
negative contribution to inventory turnover, thus constituting a viable determinant for inventory
pressure.
The KPI in addition to scored predictor values by themselves do not provide any significant
analytic insights into problem areas and underlying causes. Instead, these values have to be
compared within each data category in order to identify the extreme values, according to figure
15. Colour-coding was added for increased visibility, cell colours are determined by the factor’s
value relative to the other values for the same data category in order to showcase extreme values
in the different categories. Red cells indicates lower values in the inventory turnover column,
and predictors with higher contribution to low inventory turnover (thus potential problem ar-
eas), while green cells should be be considered functioning areas in the context of this study.
Additionally, the single largest predictor term is displayed for each product segment.
Figure 15: Colour-coding
In summary, the KPI inventory turnover ratio is used to compare inventory pressure, while the
scoring method explained in the above paragraph is used to compare the individual predictors.
6.3 Main product families
In figure 16 below, the scores of each main product family (according to the Axfood classification)
are displayed. The product families divide the assortment into 19 groups, with significantly
varying product characteristics. It is thus relevant to distinguish between the families within
the framework of the analysis.
54
6 Segment analysis
Figure 16: Main product family segmentation
By inspection of the table, a clear correlation is visible between the values in the inventory
turnover column and the respective predictors. The product families with the lowest inventory
turnover values also account for the most problematic predictor scores, confirming the model’s
accuracy. Moreover, non-food products tend to have lower inventory turnover than food prod-
ucts, which in some extent can be explained by the predictor for shelf life, however shelf life is
not shown to be an influential predictor by itself. For most segments, the order frequency is the
most influential term, with the exception of the special product family, where the variability of
demand is significantly larger than any other value.
6.4 Private label products
Research question 3a pertains to the hypothesis that private label products contribute to inven-
tory pressure to a larger extent than label products, due to a high degree of foreign imported
goods as well as unpredictable supplier conditions. This was investigated by comparing the
levels of inventory turnover between private label and label SKUs. The table below shows no
significant difference in inventory turnover when considering the whole data set, and therefore
the hypothesis can be rejected to a relatively large extent. However, differences may be present
between sub-segments. The only value that stands out is the average supplier lead time, which is
significantly larger for private label products (in accordance with the Axfood hypothesis stated
in section 1.2), but since the private label products perform better in terms of order frequency
and demand variance, the lead time effect is cancelled out.
55
6 Segment analysis
Figure 17: Private label vs. label segmentation
6.5 Imported products
Another hypothesis suggested by Axfood was that imported products were a more reasonable
reason to inventory pressure than the private label segmentation. As displayed in figure 18,
there does not exist a significant difference between inventory turnover for non-imported and
imported products. However, the majority of the imported products are delivered through the
storage facility in Gothenburg, Sweden, which may have affected the data and the result in a
misleading way.
Figure 18: Import vs. non-import segmentation
6.6 Inventory volume
The data set was also segmented according to average inventory levels (in number of pallets in
storage) on both SKU and supplier level. The designated KPI for inventory pressure is a turnover
metric, which does not showcase actual inventory levels, a vital component in the context of
inventory and space utilisation. Practically, low inventory turnover levels are only real inventory
pressure issues when the average inventory levels are somewhat significant. The volume metric
could not be included in the regression analysis in any meaningful and comparable way as it
did not meet all KPI criteria in section 5.1, and was thus used as a segmentation variable here
instead. The SKUs and suppliers were divided into three (3) groups according to their average
values:
• Group 1: Bottom 70-percentile of SKUs/suppliers. The vast majority of items, where any
single SKU/supplier does not account for any significant inventory utilisation
• Group 2: Values in between the bottom 70- and top 10-percentile limits, with significantly
higher inventory utilisation per SKU/supplier than group 1
56
6 Segment analysis
• Group 3: Top 10-percentile of SKUs/suppliers. A small minority of SKUs/suppliers that

accounts for a very large amount of the total inventory utilisation
SKU level
From the segmentation according to average inventory level on SKU level as displayed in figure
19, it is evident that products with low inventory levels (group 1) show significantly lower in-
ventory turnover rates. This could be explained by contract constraints such as minimum order
quantity and Axfood’s own strategy to always try to order one pallet at minimum. These con-
straints drive lower order frequencies, which is verified by the significantly lower order frequency
for group 1. Moreover, the second most influential term demand variance is also significantly
larger for group 1. Group 2 performs the best in terms of inventory turnover and logically, for
the majority of the predictors.
When comparing the total volume levels for each group, it is evident that group 1 has less than
half of the total volume compared to group 3 (3,271 compared to 7,192 pallets), and slightly
less than group 2 (3,506 pallets). Therefore, while group 1 does perform the worst in terms
of inventory turnover, the lower ratio among these products does not affect the total inventory
pressure level in the same degree as group 3, due to the lower volume level. However, while it
is evident that Axfood prioritises efforts to reach higher rates of turnover for the high-volume
segments (group 2 and 3), actions for improvements pertaining to group 1 should in either way
be considered. The optimal scenario from an inventory utilisation perspective would be if group
3 with the highest volume level, also showed the highest rate of turnover and thus binding up
as little inventory space as possible.
Figure 19: SKU level volume segmentation
Supplier level
Segmentation according to average inventory level on supplier level shows that large suppliers
perform the best in terms of inventory turnover and, thus the majority of the predictors. This
may be due to more flexible contracts for large suppliers and economies of scale, which enables
higher order frequency.
57
6 Segment analysis
Figure 20: Supplier level volume segmentation
6.7 Product value
In order to incorporate the perspective of product value (as stated in section 6.7), the data set
was also segmented according to Axfood’s ABC classification based on volume value (A, B, C)
and pickup frequency (H, M, L). According to this classification, a higher level of inventory
pressure are tolerated for the CH product class due to the significant customer importance and
low holding cost. Meanwhile, class AL can be considered as the least prioritised since products
in this category are both capital intensive and have no significant importance for the customer,
and should thus not be allowed any significant impact in terms of inventory pressure. Due to the
varying prioritisation of the product classes, different service level targets are set accordingly.
Figure 22 shows the targeted service level for the various product classes.
Figure 21: ABC segmentation
Figure 22: ABC classes and service level targets
From the segmentation according to product value groups, it is evident that products that are
classified in a group with lower service level goals generally perform the best in terms of inventory
turnover, while products with a higher service level have lower inventory turnover. However,
higher service level targets typically indicate higher product importance to the organisation,
58
6 Segment analysis
either in terms of profitability or overall product necessity to end customers. Therefore, it is

reasonable to tolerate lower inventory turnover rates and higher utilisation of capacity among
these segments.
However, while product class CL only has a moderately high service level goal of 95 per cent,
the inventory turnover rate (2.56) stands out as the lowest among all of these segments, and
significantly lower than the other classes with equal service level targets. This is primarily
explained by the predictors order frequency and variability of demand. In addition, product class
CL is the absolute largest in terms of volume with 3,264 pallets, which implies that this group
is associated with significant contribution to inventory pressure in terms of both low turnover
and high levels of volume, while not being a prioritised segment according to the classification.
Furthermore, product Class AL has the lowest service level goal, showing less importance to
the organisation. In addition, the entire A segment is characterised by high volume value,
making storage expensive. This segment should therefore optimally show a high rate of inventory
turnover. The data however shows that this segment has the fourth lowest inventory turnover
and therefore should also be considered as a "non-valuable" contribution to the overall level of
inventory pressure.
In summary, problems among the segments AL and CL should be investigated further, as high
inventory utilisation from segments in the L category are inefficient from a product value point-
of-view.
59
7 Conclusion
7 Conclusion
In this concluding section, the main findings of the conducted study are summarised and related to
the initial research questions. The results are also discussed in terms of relevance and usefulness,
in addition to their alignment with established theory on the subject. With these findings as basis,
a recommendation is provided to Axfood. Furthermore, the limitations of the study are presented,
along with their assessed implications.
7.1 Findings
1. What KPI metric should be used to evaluate inventory pressure levels on SKU level?
Based on the case study, the inventory turnover ratio was identified as the optimal KPI to be
used, mainly due to its simplicity, data availability and overall comparability in a large data
set with various types of SKUs. The turnover ratio accurately captures the dimension of how
efficiently an SKU flows through an inventory system, and a slower ratio would thus imply
contribution to the overall inventory pressure. Thus, the ratio is related to inventory pressure
in an inverse manner. Additionally, for the Axfood case specifically, a metric for the utilisation
and/or turnover of inventory buffer spots would also have constituted a viable KPI, however
this option was dismissed due to lack of relevant data.
When following up KPIs such as the turnover ratio of inventory for product segments, it is also
vital to relate this score to a metric of the segment’s value to the firm. More inventory resources
should naturally be allocated to valuable product segments, and it may be reasonable to tolerate
higher inventory pressure contribution from such segments. Various dimensions of value could be
used for this purpose. Both an ABC product classification and the contribution margin metric
were deemed generally relevant, however for the Axfood case, contribution margin data was not
readily available, and thus the profitability dimension could not be quantified.
2. Which product characteristics are instrumental in causing high inventory pressure?
(a) What are the measurable predictors of inventory pressure?
(b) To what degree do these predictors contribute?
Based on the finding of research question one, the inventory turnover ratio was used as the
dependent variable in the regression model. An initial selection of 13 variables were considered
61
7 Conclusion
viable predictors, out of which five were excluded due to unavailability of data. A total of
eight predictors were used in the regression analysis, out of which three were determined to
be statistically influential predictors. In descending order of relevance, low order frequencies,
high variability of demand and prolonged supplier lead times were all shown to be significant
contributing factors to inventory pressure, as defined by low values of the inventory turnover ratio
in the regression model. This finding is in line with academic theory on the subject, stating that
cycle stock (driven by order frequencies) is typically larger in volume with higher contribution
to inventory pressure than safety stock (driven by variability of demand and lead times), thus
affirming the order of relevance for these predictors. An additional explanation to why the
order frequency was found to be the overall most significant predictor was given in the case
study. Supplier contract conditions stipulating minimum order quantities were indicated to limit
the degrees of freedom in Axfood’s purchasing, a plausible cause of lower inventory turnover.
Moreover, lower discount frequencies and higher shelf lives were also shown to contribute to
lower turnover ratios (both to virtually the same extent) and while statistically significant,
these predictors had much smaller coefficient weights and should not be considered any real
determinants in this case.
A final conclusion to be made from the statistical selection of predictors is the fact that the
service level margin, i.e. the difference between actual and targeted service levels, did not
constitute a statistically significant determinant of inventory turnover. The key takeaway from
this finding is thus that managing inventory pressure levels does not stand in contradiction to
maintaining satisfactory service levels, which is vital for FMCG firms.
3. Are any particular segments associated with larger inventory pressure problems, either on
product level or supplier level?
(a) Should private label products in particular be regarded as a cause of high inventory pressure?
The data shows no significant difference in inventory turnover between private label or label
products, when considering the whole data set. However, there exists a large difference in lead
times, but since private label products perform better in terms of order frequency and demand
variance, the lead time effect is cancelled out, according to the model. Thus, the hypothesis that
private label products would contribute to inventory pressure in any significantly larger extent
could be rejected on the basis of the conducted case study. Nor does there exist a significant
difference in inventory turnover for non-imported and imported products.
Based on the segmentation of the main product families, higher levels of inventory pressure was
detected in the non-food segments, mainly a result of lower order frequencies, and in the case
of one product family, high variability of demand. While longer shelf lives could service to slow
62
7 Conclusion
down the rate of turnover among non-food segments, the shelf life parameter was not shown to
be an influential predictor by itself, and the underlying causes for why these segments seem to
display higher levels of inventory pressure should be investigated further by Axfood.
The volume segmentation analysis shows that low-volume products have a lower inventory
turnover than high-volume products. A reasonable explanation for this was found to be the
minimum order frequency terms set by the supplier contract, as well as Axfood’s own strategy
to always try to order one pallet at minimum, which is verified by the significantly lower order
frequencies showed by the data. Similar results were seen on supplier level, where products asso-
ciated with high-volume suppliers perform the best in terms of inventory turnover. A reasonable
explanation factor are beneficial supplier contracts, in addition to higher order frequencies.
When segmenting the inventory data based on ABC classes, along with their respective service
level targets, products that are classified in groups with lower service level targets typically per-
form the best in terms of inventory turnover. While products with higher targets generally show
lower levels of inventory turnover, this should be tolerable due to the greater firm importance
and thus inventory prioritisation of these items. However, product classes AL (high stock value,
low pickup frequency) and CL (low stock value, low pickup frequency) both stand out with low
turnover ratios, in relation to these segments’ service level targets and overall importance as
defined by the ABC classification. The conclusion is thus that these two segments contribute
to the overall level of inventory pressure in a manner that may not be appropriate or necessary
from a standpoint of product importance to Axfood.
7.2 Reflection of study
The issue of increasing inventory pressure is one that brings both operational and financial
implications for a growing FMCG firm. The purpose of the conducted study was to establish an
initial framework for analysing the problem on a more granular level, providing a basis for future
measures. A designated KPI allows for more transparent comparisons between various parts of
the product assortment, in addition to a more detailed diagnosis. The case study has shown
that the inventory pressure problem is highly complex and that its root causes can be found
across various functions and levels of an organisation. The main takeaways from the regression
analysis would imply a number of causing factors among the measurable, quantitative metrics.
However the qualitative underlying factors and forces are yet to be analysed in further detail.
Examples of such factors are the dynamics of supplier negotiations, purchasing behaviour within
the organisation, as well as the overall corporate strategy (particularly in relation to product
assortment).
The decision of using the inventory turnover ratio as a KPI for inventory pressure was made
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7 Conclusion
for reasons of simplicity and overall relevance in the case, based on both academic theory and
qualitative interviews as part of the Axfood case study. The priority when conducting the study
was to enable the construction of a reliable model for the purposes of detecting patterns. The
KPI met all of the stipulated criteria (see section 5.1), and enabled a regression analysis with
satisfactory levels of significance and correlation for modelling the phenomenon in an accurate
manner. While the simplicity of using a ratio metric as a KPI does compromise some level of
detail relating to the underlying problem, as compared to e.g. a more complex KPI weighted
from multiple metrics, the main benefit of its application comes in the form of comparability. The
turnover ratio should be a readily available metric in any FMCG firm (not limited to Axfood).
Combined with the more detailed investigation of the underlying predictors, a satisfactory level
of accuracy is achieved. It should also be clarified that while in this quantitative study of the
Axfood case, the inventory turnover metric was deemed optimal, other KPIs could certainly be
viable, depending on the case in question. Additionally, other types of studies relating to the
phenomenon of inventory pressure are also possible, not limited to quantitative models, and this
is further discussed in section 7.3.
The reader should take note of the fact that the regression model is based only on Axfood’s in-
ventory data, and that the results would surely differ if the same method was applied on another
case. However, the findings of most influential predictors were aligned with inventory manage-
ment theory and the conducted interviews. The findings of the segment analysis, specifically the
identified problem areas, are case-specific results and while some conclusions may be possible to
generalise across the entire food retail industry, these implications are primarily aimed towards
providing a recommendation to Axfood (further discussed in section 7.3). In summary, the
method of applying a multiple regression model to identify predictors in this purpose of ranking
product segments was considered a success.
7.3 Recommendation to Axfood
The KPI metric can be used to effectively and efficiently score products and suppliers according
to how individual segments contribute to the overall level of inventory pressure. This KPI can
be good complement to the current measurement of service level. Furthermore, when comparing
the predictors’ values between various segments of SKUs/suppliers, it is possible for Axfood to
see what parameter that drives the inventory pressure and where to take action. While various
forms of segmentations have been performed during this study, Axfood is recommended to apply
the same model with different SKU or supplier segments, such as to possibly provide further
narrowed down specific causes of problems. In cases where low order frequencies is the driver of
low turnover, Axfood should look further into the underlying reasons, such as inefficient contract
terms or unsatisfactory behaviour either from the purchaser in question, or from the supplier. In
64
7 Conclusion
cases where variability of demand is a key driver, Axfood is recommended to increase efforts of
forecasting customer behaviour and demand. In theory, such efforts would also serve to reduce
the negative effect of long lead times, as orders could be placed with a longer forecast horizon,
enabling the larger order volumes that are sometimes found in certain supplier contracts.
Since all identified variables could not be used in the model due to lack of data, Axfood is
recommended to increase efforts of data collection, making all relevant and interesting data
points available for further analysis. The buffer spot allocation of individual SKUs stands out
as the most significant missing data category as of now, since this would further include the
import volume aspect to the analysis.
According to sources within Axfood’s product flow control unit, the largest issues relating to high
inventory pressure have been specific incidents involving e.g. a particular SKU during a certain
time window. While this study originates from a large data set looking at average values for 2018
and does not include an analysis of any specific incident, the regression methodology and model
introduced in the study could be used as a basis for future, more detailed investigations of the
underlying factors of specific cases. In addition, Axfood is recommended conduct year-over-year
studies with the inventory pressure KPI and its identified predictors as basis, in order to reach
insights into how these variables have changed over time, and the underlying reasons for which.
This dimension was not included in the scope of this study and could serve to shine a light on
important trends that may have an effect on increasing levels of inventory pressure.
7.4 Limitations of study
There may exist unforeseen limitations in the data set, that could potentially skew the outcome
of the analysis. However, data exclusion was made on the basis of data availability and with
the assumption that availability was not subject to any specific patterns within the data set (of
which there were no indications), the data exclusion in itself should not alter the results in any
significant way.
The inventory characteristics of the Axfood case may differ from the general FMCG industry in
ways that were not identified within the scope of this study. This could particularly be an issue
when comparing the Axfood case with a FMCG firm outside the food retail industry.
A total of seven (7) subjects were interviewed, primarily employees within the product flow
control organisation, as this was deemed the most significant unit of the Axfood for the purposes
of this study. However, this could also pose a limitation and a possible bias factor. Had another
set of subjects been interviewed, the inbound set of predictors for the model may have been
different.
65
7 Conclusion
Due to limitations in data availability, all identified potential predictors could not be included in
the regression analysis, it is therefore possible that such predictors could have a significant impact
on inventory turnover that was not detected by the regression model in this case. Additionally,
the profitability dimension of contribution margins was also subject to data limitations and
could not be included. While the ABC classification does provide a similar value metric, the
contribution margin could have offered a more quantitative metric, and enabled a more granular
analysis of the profitability aspect.
7.5 Sustainability aspects
The study addresses issues relating to inventory capacity and its potential determinants, which
is measured from the standpoint of inventory turnover. While the constraint of sustainability
has not been covered in the main scope of the study, the investigated problem and the suggested
measures do have sustainability implications. Axfood continuously implements and follows up
initiatives to address sustainability within the company’s operations [5]. If Axfood could apply
measures to increase the total rate of inventory turnover or have a method for addressing critical
products, this could help the company to reduce the food waste that are due to exceeded
expiration dates.
7.6 Ethical considerations
Ethical considerations have been taken into account throughout the entire research process.
Both personal as well as company integrity have been respected. All interview subjects have
participated voluntarily, and have all been given the option to examine the interview findings
prior to the study’s publishing. Confidentiality aspects relating to company data have been
taken into account, data analysis and storage have been handled on company computers and
no confidential information has furthermore been published in this report. KTH’s guidelines
relating to plagiarism and overall research ethics have been taken into account during the course
of the study.
66
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69
A Interview material
A Interview material
The interview outline as follows was used for all the conducted interviews with employees within
Axfood. All of the conducted interviews were preceded by an initial presentation of the problem
background and the purpose of conducting interviews, with a focus on the KPI and the regression
model.
• From your point-of-view, what is the single best KPI for evaluating inventory pressure on
the SKU level, and why?
• From your point-of-view, what metric should be used to relate inventory pressure to prod-
uct value to the organisation?
• From your point-of-view, what is the primary cause of inventory pressure at Axfood, and
why?
• The following metrics have been identified as potential predictors (causes) of inventory
pressure on SKU level:
– Average order size

– Order frequency
– Shelf life
– Variability of demand
– Private label goods (Y/N)
– Supplier lead time
– SKU space requirement
– Discount frequency (number of offers during 2018)
– Imported good (Y/N)
• Is it your opinion that any of the above items should be removed from the analysis due to
non-relevance in the matter?
– If YES, why?
• Is it you opinion that any other metric(s) should be included in the analysis?
– if YES, which metric(s), and why?
• (Only selected subjects) Would it be a reasonable measure to remove the top-2-percentile

from the collected inventory data set in order to exclude unreliable data points?
I
B Summary of conducted interviews
Interview 1
Interviewee name: Erik Sundblad

Role: Logistics Negotiations Manager
Interview location: Axfood headquarters (Torsplan, Stockholm)
Interview date: 2019-03-13
Type of interview: Semi-structured / structured
According to Sundblad, the single best KPI to measure inventory pressure on SKU level would be
the average number of allocated buffer spots per SKU. A buffer spot is the place where a product
is located before being moved to a permanent storage location. To maintain a satisfactory
traceability i the storage facility (due to regulation), goods are generally sorted in various buffer
spots according to their date of expiry. These buffer spots are located on the storage floor,
consuming space, which is the main reason for their significant contribution to inventory pressure,
according to Sundblad. The pallets in buffer vary in degree of filling, however the space consumed
is always one full pallet, since they are located on the floor.
According to Sundblad, the number of allocated buffer spots is a better metric for volume than
the total number of goods for one particular SKU. He argues that the used buffer places create
a much more urgent strain on the storage facility and furthermore, that as the total number of
units in storage for a particular SKU increases, so will the number of buffer spots.
Sundblad also argues that the metric of volume should be complemented by a metric of time,
such as a turnover ratio, in order to capture the perspective of consumption in addition to
the dimension of space. He suggests using a turnover metric for the allocated buffer spots by
converting the actual number of pallets in buffer to how many units could be theoretically placed
on these pallets, and then dividing by the total consumption. This metric would capture the
effect of not utilising the buffer pallets in an optimal manner (possibly only half-filled pallets).
Additionaly, Sundblad argues that the primary causes of inventory pressure are supplier lead
times and order frequencies in combination with variability of demand. The motivation for this
is the fact that the main reason for having extra inventory is to take into account the variability
of customer demand that could arise during the lag time from order point to delivery (from
suppliers) and thus minimise the risk of a stock-out during this period.
II
Interview 2
Interviewee name: Linus Bergqvist

Role: Product Flow Control Manager
Interview location: Dagab headquarters (Jordbro, Stockholm)
From Bergqvist’s point-of-view, the degree of inventory filling in terms of number of buffer
spots per SKU would constitute the optimal KPI for monitoring the level of inventory pressure.
The rate of inventory turnover should also be weighed in, an complemented by a measure of
SKU firm value (e.g. the product contribution margin), since certain SKUs are deemed more
important in terms of profitability and should thus be "allowed" to consume more inventory
capacity. Bergqvist agrees that the average total volume could be used to divide the data into
different segments.
According to Bergqvist, none of the suggested predictors should be removed due to being non-
significant Additionally, he suggests including the number of purchases on "wait days" as a
predictor. This metric captures how often a SKU is ordered when there is still a considerable
quantity of units in storage, as this would constitute a wasteful purchasing behaviour in terms
of inventory capacity. Bergqvist also suggests including the service level as a predictor. The
general service level target within the firm is 97 per cent and in Bergvist’s opinion, having a
service level above 98 per cent would consume unnecessary inventory capacity. A binary variable
could be used to determine if the service level per SKU is above or below 98 per cent.
Due to the human factor having a significant effect on data quality, Bergqvist agrees that remov-
ing the top 2-percentile in each data category would be a reasonable method to handle outliers
in the regression analysis.
III
Interview 3
Interviewee name: Mathias Jönsson

Role: Prognosis Coordination and Product Flow Specialists Manager
According to Jönsson, the optimal metric for measuring inventory pressure would be the inven-
tory turnover rate, possibly in combination with a metric of space requirement per SKU (e.g.
how much space one unit comsumes per pallet). He suggests using the internal ABC classifica-
tion of SKUs to relate inventory pressure to product firm value, or alternatively, to use another
data source such as performed customer analysis of product importance.
Jönsson identifies the root cause of high inventory pressure as the human factor associated
with purchasing behaviour. This could mean purchasing units i half-filled pallets as opposed to
filled pallets, which could constitute a wasteful activity in terms of inventory space utilisation.
The internal AWR system provides purchasers with automated order suggestions, but some
purchasers tend to manually alter these suggestions, possibly to maintain a high enough service
ratio. The main problem seems to arise when ordering in too small batches, which leads to more
deliveries and thus, more buffer spots are required in storage. He argues that the purchasers with
the best statistics are the ones who alter the automated order as little as possible. The optimal
course of action, according to Jönsson, would be to instead "record" when the order suggestion
seems to be faulty, enabling the system to learn ad improve. Jönsson argues that the number
of altered order suggestion could be a reasonable predictor for inventory pressure. Additionally,
Jönsson suggests service level as a possible predictor and points out that the difference between
required service level per KPI and the actual service level would serve to indicate whether the
service level is unnecessarily high, possible at the expense of inventory capacity. Jönsson also
says that new SKUs often cause strain in the supply chain, since Axfood generall tries to push
a "rapid start volume" to the stores in order to promote them for marketing purposes, and
furthermore that whether a SKU is newly introduced could be used as a predictor.
Jönsson agrees that removing the top 2-percentile in each data category would be a reasonable
method to handle outliers in the regression analysis.
IV
Interview 4
Interviewee name: Hans Hagdahl

Role: Product Flow Analysis Manager
According to Hagdahl, the optimal metric to measure inventory pressure would be inventory
turnover rate. He argues that measurements that involve space requirements isn’t a good mea-
sure, since that depends more on the handling of the pallets and requirements from the specific
inventory location and not on product characteristics. Moreover, he argues that the current
measurement of fill rate is based on the current capacity and doesn’t show if current stock level
is optimal or not. To involve each SKU’s firm value, he suggest using a the internal ABC classi-
fication based on importance for the customer and not contribution margin, since that isn’t the
same for the whole supply chain. A product can for example have very low margin for Dagab,
but high for the supermarket. Hagdahl suggests that inventory turnover is the optimal metric,
while space and buffert locations, as well as, ABC calcification, can be used as a compliment.
According to Hagdahl, none of the not binary predictors should be removed, however, the two
binary variables EMV and Imported goods do not per say cause inventory pressure. He means
that these parameters are a set of the other variables and depends on the supplier contract
and not on product characteristics. Hagdahl also argue that a supplier that delivers a large
number of unique products is increasing the risk of inventory pressure, since if Dagab only needs
to order one unique product they need to fill up the minimum order size with other products
that already have a sufficient stock. To capture this, number of SKU’s per supplier can be
added as a predictor. Another predictor that may be too complex to involve is the loss of sale
of products that is similar to promoted discount products. During this promoting time, the
inventory pressure from similar products increases.
V
Interview 5
Interviewee name: Carina Stenberg

Role: Prognosis Coordinator
Interview location: Conference call
According to Stenberg, the single best KPI for measuring inventory pressure would be the
rate of inventory turnover. However, she emphasises that contracts are procured on supplier
level, and often encompassing large volumes and multiple SKUs. Therefore, Stenberg concludes
that the inventory turnover should be measured on supplier level, i.e. how fast each suppliers’
SKUs flow through Axfood’s inventory. Additionaly, the problem relating to buffer spots in the
inventory is mentioned during the interview. Stenberg argues that this issue primarily relates to
inefficient purchasing behaviour that occurs when SKUs are ordered in minimum order volumes
and not fully utilising the pallets in buffer, as this ties up significant inventory space.
Regarding the subject of SKU value to Axfood, Stenberg mentions "class-articles", meaning
seasonal articles that are prioritised in terms of safety inventory and service level. Such SKUs
could, according to her, be assigned a higher product value.
Stenberg agrees with the primary set of predictors to inventory pressure, and suggests the
addition of Minimum order quantity among these variables. Due to the terms stated in supplier
contracts, some SKUs cannot be ordered in the demanded quantities, and are instead ordered
in a larger volume, sometimes leading to unnecessarily high inventory volumes.
VI
Interview 6
Interviewee name: Tobias Petersson

Role: Automatic Ordering Manager
According to Petersson, the single best KPI for measuring intevory pressure would be the rate
of inventory turnover, due to it being a simple and understandable metric. Moreover, inventory
turnover is easy to benchmark between Axfood’s all inventory sites. Petersson also argue that
the contribution margin or customer value, needs to be considered if one should be able to
evaluate if the inventory pressure is good or bad.
Petersson agrees with the primary set of predictors to inventory pressure and suggest to also
include the forecast quality. If the forecast isn’t accurate, especially if it’s to high, it will cause
inventory pressure. The forecast of campaigns is very difficult due to lack of historic data, but
also critical since it often is large volumes. Petersson suggests using a predictor describing how
accurate the forecast has been for each product, however, a lot of data point may be missing
since this evaluation is new at Axfood.
VII
Interview 7
Interviewee name: Nadja Rosén

Role: Private Label Purchasing Manager
According to Rosén, the inventory turnover ratio constitutes the optimal KPI for inventory
pressure, as this metric captures the effect of working capital being tied up in physical goods in
storage. Rosén agrees with the preliminary set of predictors and does not have the opinion that
any predictor in the set should be removed.
Additionally, she suggests including a dimension for contracts, such as minimum order quantities,
as SKUs sometimes have to be ordered in larger quantities than necessary. She also suggests
that changes in the assortment can have a contributing effect on inventory pressure. In some
cases, newly introduced SKUs are ordered in particularly large quantities due to high inventory
prioritisation and a "must have" status in Axfood stores. When an SKUs is later reclassified
and no longer assigned top inventory priority, unnecessarily high item volumes may remain
in storage and can potentially cause inventory pressure. Apart from this, Rosén argues that
seasonal SKUs, such as barbecue charcoal and Swedish herring, may cause periodic peaks in
inventory utilisation, and that this dimension may be included in the set of plausible predictors.
VIII
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DEGREE PROJECT IN THE FIELD OF TECHNOLOGY

INDUSTRIAL ENGINEERING AND MANAGEMENT

Monitoring inventory pressure in a

KTH ROYAL INSTITUTE OF TECHNOLOGY

Master of Science Thesis TRITA-ITM-EX 2019:349

Examensarbete TRITA-ITM-EX 2019:349

Monitoring inventory pressure in a Fast-Moving

Mätning av lagertryck för snabbrörliga

Monitoring inventory pressure in a

4 Axfood case study 31

5 KPI & model construction 37

B Summary of conducted interviews II

Abbreviations/ Key terminology

Automatic ordering . . . . . . . . . . . . Function for continuous replenishment of goods towards stores

Olof Holmberg Hampus Österlind

1.2 Problem statement

1.3 Purpose and research questions

2. Which product characteristics are instrumental in causing high inventory pressure?

(a) What are the measurable predictors of inventory pressure?

The conducted study is limited according to the following principles:

• The subject of inventory pressure is being investigated as a static phenomenon, i.e. no

1.5 Theoretical contribution

1.6 Empirical contribution

2.1 Choice of methodology

2.2 Research design

Figure 1: Flow chart of research method

2.3 Context study

2.4 Theoretical framework

3. Inventory and logistics key performance indicators (KPIs)

4. The statistical method of linear regression analysis

2.5 Axfood case study

2.5.2 Data collection

2.6 KPI & Model construction

2.7 Segment analysis

2.8 Research quality

2.8.1 Data sample and removal of outliers

Table 1: Size of data sample

Stage SKU sample

2.8.2 Location of research

2.8.3 Quality of data

2.8.4 Reliability of results

2.8.5 Internal validity of results

deleted in a manner that may not be fully random. [36]

2.8.6 External validity of results

3.1 Inventory management

Figure 2: Inventory levels over time [35]

3.2 Inventory control models

• Category A items - Characterised by outstanding importance, these are often rigorously

To be able to consider diﬀerent criteria in a ABC classification, Multi-Criteria Inventory Classi-

3.3 Industry metrics

3.3.1 KPI framework

3.3.2 Overview of metrics

Satisfactory supplied orders

Value of total SKU consumption

SKU units delivered

Total SKU deliveries

3.4 Linear regression analysis

3.4.1 Regression models

uses maximum likelihood estimation. [24]

3.5 Multiple linear regression

3.5.1 Ordinary least squares (OLS)

1. The dependent variable is described with a linear function of predictors in addition to