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

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 C Inventory: 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?

Overview How do you eat an elephant?

Take it one bite at a time!!! Create MRO visibility Start to define processes Consider outsourcing on certain commoditie s Establish KPIs & MEASURE them continuously Use software to build intelligence and knowledge Go after low-hanging fruit for success stories Automate more source- to-pay activities 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 headquarters 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 Project Activation Energy Progress Activation Energy with Catalyst Free Energy Of Reaction Chemical Reaction

Activation Energy Working Capital Progress Activation Energy with Successful planning and systems Inventory Savings 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 dont 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 dont 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?