Inventory Optimization Practices: 2013 Survey Results Optimization Practices: 2013 Survey Results...

September 15 – 17 2013

UPMG's 82nd Annual Educational Conference

Inventory Optimization Practices: 2013 Survey Results John H. Sequeira, Ph.D., ScottMadden, Inc.

Steve Sotwick, Oniqua, Inc.

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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?

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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

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About the Survey Organizers

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

UMMBC

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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

2. Mining, Metals Processing & Fabrication

3. Oil, Gas & Petrochemicals

4. Suppliers & Support Services to these industries

All Respondents by Industry (N=157)

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Survey Participants (Cont’d)

The utility participants were distributed as follows:

Delivery (41%)

Generation (38%)

Integrated (18%)

Respondents by

Sub-category

(N=67)

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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”

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Why Focus on Inventory Optimization?

Inventory levels continue to grow.

Inventory carrying costs at utilities range from 12.0% to 14.4% per annum.

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)

3.5%

8.2 %7.0 %

FERC 154 Inventory – All Reporting Utilities in the U.S.

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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)

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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 Metric Name

Efficiency Inventory Turns Ratio

Efficiency Days Inventory

Efficiency Inventory Asset Ratio

Efficiency Inventory Review Coverage

Effectiveness Line Fill Rate

Effectiveness Order Fill Rate

Effectiveness Line Stock Out Rate

Effectiveness Average Stock Out Duration

Effectiveness Perfect Order Rate

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Performance Measures Used

The most commonly used measure of “efficiency” is “Inventory Turns Ratio.”

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%

Inventory Asset Ratio

Other Metrics Used

Perfect Order Rate

Average Stockout Duration

Line Stockout Rate

Order Fill Rate

Days Inventory

Line Fill Rate

Inventory Coverage Review

Inventory Turns Ratio

13%

15%

21%

28%

32%

35%

46%

54%

56%

63%

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(N=45)

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.

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(N= 38)

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.

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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

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Comparing Performance Across Industries

The Mining, MP&F and the Suppliers & Support Services industries are able to deliver both inventory efficiency AND effectiveness.

Oil, Gas & Petrochemicals apparently struggle to do either.

Utility performance is mixed.

Eff

icie

ncy

Effectiveness

Mining, Metals

Processing &

Fabrication

Suppliers &

Support Services

Electric & Gas Utilities

Oil, Gas & Petrochemicals

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Inventory Optimization Practices - Overview

The 2013 study examined 16 different Inventory Optimization practices:

People & Organization – 3 practices (We will discuss 2)

PEOPLE

PROCESS

Policy & Process – 9 practices (We will discuss 4)

TECHNOLOGY

Tools & Technology – 4 practices (We will discuss 3)

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People & Organization – 1

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)

Parties Responsible for

Inventory Optimization

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People & Organization – 2

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)

Levels at Which

Inventory is Optimized

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Policy & Process – 1

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)

Formal Process Exists for New

Inventory Items & Levels

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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)

Method for Assigning

Inventory Stocking Levels

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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)

Methods Used to Determine

Safety Stock Levels

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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)

Annual Budget for Disposal of

Surplus / Obsolete Stock?

2%

5%

8%

1%

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Tools & Technology – 1

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)

Integration of Materials Management

and Asset Management Systems

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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)

Degree of Software Integration Between Inventory

Management and Asset Management Systems

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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)

Use of Specialized Inventory

Optimization Tools

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Tools & Technology – 4 Inventory Optimization

Software Used

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.

Oniqua34%

Home Grown

33%

SAP8%

Others25%

Utilities

(N=12)

Home Grown

75%

SAP25%

Suppliers

(N=4)

Oniqua92%

Oracle8%

Mining, MP, & F

(N=25)

Oniqua100%

Oil, G & P

(N=6)

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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

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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

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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)

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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.

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Questions and Answers

To learn more about this study or to join the UMMBC, please contact any of the following:

Andy Flores

Partner

3495 Piedmont Rd.

Building 10 #805

Atlanta, GA 30305

(404) 814-0020

John Sequeira

Partner

2626 Glenwood Ave.

Suite 480

Raleigh, NC, 27608

(704) 560-5061

Steve Sotwick

Vice President

7900 E. Union Avenue

Suite 920

Denver, CO 80237

(303) 952-6671

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