Think Outside Your ERP Mission-Focused Inventory Strategies

Transcription

1 Think Outside Your ERP Mission-Focused Inventory Strategies by Ray Haeme Margo Cohen Eric Michlowitz

2 Think Outside Your ERP Mission-Focused Inventory Strategies Rising logistic costs and need for better service are placing greater pressure on government agencies and their business partners to achieve savings through a lean yet responsive inventory. But standard optimization approaches, which are geared for high-volume consumer inventories, have limited effectiveness for the many organizations whose inventories serve different purposes, such as emergency response or mission-critical equipment repair. In response, innovative organizations have developed new approaches that tailor their inventory solutions to their unique mission requirements. These Mission-Focused Inventory Strategies are achieving the twin goals of improving service and reducing costs while aligning the supply chain to support the organization s mission goals and objectives. The need to optimize inventory performance is not new. But organizations today are facing a confluence of particularly harsh pressures: rising storage and transportation costs; an at-capacity, aging infrastructure; and, for many organizations, increasing service or mission requirements that hinge on providing the right inventory, at the right place, at the right time. Unfortunately, standard inventory optimization approaches have achieved uneven success when addressing these challenges. Traditional approaches, implemented in Enterprise Resource Planning (ERP) systems, use metrics such as economic order quantity, turn ratios, and fill rates and are very effective for consumer-oriented inventories that have large volumes and high turn ratios. But these tools provide little help to the large number of government organizations faced with less homogenous inventories and unique mission requirements. The key to finding the right inventory optimization approach for these organizations is to first understand the role that inventories play in supporting their missions. In our experience, there are four basic types of inventories each with its own characteristics, and each shaped by the types of missions it supports, and each requiring a tailored inventory stocking and replenishment strategy. 1) Consumer/Retail Inventories These inventories support the high-volume demand for constant replenishment of consumable parts and products. Among the commercial organizations that often require these types of inventories are consumer product companies, chip manufacturers, and auto manufacturers, whose supply chains must satisfy a high-volume, widely distributed demand for their products. Some government agencies also maintain inventories that serve these purposes, such as military supply organizations that provide food, clothing, fuel, and other consumable items used daily by service members, and the General Services Administration, which provides office supplies, office furniture, hardware, paint, and other high-use supplies to government agencies. 2) Scheduled Inventories These inventories primarily support planned demand for raw materials, parts, and products that feed a manufacturing line, repair line, planned projects, or kit assembly. Global manufacturers, for example, plan specific production runs of their products. Military repair depots plan for a specific number of overhauls or component repairs during annual cycles. While demand for end products or repaired equipment or components may change, thereby causing adjustments to a production plan, the inventory of materials and parts needed for production of a specified quantity is fixed and scheduled over a given duration of the production cycle. 3) Emergency Inventories These inventories support the unpredictable but critical need for supplies during emergencies, such as a 1

3 hurricane or a pandemic. Many government agencies, including the Federal Emergency Management Agency and Centers for Disease Control and Prevention (CDC), have missions requiring rapid response to disasters. They must be able to mobilize and rapidly distribute large amounts of supplies. Private organizations, such as utility companies and hospitals, stockpile supplies for similar unplanned purposes. Emergency response inventories are expensive to maintain but critical to these organizations missions. 4) Break/Fix Repair Parts Inventories These inventories support a low-volume demand for parts and supplies to restore critical equipment to an operational status. Military units, transport companies, heavy equipment operators, communication service providers, and many others need to stock spare parts that are rarely needed, but nevertheless are essential to operations. In some cases, the lack of a single component can stop or endanger operations. Exhibit 1 shows each of these segments along different continuums of key inventory characteristics. For example, the service level required for the delivery of consumer inventories is typically measured in days. But the service level for the other segments becomes progressively more urgent, and for some repair-parts inventories, the urgency might be measured in hours or even minutes. Similarly, the volume of demand for consumer inventories is typically at the high end of the demand continuum, while repair-parts inventories have a lower volume demand. The demand for consumer inventories is also more predictable than other inventory segments, which lie on less predictable spans on the continuum. Although there exists some overlap in these characteristics every organization will have its own specific requirements and needs each of these inventory segments tends to have its own unique fingerprint as defined by its placement on each continuum. Exhibit 2 builds upon these characteristics to provide more detailed comparisons of each inventory segment, showing the types of companies and organizations that rely on these different types of inventories. Widely dispersed businesses and organizations, with national Exhibit 1 Characteristics of Inventory Segments Service Level Demand Volume Demand Volatility Standard Inventory Metrics and Optimization Approaches Need in Days Very High Predictable Very Applicable Need Immediately Very Low Unpredictable Not Applicable Consumer/ Retail Scheduled Emergency Break/Fix Repair Parts 2

4 Exhibit 2 Inventory Category Descriptions Consumer/Retail Scheduled Consumer/Retail Emergency Break/Fix Repair Parts High volumes with high turn ratio Variable volumes with just-in-time delivery High volumes with limited duration Low volumes, often with very low turn ratios Variable demand; low predictability Service-level criticality: Minutes to 12 hours Structure: Multi-echelon, regional stock based on demand frequency and service-level requirements Examples: On-call services, such as ISPs and ASPs; and equipment servicing companies Variable, but predictable demand Service-level criticality: hours Structure: Segmented by value and volume; multi-echelon to minimize stock-outs, 3PLs play a significant role Examples: Major retailers, GSA, consumer goods, groceries Planned demand Service level criticality: hours Structure: Multi-echelon, including vendor managed; scheduled to meet production flow Examples: Aircraft manufacturers and shipbuilders, military depots, utilities, low-rate manufacturing Unpredictable demand Service-level criticality: Less than 12 hours Structure: Multi-echelon; prepositioned stocks, with supplier agreements for fast response Examples: FEMA, CDC, Red Cross, state and local emergency response or even global footprints, tend to use multi-echelon inventories. That is, inventories are layered at central, regional, and local distribution centers or warehouses. This further challenges the ability of standard inventory tools, metrics, and optimization approaches to define just how much inventory to stock at each level. The consumer-oriented inventory is the best known and most widely examined segment, both in academic textbooks and by inventory experts. Similarly, the bulk of inventory optimization methods and tools, such as turn ratios and fill rates, are aimed at organizations that maintain this type of consumer inventory. However, the other inventory segments play equally important roles for their organizations and they are by no means rare. As an example, many government agencies and companies carry large numbers of repair parts for critical equipment that must be maintained at high levels of operational availability or readiness. Even small amounts of downtime are extremely costly and can have a detrimental impact on critical missions. As a case in point, consider inventories that are maintained to support break/fix repair operations. Diverse military equipment, for example, must be maintained at the highest level of readiness in order to respond to critical events worldwide. The Air Traffic Control system maintains communications gear and radars across the country that must perform continuously to ensure flight safety. We expect our cell phones and computer networks to be operational whenever we use them. Manufacturers of all types depend on high-volume production machinery to run at a near continuous rate. Downtime costs millions in lost production and increased lead times. Whether the situation is driven by a small number of highly reliable equipment items, or a large array of diverse equipment with unpredictable usage and demand patterns, the requirements are nearly the same. Tens of thousands of repair parts may be needed in inventory to ensure rapid recovery of critical equipment in the event of failure. Some parts may be extremely specialized or even obsolete and may not be used for any other purpose. 3

5 For break/fix repair organizations, carrying parts in inventory is an investment or insurance policy. The lack of a single item in inventory could bring the rest of the organization to a halt, or create some very unhappy customers. Consequently, turn ratios, stock policies, optimal stocking quantities and locations, replenishment policies, and retention policies are not applicable when average annual demand is a fraction. The challenge for the organization becomes managing risk and uncertainty across a highly diversified inventory rather than managing a relatively homogenous inventory with a predictable demand rate. Also important to recognize is that break/fix solutions must be tailored to an organization and its specific circumstances. Numerous organizations such as the military services face tremendous challenges as they transition from legacy systems to more modern ERP systems. In part, this is because of the need to carefully select and adjust parameters for break/ fix inventories in ERPs that are primarily designed for Consumer/Retail inventories. Some organizations are also examining upstream solutions. For example, onboard diagnostics or networked prognostics that signal when a part is about to fail would reduce lead time for getting the right part to the point of repair, but such tools may be quite expensive and difficult to implement quickly if not already designed into the equipment. Similarly, using premium transportation often costs less than stocking expensive parts at many locations (or stocking inexpensive parts at thousands of locations). However, operating budgets and capital budgets are often tracked independently, and so it may not be easy to demonstrate that a small increase in one budget is generating substantial savings in the other. Thus, organizations must ensure that they understand the full cost-benefit implications of possible solutions within each inventory segment. To help organizations that have unique inventory needs, Booz Allen recommends developing a Mission- Focused Inventory Strategy using a three-step process: 1. Identify the mission requirements supported by the inventory, including the corresponding inventory roles and characteristics. 2. Design inventory metrics and select the appropriate analysis tools to optimize inventory efficiency and bolster its support of mission requirements. 3. Align inventory strategy with the organization s overall supply chain strategy to ensure that all interrelated processes achieve complementary improvements. There is no one-size-fits-all inventory strategy: It is crucial for an organization to develop an inventory strategy that recognizes and bolsters the specific role played by its inventory in supporting the organization s mission requirements. Break/Fix Case Study Booz Allen has helped strengthen the inventory strategy of dozens of private sector and public sector organizations. While the missions and objectives are often different, these organizations typically face a similar set of inventory challenges. In one recent engagement, we helped an industrial electronics company reduce costs and improve repair service with a mission-focused approach that aligned inventory strategy with the corporate mission. The company sold and serviced a range of electronics products that were widely dispersed and often operated in relatively remote locations throughout the world. Businesses that bought these products depended heavily on them and demanded service agreements that promised repair response times as low as four hours from notification to both parts delivery and completed equipment repair at the operating location. To meet these very demanding response times, the industrial electronics company had a large logistics and repair organization with thousands of repair technicians operating in teams responsible for specific territories worldwide. Although this case involved a commercial organization, it mirrors several government operations, such as the Federal Aviation Administration and each military service. 4

6 The service agreements placed a great cost burden on the company s inventory. Although the company had to maintain an inventory of 30,000 stock keeping units (SKU) for repair parts, very few of these parts had a demand greater than one unit per year. That is, most SKUs had intervals of a year or longer between inventory requests, which made it cost-ineffective for the company s repair technicians to carry numerous SKUs in their vehicles, because only a small portion of the parts would ever be needed during a one-totwo-year span. But storing them in local storage units or regional warehouses made it difficult for repair technicians to quickly retrieve and install the parts when service was requested. The company had tried to devise cost-saving solutions using standard stockand-replenishment approaches, but the proposed solutions required prohibitive amounts of spending to enable even a moderate improvement in service. Tailoring Inventory Strategy to Meet Mission Requirements When Booz Allen was asked to advise the company, we applied the mission-focused approach to analyze the problem. First, we diagnosed the business/mission requirements and the role that inventory played in meeting those requirements. In this case, the role and characteristics of the inventory fit a typical break/ fix repair inventory (see Exhibit 1), in which individual parts have low demand but are highly critical to operations. Standard optimization metrics such as turn ratios and fill rates did not apply. Finding the right inventory strategy meant focusing on speed rather than quantity. Consequently, the second step applying the right metrics and analysis tool required the company to shift its objective from improving the local fill rate to getting the right part to the technician in time to meet the service agreement without increasing costs. This approach required a very different operating style and culture, as well as new metrics to ensure that the company was achieving its new, mission-focused goals. It also offered exceptional results in terms of improved performance and large reductions in inventory investments. After careful analysis, Booz Allen recommended the following inventory strategy: Reduce dramatically the number of SKUs that technicians carry in their vehicles. The precise number and type of SKUs per technician varied for each territory, depending on factors such as the historical demand of the installed product base. Overall, however, technicians carried fewer parts, and only those with the highest usage. Use local storage options for carrying enough parts to provide local part availability in those areas that have a high density of installed products, which enables technicians to specialize in a class of product. These storage facilities must be optimally located and/or numerous enough to adequately reduce the technicians pick-up times. Increase the use of third-party, manned storage locations to support a desired local part s availability in low-density, rural areas. Although it may be necessary at times to pay a high premium to fly-in needed parts, this approach provides a less costly way to deliver the relatively few parts needed in these areas, because inventory costs are kept low. This strategy was coupled with broader scale recommendations on equipment design, improved diagnostic procedures, and increased responsiveness on repair calls that did not require parts. Aligning Inventory and Supply Chain Strategies The third step in a mission-focused approach calls for aligning inventory strategy with supply chain strategy. Booz Allen helped the electronics company improve interrelated supply chain operations and processes by doing the following: Assessing optimum locations for both third-party and territory storage to match installed base demand patterns 5

7 Tailoring stocks in storage locations to match surrounding installed base Streamlining delivery processes (from request to approval to dispatch of parts) Understanding and improving dispatch to improve response time and decrease inventory fill rate Improving pre-arrival intelligence for onsite service calls (e.g., through the use of remote diagnostics), so that part need is known before the technician s arrival Examining ways to reduce the total demand for onsite service calls (e.g., by increasing remote resolution) Exploring upstream solutions such as simpler designs, onboard diagnostics, less customization, and more flexibility in the service contracts to generate future savings. Taking on all aspects of the supply chain at once can be a challenging task. But with an overall strategy in mind, organizations can plan specific actions over time that drive improvements throughout the supply chain, bolstering service-level effectiveness and cost efficiencies with the least risk to the company. By implementing these new inventory optimization measures, the industrial electronics company anticipates that it will reduce inventory working capital expenditures by more than 40 percent. At the same time, the company is on-pace to improve repair response rates from less than 75 percent to more than 85 percent, thus exceeding the rigorous service level agreements that it previously struggled to satisfy. Conclusion Organizations are facing unprecedented pressure to cut inventory costs while simultaneously improving inventory services in support of expanding mission requirements. Although standard inventory tools and metrics can address this challenge for highvolume, consumer-product inventories, they are not applicable to inventories that serve other, equally important purposes for their organizations. In the same way that the industrial electronics company used a Mission-Focused Inventory Strategy to find solutions to its inventory problems, we have seen innovative businesses and government agencies adopt mission-focused approaches to address their unique inventory challenges. Moreover, while inventory optimization is an important step, it should be viewed as only the first step in a broader supply chain strategy that includes forecasting (e.g., sales and operations planning), supplier performance (e.g., consolidating the vendor base, standardization, reducing external lead times and minimum order quantities, etc.), and deployment and replenishment (e.g., segmented stocking strategies, utilizing consumption-based pull replenishment, enhanced distribution strategies to include crossdocking, hub-and-spoke strategies, etc.). Below are a few examples of our recent work across these areas: The United States Agency for International Development s (USAID) Supply Chain Management System (SCMS) project recently sought to improve its ability to forecast its inventory needs. Working closely with SCMS, Booz Allen developed planning procedures and tools. We collaborated with advisors from 16 different countries to analyze forecasts and supply plans, educate them about supply chain practices, examine country issues affecting demand, optimize inventory levels, review stockouts and overstocks, and investigate forecast and plan accuracy-all based on USAID s unique mission requirements and inventory s role in meeting those requirements. As a result, SCMS has significantly improved customer service with higher rates of fulfillment and relies less on emergency purchase orders to meet needs. Recently the NIH undertook the daunting task of implementing an ERP system across all of its research institutes. With Booz Allen s assistance, the NIH pursued a life cycle approach that accounted for the interplay between the key elements of a successful transformation: people, process, and technology. Working closely with NIH 6

8 staff, our approach to inventory strategy included re-engineering the warehouse, item management, and purchasing business processes; helping to integrate the ERP systems and data with the new business processes; and applying inventory optimization methods to improve inventory service levels, while reducing overall inventory stock levels. The net result of these and related efforts enabled NIH to reduce its customer backorders by 92% and reduce on hand inventory by >$1M. In addition, warehouse pick productivity improved by 50% and inventory accuracy for select sub inventories improved over 90%. These goals were achieved by addressing the transformation from all directions, not simply as a technology upgrade. The CDC has developed more cost-effective inventory practices to meet its service level agreements. Booz Allen worked with CDC to streamline its nationwide distribution of 60 million vaccine doses to more than 40,000 healthcare providers. Among the changes, CDC consolidated 64 stores of inventory into two stores, generating a one-time saving of $68 million and anticipated annual savings of more than $38 million. Organizations seeking to emulate these results should, as a first step, begin aligning their inventory strategy with the principles of a mission-focused approach. A successful strategy can provide significant benefits in terms of increased service-level performance and reduced costs. But to be successful, the inventory strategy must be tailored to suit the mission of the organization, and even further tailored to the specific roles and geographies the organization serves. Careful analysis, clear thinking about the mission of the inventory, and full integration into the overall supply chain provide a firm foundation for robust, streamlined inventory operations. 7

9 About Booz Allen Booz Allen Hamilton has been at the forefront of strategy and technology consulting for 95 years. Every day, government agencies, institutions, corporations, and infrastructure organizations rely on the firm s expertise and objectivity, and on the combined capabilities and dedication of our exceptional people to find solutions and seize opportunities. We combine a consultant s unique problem-solving orientation with deep technical knowledge and strong execution to help clients achieve success in their most critical missions. Providing a broad range of services in strategy, operations, organization and change, information technology, systems engineering, and program management, Booz Allen is committed to delivering results that endure. With 20,000 people and $4 billion in annual revenue, Booz Allen is continually recognized for its quality work and corporate culture. In 2009, for the fifth consecutive year, Fortune magazine named Booz Allen one of The 100 Best Companies to Work For, and Working Mother magazine has ranked the firm among its 100 Best Companies for Working Mothers annually since To learn more about the firm and to download digital versions of this article and other Booz Allen Hamilton publications, visit Contact Information: Cleveland, OH McLean, VA Joseph Martha Vice President martha_joseph@bah.com 216/ Ray Haeme Principal haeme_ray@bah.com 703/ Eric Michlowitz Principal michlowitz_eric@bah.com 703/ Margo Cohen Associate cohen_margo@bah.com 703/

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