Ajinomoto Group Medium-Term Plan for Digital ...

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Ajinomoto GroupMedium-Term Plan for Digital Transformation (DX) in Supply Chain Management (SCM)

March 23, 2021Takayuki KodaCorporate Vice President In charge of SCM ReformSCM SubcommitteeDX Committee


Confidential

Planned cost reductions and business profit in SCM

Challenges for Ajinomoto Co. and objectives for DX in SCMBusiness challenges related to Ajinomoto Co.’s SCM⇒ Inventory rationalization (reduce days inventory outstanding (DIO))

Direction and progress on reducing inventory1. Rationalize number of SKUs2. Reduce number of inventory locations: Reorganization of domestic

seasoning and packaged food production3. Improve demand forecasting and automate production

-1.5

-6.0

-7.5

-6

-4.5

-3

-1.5

0FY2020 forecast FY2020-2022 Plan FY2020-2025 Plan

Cumulative Cost Reductions (billion yen)

Copyright © 2021 Ajinomoto Co., Inc. All rights reserved

Planned Cost Reductions (SCM related)

Cost reductions(billion yen)

¥4.5 bn

2


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Business Challenges for the Ajinomoto Group

ROE > ROIC > ROA > WACC (is how it should be）4.9% > 3.0% > 2.1% < 5-6% (Ajinomoto Group’s consolidated FY2019 results)

ROA＝7.2% (= business profit÷ total assets: announced publicly)

ROE = operating profit (1 – tax rate) ÷ shareholder’s equity

ROIC= operating profit × (1 – tax rate) ÷ (shareholder’s equity + interest-bearing debt)

ROA = operating profit× (1 – tax rate) ÷ total assets

★ All important managerial indicators are low, especially ROA.

SCM factors contributing to low ROA1. Denominator: Large inventory (FY2019 Group average DIO: approx. 93）2. Numerator: Low profit margin (room for improved efficiency in SCM-related business）

Copyright © 2021 Ajinomoto Co., Inc. All rights reserved 4

Trend in DIO⇒ Room for Reduced Inventory

・Average DIO of 50 days before 2005 increased to 93 days in 2019

Around 50 days up to 2005DIO rises after 2005

Note: DIO = Days Inventory Outstanding

Trend over past 40 years (CCC, inventory amount, etc. for fiscal years ending in March)Sa

les,

Cos

t of S

ales

, and

Inve

ntor

y (b

illion

yen

)

CC

C a

nd D

IO

売上高売上原価棚卸資産棚卸資産回転日数

買入債務回転日数

売上債権回転日数 CCC

1,500

1,200

900

600

300

Sales Cost of Sales

Inventory DIO Accounts Payable Turnover in Days

Receivables Turnover in Days

1980

1982

1984

1986

1988

1990

1992

1994

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018


Change with Group Consolidation (Manufacturing Cost vs. Inventory)

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000

FY2008⇒FY2019 (end of year comparison) Group Consolidated Manufacturing Cost vs. Inventory

94 days

Inventory(billion yen)

75 days102 days

65 days

Maintained DIO and expanded business

Business thatincreased

DIO

Change in businesses in scope of consolidation

Business thatimproved

DIO

FY2008 results

FY2019 results

Note: DIO = Days Inventory Outstanding

210

200

190

180

170

160

150

140

130

120

600 650 700 750 800 850 900 950 1,000 1,050

Manufacturing cost

(billion yen)


Change in DIO – Breakdown and Target

50.0

64.5

93.7

70

27.3

8.2

14.5

10.1

0

10

20

30

40

50

60

70

80

90

100

Before 2005 3 years (nodata)

2008 Change inconsolidation

scope

Businessdecreased

Businessincreased

2019 Target2025

DIO


Identify core issues for resolving pain points in SCM and achieve the following by reducing DIO:

SCM Subcommittee FY2020-25 Plan

Resolvepain points

Improve productivityReduce lead times Reduce DIO

Visualize with value stream mapping（flow of items and information）

Design work from an overall viewSet KPI targets (emphasis on ROIC)Work based on data (OE)

Absolutely achieve theMedium-Term Management Plan for all organizations

1. Improve customer value (provide fresh products to customers)2. Improve shareholder value (improve capital efficiency)

Target KPIsFY2022 FY2025

DIO ⇒ 86.5 days(equivalent to ¥15 bn)

⇒ 70 days(about ¥50 bn)

Cost reductions ¥1.5 bn ¥6 bnPositioning Target value Goal vision



Confidential





Inventory Classification and Reductions

The role of inventory is to:・Ensure a stable flow of products by levelling out and absorbing fluctuations in sales and production

Inventory Factors having an impact

Cycle stock Production frequencyLead time

Safety stock Fluctuations in realdemandAllowable stockout rate

Anticipatory stock(build up)

Production capacitySales promotions

Sales slippage Accuracy of sales forecastsInsufficient data

Productionslippage

Accuracy of production planBatch production

Plannedinventory

Unplannedinventory

Review work flow・Monthly⇒weekly production

1. Reduce inventory locations

Aiming for zero2. AI demand forecasting3. Production robustness

(automated production)

Reduce SKUs


Reducing SKUs: Approach (Current State)

Current State1. No way to understand

costs per SKU2. Shared costs on

allocation basis(Personnel,

warehousing, etc.)

Solution3. Digitalization to see

true cost⇒ Accurate reduction

Increase in quantities and unit prices of products with high BPM

Sales

BPM (%) Theory of Sales by SKU and Business Profit Margin

Reduced SKUs

Tightening of fixed costs andexpenditure = Improved profitability

Sales of this SKU


In the case of COVID-19 (within Ajinomoto Group)

1. Difficult to get production staff because of COVID-19 so continued supply with emphasis on main SKUs⇒ As a result, sales decreased but profit improved.

2. Strong demand was an important factor but lead times from factory production to shipping were reduced resulting in smaller number of days of inventory.

Reducing SKUs: Approach (Going Forward)

Got a visceral sense of this on corporate and department level⇒ Accelerate future initiatives


1. Reduce Inventory Locations: Reorganization of domestic seasoning and packaged food production

Reorganization planned to be completed at end of Sept. 2021

New Japanese dashi plant (Yokkaichi)

Manufacture of Japanese dashi

Packaging process

Ajinomoto Co. (Yokkaichi)

New soup plant (Suzuki-cho)

From 5 to 3 locations

New packaging plant

Planned construction of new manufacturing plant

Planned construction of new manufacturing and packaging plant

Located in Yokkaichi City,Mie Prefecture

Knorr Co. (Shimonoge)

Ajinomoto Packaging Co. (Takatsuki)

Ajinomoto Co. (Suzuki-cho)

Ajinomoto Packaging Co. (Suzuki-cho)

Knorr Co. (Shimada)

Located in Shimada City,

Shizuoka Prefecture

Located in Suzuki-cho,

Kawasaki City

The effect of the reorganization of the production system is not included in the cost reductions in this material.


2. Improve Demand Forecasting with AI3. Automate Production

Past shipments

Event planning

Sales forecasts Demandforecast

Current: based on personal intuition, experience, etc.

Past shipments

Weather info.

Info. oningredient prices, etc.

Demand forecast

Future: objective, data accumulation, constantly evolving


-2.5 -15.0 -10.0

-50.0

-60

-40

-20

0

1.0 ＋1.5 4.1

＋6.0 ＋α

＋α

0

2

4

6

8

10

FY2020 Forecast FY2020-2022MTP

FY2020-2022plan

FY2020-2025MTP

FY2020-2025plan

Cost improvements

Copyright © 2021 Ajinomoto Co., Inc. All rights reserved

Planned Business Profit and Inventory Reductions (SCM reform related)

(billion yen)

(billion yen)

Planned Business Profit (BP) (Cumulative)

Planned Inventory Reductions (vs. FY2019)

15

Identify core issues for resolving pain points in SCM and achieve the following by reducing DIO:

Resolvepain points

Improve productivityReduce lead times Reduce DIO

Visualize with value stream mapping（flow of items and information）

Design work from an overall viewSet KPI targets (emphasis on ROIC)Work based on data (OE)

Absolutely achieve theMedium-Term Management Plan for all organizations

1. Improve customer value (provide fresh products to customers)2. Improve shareholder value (improve capital efficiency)

Target KPIsFY2022 FY2025

DIO ⇒ 86.5 days(equivalent to ¥15 bn)

⇒ 70 days(about ¥50 bn)

Cost reductions ¥1.5 bn ¥6 bnPositioning Target value Goal vision

SCM Subcommittee FY2020-25 Plan


Forward-looking statements, such as business performance forecasts, made in these materials are based on management's estimates, assumptions and projections at the time of publication. A number of factors could cause actual results to differ materially from expectations.This material includes summary figures that have not been audited so the numbers may change.Amounts presented in these materials are rounded down.

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