Sales, Inventory & Operations Planning During High Growth, GMCR

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After Action Review: Sales, Inventory & Operations Planning

During High Growth

Green Mountain Coffee Roasters, Inc.

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AAR: SIOP Development

•  Coffee Industry Background •  GMCR Company History •  The Development of the Keurig Brewing

System •  The High Growth Phase •  SIOP Development •  After Action Review: SIOP to Date

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Forward-Looking Statements

Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those stated here. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the impact on sales and profitability of consumer sentiment in this difficult economic environment, the Company’s success in efficiently expanding operations and capacity to meet growth, the Company’s success in efficiently and effectively integrating Tully’s and Timothy’s wholesale operations and capacity into its Specialty Coffee business unit, the Company’s success in introducing new product offerings, the ability of lenders to honor their commitments under the Company’s credit facility, competition and other business conditions in the coffee industry and food industry in general, fluctuations in availability and cost of high-quality green coffee, any other increases in costs including fuel, Keurig’s ability to continue to grow and build profits with its roaster partners in the At Home and Away from Home businesses, the impact of the loss of major customers for the Company or reduction in the volume of purchases by major customers, delays in the timing of adding new locations with existing customers, the Company’s level of success in continuing to attract new customers, sales mix variances, weather and special or unusual events, as well as other risks described more fully in the Company’s filings with the SEC. Forward-looking statements reflect management’s analysis as of the date of this press release. The Company does not undertake to revise these statements to reflect subsequent developments, other than in its regular, quarterly earnings releases.

NASDAQ: GMCR

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History of Coffee

  Coffee Plant indigenous to Abyssinia (Ethiopia)   First reliable record of coffee consumed as a

beverage in the 9th century   Cultivation to Yemen as early as A.D. 575   Protected by Arabians, germinal seeds

finally obtained by the Dutch in 1616.   Colonization of coffee throughout the tropics

beginning mid 17th century in Indonesia and to the Caribbean in early 18th century.

  Principal cash crop of the new world colonies

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Coffee in North America

•  First introduced by Capt. John Smith with the founding of Virginia in 1607

•  Coffeehouses flourished quickly as a fundamental part of American culture

•  The Green Dragon, center of social and political life in Boston, was known as “headquarters of the Revolution”

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20th Century Coffee Marketing in the U.S.

•  Beginning of the Century, coffee was typically purchased “green” by consumers, or roasted locally by grocers

•  With commercialization of merchandisers, local roasters were not competitive with large roasters

•  Eventually, over 80% market share would be held by 3 major roasters

•  The battle for brand loyalty was largely fought with lowest price, and quality suffered

•  Coffee consumption declined steadily from 1960 to 1980, to half the per capita volume

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The birth of Specialty Coffee

•  Specialty coffee industry born in 1982

•  Focus on quality, freshness, brewing quality

•  Coffeehouses once again flourish and are at the center of culture

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Green Mountain Coffee Story •  Founded in 1981 •  Began as a café and small roaster in Waitsfield, VT •  Grew to 16

coffeehouses in 5 states

•  Went public in 1993

•  Sold all retail stores in 1998 to focus on wholesale

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Green Mountain Coffee Story •  Grows to become one of the

top 5 coffee roasters in the country

•  Leader in Fair Trade & Organic

•  Becomes co-branded roaster with Newman’s Own Organics in 2003

•  Leading Keurig Roaster, buys Keurig in 2007

•  Becomes 2nd Fastest Public Growth Company in US

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Multi-Channel Wholesaler

Supermarket

Office Coffee Service & Food Service

Department Stores & Mass

Consumer Direct

All Other

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Keurig Development •  1993 – Conception of Single Cup

•  1995 – Brewer Launched around a converted salad dressing cup

•  Office Coffee Market 1st Focus

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Keurig® Success

•  Marketing Strategy based on the “Razor & Razor Blade”

•  Brewer (the Razor) Sales at near cost

•  K-Cup (the Blade) Sales carry good margin

•  Core Value Propositions: Quality, Variety, Convenience

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2,500

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Multi-Site Mfg and Fulfillment

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GMCR Stock Price – Last 5 Years

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GMCR:PEET:SBUX Stock Value Change Last 5 Years

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High Growth Creates Challenges

•  Tripling of SKUs •  Growth from 1 Manufacturing Plant to 6,

across the continent •  Non-rational, non-optimum capacity mix for

SKU & Distribution requirements •  Capacity < Demand (Both Materials & Production)

–  Constrained Sales and Channel Allocation Battles –  Inventory Policy is Not Ideal; “Build what you can to

meet current orders” vs. Safety Stock based Targets

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Sales, Inventory & Operations Planning as a Strategic Initiative

“A set of business processes that helps companies keep demand and supply in balance.”*

*Sales & Operations Planning by Thomas Wallace & Robert Stahl, 2009

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Fundamentals •  Demand & Supply

–  When Demand > Supply •  Delivery, Cost and Quality Metrics decline

–  When Supply > Demand •  Lower margins, higher costs and lower cash

•  Volume & Mix –  Volume

•  How much of what types of products? •  Rates of sales, production, inventories

–  Mix •  Which products specifically, how to prioritize?

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Project Charter

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Goals

Customer fill rates Financial forecast accuracy Timely and effective New Product launches Pro-active Capacity Planning Reduce planning process time Reduce Freight Costs Streamline Multi-Site Planning Process Reduce Inventory Carrying Costs

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  A SIOP Process & Meeting Structure, which includes:   Process to communicate from Phase to Phase   Unconstrained demand plan from Sales/Marketing   Cross-Functional constrained demand/supply review   Clearly Defined Meeting Inputs/Outputs   Standard Work Requirements   Required Resources/Attendees   Meetings Sequenced Appropriately   SIOP Policy Development   Metrics: Sales Forecast vs Actual, Target Inventory Levels, Capacity

Plan, Production Schedules vs Actual   Scenario Planning Ability   Improve forecast accuracy by 10% for new product forecast by 2/1/11   Establish baseline for sku level forecast accuracy by 11/1and target

improvement.   Improve DDP performance to 98% by 3/11   Improve linkage between DDP and Customer scorecards   Reduce Touch Time by 30% by 3/11

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Vertical Value Stream Process

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Rapid Improvement Output

–  Identified Phases, Meeting Schedule, Attendees, High level inputs / outputs

–  Created process for converting unconstrained to constrained demand

–  Created Project Team –  Outlined Pre-work to Launch

*RIE did not include KBU

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RIE Objectives

•  Rapid Deployment Effort –  Met targeted 8/20 date for initial SKU level forecast

•  Agreed upon components = existing customers/products, incorporation of Consumer Direct

–  Agreed upon demand template format with Ops –  Consolidating external data sources (New Products,

New Customers) in Access –  High level data requirements / metrics defined –  Instituted foundational process changes

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Sales, Inventory & Operations Planning

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SIOP Calendar FY11 SCBU/KBU COLLABORATIVE SIOP CALENDAR

***SIOP BEGINS***

PERIOD 3 Nov / Dec Sun Mon Tue Wed Thu Fri Sat

21 22 23 24 25 26 27 28 29 30 1 2 3 4

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Sales & Marketing Demand Review

Supply Planning Meeting

Joint SIOP Meeting

Executive SIOP Meeting

SCBU Constrained forecast to be published after Executive SIOP Meeting

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SIOP Process Changes Sales & Marketing

•  Integrating New Products into SCBU Forecast •  New Products Review - Pre-meeting established •  Stagegate Workbooks – dynamic updates •  NPD definition of forecast ownership (up to 60 days prior to launch)

•  Exception based forecasting for Sales •  Sales focus on new products and outliers from statistical baseline •  Sales focus on key customers – longer term: sales calendar planning

•  Activating the Demantra Forecast (SKU level) •  Using statistical sku level baseline forecast from Demantra •  Integrated DDX data •  Demand Planning reviews SKUs, channels, product types (System Integrity) •  Consolidating external data sets via EPM Cube (New Products, CD) •  Import New Products, Pipeline, Keurig, convert to SKU & Export to Ops

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SIOP Process Changes - Supply Chain •  SKU level forecast = input to production

forecast

•  Release site production forecasts 6 weeks in advance of each period vs 3

•  Establish formal process of converting ship-to forecast to ship-from forecast

•  Refine and improve the process of setting safety stock levels

•  Weekly meetings with each site to monitor production-to-plan metrics

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We hold these truths to be self evident…

“The forecast will be off.” “Customers will

surprise us!”

“Equipment will break down.”

“Priorities will change.”

“Resources will be constrained.”

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SIOP Status •  First Run through Period Calendar

–  Forecast was wrong –  Priorities Changed –  Customers surprised us –  Equipment broke down –  Resources were constrained

•  Loaded Forecast into Supply Planning –  12 Iterations of Planning Instances and Solver Runs –  Comparison with Manual Analysis –  Maintenance of Planning Attributes

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SIOP Next Steps

•  Activate Supply Planning as Feed to Site Production Plans

•  Onto 3rd Iteration of SIOP –  Improved Forecast –  Greater Integrity of “One Set of Numbers” –  Communicated Commitment

•  Further Refinement of Planning Tools to Incorporate SIOP Feed into Production Scheduling and MRP

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After Action Reviews

An after-action review (AAR) is a professional discussion of an event, focused on

performance standards, that enables soldiers to discover for themselves what happened,

why it happened, and how to sustain strengths and improve on weaknesses. It is a tool

leaders and units can use to get maximum benefit from every mission or task. :US Army TC25-20

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After Action Review Format

•  What was supposed to happen? What actually happened? Why were there differences?

•  What worked? What didn’t? Why? •  What would you do differently next time?

•  Best when coupled with a Before Action Review

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After Action Conclusions

•  Significant Progress Achieved in SIOP Program –  Better Communication between all stakeholders –  Quality Forecast to load MPS and MRP tools –  Formal Process & Cadence Appropriate for our

Enterprise •  Challenges to have been anticipated

–  Critical Partners need to be brought in early –  Senior Executives need appropriate involvement –  Never enough resources to focus on development

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After Action Conclusions

•  Significant Progress Achieved in SIOP Program –  Better Communication between all stakeholders –  Quality Forecast to load MPS and MRP tools –  Formal Process & Cadence Appropriate for our

Enterprise •  Challenges to have been anticipated

–  Critical Partners need to be brought in early –  Senior Executives need appropriate involvement –  Never enough resources to focus on development

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Partners Need to be Brought in Early

•  Hesitation that we need “our house in order” before we involve critical partners

•  Challenge: if both houses aren’t in order, the whole system doesn’t work

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Senior Executives Need Appropriate Involvement

•  Senior managers don’t just need to be committed to the concept of S&OP, they also need to be committed to the design

•  Hesitation to bring in Senior Managers to the design, as we thought it would be distracting

•  There is less credibility to the results, especially at the early stage, because they were less involved with design than appropriate.

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•  Recruit a Director of Planning –  Expertise in Multi-Site Supply Chain Planning with Tier 1 (SAP,

PeopleSoft, etc.,) ERP system

•  Enforce “One Plan” System –  Reliable, integral set of data on demand, capacity and

constraints –  Exercise communication, data analysis and tool usage to the

point of competence –  Further enhance quality of forecast, capacity planning and

inventory policy execution

•  Run the next 20 miles of the Marathon

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Questions and Discussion

Please contact me at Don.Holly@gmcr.com