Strategies for Inventory Optimization

Article extract from Reliable Plant newsletter:
http://www.reliableplant.com/Read/29885/inventory-optimization-strategies

Inventory management and procurement compliance often present a difficult challenge for any manufacturing organization, regardless of how strict and disciplined it may be. While many procurement teams feel they have effectively leveraged spending through preferred supplier negotiations and strategic purchasing processes, the reality is that they have only hit the tip of the iceberg. The main factor that holds many organizations back is data quality or lack thereof. Some parts, and their associated description, radiate with accuracy and attribute information. Unfortunately, this only represents about 10 percent of the items in a given database. More realistic are items that barely have a part number or any type of description that would allow the preferred supplier to accurately provide a replacement part.

Without clean data, there is a good chance that the agreement, which was originally negotiated with the preferred supplier, doesn't accurately represent the organization's true spending. In most cases, the majority of companies can't tell definitively what they bought, who they bought it from and how much they bought it for in the past week, let alone the past 12 months.

Progression Model

Implementing a successful inventory optimization program involves several phases, none of which can be completed effectively without first having quality data. The following cost-savings progression model illustrates the critical tasks necessary to achieve maximum success.

Data Cleansing

Let's face it; manufacturing companies specialize in producing finished goods, not in cleaning data. Perhaps this is why their data has become so corrupt in the first place. In any case, it is always best to leave this task to the subject-matter experts who specialize in the field of material and vendor master data cleansing.

Prior to project commencement, a standard operating procedure will be developed to clearly articulate the naming convention, abbreviations, policies and formatting requirements that will be used to consistently structure data throughout the organization moving forward. Next, legacy data will be cleansed, standardized, enhanced and validated to provide an item master that is consistent among product groups while containing accurate and attribute-rich descriptions.

Once clean, the data will be formatted to meet the specific configuration requirements of the chosen enterprise asset management (EAM)/computerized maintenance management system (CMMS), including field type, character limitation and data arrangement. During the cleansing process, potential duplicate records will be identified at both the local (plant) and corporate level. The newly cleansed item master will provide detailed visibility and reporting at the stock keeping unit (SKU) level.

In addition, data cleansing and classification will enable items to be segmented into common product groups or commodities. On average, a typical item master houses 30 percent original equipment manufacturer (OEM) items versus 70 percent standard maintenance, repair and operations (MRO) items. From there, these two categories are broken down into seven or more parent product groups, as shown below. These common categories can be further segmented into subcategories and analyzed throughout the item and spending analysis phases.

Catalog Management

Immediately upon completion of a data-cleansing project, a catalog-management strategy must be implemented to maintain ongoing consistency, integrity and sustainability of the item master. The catalog-management task can be performed manually by internal resources, using automated software or through a third-party service provider. Regardless of which method is chosen, a data governance team must be formed in order to restrict enterprise resource planning (ERP) access and create a corporate internal workflow for requesting additions, modifications, extensions and suspensions to the item master.

During the catalog-management process, all item master updates and entries will be standardized and formatted according to the standard operating procedure, which was developed during the initial data-cleansing project. An effective catalog-management strategy will therefore maintain consistency and accuracy while preventing future duplication within the corporate item master moving forward.

Item Analysis

Now that you've implemented a data-cleansing project and finally have quality data to work with, the inventory optimization process can begin. The first phase dives deep into the transactional history of each data record to segment items into three distinct usage categories. Those categories are defined as follows:

• Required Active – Items that have been purchased and/or issued at least once during the analysis period and do not have an on-hand quantity that exceeds the recommended maximum stocking level
• Excess Active – Items that have been purchased and/or issued at least once during the analysis period and have an on-hand quantity that exceeds the recommended maximum stocking level
• Inactive – Items that have not been purchased and/or issued during the analysis period, which must further be identified as critical spares, obsolete or slow-moving

Of the total on-hand inventory, industry standards suggest that required active items represent 25 to 30 percent, excess active items represent 10 to 20 percent, and inactive items represent 50 to 60 percent. The excess active category represents a safe inventory reduction opportunity with immediate cash-flow generation potential, which can often be used to fund the initial data-cleansing project and build a solid business case for finance.

Stock Level Optimization

With excess inventory now identified through item analysis, the stock level optimization process can begin. After all, the last thing you want at this stage is to continue overstocking inventory due to inaccurate and outdated minimum/maximum or reorder-point/reorder-quantity (ROP/ROQ) levels. Using a complex formula, which considers variables such as criticality, issue quantity, issue frequency, average lead time, etc., optimal minimum/maximum levels can be calculated to minimize on-hand inventory while safeguarding against future stock outs and unplanned equipment downtime.

In the example above, the blue-shaded fields represent existing inventory values, while the red- and gray-shaded fields represent calculated values. Based on the existing inventory information and client requirements, it was determined that the average lead time for this particular bearing sample was 3.5 days, and the new minimum/maximum level was to be adjusted to 2 and 4. Using the new minimum/maximum values, it was calculated that four of the eight current on-hand items were actually required, while the remaining four represented excess stock.

To take inventory safeguarding one step further, a stock status report can be performed to identify part availability and lead time at the preferred vendor's local branch, regional branch and corporate distribution center.

Inventory Disposition

So it's time to generate some cash flow and free up valuable warehouse space that is currently occupied by excess and obsolete inventory. There are several strategies for disposing of inventory based on timeline, desired payback and available resources. Here are a few of the common disposition strategies that produce quick success and great returns:

• Vendor buy-backs
• Third-party liquidation
• Auction
• Corporate internal redeployment/depletion
• E-commerce (eBay, Amazon, etc.)

Of the above-mentioned strategies, third-party liquidation often provides the quickest and easiest success for companies, as it requires few resources, payment is immediate, and inventory is removed from the site within a short period of time. The downfall to this strategy is that it may not provide the payback for which you were hoping. In many cases, third-party liquidation will deliver 10 to 30 cents on the dollar, which for some organizations is simply a bonus just to get the unused inventory off their shelves. However, if you're looking for larger returns, you may want to consider an e-commerce solution or discuss vendor buy-back opportunities when negotiating your next supply contract.

Spending Analysis

Perhaps one of the most critical phases in the overall inventory optimization program, a spending analysis is performed to identify how much money is being spent, with whom it is being spent and on what it is being spent. With a consistently cleansed item master now enabling detailed visibility at the SKU level, the results of a spending analysis can be quite eye-opening for the procurement team. It is often at this point that procurement managers realize they have only leveraged a portion of their actual spending while missing out on several cost -savings opportunities along the way. Based on vendor name, last price paid, issue frequency, issue quantity and additional analytics, a successful spending analysis should reveal the following statistics:

• Total number of vendors
• Number of vendors per product group
• Dollars spent per vendor
• Dollars spent per product group
• Dollars spent with preferred vendor(s)
• Maverick purchases
• OEM purchases
• Price variances between OEM and MRO items
• Price variances through a preferred vendor
• Price variance between preferred and non-preferred vendors

No matter how staggering the results may be, these data-driven statistics will become the foundation for leveraging spending and achieving cost savings during the strategic sourcing and negotiation phase of the procurement process.

Strategic Sourcing

Now we're getting down to the fun part, strategic sourcing and negotiating. It's often surprising just how many companies have never tendered their MRO spending or have only focused on a small portion of it, especially considering the competitive nature of the industrial distribution space and multitude of cost-savings opportunities that are available. With accurate spending analysis reports now available at your fingertips, it's time to create an RFx to identify and select the best-suited vendor(s).

Once again, the RFx process can be performed by internal resources or through a third-party service provider. In either case, be sure to leverage your spending analysis reports and provide a quality market basket to obtain the most accurate product quote. Keep in mind that price isn't the only factor to consider during an RFx. While it may be one of the most heavily weighted components of your RFx, other factors such as lead time, availability, terms and conditions, guaranteed cost savings, and special incentives should also be taken into great consideration. Remember, if you have important requirements that are non-negotiable, make them known to bidders and don't just ask — demand them. The better you outline your requirements within the RFx, the more likely capable bidders are to meet them.

Once you've narrowed it down to a short list of vendors, the real negotiations begin. Be creative with the things you want, firm with the things you need and know when it's time to walk away. Chances are you'll be entering into a long-term contract, so it is important that the final agreement be mutually beneficial to all parties.

Compliance

Compliance is the last remaining piece of the puzzle to ensure ongoing procurement success and maximum operational efficiency. Traditionally, strategic sourcing and compliance has been based on preferred vendor programs and lenient purchasing procedures, which as we know, were driven by poor data. Too often buyers disregard preferred vendor programs with no repercussions just so they can buy from the local supplier with whom they have an existing relationship. Nowadays, as competition becomes stronger, budgets continue to shrink and technology advancements are a daily occurrence, companies must tighten up their processes to ensure that every dollar is spent wisely. How you ask? The answer is in this article, yet everything you've read thus far means nothing if it is not enforced down to the finest detail and end users do not comply with the cost-savings programs that have been negotiated.

Let's be honest, there's no point in establishing a preferred vendor program if you're not going to honor the contract. The key is not only to enforce compliance at a high product group level through the preferred vendor, but also down to the individual SKU level (by manufacturer). With outsourcing and contract work now trending throughout industry, third-party procurement companies are often a great solution to manage purchasing and compliance. If you choose to use internal resources, you may want to consider a software solution, which will force users to purchase only from preferred vendors.

Of course, there are exceptions such as catastrophic breakdowns and part unavailability through the preferred vendor, in which case the user must specify a reason as to why the part is being purchased from a non-preferred vendor. If nothing else, this process instills ownership and accountability, as end users are aware that upper management is monitoring their purchasing habits.

Moral of the Story

To summarize, achieving cost savings is not a quick, single step task. It is an ongoing process that requires a number of phases, beginning with data quality. Whether you choose to perform the above-mentioned tasks internally or through a third-party service provider, the process and cost-savings opportunities remain the same. For your organization, the best option may be to perform a select group of tasks internally for which you have adequate resources and expertise. As for the remaining tasks, build a relationship with a third-party service provider who specializes in the field and is flexible to meet all of your business requirements and objectives. Every company specializes in something, and for most that something isn't data cleansing or inventory optimization. Stop spinning your tires. Stick to your specialty and let the subject-matter experts perform theirs. It's a win-win situation in the end, which will see you achieve your cost-savings and procurement objectives within a much more reasonable timeline and scope.

The Journey to Reliability Uncovers a ‘Hidden Plant’ Within the Walls

Article extract from ReliabilityWeb newsletter:
http://reliabilityweb.com/index.php/articles/the_journey_to_reliability_uncovers_a_hidden_plant_within_the_walls/

Those working in the field of maintenance know how important it is to the success of any organization to maximize reliability and minimize or eliminate unscheduled downtime. This can be a daunting task and often requires professional collaboration, a change in organizational culture, and the willingness and ability to make decisions that are not always popular.

Lubrication Engineers (LE) is no different than any other manufacturing facility in the world. It can only make a profit if it is producing quality product and shipping it to customers in a timely fashion. If the facility experiences unscheduled downtime with its production equipment, it causes a ripple effect throughout the entire operation. When this happens, the organization seeks to learn from it and get better to minimize the risk of it occurring again.

LE manufactures its own high-performance industrial and automotive lubricants in its 200,000-square-foot manufacturing and warehouse facility. Its products are distributed and used by companies all over the world (Figure 1). As a batch process manufacturer - as opposed to a continuous process manufacturer - LE is able to give each product an intensive care approach during the cooking and blending steps. It formulates its products to meet the needs of the application and not just to meet minimum specifications.

After the finished product is approved by quality control, the product handling department fills containers ranging in sizes from pint bottles to tanker trucks. Product is stored in three warehouses across the United States, which helps lessen the delivery times to customers in various regions.

All this may sound good, but LE is never satisfied with the status quo. The company works continually to maintain or improve mechanical uptime in order to provide quality product and reliable service to its customers. Seven years ago, LE had some challenges to overcome. The biggest challenge was the need to change the reliability culture in the entire facility. While LE was already very good at helping its customers improve lubrication reliability and mechanical uptime, the company knew it could do better in its own facility. The organization needed to walk the walk, not just talk the talk.

LE needed to focus on managing its assets at a higher level than ever before. The company initiated plant-wide meetings to discuss reliability topics. Discussions focused on reliability in terms of how it relates to its employees, as well as its customers. LE determined that it could do better in its reliability efforts and save money by doing so.

Getting Started

The beginning of a reliability journey can seem overwhelming, but that is why it is so important to be patient and take one step at a time. Although it would seem easy for a company like LE to get started because it already partners with reliability-minded product and service providers, its reliability journey still sputtered, at best, in the early stages, even with this built-in advantage.

Top-Down Support

It was imperative that senior management recognized that good lubrication practices would protect assets and keep them generating products and profits, positively affecting the bottom line. LE also needed its leaders to place equal importance on both human and mechanical assets.

Education & Training

LE chose to spend money on its people to get them the training they needed. The maintenance team and senior management attended maintenance reliability conferences and as many training opportunities as possible. Many were able to earn certifications, including Machinery Lubrication Technician Level I (MLT), Oil Monitoring Analyst Level I (OMA) and Certified Lubrication Specialist (CLS), which further increased their confidence and ownership of the process (Figure 2). They then began implementing what they learned into their operations.

Reliability Products

One of the first changes made was installing desiccant breathers and sight glasses on many of the assets (Figure 3). Top-down support was crucial for this investment to happen. It was understood and agreed upon that increasing the reliability of each asset would lower the total cost of ownership. LE later incorporated other reliability products, including automatic lubricators and filtration devices.

Computer System

As the workforce’s knowledge level increased and reliability improved due to the small changes put in place, improvements began to accelerate. LE began looking into a computerized maintenance management system (CMMS) because, up to this point, maintenance reliability technicians were working from computer-generated asset cards to do lubrication activities. Maintaining this archaic system was not easy.

During its review of several CMMS packages, LE realized that a CMMS would be more time-consuming to implement than a simple computerized lube route system. At the time, the main goal was to quickly get a better handle on lubrication reliability practices, however, many of the CMMS packages reviewed did not incorporate lubrication, or their lubrication components would have been cumbersome to implement. After many discussions, LE came to the conclusion that adopting a CMMS system did not make sense at that time for its five person, one shift maintenance department. Having made this decision, LE was able to proceed more rapidly with the rest of its journey.

Plant Survey

LE’s mechanical assets include 177 gearboxes and gear reducers, 119 electric motors, 51 pumps and 21 stirring vessels, as well as compressors and additional miscellaneous equipment. The entire facility was surveyed and each lubrication point on each asset was identified. This helped the facility visualize the amount and type of equipment it was performing maintenance on and gave it a blueprint to start managing the equipment more efficiently. This is a critical step in the process and should not be skipped.

Lube Room

Lubricants are the lifeblood of mechanical assets throughout any facility. LE regards them as assets, not consumables. In fact, LE looks at lubricants as its number one asset. Just like any other asset, lubricants need to be maintained properly and used properly for specific applications. A well-equipped lube room will protect these fluid assets so you can sleep at night.

LE purchased a new lubrication storage system and created a dedicated lube room (Figure 4). This made it evident to all employees that the company was serious about reliability. The maintenance team took ownership of this new lube room and storage system, and they are very proud of it.

This created momentum in the lubrication reliability journey, which became increasingly evident as the maintenance team began to think of more ways to improve machine uptime.

Lubricant Identification

All lube points were tagged according to product number and color-coding that matched the storage system tanks was implemented. This helped make lubrication a smarter, more streamlined process for the team and it raised the knowledge level of each team member.

Lube Route Software

After a search of available software solutions, LE purchased lubrication reliability software to manage all its lube tasks. The quick turnover to this system enabled LE to keep its mechanical assets running and minimize downtime. With the software, LE was able to assign lubrication routes and schedules to team members who took ownership of the process to ensure “their” equipment was maintained properly.

The software significantly improved LE’s ability to manage the lubrication of its mechanical assets and helped the facility organize its approach to handling maintenance activity.

Results

By implementing all these steps on its reliability journey, LE has seen a major reduction in the cost of equipment repairs and maintenance. From 2006 to 2008, LE documented an annual average expenditure of $243,000. In 2009, the first full year after lubrication reliability changes, this annual number dropped dramatically to $83,000. LE spent an average of $76,000 annually in the five years since the program was implemented on repairs and maintenance of equipment (Figure 5).

Using condition-based monitoring and oil analysis, LE also drastically decreased its oil usage. From 2008 to 2013, annual lubricant usage dropped from 449 gallons to 67 gallons, for a savings of more than $11,000.

Reducing lube change-outs, as well as repair and maintenance tasks, contributed to significant labor savings. In 2008, 672 hours of labor were dedicated to maintenance and repair tasks; in 2013, that dropped to 120, for a savings of nearly $10,000 (Figure 6).

Looking back, the main drivers that helped LE on this journey were:

• Supportive top-down leadership;
• Willingness to invest equally in both people and mechanical assets;
• Detailed plan of attack;
• Patience (organizational stamina);
• Quantification of results.

With similar drivers in place, your organization can achieve the same positive results. The most important thing to do is take that first step and get started. Soon, you will be on your way to finding the hidden plant within your facility.

Darren Booth, CLS and vice president of Manufacturing Operations, has worked for Lubrication Engineers, Inc. for 25 years. Darren currently oversees plant operations, consisting of manufacturing, product handling, traffic and maintenance. Through his role in helping implement lubrication reliability throughout the operation, he has been a catalyst in lowering LE’s total cost of ownership of its mechanical assets.