WHITE PAPER Reducing Inventories and Cost of Operations While Improving Customer Support Applied Industrial Technologies Corporate Headquarters 1 Applied Plaza «Cleveland, OH 44115 216-426-4000 www.applied.com Applied Industrial Technologies is one of North America s largest industrial distributors and a leader in supply chain management systems, resulting in more productive and efficient operations for many Fortune 500 companies and government agencies. This White Paper addresses the advantages of using Supply Chain Operations Reference (SCOR) model, and SCOR performance measures such as Perfect Order Fulfillment (POF), to achieve substantial cost savings and end-user customer support improvements.
Introduction As public and private-sector organizations strive to become more efficient and effective, all cost drivers need to be reviewed to ensure that excess costs are eliminated, that organizations are getting the desired returns on investments, and that customers are supported in the way they desire. Government facilities in particular are being pressured to find new ways to reduce costs. Partnering with a strong supply chain management vendor can help organizations consistently achieve these desired outcomes. One factor in a well-run organization is the concentration and continuous improvement of core competencies. One core competency area often overlooked by organizations is inventory management and performance. Inventories are a capital investment area and a substantial cost driver that can be streamlined with the right supply chain partner. Organizations with substantial static inventories can become more efficient by collaborating with companies that have well-developed expertise in modern supply chain management. Applied Industrial Technologies is a large industrial distributor with the experience to help organizations reduce their inventory and cost of operations while improving customer support. As a strong supply chain partner, Applied can provide many opportunities to drive total costs down, thereby freeing up capital to reallocate scarce resources to other vital areas, e.g., new equipment for the Department of Defense to maintain its military superiority, or new machinery for a private-sector manufacturer to improve their production processes and capabilities. Many organizations are migrating from Material Requirements Planning (MRP) and MRP II systems to supply chain management principles based on customer pull-based production with smaller lots sizes and reduced inventory. These proactive inventory management programs have proven to be more efficient and effective in fully satisfying end-customers than maintaining large inventories associated with push-based production quotas that can leave gaps in support and readiness. Today, market-leading distributors with strong inventory management services have recognized the importance of adopting a culture of lean process engineering while becoming Six-Sigma and/or ISO certified. Some have implemented the systemic 5S methodology of workplace organization (Sorting, Straightening, Systematic cleaning, Standardizing and Sustaining), if not also Safety (6S), Security (7S) and Satisfaction (8S). Adoption of this innovative operating culture helps organizations understand how to make their processes increasingly standard and repeatable, and more efficient and effective. Innovative Supply Chain Management Generates Improved Business Results Industrial distributors carry an extensive amount of inventory designed to meet the demands of their entire customer base. Companies can take advantage of a distributor s buying power by leveraging the total distributor spending associated with supporting their entire customer base. The net result for customers is lower individual customer costs based on leveraging the larger over-all spend volume of distributors. Advantages of partnering with an experienced industrial distributor such as Applied, include: Consolidated shipments Fewer purchase orders Fewer expedite orders Higher customer satisfaction Page2
Large industrial distributors with strong supply chain capabilities can provide a greater number of integrated suppliers via strategic business relationships. They can also routinely offer a wider breath of products than smaller, individual supply chain companies can provide. In short, Applied simplifies the customer s supply chain management challenge and improves end-customer support. This translates to more and better integrated support options, and improved Supply Chain Operations Reference (SCOR ) model-based Perfect Order Fulfillment (POF) results. It also translates into reducing the cumulative costs associated with non-integrated suppliers, e.g., costs and delays related to highly variable support, more contracts to manage, more staff needed to manage those contracts, etc. The SCOR model is a product of the Supply Chain Council, Inc. (SCC), an independent, not-for-profit, global corporation with membership open to all companies and organizations interested in applying and advancing supply chain management best practices. The SCOR model captures the Council s consensus view of end-to-end supply chain management. It provides a unique framework that links business processes, metrics, best practices and technologies into a unified structure that supports communication among supply chain partners and improves the effectiveness of supply chain management activities. The SCOR model was developed by industry leaders who manage global supply chains and has been widely adopted to help organizations analyze and improve the performance of their supply chains. Benefits of the SCOR model include: Rapid assessment of supply chain performance Clear identification of performance gaps Enhanced operational control of processes Streamlined management reporting Systematic supply chain mergers to capture savings Perfect Order Fulfillment (POF) is the premier SCOR model metric that is defined as the percentage of orders that are delivered "on time and in full" to request date and/or to commit date, that meet the customer's three-way match (invoice, purchase order and receipt) and that have no product quality issues. POF is also frequently used to measure Supplier Delivery Performance and Manufacturing Schedule Attainment. One can substitute Purchase Order or Manufacturing Order for Customer Order, respectively. In short, POF measures: Timeliness Quantity Quality Documentation A perfect order is derived from the perspective of the end-customer and is one where there are no discrepancies or failures in all four components above. A failure of any one of these components is a total POF failure. The percent of perfect orders is the primary metric used by the Defense Logistics Agency (DLA) to measure enterprise performance. The POF metric takes into account many different aspects of the customer experience and combines them into a single score that accurately reflects total supply chain performance and total customer satisfaction. Page3
Proactive Inventory Management Reduces Your Cost of Operations Maintaining a spare parts inventory requires a significant investment by an organization. For example, there are costs to maintaining that investment, such as carrying costs (taxes, insurance, obsolescence, infrastructure, security, software and hardware, human resources). Industrial distributors are experts in efficiently managing inventory investments, so best practices include shifting as much of the inventory management burden as possible to an industrial distributor, thereby avoiding carrying costs and freeing up working capital. In addition, when economic downturns or recoveries occur, the supply chain partner can help minimize the impact of large inventory adjustments caused by an individual consumer because they are better able to absorb the shock of these events. This helps maintain a steady cash flow despite conditions of economic turmoil. The best industrial distributors are able to forecast usage based on their experience with various models for larger accounts. As a result, they can reduce lead times and stabilize overall ordering patterns. This allows a good industrial distribution partner with a sophisticated and efficient supply chain management system to provide a more reliable availability of inventory. Large industrial distributors also have strategically located and networked distribution nodes to get the product to the user when and where it s needed. Deliveries are managed to arrive at the end-user in keeping with POF parameters, thereby eliminating the need to stage products and/or have multiple, on-hand inventories. Reducing Static Inventories Reduces Cost and Increases Available Capital Page4
Industrial distributors also work very closely with product manufacturers to ensure that sufficient items are manufactured to meet end-user demand in keeping with POF. Daily forecasts are often sent to manufacturers so production can be managed to meet demand and optimized to enable desired POF outcomes. Many distributors have direct connections with manufacturers that not only integrate their systems but also allow end-customers to see what is in the end-to-end supply chain, including what is available from the manufacturer. This real-time collaboration helps ensure highly consumable/critical items are visible and available when they are needed often regardless of the individual customer's demand history. Companies can virtually eliminate company-owned on-site inventory (thereby contributing to cost savings and cost avoidance) and instead use their distributor partner s inventory with the assurance that needed inventory will be in the pipeline and available to end-customers. Customizing Inventory Management Systems to Meet Individual Needs A strong industrial distribution partner can customize an inventory management system or methodology to systematically review existing customer inventories and determine optimization opportunities. Inventory management systems can help determine ideal on-site, distributor-owned inventory requirements. They can also help rationalize existing inventory investments by making recommendations on what inventory is redundant, obsolete, past the recommended shelf life, or even address interchange opportunities that may increase system life or lower the replenishment costs. In addition, a distributor can analyze their own inventories to determine what is readily available within the customer s required lead time for that product, creating a fully-responsive fulfillment strategy that uses POF as its key measure of performance. Applied has these capabilities. Past Industrial distributors may also offer storeroom/warehouse management solutions, and may even offer a web-based, bar code-enabled inventory management system designed to help improve a customer s own inventory investment. State Often storeroom/warehouse management solutions are customizable to address several inventory management strategies, and will be combined with dedicated or even consigned inventory commitments from the distributor. Some of the solutions Applied offers include: Curre nt State a. Bin Restock Programs (BRP). The distributor is responsible for monitoring their portion of a facilities storeroom and making replenishment recommendations. Customer-owned and managed inventory is managed by the customer, unless otherwise arranged (see Customer-Managed Inventory below). b. Vendor Managed Inventory (VMI). VMI is similar to a bin restock program, but it monitors and reports inventory usage and spend patterns by item, and typically leverages bar code scanning technology. c. Customer Managed Inventory (CMI). The distributor provides access to software or a website capable of allowing the customer to manage their own storeroom. This software will monitor and report usage by item and often automate the replenishment and procurement process between the customer and distributor. Page5
d. Distributor-Provided Storeroom Management Full or Partial Control (DPSM). In some cases a customer will outsource management of their storeroom or sections of their storeroom. Typically, a distributor will leverage their Inventory Management System to ensure that the customer only carries an optimal level of on-hand inventory and will use their own storeroom management software to efficiently manage the customer s investment. e. Automated Dispensing Equipment (ADE). The next generation of Storeroom Management Systems is coming in the form of Automated Dispensing Equipment. Dispensing equipment is most commonly associated with a vending machine, but actually has been expanded to include sophisticated locker systems, intelligent shelving units, automated and controlled tool cabinets, and even location-specific, weight-sensitive technology capable of automating an entire storeroom. ADE can be used to address three common concerns: storeroom automation, point-of-use availability and mobility, and reusable or shared asset management (check in/out processes). Using ADE to manage highly consumable inventory (gloves, glasses, Personal Protective Equipment (PPE), batteries, cutting tools, and other general maintenance supplies) has helped many companies reduce consumption of controlled inventory by 35-40% or even more. Typically, implementing improved inventory and storeroom/warehouse management tools, techniques, processes and systems begins with a clean-up and organization phase, such as the 5S process described in the introduction of this whitepaper. Then, the distributor s inventory management systems or methodologies are engaged to establish preliminary inventory stocking levels and manage enhanced inventory management execution in this improved environment. Lean process engineering is invaluable in this regard. Page6
Conclusion Applied Industrial Technologies has been meeting the increasingly demanding needs of industry since 1923. Applied is a strong supply chain partner who can help its customers pick the right combination of inventory management solutions to manage inventories without deceasing productivity, production requirements and/or end-user customer support (e.g. POF). Applied offers market-leading innovation, highly-developed expertise and relentless customer support: a. Innovation. Applied has partnered with more than 2,000 world-class manufacturers that lead the industry with the most innovative, efficient and reliable industrial products. Applied is there every step of the way seeking to continually optimize and maximize your operations. We work to identify savings resulting from improved product life, reduced maintenance and labor costs, reduced energy consumption, lower cost product substitution, reduced inventory investment and a host of transactional savings - improving your bottom line. b. Expertise. At the core of Applied you will find an organization dedicated to continuous learning. We believe you should only be served by associates who can offer well-planned system solutions to your production needs. Applied offers more than four million items and also provides customized shop services for mechanical, fabricated rubber and fluid power products, as well as services to meet storeroom management and maintenance training needs. c. Support. With approximately 470 facilities across North America, we're there when you need us. Applied is one of North America s largest industrial distributors serving Maintenance Repair Organizations (MRO), Original Equipment Manufacturers (OEM), and Government markets with a diverse range of high-quality products including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance and mill supply products. In conclusion, Applied is a highly experienced and proven supply chain leader. Applied is perfectly positioned to assist you with improving your inventory performance, reducing your cost of operations and augmenting your bottom line all while measurably improving your customer support. Page7
Case Study Manufacturer of Large Custom Metalworking Components Based on analysis of on-site survey results and actual data collected, cost savings can be achieved with a comprehensive inventory management system provided by Applied Industrial Technologies. Purchasing Costs Existing Method Applied System Number of POs per week 40 10 Number of working days/year 252 252 Total purchase orders per year 2016 504 Cost per purchase order $80 $80 Total cost of purchase orders $161,280 $40,320 Total Purchasing Savings $0 $120,960 Maintenance Costs Existing Method Applied System Number of maintenance employees 10 10 Number of parts acquisitions per day 5 5 Number of minutes per acquisition 18 7 Total minutes per day 900 350 Total hours per year 3780 1470 Total maintenance cost at $26.60/hr. $100,548 $39,102 Total Maintenance Savings $0 $61,446 Storage Area Costs Existing Method Applied System Number of storage area employees 1 1 Number of requisitions per day 20 20 Number of minutes per requisition 5 2 Total minutes per day 100 40 Number of outside trips per week 40 10 Total minutes per week 2,400 600 Minutes per day stocking/ordering/records 60 0 Total hours per year 2,688 672 Total storage area costs at $26.60/hr. $71,501 $17,875 Total Storage Savings $0 $53,626 Summary of Costs Existing Method Applied System Applied Savings Purchasing $161,280 $40,320 $120,960 Maintenance $100,548 $39,102 $ 61,446 Storage Area $ 71,501 $17,875 $ 53,626 Totals $333,329 $97,297 $236,032 Summary of Labor Hours Existing Method Applied System Applied Savings Maintenance 3,780 1,470 2,310 Storage Rooms 2,688 672 2,016 Totals 6,468 2,142 4,326 Page8