Strategic Inventory Management The systematic approach to managing inventory

Transcription

1 2013 May Strategic Inventory Management The systematic approach to managing inventory At a glance PwC proposes a systematic approach to identify and solve inventory issues via the Inventory Entitlement Model (IEM) and Plan For Every Part (PFEP). The IEM provides an improved model to determine inventory levels by part. The PFEP creates a common understanding of how the part is currently managed and aligns the organization on how it should be managed. Results include decreased inventory levels, increased materials availability, and improved cross-functional collaboration.

2 2 Strategic Inventory Management Introduction

3 While companies have greatly improved manufacturing efficiency via Lean techniques, many companies are still plagued by the following: Excessive overall inventory. Increases working capital requirements, hinders the ability to react to changing market conditions with product changes, and adds additional costs. Within Lean thinking, excessive overall inventory is one of the seven original types of waste. Insufficient inventory of critical parts. Stockouts of hard-to-replace parts result in potential critical line down situations. Unreliable supply chains that break at the most inopportune times. t understanding the potential risks in the system result in vulnerable supply chains and slow reactions to change. There are numerous reasons why companies are still plagued by inventory issues, even with improved manufacturing efficiencies: 1. While management has focused on improving operations, there hasn t been the same emphasis on shop floor integration with the supply chain. 2. Purchasing and commodity management is increasingly handled via a centralized staff and is becoming disconnected from the shop floor. 3. Misaligned metrics focus on purchased price variance rather than the total cost of the inventory. Usually this is driven by two main factors: employees competing metrics or simply lack of understanding of the total inventory costs. 4. Management does not understand the risks associated with critical parts. 5. Management is not able to assess and counter-measure the volatility of a longer lead-time supply chain. Coupled with not understanding risks in the supply chain, companies face material unavailability unless secondary sources can be found. The above inventory problems are similar and repetitive across different industries and companies. Companies do not have a systematic way of attacking inventory issues and resort to firefighting, instinct, and unnecessary buffers; they temporarily get problems in control, but do not create a long-term fix. With the problem temporarily under control, they move onto the next problem until the original one inevitably surfaces again. The systematic approach to managing inventory 3

4 Our experience shows that addressing a small number of parts oftentimes just 50 to 75 can solve 80% of inventory management problems. PwC proposes a systematic approach to identify and solve the inventory issues: Strategic Inventory Management PwC believes the key to solving the inventory problem is to create a systematic approach to identify and solve the relevant issues at the part level. The approach can be divided into two complementary methodologies: Inventory Entitlement Model (IEM) and Plan For Every Part (PFEP). IEM is a dynamic inventory optimizer that combines the part level historical information with the company s operations and inventory targets. The final output provides an inventory target for each part (inventory entitlement), which can then be aggregated for an overall inventory level. PFEP establishes a process to drill down on the critical parts and create a holistic action plan to ensure each part is properly managed according to its intrinsic characteristics. This creates a workable plan to reach entitlement. By combining both methodologies, companies are able to identify the correct handful of parts that will most improve their inventory and materials performance, as well as address the real waste-drivers at the part level, making strategic inventory management a reality. Our experience shows that addressing a relatively small number of parts oftentimes just 50 to 75 can solve 80% of inventory management problems. 4 Strategic Inventory Management

5 Plant PFEP ID Walk Date Owner Midwest 0 15-Apr-12 Company X Basic Characteristics On-Hand Part Number Description Type Program ABC Standard Cost ($/Unit) Units Value ($) Days Example Part Radiator Fans FG Product Line 1 A 700 1,000 Total Transit WH Usage Details Plant Week Demand (Units / $ / Days) Avg. Wkly Dmnd (Units / $ / Days) Avg. Daily Dmnd (Units / $) Last 52 Wk Dmnd (Units/$) SC Consign Average Entitlement Units Value ($) Days Supplier (RM) / Customer (FG) Information Total Name Code Country City Rating Plant Supplier Corp China Shanghai Great Transit Supplier Ordering (RM) Customer Ordering (FG) Transportation Packaging Mfr. Lead Time (Days) 40 Order Type N/A Shipment Mode Full truck Container / Pkging. Pallet MOQ 1000 Forecast Horizon (wks) N/A Transit Time (days) 5 Pkg. Description Medium LTA Yes Respectful of Frzn Window N/A Safety Time (days) 5 Parts per Pkg. 10 Exclusive Yes Frozen Window (Wks) N/A Shipment Frequency Weekly Standard Pkging. Yes Consigned Frequent Premium Freight N/A Standard Pkging Weight 50 kg Pull Pkgs Per Pallet / Layer 4 Move to Consign Adjust Order Type N/A Change Shipment Mode Milk Run New Container / Pkging. Move to Pull Yes Adjust Forecast Horizon N/A New Safety Time 4 New Parts per Pkg. Adjust MOQ 500 Adjust Frozen Window N/A New Ship. Frequency Bi-weekly New Pkgs Per Pallet / Layer Interim Storage, POU, & Lean Receiving Location Storage Location Humidity Controlled Point-of-Use Visual Control Level First-In-First-Out (FIFO) Receiving Area Storage Area Sub-Assembly Area Additional Observations / Comments O1 Supplier frequently changes payment terms due to poor cash flow management O2 The finished good for this part will be discontinued within the enxt year O3 Part used to be made in-house Action Items A1 Part should be ordered differently - placed on pull A2 Opportunity for lean improvements, such as visual control and FIFO A3 Part should be transported via milk-run and arrive bi-weekly By understanding the characteristics of the critical parts in the operation, companies can proactively identify and manage risk at the part and supplier level. Benefits of implementing the Inventory Entitlement Model and Plan For Every Part The benefits of implementing IEM and PFEP are numerous: 1. Inventory levels will be accurately calculated based on usage patterns and operational necessities. Once companies learn the accurate inventory level they can optimally allocate resources by investing in critical parts while cutting unnecessary costs in dead inventories. 2. Lean principles will be extended upstream into the supply chain. 3. The systematic implementation approach will promote crossfunctional collaborations between operations and supply chain personnel. Long-term solutions will create a collaborative relationship with suppliers that will benefit the overall sourcing strategy. 4. Finally, by understanding the characteristics of the critical parts in the operation, companies will be able to proactively identify and manage risk at the part and supplier level. Chart 1. Overview of the PFEP process Entitlement analysis High priority part identification Plan For Every Part (PFEP) Gap to entitlement by part Identify the high-priority parts Plan For Every Part (PFEP) inventory Entitlement inventory Actions to improve performance at the part level Establish inventory level Based on company business rules and historical usage, simple math to determine proper inventory level Incorporates raw, WIP, outside processing Calculated at the part level Parts for initial focus Inventory reduction parts most over entitlement Service focus parts most under entitlement Part level deep dive State - Ordering - Packaging - Transportation - Interim Storage/POU - Lean State Specific activities identified to get from current state to future state Owners assigned to each activity The systematic approach to managing inventory 5

6 6 Strategic Inventory Management Step 1: Creating the Inventory Entitlement Model

7 IEM provides an improved model to determine inventory levels by part Many companies use ABC methodology to segment and prioritize the parts in their inventories. The segmentation is based on the parts annual purchased value (APV) the total volume purchased multiplied by the unit price of the part. The parts classified A represent the first 80% of the APV, parts classified B parts represent the next 15% of the APV, and parts classified C are the remaining 5%. Companies can then set inventory targets by classification, such as 2 days of inventory for A parts. One of the biggest advantages of this methodology is that it is easily understood and provides a mechanism to keep different levels of inventory controls over the different segments. While a good starting point, ABC does not take into account usage patterns will the part be used mostly in a select product that sells well in the first half of the year? If so, the company would want to manage that part differently than one that is used steadily throughout the year. ABC also doesn t take into account how parts should be managed (e.g., Pull, Discrete POs, Min-Max, etc.). To improve the methodology, we propose using these two factors, APV and the part s volatility, to better decide how to manage and control the inventory. Chart 2 shows an example matrix of APV including volatility. This matrix suggests how to manage each part and what the appropriate inventory level should be. The exact part management proposal needs to be adjusted for the operational specifics of each company. By comparing the entitlement with inventory on hand, companies can quickly see what parts are most over entitlement, and lead to excess inventory, and those most under entitlement, and may be a cause of stockouts. Chart 2. ABC classification and volatility Primary factors High Management Focus Parts A B C Low Volatility Pull from actual consumption for lowest volatility parts Sequenced pull for remaining parts Entitlement = 2 days Pull from actual consumption Entitlement = 5 days VMI or min/maxbased replenishment Entitlement = 15 days Medium Volatility Sequenced pull Entitlement = 2 days Sequenced pull OR staged release Entitlement = 5 days Discrete P.O. Entitlement = 20 days High Volatility Discrete P.O. with additional PFEP level of attention and approvals Entitlement = 2 days Discrete P.O. Entitlement = 10 days Discrete P.O. Entitlement = 20 days Low Reliance on MRP High The systematic approach to managing inventory 7

8 8 Strategic Inventory Management Step 2: Plan For Every Part

9 The PFEP creates a common understanding of how the part is currently managed and it aligns the organization on how the parts should be managed. What is PFEP? PFEP is associated with the auto industry, but the methodology applies to all industries where purchased parts are critical to the final product and represent a significant portion of the final cost structure. It is a crossfunctional core integrating process between manufacturing, procurement, and materials control, as well as other functionalities. The PFEP creates a common understanding of how the part is currently managed and it aligns the organization on how the parts should be managed. See Chart 3 for examples of key factors. Chart 3. Organization alignment on how a part should be managed 1: Part Data Basic information about the part (value, volume, volatility, size, suppliers, blend, part class, lead time, where used, part family, planner ) How is the part ordered? (consumption-based pull signals, discreet P.O...) 2: Part Plan How is PFEP different from traditional approaches? Traditional approaches to manage inventory and the supply chain are often done by fiat or executive directive and have the following characteristics: Top-down approach that applies to all parts, with little nuance Focus is only on the inventory held by the company Limited involvement usually involves only purchasing or manufacturing Little to no discussion on the overall part management: how to order, how to package, how to move, etc. method to evaluate the operational trade-offs of decisions 3: Status How is the part received? (receiving and stocking methods and locations, quality requirements ) How does the part move? (where used, intra-and inter-plant processes, farm-out ) Based on the above, traditional approaches don t create long-lasting solutions because they are incapable of prioritizing and solving issues in a systematic way. The symptoms of inventory issues are addressed but the underlying causes are not. In contrast, PFEP is a bottoms-up approach that carves out time to dive into each of the critical parts identified in the IEM process. In short, PFEP enables specific action plans at the part level, which are sustainable by: Understanding how each critical part is currently managed Discussing how to implement proper control techniques consistent with the business s operating rules in the areas of ordering, delivery, packaging, receipt, movements, system management, Lean practices, and more Looking at inventory from a total network perspective Driving decisions from a total cost perspective Involving cross functional teams to assess the overall management of the part and balance functional objectives Providing the mechanism to drive balanced organizational metrics How is the part delivered? (shipment mode, size, frequency, tender time, packaging ) How is the part managed? (future requirements, inventory requirements and status, supplier forecasting process, known risks ) The systematic approach to managing inventory 9

10 How does PFEP work? The PFEP is simply a plan that is derived by understanding the current characteristics of a part to help attack the areas of waste driven by those parameters packaging and presentation, order sizing, shipment modes and frequencies, buffer strategies, etc. It is often represented in a one-page overview that consolidates all appropriate information on how the part is currently managed and how the part should be managed (see Chart 4). The one-page overview is the culmination of the PFEP process, which can be divided into three phases: pre-walk, walk, and postwalk. The pre-walk phase identifies the part and understands the current state. The walk phase is intended to generate a deep dive discussion on how to better manage the part. This discussion is aided by business rules and guidelines, which require customization to be truly effective. The post-walk phase assigns action items to get to the proposed future state of the part management. In summary, PFEP is a deep understanding of the current method of managing each part followed by a clear recommendation that describes how this part should be managed. Action items then need to be assigned to get from the current state to the future state. Chart 4. PFEP one-page overview Plan For Every Part (PFEP) Plant PFEP ID Walk Date Owner Midwest 0 15-Apr-12 Company X Basic Characteristics Usage Details Part Number Example Part Radiator Fans Description 26 Week Demand (Units / $ / Days) Avg. Wkly Dmnd (Units / $ / Days) On-Hand Type Program ABC Standard Cost ($/Unit) Units Value ($) Days FG Product Line 1 A 700 1,000 Total Avg. Daily Dmnd (Units / $) Last 52 Wk Dmnd (Units/$) Transit WH Plant SC Consign Supplier (RM) / Customer (FG) Information Average Entitlement Units Value ($) Days Total Name Country City Rating Code Plant Supplier Corp. China Shanghai Great 9999 Transit Supplier Ordering (RM) Customer Ordering (FG) Transportation Packaging Mfr. Lead Time (Days) Order Type Shipment Mode Container / Pkging. 40 N/A Full truck Pallet MOQ LTA Exclusive Consigned 1000 Forecast Horizon (wks) N/A Transit Time (days) 5 Pkg. Description Medium Yes Respectful of Frzn Window N/A Safety Time (days) 5 Parts per Pkg. 10 Yes Frozen Window (Wks) N/A Shipment Frequency Weekly Standard Pkging. Yes Frequent Premium Freight N/A Standard Pkging Weight 50 kg Pull Pkgs Per Pallet / Layer 4 Move to Consign Move to Pull Adjust MOQ Adjust Order Type N/A Change Shipment Mode Milk Run New Container / Pkging. Yes Adjust Forecast Horizon N/A New Safety Time 4 New Parts per Pkg. 500 Adjust Frozen Window N/A New Ship. Frequency Bi-weekly New Pkgs Per Pallet / Layer Interim Storage, POU, & Lean Receiving Location Storage Location Humidity Controlled Point-of-Use Visual Control Level Receiving Area Storage Area Sub-Assembly Area First-In-First-Out (FIFO) Additional Observations / Comments O1 Supplier frequently changes payment terms due to poor cash flow management O2 The finished good for this part will be discontinued within the enxt year O3 Part used to be made in-house Action Items A1 Part should be ordered differently - placed on pull A2 Opportunity for lean improvements, such as visual control and FIFO A3 Part should be transported via milk-run and arrive bi-weekly 10 Strategic Inventory Management

11 PFEP results The PFEP is an effective tool that enables change at the part level. Please see Chart 5 for an example. Based on historical experience, the typical results after six months of implementing the IEM and PFEP methodologies are: 25%-40% increase in turns improvement Increase from 91% to 96% of materials availability Mind-set change: cross-functional alignment between supply chain and operations Improved supplier relationships Chart 5. PFEP example result, one part Plant PFEP ID Walk Date Owner Midwest 0 15-Apr-12 Company X Basic Characteristics On-Hand Part Number Description Type Program ABC Standard Cost ($/Unit) Units Value ($) Days Example Part Radiator Fans FG Product Line 1 A 700 1,000 Total Transit WH Usage Details Plant Week Demand (Units / $ / Days) Avg. Wkly Dmnd (Units / $ / Days) Avg. Daily Dmnd (Units / $) Last 52 Wk Dmnd (Units/$) SC Consign Average Entitlement Units Value ($) Days Supplier (RM) / Customer (FG) Information Total Name Code Country City Rating Plant Supplier Corp. Plan For Every Part (PFEP) How to get started 9999 China Shanghai Great Transit To successfully implement Strategic Inventory Management, companies should do the following: Make Strategic Inventory Management an imperative. Communicate the importance of the process and put an operations person in charge. Involve a cross-functional team and align the organizational metrics. Opposing objectives between organizations such as purchasing, fulfillment, materials, and manufacturing is one of the most common obstacles to successful supply chain transformation. Create business/running rules to help define how parts should be managed. These provide guidance to the company in areas such as ordering, transportation policy, and materials movement. They are usually developed in conjunction with an integrated materials management process and are so important that they need the approval of the head of operations. Define ownership. Who will be the executive sponsor? Who will be the leader? What will the cross-functional team look like? Start the process. Full IEM and PFEP development process requires two or three months, with the first four to six weeks spent in preparation (create IEM, develop business rules, customize walk tools, etc.). Walks can start in about six weeks. Conversely, a rudimentary IEM model and initial walks can be done in two or three weeks, with fine-tuning run concurrently. Supplier Ordering (RM) Customer Ordering (FG) Transportation Packaging Mfr. Lead Time (Days) MOQ LTA Exclusive Consigned Pull 40 Order Type N/A Shipment Mode Full truck Container / Pkging. Pallet 1000 Forecast Horizon (wks) N/A Transit Time (days) 5 Pkg. Description Medium Yes Respectful of Frzn Window N/A Safety Time (days) 5 Parts per Pkg. 10 Yes Frozen Window (Wks) N/A Shipment Frequency Weekly Standard Pkging. Yes Frequent Premium Freight N/A Standard Pkging Weight 50 kg Pkgs Per Pallet / Layer 4 Order Move to Consign Move to Pull Additional Observations / Comments O1 Supplier frequently changes payment terms due to poor cash flow management O2 The finished good for this part will be discontinued within the enxt year O3 Part used to be made in-house Hard PO with full Action Items A1 Part should be ordered differently - placed on pull A2 Opportunity for lean improvements, such as visual control and FIFO A3 Part should be transported via milk-run and arrive bi-weekly Adjust Order Type N/A Change Shipment Mode Milk Run New Container / Pkging. Yes Adjust Forecast Horizon N/A New Safety Time 4 New Parts per Pkg. Adjust MOQ 500 Adjust Frozen Window N/A New Ship. Frequency Bi-weekly New Pkgs Per Pallet / Layer methodology Interim Storage, POU, & Lean Receiving Location Storage Location Humidity Controlled Point-of-Use Visual Control Level First-In-First-Out (FIFO) Receiving Area Storage Area Sub-Assembly Area : lead-time. Significant Transaction monitoring and schedule change Blend of 2 suppliers one with significant performance issues Plan: Volume, Value, and Volatility indicate Pull Methodology. LTA to lock-in favored supplier Transportation : ly via LTL; weekly shipments Plan: Add to rth East milk Run (set delivery schedule) shipments 2x per week to support lineside delivery and pull Packaging : Disposable Wooden crates $50/crate and 150 pounds of weight (LTL cost) Flat orientation and plastic wrapping creates ergonomic issue and additional time/unit Left and right packaged/shipped separately Plan: Returnable packaging with vertical orientation and wheels Shipment and storage in pairs Intra-plant moves : 2-step receiving Movement to stockroom for uncrating and unwrapping Movement to Kitting area for staging Movement to lineside Plan: 1-step receiving, storage at lineside in proper orientation Visual place on the floor Lean : visual indication of normal on the floor. Storage is not FIFO. Plan: Painted location on the floor. Sign with min, max, kanban on the floor with barcode for lineside pulls The systematic approach to managing inventory 11

12 12 Strategic Inventory Management Further information

13 PwC has extensive experience implementing IEM and PFEP processes at manufacturing organizations. For further discussion on how to implement IEM and PFEP transformation changes, please contact: Kevin M. Smith p [email protected] Sebastian De Meel p [email protected] Barry Neal p [email protected] The systematic approach to managing inventory 13

14 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.this content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. MN