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Optimizing Inventory in Today’sChallenging EnvironmentMaximo MondayAugust 11, 2008 2008 IBM Corporation1

Agenda The Value Proposition Case Studies Maximo/DIOS Offering Getting Started Q&A2 2008 IBM Corporation

Current Inventory Management Practices are Inadequate andPose Additional Risk to Meeting Target Service LevelExpectations 3rather than more progressive inventoryclasses.Production dictates the lot sizes.Demand forecasts are created at toohigh a level to drive meaningfulinventory targets at the stock keepinglocationSafety stocks are calculated usingordinary techniques.Management reactively focuses onshortages.Inventory management theories aremisinterpreted by setting incorrectparameters.Optimal Stock versus Actual StockActual StockOptimal Stock87Stock ValueInventory levels in mostcompanies are far from optimaldue to a number of influencingfactors: Traditional ABC classification is used6543210123456ClassificationThe typical problem our clientsexperience is keeping excessiveinventory while achieving lowavailability (Service Levels &Fill Rates). 2008 IBM Corporation

To Meet these Challenges, Companies are Starting toRecognize that they Need Better Concepts and Tools toManage their InventoriesHow companies set inventory policies is evolving from generalplanning rules to a more sophisticated approach that balancescost and service at each SKU/location across the entire supplychain.This change is being driven by increases in SKU complexity,pressure to deliver customer service improvements, andshareholder performance through cost controls.Top Drivers For Improving Inventory ManagementHow do you set your inventory rt salesgrowth in newchannels andgeographies0%Customerretention issue,need to improvecustomer serviceGeneral Rules(e.g. WOS)Gain market sharethrough superiorservice & productavailabilityMRP/DRP or APSMulit-echelonoptimizationBasicAdvancedDegree of sophistication63%26%ABCD CategoriesReduce inventorycarrying costs andother relatedexpenses“Inventory Management is more than justinventory reduction. Companies have startedrealizing the importance of inventory as acompetitive advantage.”Source: Aberdeen Group4 2008 IBM Corporation

IBM has Developed a Body of Leading InventoryOptimization Practices based on Many Engagements If your operation is not .– Creating and updating demand forecasts for each part/location on a daily orweekly basis using methods that minimize forecast error– Measuring and maintaining service levels by asset use/part/location and usingthose segmentations to drive differentiated inventory policies– Calculating the individual safety stock, reorder quantity, and stocking locationfor each individual part/location on at least a weekly basis– Optimizing the trade-offs between stock value and order quantity andfrequency– Considering inventory carrying costs, order processing costs, and inventoryvalue in setting inventory targets and reorder quantities– Measuring replenishment cycle time and variability for each part/location andmanaging to minimize impact on inventory levels Then– It is highly likely that a rigorous analysis of your supply chain managementpractices, tools, and policies will result in identification of specific actions that willboth reduce inventory investment and increase inventory effectiveness forsupporting asset availability and efficiency5 2008 IBM Corporation

An outgrowth of our experience has been development of atool/solution by IBM Research that incorporates andapplies our leading inventory management practicesWhat is Dynamic Inventory Optimization Solution (DIOS)?DIOS identifies inventory reduction opportunities by determining the optimalinventory at the part level. DIOS can consider many factors such as service levels,demand variation, supplier lead-times, batch size, overage and underage levelsand can be used to identify opportunities for Quick Hits for reducing Inventory orimproving Service levels.DIOS Optimization GoalsMaximoDIOSDemandForecasting Optimal lot size for each partWorkManagement Optimal safety stock for each part Optimal classification of part’s Optimal replenishment policies for eachpart class Reducing excess inventories Exceeding service level expectations6InventoryManagementProcurementSafety StockCalculationInventoryClassificationBatch s 2008 IBM Corporation

IBM DIOS Provides Powerful Capabilities thatComplement ERP/APS and Minimize Management RiskDIOS CapabilityRequirement Accurately ForecastDemand Minimize Demand andSupply Risk Optimize InventoryReplenishment Replenish InventoryUsing Forecast Analytical Excellence 7Advanced statistical forecasting engine capable of automaticallypicking the optimal algorithm for each SKUAbility to predict promotion, seasonal and other periodic effectsProven real-time system forecast performance including datacleansingAbility to optimise forecast time buckets and parametersCalculate optimal safety stock levels using a range of differentsafety stock calculation schemesDemand classification (effect of demand variability on safety stocklevels)Match forecastability to safety stock requirementsDetermine EOQ and optimal replenishment frequencyUnderstand the tradeoffs between ordering frequency, inventory andservice levels using the K-curveModel constraints such as delivery lead times, vendor minimumorder quantities as well as price breaksPowerful simulation capabilities to evaluate alternative modelsAbility to transfer optimised parameters and forecast toreplenishment systemsFlexibility to incorporate additional attributes in the analysis and passthese back to replenishment systemOptional use of the replenishment moduleERP/APSPowerful reporting and analytics, selection and drill downcapabilitiesNumerous graphical representations helping to develop a deeperunderstanding of your businessReporting flexibility with user definable fields 2008 IBM Corporation

Superior Inventory Management Delivers Immediate andSubstantial Benefits to the Bottom LineTypical Inventory Overage/Underage ChartExample Benefit Calculation( 22.4 Base Inventory)3000ThousandEUR200010000Net Inventory Reduction (32.5%) 7.28MOne time cash savings at 75%1234567salvageable stock 5.46MCarrying Cost 15% * 7.28M-1000Inventory ClassesAnnual Carrying Cost Savings 1.09MTotal 5-Year Net Present Value of 8,000,000(discounted at 10%, including cost of software and services)Note: No value attributed to improvedservice level8 2008 IBM Corporation

An Overwhelming Majority of IBM DIOS Engagementshave Identified Significant Inventory ReductionPotential% of Inventory Reduction Achieved In all these recent 21 projects there was only one client who waspreviously approaching real optimal inventory levels7063605250434055 Annual Usage Value (Million )Note: Annual Usage Value (AUV) annual value of the goods distributed from the warehouse.9 2008 IBM Corporation

Agenda The Value Proposition Case Studies Maximo/DIOS Offering Getting Started Q&A10 2008 IBM Corporation

Large European Utility CompanyImproving inventory management in an MRO environmentEuropean Utility, a major electricity generator and nuclear powerChallenge station operator, wanted to implement a wide-ranging SupplyChain Strategy. The company had a target of reducinginventory, as well as reducing the risk of lost revenue due to theunavailability of spare parts. With 369,000 SKUs and inventoryincreasing at the rate of 4M per year, European Utility neededto quickly identify ways to optimize its inventory levels to supporthigh service levels.SolutionEuropean Utility selected IBM to install and integrate theDynamic Inventory Optimization Solution to help improve themanagement of their inventory. In addition to optimizing theinventory policies, a variety of process, organization and ITimprovements were made to sustain the benefits.The client’s materials and planning manager said ".this tool isthe best I’ve seen for my needs."Benefits Contributed to client’s target of reducing inventory by 20M Planned reduction on the loss of revenue due to theunavailability of spare parts Improved inventory management enabled higher up-time ofpower station assets through the use of category specific, riskinformed best practices11 2008 IBM Corporation

Global Automotive OEMOptimizing inventory despite erratic customer demand patternsChallenge OEM wanted to reorganize and optimize their world-wide spareparts business. The challenge was to model the cost structureof their logistics processes in great detail and to determineoptimal replenishment strategies for each part in order tominimize these costs while guaranteeing a prescribed globalservice level. Calculating safety stock levels for parts withhighly sporadic demands was one of the biggest problems tobe solved.SolutionBased on the IBM Dynamic Inventory Optimization Solution theIBM team designed and implemented a customer-specificoptimization kernel around an SAP APO implementation fillingthe functional gaps of SAP.Benefits12The solution allows the customer to run its spare parts businessat minimum costs while ensuring to keep a target service level.The replenishment planning system implemented provides ahigh degree of automation and allows the planners to quicklyfocus on problematic parts. By using one of the varioussimulation scenarios the customer is able to compare differentplanning strategies and analyze what-if scenarios efficiently. 2008 IBM Corporation

The analysis of a large transit authority’s sample datashowed an opportunity to reduce inventory whileincreasing part availability Creating a segmented inventory strategy Combined with better demand forecasting And setting of optimal inventory and replenishment policies Is estimated to yield savings* ofFor SampleData Set(172 items, 7.1M)Extrapolated ToTotal Inventory(20,000 items, 80.0M)* at an average service level of 0.7M**99.5% 1.6M***95% 9.0M**99.5% 18.0M***95%5-year NPV, excludes costs** Assumes the entire expected inventory reduction can be realized*** Assumes a maximum of 20% inventory reduction13 2008 IBM Corporation

Agenda The Value Proposition Case Studies Maximo/DIOS Offering Getting Started Q&A14 2008 IBM Corporation

What is “Inventory Optimization with Maximo” An “integrated module”– Leverage proven Inventory Optimizationsolution (DIOS)– Implement against Maximo data– Configure and execute within Maximo Extending standard Materials andProcurement Management modules– Data source is standard Maximo inventoryand procurement data– Optimised inventory configuration feedsback into standard Maximo data Analysis and “Lights-Out” operation– Background (daily) optimization– On-line analysis, simulation andconfiguration15 2008 IBM Corporation

What is Maximo Inventory Optimisation?Maximo work process & integration appsMaximo – DIOS Integrationmaterial supply (orders)Purchasingmaster data, demand, forecastmaterial demand (non-stocked items)material demand (reorder)optimised inventory parametersInventorymaterial demand (stocked items)Analysis &Optimisationinventory consumption (issues/returns)Work Management Enhance existing Maximo capabilities for purchasing, inventory, andwork management IBM DIOS optimisation algorithms and scenario capability Provides actual Maximo data for optimisation Derive direct value through DIOS optimization (cost reduction etc) andimproved Maximo value realisation (inventory availability to increaseasset service levels/utilisation with reduced inventory costs)16 2008 IBM Corporation