Developing a Robust Service Parts Supply Chain in a Rapidly Evolving Strategic and Logistics Landscape

Transcription

1 Developing a Robust Service Parts Supply Chain in a Rapidly Evolving Strategic and Logistics Landscape China at the Crossroads of the Global Supply Chain Presented by: Steven Aschkenase David C. S. Brady Shanghai, China April 14, 2004 Supply Chain Supply Management Chain Management Conference Conference

2 The Power of Partnership The Know-How that Helped Build the Legend Extensive service parts operating experience worldclass performance and operating insights for complex supply chains Logistics operations management for over 40 clients in 22 countries Benchmark levels of accuracy and quality-extensive deployment of Six Sigma Asia Pacific HQ in Shanghai Full range of integrated service parts capabilities: strategy development; process design and improvement; technology planning and implementation; human resource and change management; tax planning and optimization, and site selection services Extensive experience in Automotive, Aerospace & Defense, Telecommunications, High Technology and General Manufacturing Nine offices in China Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 1

3 Today s Discussion Service Parts Profit Opportunity Unique Challenges of Service Parts Supply Chains The 12 Key Building Blocks for a Successful Service Parts Supply Chain The Current Reality in China The Unique Strategic Challenges Our Beliefs on How the Market will Evolve Actions You Can Take Today to Provide Near-term Benefit and to Prepare for the Future Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 2

4 Why is Excellence in Service Parts Important? Industry Market Share Profit Automotive 20% 30% 50%+ Aerospace 30% 40% 50%+ Industrial 60% 70% 50%+ Regardless of industry, service parts is a major source of profit Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 3

5 Service Parts Planning is Different Production Planning 1. Demand for parts tied to demand for end item 2. High-volume demand tied to marketing/production 3. Engineering change processes well established 4. Outbound distribution planning and modeling 5. Lower SKU volume production parts only Service Parts Planning 1. Individual parts may require forecasting 2. Low-volume demand tied to parts failure/maintenance 3. Predecessor/successor linkages can be tricky 4. Inventory deployment may require complex tradeoffs 5. Higher SKU volume support parts not in production Source: MSI Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 4

6 Service Parts Warehouses Are Different It is not pallets-in, pallets-out It is pallets-in, 1 s-out Need more detailed control of the work performed in the warehouse: kitting, labeling, picking, shipping, cross docking, packaging, etc. Need more detailed control of shipping Complex return logistics and return processing often exists Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 5

7 Service Parts Building Blocks The Ideal Service Parts Supply Chain 8. Inventory Management 9. Order Management 10. Distribution Operations 11. Transportation Results Customer & Shareholder Value 12. Reverse Logistics Execution Processes Enablers 7. Supplier and Customer Collaboration 6. Performance Management 5. Visibility Foundations 4. Data Management 2. Network Strategy 3. Information Systems Platform 1. Supply Chain Organization, People and Competence Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 6

8 The Reality of China Profile of Chinese aftermarket customers Logistics network Commercial environment Distribution channels Case Study: Heavy Equipment/Machines Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 7

9 Current Customer: First Generation Machine Owner 80% private owners and 20% state-owned enterprise (SOE) 30% own one machine only, 30% own two to three units and 40% a fleet Purchasing decision based on price only counterfeit and will fit parts reduce machine life and OEM reputation Run to destruction mentality poor maintenance and limited understanding of total ownership cost Limited leasing due to resale market and credit issues Local insurance companies insist on the cheapest possible repair this helps the grey market Limited service retention at Dealers Relationship buying is key GUANXI is King Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 8

10 Current Logistics Network: Inefficient and Unreliable Road Network Roads still primitive Express highways are linking major cities, but still inadequate National trunk highway destined to finish by 2010 Air Network Air routes increasing between major cities, but still largely fragmented Passenger traffic takes priority over cargo Air cargo is replete with inefficiencies Rail Network Rail system is the most extensive and used for bulk shipments (>90%) Lack of automation makes the entire system manual and unreliable Intermodal system is mostly broken or non-existent Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 9

11 Current Logistics Network: Inefficient and Unreliable (continued) Shipping Network Barges up the Yangzi, Yellow, and Pearl still taking a large share Limited to commodities Container terminals are being upgraded across the coastal cities Trucking Network Main means of finished-goods transport, but no national network Provincial governments making it tough to be transparent and predictable because of protectionism Road tolls in excess of 20% of total cost of transport Government Regulation Only Chinese companies can distribute across the full range, which leads to cartel pricing High import tax Enforced dual distribution Customs procedures are extremely cumbersome and lack transparency Automation is underway, but bureaucracy prevails Very limited information/visibility. Given unreliable transport, this makes planning very difficult. Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 10

12 Commercial Environment Challenges Most foreign OEM s purchase service parts outside of China Higher purchase prices High logistics costs Excessive import tax Distribution constraints for imported versus domestic parts Difficult to source service parts inside China due to supplier capability issues and logistics costs. Typically second and thirdtier suppliers Including transportation and warehousing, Chinese logistics cost is 30% to 40% of sales for manufactured goods while in the western countries, this is kept well under 10% Non-competitive pricing in China enables will-fit suppliers, counterfeit manufacturers and traders to flourish in the grey and black market Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 11

13 Current Distribution Channels Grey Market: Genuine parts but not sold through the normal authorized channels Will Fit: Non-genuine parts sold through a third party under different brand names Counterfeit: Non-genuine parts but sold as genuine parts All these supply lines are damaging the authorized dealers ability to manage their customer base Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 12

14 Case Example: Heavy Equipment Service Parts Distribution in China Overseas OEM Dealers Customer s Corporation Overseas Grey Market Will-Fit Parts Mfg./Suppliers (Taiwan, Korea) Grey/Black Market (Under-Declaration Value) Traders 40% OEM Parents Genuine Parts Suppliers OEM Factories Grey Market OEM Warehouses Authorized China Dealers by Territories 30% Customers Counterfeit Parts Mfg./Suppliers Grey Market Retailers Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 13

15 Current Realities Can Make Parts Unprofitable Illustrative Example Mature Market Immature Market Market Based Price to End User Profit to Dealer 7-5 Cost of Dealer (import duty, VAT, freight, warehouse, marketing) OEM Price to Dealers Profit to OEM 26-7 Cost of OEM (raw material, labor, freight, warranty, warehouse, insurance, marketing etc) Profitability to Dealer 9% -14% Profitability to OEM 35% -20% Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 14

16 How the Market Will Evolve: Our Beliefs Sourcing of Service Parts in China Shared Facilities and Optimized Networks Increased Asset Management Sophistication and Power by the Hour Use of RFID to Help Cope with Physical Network Challenges Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 15

17 Local Sourcing Can Restore Parts Profitability Mature Market Immature Market LCC Market Based Price to End User Profit to Dealer Cost of Dealer (import duty, VAT, freight, warehouse, marketing) OEM Price to Dealers Profit to OEM Cost of OEM (raw material, labor, freight, warranty, warehouse, etc.) Profitability to Dealers 9% -14% 15% Profitability to OEM 35% -20% 18% To make the local sourcing option work, you must establish a local value-added logistics center for inspection, painting, kitting, etc. Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 16

18 Benefits of Shared Facilities and Optimized Networks Put your brands together Opportunities for Acquisition and JV in China... Do It NOW Consider outsourcing Optimization of network in order to: Improve inventory management Improve parts availability Increase sales Improve transportation management and reduce freight costs Save warehouse space Scale in China can lower cost significantly Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 17

19 Benefits of Shared Facilities and Optimized Networks: Cat Logistics Case Study Before After Improvement Inventory Value $95 M $65 M $30 M Facing Fill Rate 87% 94% +7% Inventory Turns Warehouse Space 1.6 M Sq. Ft. 1.2 M Sq. Ft M Sq. Ft. Number of Facilities The optimal network will help increase your efficiency and lower your logistics cost by 15% Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 18

20 Chinese Customers Will Become More Sophisticated Asset Managers High Asset Optimizer Value extraction philosophy Optimized resource planning Integrated systems Asset Manager Asset Management Breadth/ Depth Asset Monitor Asset management philosophy/business model Limited utilization of analytical tools integrated in decision-making Predictive maintenance philosophy Historical cost and maintenance information Asset management department Lack of asset management incentives Classic Asset Operator Low Low Least initial cost Reactionary maintenance Asset Value Extraction High Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 19

21 OEMs Will Start To Sell Power By The Hour and Lock In Parts and Service Business Standby Time Operating Time Uptime Uptime + Downtime Logistics Down Time (LDT) Parts Availability In the Bin Needed items transportation Source: Northrop Grumman Corporation Administrative Delay Time (ADT) Locating tools Setting up test equipment Finding personnel (trained) Review manuals Complying with supply procedures Communications means not available Corrective Maintenance Time (CDT) Preparation time Fault location time Getting parts Correcting fault Test and checkout Preventive Maintenance Time (MDT) Servicing Inspection Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 20

22 RFID Will Enable High-levels of Service at Lower Costs Strategic/Customer Benefits Cost Supply Chain Benefits Improved Maintenance Efficiency Technicians will be able to quickly determine configuration and maintenance history Reduction in Counterfeit Parts Customer will be able to validate part authenticity Service Level Enhanced Process Discipline Performance Especially in warehouse operations, transportation and logistics Improved Visibility More efficient matching of supply and demand based on timely information RFID s value lies in enabling companies to reach a level of process discipline that is beyond the reach of human interaction or alternative technologies AMR Research Source: AMR Research, Deloitte Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 21

23 Where to Focus Today Develop product and service bundles power by the hour. Educate customers on the total cost of ownership. Consider telematics and remote diagnostics to lock in service and parts Assess opportunities for shared facilities and network optimization. Consider collaboration/outsourcing. Pursue local sourcing for service parts Begin simple RFID pilots build knowledge and capability Get your regional/global service parts supply chain into fighting trim... Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 22

24 Improving Your Service Parts Supply Chain Typical Opportunities for Rapid Improvement 8. Inventory Management 9. Order Management 10. Distribution Operations 11. Transportation Manage Inventory with Statistics Apply Basic Principles to Supplier Management Clean Up Your Inventory Data Customer & Shareholder Value 12. Reverse Logistics 7. Supplier and Customer Collaboration 6. Performance Management 5. Visibility Apply the Lean Methodology to Distribution Staff Key Positions with the Right People 4. Data Management 2. Network Strategy 3. Information Systems Platform 1. Supply Chain Organization, People and Competence Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 23

25 Service Parts Supply Chain Improvements Can Have A Major Impact Performance Index Caterpillar Case Study Productivity Achieved $85 Million Per Year Savings Sales Availability Improved Service From 94% to 96% Base Year Year 1 Year 2 Year 3 Year 4 Year 5 Inventory Reduced Inventory 47% Copyright 2004 Deloitte Development LLC and Caterpillar Logistics. All rights reserved. 24

26