1. Eaton Corporation Sustainable Growth through Network Optimization
April 17, 2014
Eaton Corporation Sustainable Growth through Network Optimization
SCM Expert Team
Tiffany Wendler
Lukas Brenner
Andrew Tye
Patrick Haslanger
GSCMI 2014 Case Competition – Team 1: Wendler

2. Your Supply Chain Management Expert Team
Tiffany Wendler
Lukas Brenner
Andrew Tye
Patrick Haslanger

3. Agenda Current Situation and Problem Statement Recommendation Analysis
Tiffany Wendler
Current Situation and Problem Statement
Recommendation
Analysis
Implementation
Risk and Mitigation Measures
Conclusion 1 2 3 4 5 6

4. Company Overview – Eaton Corporation1
Tiffany Wendler
Company Highlights
Organizational Structure
Power management company
Provide energy-efficient solutions to manage electrical, hydraulic and mechanical power
Sales $22b (2013)
Efficiency, reliability, safety
175 countries
102,000 employees
Eaton Corporation
Electrical
Aerospace
Vehicle
Hydraulics
Electrical Sector
Largest sector
Comprehensive portfolio of end-to-end electrical solutions including distribution, generation, quality control equipment, full-scale engineering and support services
Product categories
Automation and Control
Circuit Protection
Electrical Distribution
Residential Power Management
Backup Power and Monitoring Systems

5. Current Supply Chain Network1
Tiffany Wendler
Supply Chain Network
CMSC (including SAT and SVC)
Plant
Warehouse
CDC
2 plants: NC, SC
16 CMSC sites
1 third party CDC
2 warehouses: CA, NC
1 DBN: TX
Top 5 orders: Dallas, Los Angeles, Atlanta, Houston, Chicago
Challenges
Frequent stockouts on the west coast
Growing demand of high tech companies requiring short lead times
No clear order structure
Warehouses not dedicated to electric sector  no priority
Unequal performance between east and west
Currently a very complicated supply chain

6. Problem Statement 1
Tiffany Wendler
Eaton Corporation strives to improve its existing supply chain network for the Electrical Sector.
Short-term: level performance in east and west through reducing premium flights and DOH inventory
Long-term: ensure sustainable growth, especially on the west coast

7. Recommendations Short-term Long-term2
Tiffany Wendler
Short-term
Financial impact:
Optimize inventory levels for all CMSC sites
Savings:
$2.49m
Decrease air freight shipments
Long-term
Add warehouse space in LA area
Savings:
$3.72m
Source strategically from 2-3 close-by sources

8. ST-Measure 1: Reduce Air Freight3
Lukas Brenner
Current Air Freight Situation
Current Distribution
Air freight makes 8% in weight and 40% in cost
Costs per mile are considerably higher for air shipment
Air freight’s intended use is for emergency shipments
Transportation via air is used regularly to catch up with late orders; especially for West Coast
100%
100% 8%
39%
Air
Ground
Weight
Cost
Short-Term Measures to Reduce Air Freight
Address 3 largest users of air freight: Chicago, LA and San Francisco
Dallas-SVC sources currently 53% of goods value from Puerto Rico (air freight inevitable)
Develop actions plans for 3 facilities including special expert consultation, re-design for quick- wins, improved ahead-planning to increase truck freight share
Ratio: Air Freight Volume over Total Volume at Location*
% of Air Freight
Ø 8%
Chicago-SVCChicago-SVC
Dallas-SVCDallas-SVC
LA- SAT
SF- SAT
ST measures possible to support – real effective measures in LT planned
*For 16 CMSC Locations , SVC/SAT selectively used to visualize differences

9. ST-Measure 2: Reduction CMSC Inventory3
Lukas Brenner A
Approach to Minimize Inventory – 3 days
Utilize periodic inventory system by ordering every 3 days
Reduce time between order receipt and shipment in plant from 2 days to 1 day
Calculate necessary average inventory (S.L. 99%)
Result: 83% of inventory can be reduced
2,037
- in $t -
1,668
345 24
Inv. Holding Cost As-IsInv. Holding Cost As-Is
Inv. DecreasesInv. Decreases
Decrease waiting time 1dDecrease waiting time 1dDecrease waiting time 1d
Inv. Holding Cost optimalInv. Holding Cost optimalInv. Holding Cost optimal
$1.69m Total Savings B
Approach to Minimize Overall Costs – 6 days
- in $t -
Expand order period from 3 to 6 days
Trucks can be loaded more extensively since demand of CMSC will aggregate during additional 3 days
Assumption: Reduce LTL rate by 25% from an average $0.30 to $0.23
Result:
77% of inventory can be reduced ($1.56m savings)
25% of ground shipping costs can be saved ($0.92m) -
2,037
1,544
473 20
920
Inv. Holding Cost As-IsInv. Holding Cost As-IsInv. Holding Cost As-Is
Inv. DecreasesInv. Decreases
Decrease waiting time 1dDecrease waiting time 1dDecrease waiting time 1d
Inv. Holding Cost optimalInv. Holding Cost optimalInv. Holding Cost optimalInv. Holding Cost optimal
Shipping Cost ReductionShipping Cost ReductionShipping Cost Reduction
$2.49m Total Savings
Assume holding costs of 10%; Total shipment costs by truck prior to optimization: $3,681t

10. ST-Measure 2: Reduction CMSC Inventory3
Lukas Brenner B
Optimal Inventory vs. Actual Inventory (in $)
- Based on p=6 -
DOH: Days of Inventory on Hand Comparison (in days)*
Avg. inv. at each location can be reduced by $705k – DOH* down from 39 to 8 days
*Dallas-SVC (as outlier) not included: DOH (new) 163 days: location where optimal inventory > current inventory

11. LT-Option 1: Create 1-2 New CMSC Sites3
Andrew Tye
Pros
Cons
Reduce regional logistics costs
Improve inventory turnover
Enhance brand image
Increase responsiveness to regional demand
Better customization possible
Does not tackle root-cause
Close-by warehouses cannot supply
No focus on long-term growth
High shipping costs if located in the west
High investment needed
Future demand is expected at regions where CMSCs already exist
Root-cause Issues
Financial Considerations
Root-cause of problem: Missing supply from warehouse/plants at west coast
New CMSC cannot increase supply but might increase demand for respective product
 Problem is not solved, but potentially increased
Building CMSC needs high initial investment as it includes production factory
Running costs are high due to production cost, sales team and overheads
 It is not feasible to build additional CMSCs
Do not add two new CMSC sites

12. LT-Option 2: Optimization (Warehouse LA)3
Andrew Tye
Approach
Pros & Cons
No direct sourcing from Puerto Rico and from plants “Other”
Optimize sourcing by reducing # of CMSC-suppliers
Where possible source from plant/warehouse in region to decreases miles and shipping costs
Add one warehouse in west to increase capacity, level performance and enable future growth (renting warehouse space also possible)
Reduce pressure on W34 and W87
Dedication to electrical sector
Shorter lead time to CMSC sites
Reduce shipping costs
Simplify supply chain structure
High shipping costs to east if located west
High capital investment
Analysis
- in $t -
Total Savings: $3.72m
6,022
2,341
1,381
2,300
New warehouse
Total Shipping Costs As-IsTotal Shipping Costs As-Is
Savings Air TransportationSavings Air Transportation
Network Redesign (Land Transportation)Network Redesign (Land Transportation)Network Redesign (Land Transportation)
Total Shipping Costs OptimizedTotal Shipping Costs OptimizedTotal Shipping Costs Optimized
Redesign of sourcing network including one LA warehouse saves $3.72m
Assume saving of nearly all air freight cost through optimized sourcing

13. LT-Option 2: Optimization (Warehouse LA)3
Andrew Tye
Add warehouse space in the LA area (equivalent to CDC capacity)

14. LT-Option 3: Optimization (DBNs as Storage )
Andrew Tye
Approach
Pros & Cons
Add 9 additional DBNs (warehouse function)
No direct sourcing from Eaton plants anymore
No direct sourcing from Puerto Rico and from plants “Other”
Source from the 9 additional DBNs in local area to reduce miles and shipping costs
Investment in 9 assets necessary
Reduce pressure on W34 & W87
Dedication to electrical sector is possible
Improve local CMSC performance
Decrease lead time
Not focused on long-term growth
Complication of the overall supply chain (complexity)
Difficult to manage
High investment required (9 DBNs at CMSCs)
Analysis
- in $t -
Total Savings: $4.3m
(only $0.6m higher than Opt. 2)
6,022
2,341
1,950
1,731
Total Shipping Costs As-IsTotal Shipping Costs As-Is
Savings Air TransportationSavings Air Transportation
Network Redesign (Land Transportation)Network Redesign (Land Transportation)Network Redesign (Land Transportation)
Total Shipping Costs OptimizedTotal Shipping Costs OptimizedTotal Shipping Costs Optimized
Do not extend 9 CMSCs to DBNs - costs do not outweigh benefits
Assume saving of nearly all air freight cost through optimized sourcing

15. Implementation: Organizational Change4
Patrick Haslanger
Simplification
Impact
Establish clear roles and responsibilities
Plant: produce regular items in large batches
CMSC: only customer contact point, produces special orders with local sourcing
Warehouse: serves as storage and distribution center
Eaton plants: used for special orders only
DBN: implemented based on capacity of respective CMSC
Less complexity
Less inventory
Better customer service
Lower transportation costs
Standardize production and transportation priorities
Based on order size, customer importance and financial implication
Written down in policies
Profitability
Reduced lead time
Less decision-making
Centralized organization of procurement
Less decision-making
Optimized profit
Organizational changes will simplify the supply chain and decrease costs

16. Implementation: Timeline & Action Items4
Patrick Haslanger
Short Term
Long Term
Level performance between east and west
Strategic sourcing from 2-3 sources
Establish clear rules for sourcing
Redesign supply network for 5 critical CMSC
Redesign supply network for all CMSCs
Increase capacity by adding warehouse space
Reduce air freight shipping
Inventory level optimization: Reduction of safety stock
Organizational Change: Simplification and clear responsibilities
Milestone 1
Kick-off immediate changes to decrease costs
Milestone 2
Decrease overall inventory levels
Milestone 3
Reduce overall
shipping costs
Milestone 4
Increase capacity

17. Risks and Mitigation 5 Probability/Impact Risks Mitigation Measure
Patrick Haslanger
Risks
Probability/Impact
Mitigation Measure
Initial investments to achieve cost savings are high
Assess initial investment need in detail
Focus on renting/outsourcing instead
low/medium
Resistance to change from employees might occur
Involve and empower employees in the process early on
Communicate benefits
high/medium
Increased interdependence of CMSC and plants/warehouses
Implement scenario planning
Increase cooperation between entities
high/medium
Increased complexity
Assign specialists team to target specific issues
Align planning activities
medium/low

18. Conclusion 6 Financial Strategic Summary Option Description Short-term
Patrick Haslanger
Financial
Strategic
Summary
Option
Description
Short-term
Optimize inventory levels for all CMSC sites
Measure 1
Decrease air freight shipments
Measure 2
Savings: $2.49m
Long-term
Create one or two new CMSC sites
Option 1
Optimization: Add warehouse space
Option 2
Optimization: Extend CMSC storage
Option 3
Savings: $3.72m

19. Thank You!
Questions?

20. Current Structure Current Situation 1 And come from…
Orders mainly go to…

21. Current Structure 1 Eaton Plants Plant Sumter Warehouse W34
External Suppliers
Plant Fayetteville
Warehouse W87
CDC
DBN
CMSC 1
CMSC 2
CMSC 16 …
Customers
From suppliers
From plants/CDC
From warehouses
From CMSC

22. Target Structure External Suppliers Plant Sumter Plant Fayetteville
Warehouse W87
Warehouse W34
DBN
CMSC 1
CMSC 2
CMSC 16 …
Customers
From suppliers
From plants
From warehouses
From CMSC

23. Transportation Cost

24. Redesign Network and Increase Capacity (B)
Add capacity at CSMCs equivalent to 9 CDCs

25. Short-term measures: Reduction of Inventory
Order Quantity in $-Value
SUM
3,450,731
20,367,405
16,916,674
Hold. Cost
345,073
2,036,741
1,691,667
CMSC site
Total
StDev (of Months)
P+L (in D)
P+L (in M)
Mean (in M)
Optimal Inv.
Actual Avg. Inv.
Diff.
Diff. in %
COGS
DOH (new)
DOH (old)
Atlanta-SAT
6,325,254
215,634 5
0.170
527,104
232,955
899,181
666,226
386%
8,827,309.21
9.50
Atlanta-SVC
7,578,607
108,689
0.169
631,551
135,640
898,220
762,580
662%
10,519,020.23
4.64
31.238
Baltimore-SAT
4,277,874
93,861
356,489
107,551
660,821
553,270
614%
7,126,208.30
5.43
Chicago-SAT
5,720,035
79,611 6
0.193
476,670
105,227
759,572
654,345
722%
8,034,856.22
4.71
34.71
Chicago-SVC
6,405,533
99,077
0.200
533,794
129,764
959,812
830,048
740%
10,562,412.18
4.42
Cleveland-SAT
5,484,891
83,245
0.171
457,074
102,879
656,580
553,701
638%
8,359,329.74
4.43
28.429
Dallas-SAT
7,588,695
112,826
0.190
632,391
146,090
1,219,931
1,073,841
835%
12,842,765.06
4.10
Dallas-SVC
9,457,220
203,478
0.182
788,102
241,468
75,799
-165,669
31%
727,846.49
119.43
Denver-SAT
6,332,400
122,215
0.213
527,700
157,641
876,008
718,367
556%
9,557,337.44
5.94
Denver-SVC
3,940,268
60,395 7
0.226
328,356
83,156
498,253
415,097
599%
6,178,902.50
4.84
Hartford-SAT
5,720,883
91,263
476,740
111,609
743,944
632,335
667%
8,873,699.55
4.53
Hartford-SVC
6,150,607
111,048
512,551
132,447
1,064,410
931,963
804%
9,791,807.38
4.87
Houston-SAT
4,972,726
72,055
0.192
414,394
94,241
773,745
679,504
821%
7,578,959.35
4.48
37.205
Houston-SVC
8,440,786
163,664
0.199
703,399
204,958
1,491,512
1,286,554
728%
13,435,899.79
5.49
Los Angeles-SAT
9,335,966
131,076
0.210
777,997
178,529
1,645,203
1,466,674
922%
14,972,556.01
4.29
Los Angeles-SVC
7,376,935
153,345
0.220
614,745
197,912
1,105,960
908,049
559%
11,824,734.37
6.03
New Jersey-SAT
4,367,654
44,205
0.173
363,971
60,976
628,373
567,397
1031%
7,730,412.51
2.84
Orlando-SAT
5,956,920
175,939
496,410
193,851
749,806
555,954
387%
7,937,949.43
8.79
Phoenix-SAT
4,861,302
92,158
405,109
119,193
742,992
623,799
623%
6,623,160.94
6.48
Portland-SVC
4,972,556
121,680
0.224
414,380
154,790
922,198
767,408
596%
7,109,000.06
7.84
Raleigh-SAT
5,674,095
147,605
472,841
165,564
816,549
650,984
493%
8,361,580.91
7.13
San francisco-SAT
5,049,130
101,206
0.208
420,761
128,469
825,681
697,212
643%
8,054,330.48
5.74
38.166
Seattle-SAT
4,550,998
103,709
0.209
379,250
129,337
643,998
514,661
498%
9,321,026.36
5.00
St Louis-SAT
5,228,942
112,200
435,745
136,486
708,858
572,373
519%
7,245,677.26
6.78
145,770,278
116,674
0.19
506,147
143,780
848,642
704,861
628%
8,816,532.57
10.32
39.08
Average p 3
Order- Shipment Gap 1
99%
2.326
CoC
0.1

26. Overview: Shipping Costs (as-is)

27. LT-Option 4: Simplification3
Current Structure
Proposed Structure
CMSC as only customer contact point
CMSC produces special orders only
Abandon usage of Eaton plants
Incorporate CDC in warehouse/CMSC structure
From suppliers
From plants/CDC
From warehouses
From CMSC

28. Further Considerations
Other Options 3
Option
Further Considerations
a) Daily milk-run from warehouses to CMSC
LtL are a major reason for high costs
Reduce shipping frequency and pool
close-by locations
Reduce shipping costs
Weight and size of daily orders is not
fixed for CMSC sites
High interdependency
High degree of coordination necessary
Current supply chain cannot support milk-runs due to lack of planning
b) Change mode of transportation
Rail transportation could be cheaper than truck
Not feasible due to lead time
For highly standardized products only
Supply chain needs to improve planning before implementing these options