Inventory Optimization Practices: 2013 Survey Results John H. Sequeira, Ph.D., ScottMadden, Inc. Steve Sotwick, Oniqua, Inc. UPMG's 82nd Annual Educational Conference September 15 17 2013
Questions We Will Address This Morning 1. What is the purpose of this study and who organized it? 2. How important is inventory optimization and is management really focused on it? 3. What inventory performance measures are used by different industries? 4. What inventory performance levels are achieved by different industries? 5. What practices are used by different industries? 6. Is there a relationship between the practices used and the results achieved? Have there been any changes since 2009? 2
About the Survey Conducted by ScottMadden, Inc. and Oniqua MRO Analytics on behalf of the Utility Materials Management Benchmarking Consortium (UMMBC) Purpose: 1. To provide up-to-date information regarding the application of inventory optimization practices and performance results within the utility industry 2. To compare changes in utility practice usage and performance since the prior UMMBC survey in 2009 3. To compare utility practices and results to other asset-intensive industries with similar MRO inventory environments 3
About the Survey Organizers UMMBC 1. The UMMBC is a group of utilities who are collaborating to develop information needed to critically examine and improve ongoing warehouse and inventory management operations. Membership is open to all utilities 2. ScottMadden, Inc., is a general management consulting firm providing supply chain and materials management solutions to the utility industry since 1983 3. Oniqua MRO Analytics is a leading performance management solutions company focused on asset intensive industries dealing with MRO inventory 4
Survey Participants The survey includes responses from a wide range of asset intensive industries which were grouped into four Industry Categories: 1. Electric & Gas Utilities All Respondents by Industry (N=157) 2. Mining, Metals Processing & Fabrication 3. Oil, Gas & Petrochemicals 4. Suppliers & Support Services to these industries 5
Survey Participants (Cont d) Respondents by Sub-category The utility participants were distributed as follows: Delivery (41%) Generation (38%) Integrated (18%) (N=67) 6
Defining Inventory Optimization For our purposes, we borrowed the definition adopted by Southern Company. The goal of Inventory Optimization is to have: The right materials,... [specifications; work orders; bills of material, etc.] In the right numbers,.. [inventory levels; safety stock levels, etc.] At the right location,... [warehouse, storeroom, job site, etc.] At the right time, and.. [demand forecasts; lead times; need dates, etc.] At the right cost... [acquisition cost, inventory value, carrying cost, etc.] It is not inventory reduction 7
Why Focus on Inventory Optimization? Inventory levels continue to grow. Inventory carrying costs at utilities range from 12.0% to 14.4% per annum. FERC 154 Inventory All Reporting Utilities in the U.S. 7.0 % 8.2 % 3.5% At 12%, holding inventory costs ratepayers $2.1 billion every year! Holding inventory is a very expensive way of dealing with uncertainty (Bill Killingworth, MIT) 8
Management s Perspective Q: How important is inventory optimization to your company's executive management? Suppliers are more focused on inventory optimization than the companies they serve. Utility management is less focused than others. (N=154) 9
Performance Measures Examined This year s study examined 9 metrics commonly used to assess Inventory Optimization performance. 4 measure process efficiency (i.e., they focus on minimizing inventory) 5 measure process effectiveness (i.e., they focus on on-time parts availability) Type Efficiency Efficiency Efficiency Efficiency Effectiveness Effectiveness Effectiveness Effectiveness Effectiveness Metric Name Inventory Turns Ratio Days Inventory Inventory Asset Ratio Inventory Review Coverage Line Fill Rate Order Fill Rate Line Stock Out Rate Average Stock Out Duration Perfect Order Rate 10
Performance Measures Used The most commonly used measure of efficiency is Inventory Turns Ratio. Inventory Turns Ratio Inventory Coverage Review Line Fill Rate 63% 56% 54% The most commonly used measure of effectiveness is Line Fill Rate. The Perfect Order Rate is used by only 22% of the respondents 0% 10% 20% 30% 40% 50% 60% 70% Days Inventory Order Fill Rate Line Stockout Rate Average Stockout Duration Perfect Order Rate Other Metrics Used Inventory Asset Ratio 35% 32% 28% 21% 15% 13% 46% 11
Inventory Turns Ratio Cross Industry Both the Suppliers and Mining, Metals Processing & Fabrication industries reported the highest Inventory Turns Ratio. Utilities and the Oil, Gas & Petrochemicals industries report the lowest ratios. (N=45) 12
Line Fill Rate Cross Industry The Suppliers & Utilities industries report the highest Line Fill Rates. The Mining, MP&F and Oil, G&P industries report the lowest Line Fill Rates. (N= 38) 13
An Interesting Dichotomy Utility companies reported the worst Inventory Optimization performance for all 4 measures of efficiency. They also reported the best Inventory Optimization performance for 4 out of 5 measures of effectiveness. Type Metric Name Utilities Efficiency Inventory Turns Ratio Worst Efficiency Days Inventory Worst Efficiency Inventory Asset Ratio Worst Efficiency Inventory Review Coverage Worst Effectiveness Line Fill Rate Best Effectiveness Order Fill Rate Best- Tie Effectiveness Line Stock Out Rate Best Effectiveness Average Stock Out Duration Worst Effectiveness Perfect Order Rate Best-Tie 14
Efficiency Comparing Performance Across Industries The Mining, MP&F and the Suppliers & Support Services industries are able to deliver both inventory efficiency AND effectiveness. Mining, Metals Processing & Fabrication Suppliers & Support Services Oil, Gas & Petrochemicals apparently struggle to do either. Utility performance is mixed. Oil, Gas & Petrochemicals Electric & Gas Utilities Effectiveness 15
Inventory Optimization Practices - Overview The 2013 study examined 16 different Inventory Optimization practices: PEOPLE People & Organization 3 practices (We will discuss 2) PROCESS Policy & Process 9 practices (We will discuss 4) TECHNOLOGY Tools & Technology 4 practices (We will discuss 3) 16
People & Organization 1 Parties Responsible for Inventory Optimization Most companies, regardless of industry, assign responsibility for inventory optimization to individuals or groups within separate business units. The results reported for the Electric & Gas Utilities industry are consistent with those reported in 2009. (N=157) 17
People & Organization 2 Levels at Which Inventory is Optimized Approximately 30% to 35% of the companies in all industries optimized inventory within a single warehouse Utilities and Mining, MP&F favor optimizing inventory across all warehouses in a particular business unit (N=143) 18
Policy & Process 1 Formal Process Exists for New Inventory Items & Levels Most companies establish inventory levels using a formal process managed by their materials group. The remaining companies leave this decision to their end-users. (N=143) 19
Policy & Process 2 Method for Assigning Inventory Stocking Levels Regardless of industry, the preferred method for assigning inventory stocking levels is a mix of both Manual Calculations and System-generated / Automated Calculations. (N=147) 20
Policy & Process 3 Methods Used to Determine Safety Stock Levels The Mining, MP&F and Suppliers have moved the fastest in adopting advanced statistical models. The percentage of Utilities adopting advanced statistical models has grown from 15% in 2009 to 23% in 2013. (N=143) 21
Policy & Process 4 Annual Budget for Disposal of Surplus / Obsolete Stock? Pro-active budgeting for write-offs related to surplus and obsolete stock is more common in the Mining, MP&F and Supplier industries And less common among Utilities and Oil, G&P industries The % budgeted also varies (N=139) 2% 5% 8% 1% 22
Tools & Technology 1 Integration of Materials Management and Asset Management Systems Most companies across all industries believe their materials management and asset management systems are integrated. The extent of integration reported by Utilities has increased from 64% in 2009 to 70% in 2013. (N=154) 23
Tools & Technology 2 Degree of Software Integration Between Inventory Management and Asset Management Systems The Mining, Metals Processing & Fabrication Industry appears to be the most integrated. Utilities report a lower level of integration. 6% of the Utilities reported Little, if any, integration. (N=150) 24
Tools & Technology 3 Use of Specialized Inventory Optimization Tools More than half (67%) of the Mining, MP&F companies are using specialized inventory optimizations tools. Oil, G&P companies are the next most frequent adopters 35%. Utilities reported the lowest adoption rate at 18%. (N=146) 25
Tools & Technology 4 Inventory Optimization Software Used Utilities Mining, MP, & F Oil, G & P Suppliers SAP 8% Others 25% Home Grown 33% Oniqua 34% Oracle 8% Oniqua 92% Oniqua 100% SAP 25% Home Grown 75% (N=12) The dominant inventory optimization software provider for these three asset-intensive industries is Oniqua who is used by 75% of all the companies reporting the use of such software. (N=25) (N=6) (N=4) 26
The Impact of Practices on Performance 1 To assess the impact of practices on performance, we used the Inventory Turns Ratio as a measure of efficiency and Line Fill Rate as a measure of effectiveness. 13 of the 16 leading practices are associated with improved efficiency. Those that appear to contribute the most to efficiency are: 1. Assigning responsibility for inventory optimization to corporate or business unit specialists vs. warehouse level specialists 2. Greater integration of inventory management and asset management systems 3. Use of inventory optimization solutions 27
The Impact of Practices on Performance 2 6 of the 16 leading practices contribute to improved effectiveness. Those that appear to contribute the most to effectiveness are: 1. Optimization of inventory over a broader organizational horizon 2. More frequent refreshing of stocking criteria 3. Greater integration between the Inventory Management and the Asset Management systems 28
What We Did Not Have Time to Discuss The full report provides comparative data for: 9 different performance metrics: (we looked at 2 this morning) Who uses them? With what results? 16 different leading practices: (we looked at 9 this morning) To what degree are they used by each industry? Information for 4 different industries and for 21 industry subcategories: How do they compare to one another? (we drilled down on 1) 29
Report Availability Participants in the survey will be receiving copies of the full report by the end of the month. The survey will also be available from ScottMadden at a nominal cost beginning in September. 30
Questions and Answers To learn more about this study or to join the UMMBC, please contact any of the following: Andy Flores Partner John Sequeira Partner Steve Sotwick Vice President 3495 Piedmont Rd. Building 10 #805 Atlanta, GA 30305 (404) 814-0020 2626 Glenwood Ave. Suite 480 Raleigh, NC, 27608 (704) 560-5061 7900 E. Union Avenue Suite 920 Denver, CO 80237 (303) 952-6671 31