Leveraging your inventory assets

Transcription

1 Leveraging your inventory assets January 2013

2 Leveraging your inventory assets Using inventory as both a service enabler and a cost reduction opportunity The pressure on utilities, from both the capital markets and regulators, to reduce operational costs is causing industry leaders to look at how they can enhance supply chain performance. Utility supply chains have a complicated assignment, coping with such factors as a diverse material base, uneven and unpredictable demand, and the need to maintain safety stock and critical spares to respond to emergencies. Even so, solutions must be found to optimize inventory levels, reduce inventory management costs, and minimize obsolescence costs while maintaining service and availability levels. The answer is to leverage inventory and manage it as an asset. Deploy inventory to where it is needed Many utilities have inherited or migrated towards supply chain models that position substantial amounts of inventory in the field. While this may create the perception of visibility from the business's perspective, it really hinders overall inventory visibility. The problem is that once materials are deployed to the field, it is not only difficult to keep track of, but it is also difficult to redeploy for use in other field locations. A better approach is to keep the inventory at a central distribution center until it is actually needed in the field. This is especially effective for materials used in planned work (e.g. upgrades, capacity expansion, and new construction). Similarly, for unplanned work (emergencies), materials should be deployed to the field but in nominal quantities so that emergency material requirements inside of the replenishment lead time are met. To enable a more centralized model for inventory deployment, one approach is to re-evaluate the frequency of deliveries/replenishment to the field. As an example, by increasing the replenishment frequency for field materials by a factor of two, corresponding field inventory levels can be reduced by up to half. While replenishment frequency needs to be balanced by incremental transportation costs, this is a simple but effective tool to reduce inventory levels. Leveraging your inventory assets 1

3 A second approach is to leverage third parties to improve the replenishment of field inventories. One innovative solution is to utilize value-added services provided by distributors of line hardware and/or MRO. Field locations place replenishment requests directly on the third party distributor, who is then responsible for shipping the required materials directly to the field location within 2-3 days. These types of high usage / low cost materials can typically be expensed resulting in lower field inventory and inventory management costs. In addition, non-value added handling and inventory duplication by central distribution can be completely eliminated. Follow effective inventory analysis and material planning processes Managing inventory effectively includes a renewed emphasis on fundamental inventory analysis and material planning processes. The first step is to focus on inventory analysis and segmentation. Most utilities have a set of high dollar-volume or "strategic" materials (e.g. poles, transformers, wire and cable) that represent 60-80% of the annual dollar throughput but only 20-30% of the actual SKUs or part numbers. These strategic materials represent a good starting point for focused material planning initiatives since they are generally limited to a handful of commodities with a few primary suppliers per commodity. Many utilities are entering into collaborative relationships with strategic material suppliers. These relationships typically include demand forecasting, consignment, and innovative approaches to lead time reduction. As in other industries, utilities need to become more aggressive about demand forecasting. Instead of continuing to do supply chain projections based on historical usage, the process should be extended cross-functionally and rely more on the business for guidance. In addition, suppliers are frequently willing to hold buffer stocks of material, especially for high volume SKUs, which can also translate into reduced lead times and lower inventory levels. Leveraging your inventory assets 2

4 While the primary focus of inventory analysis and material planning efforts should rightfully be on active materials, there are opportunities to optimize inactive or obsolete materials as well. The most effective approach is to address the root causes or enablers of inactive materials. Primarily these consist of poor planning processes such as lack of demand visibility with sufficient lead time and poor execution of engineering change processes. Other successful approaches include working with Engineering to design inactive materials into new projects and considering resale of inactive equipment to third parties. Ensure planning is aligned with the business Supply chain organizations at utilities may not be well aligned or connected with the operating business units they support. For example, if supply planners are organized by commodity, they may not be aware of design or schedule changes on major projects. While work order management systems pass materials requirements to supply chain systems, the information may not be accurate if work order dates are not maintained or materials are not sequenced correctly to support the underlying work activities. Fundamentally, there usually is a lack of visibility to the actual business requirements. In order to address this issue, some utilities have created a function within supply chain that is responsible for confirming the accuracy of demand. This demand planning function works with project managers and design engineers to understand project related materials requirements and ensure they are accurately translated into the supply chain systems. The demand planners are typically aligned with the business unit, but also interact closely with supply planners on long lead material requirements, material forecasts, and large project requirements. By confirming the accuracy of the demand plan, the supply planning activities can be executed much more effectively and efficiently. The results are optimized inventory, improved material availability and therefore improved service, and reduced obsolescence management. Leveraging your inventory assets 3

5 Manage inventory as an asset Utilities are clearly facing strong pressures to reduce operating costs. Supply chain represents an excellent opportunity for capturing savings through inventory optimization. While utilities have historically perceived inventory as a cost of doing business, it can also be managed and leveraged as a tool to support cost reduction without impacting service levels. Supply chain savings hinge upon inventory optimization. By fulfilling demand and deploying inventory at the appropriate point in the overall distribution network, inventory can be optimized and service levels can be maintained or increased. In-depth inventory analysis and application of material planning tools can also help to reduce inventories. Finally, the creation of a demand planning function improves the accuracy of the inputs that drive the supply planning process enabling more effective inventory management and planning. Leveraging your inventory assets 4

6 For additional insights and perspective on this topic, please contact: F. Eric Finch Principal Anant Kumar Managing Director Ramnik Bajaj Manager 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US 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.