1 Integrated Demand Planning Managing the Work-to-Materials (W2M) Process Lance Schultz, Director, Materials Logistics and Planning PG&E John Sequeira, Partner ScottMadden, Inc. January 17, 2011 Platts Strategic Supply Chain for Utilities Trump International Beach Resort Miami Beach, Florida
Questions We Will Address What is effective demand planning? What does it take to make it work? How does it generally work today? How could it work? What has PG&E done to improve the process? What results have been achieved? 2
What is Demand Planning? DEFINITION: The ability to meet the following criteria for your internal customers: The right materials Right item (e.g., SKU, Cat. ID. Commodity Code, etc.) Right quantity Right quality At the right time Neither early nor late At the right place (e.g., warehouse, job site, etc.) At the right price (e.g., lowest price consistent with obtaining the right materials) 3
What Does It Take to Make It Work? Internal Customer s Responsibilities Requirement Owner Enabler Understanding of the work to be performed Understanding of the materials required to perform the work Knowledge of when the work will be performed Engineering Construction Maintenance Engineering Construction Maintenance Work Scheduler Maintenance Asset management system Work control system Accurate work packages Accurate bills of materials (BOMs) Supervisor experience Work scheduling system visible to all participants Accurate and stable need dates 4
What Does It Take to Make It Work? Material Management s Responsibilities Requirement Owner Enabler Visibility to projected materials requirements Understanding of historical material usage patterns Understanding of internal customer service levels (risk tolerance) Understanding of when to buy more materials (reorder point) Inventory Analyst Inventory Analyst Inventory Analyst Inventory Analyst Procurement Analyst Material requirements (MR) aggregation Accurate and stable need dates Inventory optimization software Analyst experience Inventory optimization software Advance notice Accurate and stable need dates 5
What Does It Take to Make It Work? Sourcing & Procurement s Responsibilities Requirement Owner Enabler Visibility to projected materials requirements Knowledge of available suppliers and market conditions Knowledge of internal and external lead times Buyer Buyer Category Team Buyer Category Team Automatic ROP notice Visibility to capital plans Adequate lead time to source effectively Market intelligence Materials requirement (MR) aggregation Supervisor experience Purchasing system integrated with inventory management 6
How Does It Work Today? Maint./Repair Maintenance Planning (Need) Engineering (Specification) New 2 2 1 1 Construction Planning (Need) Maintenance Planning (Need) 3 3 2 2 1 1 3 3 2 Reorder Materials Management (Replenish Inventory) 1 3 Buyer 2 2 1 1 3 3 Contracts/ Legal Work Execution Teams 2 1 3 2 Supplier Distributor 1 3 7
Issues that Utilities Face Specification Process Engineering inclined to over engineer requirements Specification content often not actionable by buyers Work Planning Process Work execution schedules are not visible to materials management, buyers, or suppliers Bills of materials (BOMs) are missing or inaccurate Work packages do not reflect actual materials needed Lead time to need date is shorter than sum of actual internal and external lead times Need dates are subject to frequent changes 8
Issues that Utilities Face (Cont d) Replenishment Process Reorder points based upon personal judgment rather than inventory optimization practices or algorithms Min/max or ROP updated infrequently; do not reflect current usage patterns Non-stocked materials procured for specific projects may sit in inventory for many months until schedule allows or budget is available Over engineering of products increases the SKU count and the replenishment complexity Unbalanced work resource planning creates demand spikes creating a bullwhip effect on material supply chain 9
Issues that Utilities Face (Cont d) Sourcing Process Buyers are unfamiliar with the material or services to be acquired. (It s just a process) Buyers know less about suppliers and market conditions than internal customers. (Cannot add value) Buyers not trained or skilled in negotiation 10
Issues that Utilities Face (Cont d) Supply and Distribution Process Suppliers do not fully understand the specification Supplier are responding to a specification rather than a need. They cannot suggest lower-cost alternatives Suppliers unable to creatively add value Purchasing and Contracting Process Purchasing process may preclude meaningful modifications of standard T&Cs T&C not tailored to specific materials or services Utility T&Cs may add significant cost without the utility being aware of the impact 11
The Bottom Line TOO many owners TOO little ownership TOO many handoffs and repetitive cycles Costs TOO much Takes TOO long 12
How Could It Work? Collaborative Demand Planning Approach Maint./Repair Maintenance (Need) Engineering (Specification) New Construction (Need) Maintenance (Need) Reorder Materials Management (Replenish Inventory) 1 Category Planning Teams 2 3 Work Execution Teams Supplier Distributor Contracts/ Legal 13
The PG&E Experience Problem Statement (circa 2009) Disjointed communication and no formalized planning processes with partners up and down the supply chain resulting in opportunities to improve total cost of ownership (TOC) of materials and improved inventory optimization 14
The PG&E Experience (Cont d) Approach Total supply chain engagement model Customer procurement plans LOB executive alignment Supplier scorecards Deploy key demand planning initiatives 15
Key Demand Planning Initiatives Key Materials Planning Initiatives Projected Benefits Date Optimize inventory levels on all facilities Implement SAP forecasting tool Gain inventory efficiencies through supplier capabilities Deploy supply & operations planning initiative (S&OP) Optimize value of services to T&D Optimize working capital (for other higher ROI initiatives) Better governance Increase inventory visibility Increase forecast accuracy SAP integration Hands-off PO generation approach Speed up product life cycle and utilization Improve visibility on the supply chain Leverage supplier inventories Reduce carbon footprint Increase strategic alliances internally and with vendors Synergy toward cross-functional organizational goals On going Completed Dec 2010 Kicked Off Feb 2010 16
Supply & Operations Planning (S&OP) S&OP is an integrated business management process through which the executive/leadership team continually achieves focus, alignment, and synchronization among functions. It routinely reviews LOB customer demand and supply resources and re-plans quantitatively across an agreed rolling horizon Success Factors On-going, routine meetings Structured agendas Pre-work to support inputs Cross-functional participation Empowered participants An unbiased, responsible organization to run a disciplined process Internal collaborative process leading to consensus and accountability An unbiased baseline forecast to start the process Joint supply and demand planning to ensure balance Measurement of the process (metrics) Supported by integrated technology External inputs to the process 17
S&OP Process SUPPLY CHAIN Verify historical data for dependent and independent demand provide baseline forecast Contract intelligence Demand supply best practices Validate financials assumptions (meters, transformers, others) WMIS materials report (future) Space/transportation support Obsolete/excess inventory LOB 12-month project forecast/ dependent demand MWC/MAT impacted Timeline Material codes/groups impacted CAEPS data/reports (future) Product tech knowledge and design enhancement The S&OP Meeting EXECUTABLE CONCENSUS PLAN SUPPLIERS Validate manufacturing and distribution capacity ETA Provide market insight Obsolete/excess inventory Product technical knowledge 18
Four-Stage S&OP Process Maturity Model Where we are STAGE 1 Marginal Process STAGE 2 Rudimentary Process STAGE 3 Classic Process STAGE 4 Ideal Process Internal Meetings Sporadic scheduling Formal Meetings Routine schedule Spotty attendance and participation Formal Meetings 100% attendance and participation Event-Driven Meetings Scheduled when someone wants to consider a change or when a supply-demand imbalance is found Disjointed Process Separate, disjoint demand plans Supply plans not aligned to demand plans Interfaced Process Demand plans reconciled Supply plans aligned to demand plans Integrated Process Demand and supply plans jointly aligned External collaboration with limited number of suppliers and customers Extended Process Demand and supply plans aligned internally and externally External collaboration with most suppliers and customers Minimal Technology Enablement Multitude of spreadsheets Stand-alone Applications Interfaced Stand-alone demand planning system and multi-facility APS system Systems interfaced on a oneway basis Applications Integrated Demand planning packages and supply planning applications integrated External information manually brought into the process Full Set of Integrated Technologies An advanced S&OP workbench External-facing collaborative software integrated to internal demand-supply planning systems TARGET 2010 2011-2012 2013-2014 19 The Journal of Business Forecasting, Fall 2004
PG&E Advancing in the Maturity Model STAGE 1 Marginal Process STAGE 2 Rudimentary Process STAGE 3 Classic Process STAGE 4 Ideal Process 2008-2009 2010 2011-2012 2013-2014 Ad hoc process Not formal Timeline and detail varies Spreadsheet based, report exhausting 43 LOB partners engaged Engage current LOB partners with new S&OP process Engage MWC management Identify other key projects and deploy S&OP Stage 2 process Get alignment from T&D leadership at the executive level Integrate CAEPS process and WMIS reporting into the process as it becomes available Leverage CAEPS and WMIS to drive communication and meeting agenda Integrate WMS in the process Use 2010 experience and diagnostics to redefine process based on business needs Integrate suppliers early in the process as needed Leverage multi-echelon SAP tool with CAEPS, WMIS, and WMS reporting to drive supply-demand balance consensus Suppliers engagement driven by capital plan a year in advance Integrate suppliers as part of the action register The Journal of Business Forecasting, Fall 2004 20
Benefits - Scope Key Benefits for T&D Integrated supply-demand plans will result in faster, more committed response by suppliers. Standard replenishment processes on all facilities will reduce the amount of expedites. Integrated systems (on SAP backbone) will enable T&D to maximize the use of existing inventory regardless of location (visibility). In sync with technology, new tools are being implemented in SCM (SAP Forecast, WMS) and T&D (CAEPS). Builds team. Builds partnerships. Builds accountability. Builds engagement. Release of working capital can be used on more profitable initiatives. Reduced code complexity will ease job estimation look-ups. Scope (for optimization) Fast Mover Consumables (MRO) Fast Movers Transformers Safety Equipment Tools Minor Materials Rapid Response (dead stock) Meters Obsolete/Inactive Scope (for S&OP) Long Lead Time/Critical Materials Not on Scope (keep as is) Critical Emergency Equipment Emergency Spares Storm Inventories Rapid Response (active inventory) as per SLA Location DCs DCs, RML DCs DCs DCs RMLs (2) Fremont Locations DCs, RMLs, Diablo Location DCs Location Across Territory Across Territory DCs RMLs 21
Q&A 22
23 Thank You Lance Schultz lcsg@pge.com (415) 973-9797 John Sequeira johnseq@scottmadden.com (704) 560-5061