Bringing cost driver and capacity management into Business forecast and planning, Lego

“Bringing cost driver and capacity

management into Business forecast and

planning ”

Business Forecasting & Planning Summit

March 11-12, 2010 | Marriott Hotel | Amsterdam

Egil Møller Nielsen Page 3

Content

• Logistic cost drivers – clear activity based cost think is essential

• Global focus – though S&OP process and knowing limitations of

demand seasonality and fluctuations

• Capacity reviews and Inventory consolidation in details


All have been

tendered & structure

assessed

in period 2005-2008

Logistics operations, Busines-2-Business

Logistics operations, Business-2-Consumer

Global DC footprint & capacity

Strictly confidential

EDC Jirny (Europe) – operation run by DHL Exel

Capacity (storage & handling area)

• Storage profile based on June SP is feasible

• Offered storage capacity goes down from August , as a part of the

flexible VAS area and gates have to be used for outbound

activities.

Performance YTD July

• Total performance 97,7% vs target 95%

Others

• Shared continues improvement program between DHL/LEGO

ongoing under the name “LEAN/First Choice” ongoing with focus

on

– Quality assurance

– Efficiency

– Load & Capacity Planning incl. leveling out

– Skills and training programs incl. mindset

– Shop floor management

5

SPACE (Load of capacity in terms of pallets against offered and threshold) – 12 months ahead

50

100

% of deliveries

75

YTD Total performance* = 97,7%

(target= 95,0% )*Total performance: Combined warehouse and carrier

Total Performance (pick,

pack shipped in time)


DC Dallas (US) – operation run by DHL Exel


• We have been above offered & close to threshold capacity, which

drives efficiency down and has the potential of hindering DHL

Exel’s ability to receive and ship all customer orders on-time.

• Investigation of capacity expansion for 2010 in progress, as current

capacity (storage and handling space incl. # of gates) isn’t

sufficient for 2010 business plan. Recommendation to be

completed by end September

• Any investment is done by DHL Exel


• Total performance 99,85% vs target 99%

Others

• Shared continues improvement program between DHL/LEGO

under the name “LEAN/First Choice” to be started this Q3. Will

focus on benchmarking to Jirny and will encompass start up of

Visual DC and visual boards

• Improvement workshops and initiatives are in place and will

continue within the LEAN structure

6

SPACE (Load of capacity in terms of pallets against offered and threshold) – 12 months ahead

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Load actual/bottom up 23,486 22,894 19,506 28,790 33,185 42,988 38,080 34,166 32,319 32,011 29,117 26,474

Load top down 41,515 41,190 38,738 35,688 31,715 29,852

Budget Pallets 16,306 17,778 24,360 32,244 31,813 49,286 43,650 43,064 38,056 43,180 40,106 27,646

Offered Capacity 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800

Threshold Capacity 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000


Load actual/bottom up

Load top down

Budget Pallets

Offered Capacity

Threshold Capacity

DC Pallets (ex GIT)

% of deliveries

90



80

100

YTD Total performance* = 99,85%

(target= 99% ).

*DC Dallas is collect shipper: Shipment ready for pickup by customer

carrier at scheduled time


Global B2C (lego.com) – operation run by PFSWeb and LEGO


• Billund adequate until 2013 (650.000 order lines)

• Memphis inadequate already in 2009 – Solution under

consideration


• Total performance 98,40 % vs target 98 % - Billund

• Total performance 99,59 % vs target 99 % - Memphis

Others

• Reduce pick pack time from 2-3 days to1 day Billund

• LEAN project in Billund

• Setup of new E-fulfillment center in South Korea

• PFS-web has been identified as a financial weak single source

supplier – Plan B is under development

• Project for creation of cost transparency of CED activities has been

agreed upon

* Not including distribution cost

7

% of deliveries

90



80

100

YTD Total performance = 98,40%

(target= 98% ).

% of deliveries

90



80

100

YTD Total performance = 99,59%

(target= 99% ).

Memphis

Billund


The operational KPI’s all covering all major cost pools within logistics

Cost

Impact

Inbound

SKU’sDC2DC DC

Storage

DC

Blue

Fine

DistribOH

Outbound distance

Inbound distance

Weighted Avg Delivery size

VAS activity

Gross Value pr item CBM

Pallet cube utilization

Warehouse efficiency

Warehouse productivity

Negotiated Rates

Oil prices

Exchange Rate*

Inventory turns (incl. peak)

Warehouse space utilization

Operational KPI’s

Volume in

Value chain

Customer

Behavior/VAS

Distance

DC productivity

and efficiency

Storage

Rates

Key Cost

Drivers

Inbound

Parts


The operational KPI’s are visualised

1

2

2

2

2

3

4

2

7

8

10

9

Extract of the monthly distribution cost cock pit

Outbound distance

Inbound distance

Weighted Avg Delivery size

VAS activity

Gross Value pr item CBM

Pallet cube utilization

Warehouse efficiency

Warehouse productivity

Negotiated Rates

Oil prices

Exchange Rate*

Operational KPI’s

Volume in

Value chain

Customer

Behavior/VAS

Distance

DC productivity

and efficiency

Storage

Rates

Key Cost

Drivers

1

2

3

4

5

6

7

8

9

10

11

12

13

Inventory turns (incl. peak)

Warehouse space utilization


Content






CustomerDevelopment:

we can sell 200

Marketing:

the promotion

will sell 400

Manufacturing:

they will

only sell 150

Finance:

we have

budget of 300

Financial Planning

Demand

Forecasting

& Planning

Category

Customer Service

& DistributionManufacturing

Customer

Development

Supplier mgmt

Debtor mgmt

one

consensus

plan

What is S&OP (Sales and Operation Planning ) – The generic process

• S&OP is the way the business takes decisions

• S&OP takes sales & marketing ambitions, supply possibilities, customer needs and

financial goals and balances them to create a single, achievable plan

• Improving S&OP is more about Leadership and Behaviour than it is about systems


Sales and Operation Planning Proces (S&OP) – the LEGO way

Demand Review

Capacity Review

Developement Review

Consolidation Review Pre S&OP Executive S&OP

Capacity Review Consolidation Review Pre S&OPSuggested

Actions

Review of: Inventory Outlook value profile-Offered capacity -Calculation of pallet profile

-Threshold Capacity -Evaluate capacity utilization

-Demonstrated Capacity -Identfy possible capacity bottlenecks

-Agree suggested actions

Inventory Management


Content






Definitions related to Inventory Management

1.LEGO Standard Pallet Is the Logistic Stock Keeping Unit in a distribution center.

One standard pallet contains a defined quantity of goods by item number.

2. Threshold Capacity. Defines the ultimate upper limit of number of pallets, which can be stored in

a warehouse. Threshold can max be utilized in 3 month. Threshold equals

100 % capacity utilization and slow down the warehouse operation, when

fully utilized.

As guideline threshold equals about 91% of total available pallet positions.

3. Offered Capacity. Define the optimal number of pallets, which can be stored in a Distribution

Center. The level guarantee, that the operation can run undisturbed.

As guideline, but depending of storage system, offered capacity equals about

85% of total available pallet positions.

4. Load. The actual number of pallets stored in the distribution center. Load is also

named ”demonstrated capacity”.

5. Average palletvalue. The average weighted Full Manufacturing Costs for one standard pallet of

goods. The average pallet value is a calculated key figure,- used to translate

stockvalue into number of pallets.


Inventory value Profile is the starting point for inventory management

and capacity control.


Data and Graphs from capacity review

III.09 IV.09 V.09 VI.09 VII.09 VIII.09 IX.09 X.09 XI.09 XII.09

EDC Offered 135 000 135 000 119 000 106 000 106 000 106 000

EDC Threshold 140 000 140 000 129 710 115 540 115 540 115 540

Surge(external) 5 000 5 000

EDC Demostrated 76 080 95 713 100249

EDC offered back 3 month. 120653 128 005 128005

Offered last cycle 128 005 128 005 128 005 119 605 95 796 95 796 95 796

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

EDC-Jirny capacity trend(Pallets) July. 2009 cycle

EDC Demostrated EDC offered back 3 month. EDC Offered EDC Threshold Offered last cycle

1. Based on inventory Consolidation, the inventory capacity is reviewed once a month.

2. If the capacity is changed, it must be commented in the capacity review as a decision.


Data and Graphs from inventory consolidation.

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000


Load actual/bottom up

Load top down

Budget pallets

Offered Capacity

Threshold Capacity

July 2009 cycle


Load actual/bottom up 65.000 71.102 81.058 97.731 108.334 129.872 125.032 116.722

Load top down 131.431 131.581 104.951 77.108 70.056 67.914

Budget pallets 86.186 84.488 86.529 96.851 118.415 131.709 138.775 135.209 120.572 102.844 92.039 94.196

Offered Capacity 114.835 117.985 122.935 122.935 128.005 128.005 135.000 135.000 119.000 106.000 106.000 106.000

Threshold Capacity 130.308 133.703 139.038 139.038 144.940 144.940 140.000 140.000 129.710 115.540 115.540 115.540

Flex (Load vs Threshold) 50% 47% 42% 30% 25% 100% 6% 6% 19% 33% 39% 41%

Comments:

1. In general load must be below offered capacity.

2. Load can be between offered and threshold capacity, if period of overload is max 3 months.


How to manage DC capacity and load in the S&OP proces

Starting point:

Available offered and

Theshold Capacity

in DC/EDC

The available space is

Normally the fixed space ,

-contracted with a Warehouse

Provider.

This capacity is always available,

so the focus is more how much

extra space is needed on which

horizon and duration,-and how this

optimal can be provided.

Load budget for new year

Made in September. The

value-profile is converted to

pallets by means of esti-

mated key figure for new

year

The budget gives the

first indication of the capacity

deficit for next year.

No decisions for change of

capacity is taken.

Starting point Budget Monthly capacity review Monthly consolidation

The monthly inventory

Consolidation will disclose

upcoming capacity

problems. Suggested actions

will be send to preSOP to

obtain an executive recom-

mendation

The monthly Capacity

Review will reflect

decisions on change of

capacities.

The capacity review forum

does not take decisions on

capacity changes, but monitor

the capacity situation and the

capacity utilization.

The capacity review can address

Issues to the PreSOP.

PreSOP will send the

Recommendation to

Operation board, which is

the board, who grant or refuse

the recommendations.

“Bringing cost driver and capacity

management into the Business forecast and

planning”

Appendix


Risks related to the inventory peak situation.

The inventory peaks normally once a year. The pallet capacity in the distribution center is normally not

dimensioned to cover the peak situation. Off site rental of additional space is therefore normally needed

for a shorter period . Additional warehouse space has normally to be rented for a longer period, than

the capacity calls for. Vendors of space typically require a minimum rental period, and also require a

certain notification horizon. Also it can take considerable time to find available space to a reasonable

price.

To be able to get additional space in time and on good conditions, it is absolutely necessary to have

the best possible inventory forecast in value and the best possible calculation of the corresponding

Pallet load. Especially when load is close to offered capacity or over,-its crucial to know the potential

calculation uncertainty.

There is several risk factors, which influence the forecast accuracy. These factors have to be considered

and evaluated,-in order to be able to estimate worst case space situation.

• Pallet value for pallet projection. (Must be tracked and adjusted, if trend shows a new level)

• Forecast error

• Non forecasted demand changes

• Supply change decisions (Example to prebuilt inventory/Mitigation)

• Lack of available extra warehouse space in the area.

• High rental costs


Sales and Operation Planning Proces (S&OP) – the LEGO way

Demand Review

Capacity Review

Developement Review

Consolidation Review Pre S&OP Executive S&OP

Capacity Review Consolidation Review Pre S&OPSuggested

Actions

Review of: Inventory Outlook value profile-Offered capacity -Calculation of pallet profile

-Threshold Capacity -Evaluate capacity utilization

-Demonstrated Capacity -Identfy possible capacity bottlenecks

-Agree suggested actions

Inventory Management


Pre-SOP in LEGO at a glance

Owner: Ole Fruekilde Madsen

Demand

planning

Supply

plan

PMD

com-

mercial

PMD

Ops.GSC

Capacity

Demand &

Inventory

managem

ent

CED Ops.Finance

• Sales representation is critical

component in the S&OP

process.

• Sales representation is critical if

we want to be truly consumer

driven as a company.

• The demand review will be the

critical link to consolidate the

sales perspectives into the

cycle. Agreed action to

strengthen the market input in

the demand review owned by

Ulrik.

• The pre-SOP should focus on

final consolidation of the

demand versus the supply

funneled via a clear however

practical representation.


Role description for each function in the PreSOP

Pre-S&OP participants - - High level role description -

Clarify demand and scenario uncertainties. Bridge between

BU S&OP, demand review and Pre-SOPSales

Clarify supply feasibility to sales plan

FG

supply

plan

Clarify commercial directions of product developmentPMD

comm

ercial

Novelty product issues impacting demand/supplyPMD

Ops.

Clarify capacity uncertainties & risk evaluation

GSC

Capa-

city

Global allocation, forecasting & Inventory responsibilityMOD

Clarify CED demand and scenario uncertaintiesCED

Ops.

Clarify financial impact of S&OP decisionsFinan-

ce

Owner: Ole Fruekilde Madsen


Calculation of the average pallet value

1. The calculation of the average weighted pallet value is allways done based on actual stock

on hand by plant.

The procedure is as follows:

• The actual stock on a selected date on a selected plant is extracted from

SAP. The extraction is done on item level and the extractionvalues are pieces

and FMC value listed by item.

• Masterdata in terms of pieces per pallet is applied to each item.

• Actual inventory in pallet by item is calculated by converting the inventory in pieces

to pallets via the masterdata(Pieces per pallet).

• All FMC values and calculated pallets are summed up.

• Average pallet value is calculated by dividing pallets with FMC-value.

• Pallet value calculation are done 12 months backwards to disclose seasonal

Variation, and to find a good average value for future projections.

• The actual palletvalue is calculated and tracked each month to monitor variations.

• If Variations shows a consistent trend over some month the projection value is

changed accordingly.

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