Total Fastening Service (TFS) in SCM

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2 OF ILS ILS is a principal division of Park-Ohio, which is a 153-year-old company, headquartered in Cleveland, Ohio, U.S.A. It is a leading provider of business-to-business supply chain logistics services and a manufacturer of highly engineered products for industrial original equipment manufacturers (OEMs). Between 1995 and 2002, the company grew significantly. Over this period, the company's net sales increased from $289.5 million to $636.4 million. The company employed approximately 3,200 persons worldwide. ILS is the largest U.S. fastener logistics provider of Class-C production components to 15,000 OEMs, other manufacturers and distributors. ILS provides major OEMs with a variety of value-added and cost-effective supply chain management (SCM) solutions, delivery capabilities, geographic reach, extensive production selection, as well as price and reputation for high service levels. ILS specializes in the process of planning, implementing, and managing the physical flow of production components to large OEMs from the point of origin to the point of use. The principal customers of ILS are OEMs including Fortune 100 corporations in semiconductor equipment, technology, aerospace and defense, heavy-duty truck, vehicle parts and accessories, industrial equipment, electrical controls, HVAC, appliances and motors, and lawn and garden equipment industries. ILS operates out of 64 branches located throughout Americas, Europe and Asia, and has a central distribution center located in Dayton, Ohio.

3 Total Fastening Service (TFS) in SCM ILS offers customers SCM services and comprehensive, on-site management for most of their Class-C production component needs. Class-C components are characterized by low per unit costs relative to the indirect costs of vendor management, quality assurance, inventory management and delivery to the production line. Examples of Class-C items include nuts, bolts, screws, washers, rivets, clips, clamps, cable ties, caps and various plastics and rubber components. In addition, ILS delivers a broad range of higher cost per unit products such as valves, fittings, steering components and many others. SCM customers receive various value-added services, such as part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time (JIT) delivery, electronic billing services and ongoing technical support. ILS also provides engineering and design services to its customers. Applications-engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate Class-C components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. ILS as a single-source inventory management solution represents a cuttingedge strategy, which has driven the company to continuously reengineer its SCM processes. The entrepreneurial nature of the company has led to an increasing expansion into JIT logistics solutions, as OEMs continue to simplify their suppliers. These changes have occurred largely in response to the changing

4 nature of the computer and information technology (IT) industries. In the 1990s, the company began introducing the disciplines of SCM, materials management and JIT delivery. The company's ATTITUDE spirit played a major role in driving this transition, as the chairman, president, and CEO of the company, Edward F. Crawford stated that "[o]ur company's management has worked to foster an entrepreneurial spirit in each of our independently operated business units. This spirit has served us well in the development. We believe this attitude is one of the fundamental reasons for the current and future success of our company." The company foresaw two major trends. First, quality would be a key differentiator. Second, customers would increasingly outsource more of their processes as more and more OEMs want to be assemblers rather than manufacturers and that a company's responsiveness to its customers would be a strategic differentiator. As a result, a key element of ILS's growth strategy for its customers involved performing value-added full-services. In the mean time, ILS has established closer relationships with customers as well as suppliers. ILS management team realized that by establishing closer relationships with suppliers, the company could offer better service to OEMs. Increasing volumes with major OEMs means increasing volumes purchased from suppliers, thereby allowing ILS to negotiate preferential ramp-up, quality, technology, and pricing capabilities that could be passed on to OEMs. ILS ships finished products directly to the customer workstations. This growth has been accompanied by major global expansion, involving the acquisition of some of its major customers' outsourced facilities. ILS's SCM services are typically provided to customers pursuant to TFS contracts enable ILS's customers to both reduce p r o c u r e m e n t costs and better focus on their companies' core manufacturing competencies b y : 1 ) Significantly reducing the administrative and labor costs associated with f a s t e n e r procurement by o u t s o u r c i n g certain internal purchasing,

5 quality control and inventory fulfillment responsibilities; 2) Reducing the amount of working capital invested in inventory; 3) Achieving purchasing efficiencies as a result of vendor consolidation; and 4) Receiving technical expertise in the selection of fasteners and other components for certain manufacturing processes. OEMs continue to make it a priority to reduce their total cost of purchasing and handling of production components. Due to the low unit cost and the large number of different Class-C items used to manufacture or assemble a single product, administrative and overhead costs comprise a substantial portion of an OEM's Class-C related costs. ILS provides a wide array of value-added services and is a reliable source for JIT delivery and is well positioned to capitalize on these trends. In addition, OEMs are increasingly relying on suppliers to provide design and applications-engineering support, enabling more efficient use of internal engineering resources thereby allowing ILS to increase the amount of low unit cost items supplied to OEMs. The value-added vision is being pushed even further, with OEMs focusing on product definition and marketing. OEMs can approach companies like ILS and state, "Here is what I want fasteners and accessories to be and what I want them to cost-how it works is up to you!" This allows ILS to increase its leverage with suppliers. ILS can offer the supplier a greater chance to the OEM's product. However, this means that the supplier must be able to offer the most competitive price. ILS has a central technical center that is certified by the American Accredited Laboratory Association (2ALA) and has a complete range of in-house resources that provide technical support to its customers. ILS offers this unique facility with the capability to assist its customers in both product design and application analysis. ILS application engineering specialists work closely with customers in the following areas: 1) Design review; 2) Product tear-downs; 3) Application testing; 4) Product standardization; 5) Product consolidation; 6) Line evaluations; and 7) Joint i n t e g r i t y analysis. To improve its valueadded and cost-effective s e r v i c e capability, ILS has also d e v e l o p e d i n t e r n a l resources and a c q u i r e d IBM's planta u t o m a t i o n s o f t w a r e product lines and related assets,

6 enabling it to meet these additional customer requirements. ILS delivers products directly to customer workstations, and performs traditional channel and warehouse activities such as build-to-order and configureto-order systems. In doing so, ILS minimizes the total cost of acquisition, which is a function of information, logistics capability, early design engagement, and supply-base management. ILS takes a role that orchestrates multiple suppliers into products and fulfills orders through multiple distribution channels with minimal cycle times and inventory, in order to reduce total cost with a focus on delivering value in the market. Its core competence has changed from a focus on manufacturing and logistics to manufacturing, logistics, and customer value. Global Sourcing A distinguishing feature of logistics providers compared with distributors in the fastener industry is the opportunity for international growth. As a service provider, rather than simply a price-sensitive product provider, logistics companies have room for international expansion. The secular market share gains that U.S. logistics providers are achieving domestically are duplicable in international markets. ILS's organization is primarily focused on two major functional processes, which reflect its two major channels: global sourcing and order fulfillment. The global sourcing function includes supply-base management, controlling total cost, creating and exchanging long-term value, and creating value partnerships with suppliers. The latter point emphasizes ILS's objective of becoming an agent for its suppliers in exchange for preferential pricing, technology, and so forth. The sourcing function has evolved over time. In the early 1990s, supply management between customers and suppliers was primarily transactional in nature. Later, customers developed strategic supply-base management initiatives that focused on optimizing the supply base, measuring supplier performance, developing relationships with key suppliers, and improving quality and delivery performance. In the new century, ILS executives believe that elements of both prior periods will be retained, but a new type of relationship with suppliers will need to evolve, focusing on SCM performance. This evolution is driven by the nature of the computer and IT industries. A supplier has several channels available to choose from in doing business with OEMs, with its primary objective being to get its product into the OEM's final product. It can do so through a partsdistributor, directly through the OEM's purchasing function, or via competing contract logistics providers such as ILS, and so on. The challenge to ILS becomes how to ensure that its channel provides the lowest total cost of acquisition for customers, thereby creating the greatest value. The lowest total cost of acquisition is a function of improved access to information, logistics excellence, design and applications-engineering support, and responsiveness. The challenge comes in replicating the capability across multiple parts and suppliers in order to become the channel of choice for all major products provided by suppliers. ILS currently has over 900 suppliers globally. In the past, supplier quality was not as much an issue, because the choice of suppliers was dictated by OEMs. Because ILS is increasingly being challenged to work directly with suppliers, it has become more involved

7 in quality audits, quality assurance and performance measurement. However, quality has not been a major problem because most suppliers that ILS is engaged with are top suppliers, and in this industry, quality is a critical prerequisite for entry. OEMs today require suppliers with global capabilities because they must be able to ship to manufacturing locations. ILS has also helped develop smaller regional suppliers into global suppliers. ILS purchases substantially all of its Class-C and other components from third party suppliers. ILS executives believe that raw materials and component parts other than certain specialty fasteners are available from alternative sources. ILS has multiple sources of supply for standard products, but has limited supply sources for certain specialty products. Approximately 25% of ILS' delivered components are purchased from suppliers in foreign countries and regions, primarily Canada, China, Japan, Korea and Taiwan. The Company is dependent upon the ability of such suppliers to meet stringent quality and performance standards and to conform to delivery schedules. To facilitate relationships with suppliers, ILS constantly sends its executives or on-site managers to visit suppliers. These include new parts development, sourcing program formation, and quality audits, which develop better relationships and understanding with suppliers and manufacturing. ILS employs a set of materials measures that are consistent with the theme of SCM excellence. The primary measures of supplier performance include: 1) Quality system to ISO or QS standards; 2) Supplier quality programs; 3) Reliability; 4) Performance measures; 5) Fulfillment lead time; 6) Inventory risk reduction; and 7) Lowest price. ILS believes that more OEMs will outsource procurement. ILS provides a variety of value-added, cost-effective procurement solutions and has a history of being a low overhead organization, which has permitted it to perform sourcing processes more efficiently than many of the larger OEMs. Furthermore, because ILS is purchasing multiple families of both special and standard components across multiple customer relationships, its aggregate volumes purchased in many cases surpass the amounts purchased by any single OEM. Its position expressed to OEMs is that "We have the infrastructure; your concern should be whether our expertise is the best in the industry." Inventory Planning-"Design for the Supply Chain" Managing supply chain inventories is one of the most daunting tasks at ILS. Because the company deals with many different market segments, each major customer has a customer supply chain manager who is tasked with serving its product needs. Each industry sector has different life cycles, cost constraints, and market windows. Some customers must bring new products to market faster, whereas others emphasize cost reductions, so the constraints between customers are continually evolving. This makes the role of inventory planning even more complex. The major requirements for successful inventory management in the industry are a capability to change upside and downside flexibility in the form of excess inventory and capacity and fulfillment speed, and trade this off against the risk of obsolete inventory or unused capacity.

8 To achieve this capability, ILS is also pursuing a strategy of increasing standardization through a design for supply chain strategy. A good example of this strategy is in the purchase and integration of fasteners. Due to its large customer base, ILS is one of the five largest purchasers in the fastener world. Thus, the issue is not how many fasteners it will purchase, but rather how it will allocate the fasteners it does purchase to customers. Therefore, when negotiating with suppliers, ILS managers do not negotiate at the part number level, but at the capacity level. Technology is constantly changing as new ones enter the field, meaning that ILS must monitor the technology horizon to avoid inventory obsolescence. Technology drives demand management, lead-time, price, and inventories. To manage i n d i v i d u a l c o m p o n e n t s would be impossible, so Pareto analysis (80/20 principle) is used to drive risk management, in terms of weighing off missed shipments versus excessive i n v e n t o r y exposure. Risks can be reduced by using such technologies as Electronic Data I n t e r c h a n g e (EDI) (Table 7), Global Network with All the Right Connections ( G N A R C ), D i s t r i b u t e d A p p l i c a t i o n E n v i r o n m e n t (DAE), Factory Automation (FA),

9 Advanced Equipment Control (AEC), Advanced Process Control (APC), and Graphical User Interface (GUI). Risks can also be reduced by providing the right information to customers on emerging technologies and for suppliers to consider in their designs. Conclusions One of the capabilities that distinguishes ILS from other major competitors in the contract logistics SCM services is its focus on supplychain optimization to create value for its customers and suppliers, as well as its own bottom line. The company has made strategic investments in expanding its range of capabilities and services offered, which help it to wring cost out of the product process, beginning at design and continuing through manufacturing and distribution. ILS is able to offer customized services to meet its customers' unique needs, yet still maintain core common processes. As the company moves forward with these strategies, it will surely need to continue its entrepreneurial spirit, but also to invest in the common infrastructure needed to keep pace with the dynamics of IT systems and computer industries. Maintaining the appropriate balance between this structure and the multiplicity of market needs will perhaps be the greater challenge for ILS. It will see four drivers of ILS's future growth: 1) market share gains from traditional buy/sell distributors; 2) expansion of computer capacity to manage a greater number of customers and fastener SKUs; 3) access to larger amounts of capital to carry the inventory required to add customers and more SKUs per customer; and 4) acquisition of regional and local logistics companies, thereby "rolling-up" this industry. Note: Author welcomes to discussion via JoeZhou_2000@yahoo.com.

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