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October 26, 2006
Spare Parts Inventory Optimization
ECCMA Conference 2006
Inventory Optimization Agenda
1. Introduction
2. The Trading Game
3. Typical project
4. Deterrents to Optimization
5. Recommended First Steps
Introduction
Work Experience:
- Over 14 years of experience in manufacturing and software and services
- Past five years doing spare parts inventory optimization and data rationalization
Education:- BS in Chemical Engineering from Texas A&M University
- MBA from the University of Texas
The Trading Game
Step 1: Study the contents of your bag, but do NOT reveal them to anyone.
Step 2: Try to make a trade with the person on your left. You must ask specifically for the item you desire. (ie. I want chocolate! Does not count)
Step 3: Now, reveal the contents of your bag to the those around you and make a trade with whomever you choose.
The Trading Game
Visibility matters
Standardization matters
Change management matters
The lesson of the game is that….
Typical Project
Typical Project
Inventory Optimization is NOT solely about reducing inventory!!!
It is about having the right spare part, at the right time, in the right place!!!
Inventory Optimization
Required Stock
‘Optimal’Stock Level
Actual Stock Level
Excess Stock
Obsolete Stock
Inventory Optimization Challenges
Inventory Line Items
Duplicate Stock
Traditional View
Inventory: Site CInventory: Site A
Inventory: Sites D-X
Inventory: Site B
Distributors
OEMs
Repair Shops
New View
Fundamental Questions Why, What, and Where are we holding inventory?
What inventory practices do we use?
Who are the stakeholders? Suppliers, Purchasers, managers, users of spares? Are their goals aligned?
Is my organization committed to inventory optimization?
How do I optimize my inventory? • Inventory I already own
• Inventory I am about to own (optimal stock levels)
Do we have the capabilities and systems in place to successfully optimize our inventory?
How do we know when we have done it?
OverviewHow do you eat an elephant?
Take it one bite at a time!!!
Create MRO
visibility
Create MRO
visibilityStart to
define
processesStart to
define
processes
Consider
outsourcing
on certain
commoditie
s
Consider
outsourcing
on certain
commoditie
s
Establish KPIs & MEASURE them continuously
Establish KPIs & MEASURE them continuously
Use software
to build
intelligence and
knowledge
Use software
to build
intelligence and
knowledge
Go after
low-hanging
fruit for
success
stories
Go after
low-hanging
fruit for
success
stories
Automate more source-to-pay activities
Automate more source-to-pay activities
Be strategic and work with your suppliers
Be strategic and work with your suppliers
Kicking off a project
Build a consensus within your organization that inventory optimization is important to the enterprise
Create an Inventory Manager, solely responsible for inventory optimization across the enterprise
Review the systems and the data within those systems: identify gaps in software capabilities and data quality issues which may hamper project success
Create the plan, implement the plan, measure results, modify the plan, continue to measure results.
Building Consensus
Measure the size of the prize – ROI
Typically inventory reductions of 20-30% are achievable with Inventory values approximately 2-5% of Plant, Property and Equipment stated on the Balance Sheet. Thus, $500 million in PPE equates to about $17.5 million in spare parts inventory with a 25% reduction savings of $4.4 million. These savings go straight to the bottom line.
Continuous improvement permanently impacts working capital, holding costs, reliability, etc.
Data standardization/cleansing is often a critical element to full inventory optimization, but provides a very large benefit as quality data is now populating your management systems.
Last, but not least: Sarbanes-Oxley requires that your financial reporting be accurate and signed off by your BOSS!!!
Building Consensus
Creating and Implementing the Plan
1. Keep stakeholders involved, early and often
2. Need to agree to a set of rules for spares inventory: min/max settings, excess calculations, dormant stock evaluation, etc.
3. Data acquisition – must follow a format that is consistent and repeatable for updating inventory optimization and spend analysis reporting tools (automate queries to be centrally deposited)
4. Create visibility into MRO spares: need to set expectations for minimum data quality standards used for analyzing your MRO spend/inventory
5. Normalize the currency from all locations to a single unit, typically the headquarter’s currency.
6. Slow moving vs Fast moving stock analysis software to improve upon current stocking level methods
7. Identify some easy targets to create some successes (duplication)
Deterrents to Optimization
Typical ProjectActivationEnergy
En
erg
y
Progress
ActivationEnergy withCatalyst
FreeEnergyOf Reaction
Chemical Reaction
ActivationEnergy
Wo
rkin
g C
ap
ita
l
Progress
ActivationEnergy withSuccessful planning and systems
InventorySavings
Inventory Optimisation
Stumbling Blocks Change management
• The site has always done it this way• The site does not trust inventory optimization projects• Top level management has to make it a priority• Strong centralized control, but distributed execution with
commitment from the top
Poor Data Quality• Makes it impossible to know what you have and where it is• Can demoralize project team and site sponsors• Cleanse your data even if you don’t want to as the benefits
go far beyond inventory optimization!!!
Enterprise constraints• Software capabilities• Dedicated resources (and/or trained resources)• Invest in software and people as the ROI is tremendous
Recommended First Steps
Where to start?
You can not measure what you do not see!
&
You can not improve what you do not measure!
Savings
Time
Data acquisition
1. What to pull
2. Formatting – Be consistent
3. Frequency
4. Use the internet or your servers
5. Grant access to users
*Global ERP should give access rights to view inventory held at all locations
Start Small
Measure where you are today: if you don’t know where you are, how do you start on the journey?
Find the true believers, avoid the skeptics
Work on manageable projects to create success stories
Broadcast your successes to the enterprise
Identify bottlenecks that will prevent the program from going enterprise wide – tackle them before rolling out a global effort.
Work with your major suppliers
Do not over-promise on savings in the first two years!!!
Some quick wins
Duplication
Commonality
Dormant or Obsolete Inventory
Top suppliers
Redeployment
Not quick, but essential to long-term success:
Spend Analysis/Inventory Analysis
Stocking Level Analysis (slow moving parts are the most difficult)
Q & A
Questions?