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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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
(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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82nd Annual Educational Conference September 15-17, 2013
(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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
Policy & Process – 2
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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82nd Annual Educational Conference September 15-17, 2013
Policy & Process – 3
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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82nd Annual Educational Conference September 15-17, 2013
Policy & Process – 4
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
Tools & Technology – 2
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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82nd Annual Educational Conference September 15-17, 2013
Tools & Technology – 3
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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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82nd Annual Educational Conference September 15-17, 2013
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