Optimising service levels

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Universal Components, formerly Multipart Universal, distributes spare parts to the commercial vehicle aftermarket. It specialises in the supply of ‘pattern’ parts (alternative to original equipment) to factors who, in turn, supply the end users like garages and fleet operators. Among the market leaders with sales of £10M per year, it supplies more than 1,000 commercial vehicle factors from 30-plus countries spanning Europe, the Middle East, Africa and Asia.

Their 10,000sq m Sheffield warehouse processes 1,300 order lines per day and stocks 8,200 products totalling £2M in stock value. High service levels and all-encompassing product range drive Universal’s success, but the long replenishment lead times of many products add an extra challenge. The high quality, low cost pre-requisites for pattern parts mean they source the majority from far-away countries like China and India whose combined manufacturing and transport times are in excess of eight weeks. Such long replenishment lead times make the maintenance of high service levels without excessive stockholding a difficult balancing act.

The commercial vehicle factors rely on Universal’s high service levels and broad product range, enabling it to minimise its own stockholding and offer next-day availability on many non-stocked parts. However, this makes the factors’ requirements immediate, and they will buy any parts that Universal cannot supply from a competitor, which is lost revenue.

Failure to regularly satisfy the factors’ requirements would jeopardise Universal’ position as first port-of-call for its regular customers. The converse, of course, is that high service levels are an excellent aide for winning new customers, should the competition falter. Universal has long appreciated the importance of high service levels and, five years ago, they benefited greatly from a wider RAC inventory optimisation project. RAC, formerly known as Lex Group, has several divisions managing inventory with a total stock value in excess of £400M and at the time had just won a major spare parts contract, which committed to 99% service levels. Sophisticated inventory optimisation software was implemented which managed service levels, stockholding and replenishments.

As Universal used the group’s IT systems, it, too, was able to enjoy the benefits of the inventory optimisation software. The whole project was very successful for RAC with Universal alone reducing stockholding by in excess of 20% to £2M and markedly improving service levels. The results were increased sales, lower stockholding and reduced obsolescence, all contributing towards increased profitability and strengthening Universal market position over the period. Universal became a stand-alone business in September 2004 following a MBO but it wants to retain the large company best practises from life with the RAC. Having implemented a replacement enterprise resource planning (ERP) system by February 2005 when IT support from the RAC finally ceased, it approached Signum Solutions, an Entalysis partner, for an inventory optimisation solution.

Trevor Skelton, operations manager, takes up the story: “Prior to the RAC inventory optimisation project, we used the forecasting functionality within the group ERP system which was satisfactory, but the benefit from the inventory optimisation software was considerable: stockholding and obsolescence fell dramatically, while service levels improved. Realising that we would only return to our inventory position of five years ago if we relied on the forecasting functionality within our new ERP system, an inventory optimisation solution was considered an essential part of our new IT systems.”

Skelton acknowledges that Universal was fortunate under the RAC, being able to ‘piggy-back’ on the inventory optimisation project: “The project was initiated by the large RAC divisions, whose considerable stockholding justified the six-figure solution cost. We were able to take advantage because it integrated with the group ERP system, but in our new guise as an SME, we needed an inventory optimisation solution we could afford to buy by ourselves.”

Inventory optimisation functionality ceased along with RAC IT support by February, so the clock was ticking for Signum Solutions to pick up the inventory optimisation ‘baton’. The first step was for Signum to understand Universal business and the importance of inventory within it. “The service level to stockholding cost trade-off is crucial to Universal Components,” says Skelton. “Customers buy regularly, but the number of product lines on each order is solely determined by stock availability: out-of-stock items will be sourced from the competition which is lost revenue, pure and simple. Furthermore, if stock-outs become too regular, then we risk losing our position as the first port-of-call for that customer.

“The flip-side is the cost of stockholding and replenishment, which constitute a significant proportion of our business costs and, hence, profitability. We have to ensure that our stockholding is apportioned so as to maximise the service levels of our critical products – not only the fast-movers but also the strategic items which customers expect to be available.”

Signum Solutions implemented Entalysis ISM300 (Inventory Strategy Manager), integrating it with the new ERP system and running on the same SQL Server database. Implementation took place over seven days in March, achieving a ‘go live’ date just four weeks after the project go-ahead. For the Universal implementation, Entalysis ISM300 analyses product variables and demand history, returning a re-order level and economic order quantity to the ERP system.

Entalysis ISM300’s scenario modelling enables Universal to balance service levels against forecasts for stock value and obsolescence risk. Entalysis ISM300 identifies exceptional demand and excludes it by applying multiple service levels, ensuring the underlying, repeating demand of each item is satisfied at a high service level. “The fast-movers, sold week-in, week-out are an easy decision to stock at high service levels, while items only sold once in the last year are an easy non-stock decision. Entalysis ISM300’s strength lies in managing the exceptional demand that the items between these two extremes suffer. Our stockholding would balloon significantly if we did not exclude the exceptional demand,” says Skelton. The flexibility in which service levels are applied has allowed Universal to improve service levels while maintaining the same £2M stockholding. The result is a 15% increase in order lines since Entalysis ISM300’s introduction 14 weeks ago, which is set to improve further as the revised replenishments from the far-away suppliers arrive.

Although Universal stocks 8,200 items, its product range stretches to 20,000 items. Entalysis ISM300 analyses demand over the whole product range, returning the revised stock parameters based on the selected stock strategy to the ERP system. “With such a large product range, a fast process is vital. We can vary the depth of Entalysis ISM300’s analyses, selecting a particular product group and then reviewing the strategy, forecasts and reports based on service level group or ABC code, right down to the item level. The combined user overhead is low at no more than a day per month, which is important when the users have other roles beyond inventory optimisation.”

Entalysis ISM300’s scenario modelling allows stock value analysis for different vendors supplying the same parts but on a different lead-time. This aids the decision for when we should source a product with growing demand from a far-away supplier with lower cost but a longer lead-time. Entalysis ISM300 also calculates economic order quantities to minimise the total cost of inventory by balancing the fixed cost of ordering against the variable cost of stockholding. Skelton summarises the project: “Entalysis ISM300 has been running for 14 weeks now and has already made a significant impact. In comparison with the start of the year, when we were still using the RAC systems, order lines are up 15%, which is solely down to improved service levels, while stockholding remains constant at £2M. Most importantly though, our customers have noted our improved service levels and fed this back via our internal and field sales staff, which is a ringing endorsement of the project’s early success.”

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