COGMA: Competing in a Globalized World S thg i L H Samarth Gogia, Lance Ho, Sanjeev Vaid, Nattanich Thongkraisaen Feb. 6, 2009
Solution for COGMA Challenges ahead Supply chain optimization Material risk minimization Diversifying customer base Recommendations and implementation plan Risks and mitigation Background Supply Chain Materials New Markets Recommendations Risks 2
Challenges ahead are formidable Increasing cost Volatility in Over reliance on pressures commodity prices domestic market OEMs demand for price reductions (5 10% YOY) Sub optimal supply chain Credit crunch Steel prices: 100% range over 2 years Fuel prices: 325% range over 2 years 100% revenues coming from US FX risk with exports from US Background Supply Chain Materials New Markets Recommendations Risks 3
Optimizing the supply chain
Current supply chain is sub optimal COGMA Plants Customer Plants Gouda Chester Brie 800mi 2 days 1000mi 4 days 700mi 3 days 1300mi 4 days CDC (Feta) 1500mi 5 days 1200mi 4 days Roquefort Mozzarella Provolone FTL Shipments JIT Shipments Transportation cost: $831/day Transportation cost: $4,725/day Cycle stock holding cost: $9,600/day In transit holding cost: $7,800/day Cycle stock holding cost: $2,400/day In transit holding cost: $10,800/day Large argedifference sub optimal network High cost Shorten lead time Background Supply Chain Materials New Markets Recommendations Risks 5
Several options exist 1. Status Quo (Full truckload to CDC & JIT to assembly plants) 2. Optimal truckload to CDC & JIT shipments to assembly plants 3. Full truckload to CDC & establish VMI at assembly plants (EOQ shipments to assembly plants) 4. Optimal ltruckload dto CDC & VMI at assembly plants 5. Eliminate CDC & direct JIT shipments to assembly plants 6. Eliminate CDC & establish VMI at assembly plants 6
Cost can be reduced by 54% over 2007 Options Transportation cost Cycle stock holding cost In transit holding cost Total cost/day Savings/day FTL & JIT $5,556 $12,000 $18,600 $36,156 $0 EOQ & JIT $7,528 $5,207 $18,600 $31,335 $4,821 FTL &VMI $4,191 $12,965 $18,600 $35,756 $400 EOQ & VMI $6,163 $6,172 $18,600 $30,935 $5,222 Direct, JIT $11,900 $2,400 $6,300 $20,600 $15,556 Direct, VMI $5,143 $5,160 $6,300 $16,603 603 $19,553 Note: With 2009 costs, directvmioption stillyieldsthe the bestsavingsof savings ~$40K/day 7
No CDC is best over a wide range Cost Option 4 6 Logistics Cost Difference, Option 4 & 6 30000 25000 20000 15000 10000 5000 0 25000 30000 25000 30000 20000 25000 15000 20000 10000 15000 5000 10000 2.695 0 5000 1.435 0.175 Transportation cost Holding Cost 9Direct shipment results in lower cost over a wide range of holding and transportation costs compared to with CDC Background Supply Chain Materials New Markets Recommendations Risks 8
Use comprehensive decision criteria Holding cost cycle stock at CDC and assembly plants Holding cost Intransit inventory Transportation cost Supply chain costs Supply chain risks Customer responsiveness Demand fluctuations Buffers Complexity Costs Implementation efforts Environmental impact Shipping mileage 9
Option serves all purposes Options Supply Chain Cost Supply Chain Risk Environmental Impact Implementation Efforts Total Rank Relative weight 5 4 2 2 FTL & JIT 1 3 2 5 31 3 EOQ & JIT 2 2 1 4 28 5 FTL & VMI 1 4 2 3 31 3 EOQ & VMI 2 3 1 2 28 5 Direct, JIT 4 3 4 2 44 2 Direct, VMI 5 4 5 1 53 1 Eliminate CDC direct shipments from production plants to assembly plants Ship EOQ quantities by establishing VMI at customer plants 10
Proposed network is optimal COGMA Plants Gouda Customer Plants Roquefort Chester Brie Mozzarella Provolone Equitable allocation Optimal network EOQ Shipments Transportation cost: $5,143/day Cycle stock holding cost: $5,160/day In transit holding cost: $6,300/day Shorter lead time In transit cost reduction Total savings: $4.90M 11
Other options can be considered Relocating CDC to reduce transit times At one of the existing plants New, more centralized location Peddling (milk run) options Direct peddling between COGMA plants and customer assembly plants Customer controlled peddling across all COGMA plants Transportation pooling with other local businesses Plant consolidation at COGMA Producing multiple components at same plant Dedicated COGMA plants for each customer assembly plant 12
Material risk minimization
$237K savings by buying direct (2007) Category Import from China ($/ton) Buy from Distributor ($/ton) Priceof Steel $460 $919 Transport from the steel plant to the port $100 N/A Handling costs at the port $10 N/A Shipping cost $20 N/A Unloading charges at US port $25 N/A Customs clearance $0 N/A Local transport cost from the port to the appropriate plant. $5 N/A Holding cost in transit $250 N/A Total Cost $870 $919 Cost Savings per ton $49 Cost Savings per month @ 400 ton per month $19,797 Cost Savings per year $237,560 Potential cost savings of $237K per annum in the event of constant demand and other variables Background Supply Chain Materials New Markets Recommendations Risks 14
Evaluate steel sourcing from China Pros Cost saving because of elimination of distributor markup ($237K/year) Cons Increased pipeline inventory Additional safety stock due to lead time variability Increased cycle stock level Very small buy vis à vis distributor Risk of not being able to secure steel Cost of management Total incremental cost: $370K/year Lack of expertise Background Supply Chain Materials New Markets Recommendations Risks 15
Evaluate steel sourcing from China Holding Cost increasing Background Supply Chain Materials New Markets Recommendations Risks 16
Restructure contract with distributor Do not go for direct steel procurement from China Restructure the current agreement with distributor Take or pay contract to minimize overall supply chain cost Link prices to market index for steel De link transportation cost from commodity price increase Go to a contract manufacturer model with the customer doing bulk steel procurement (win win proposition) 17
Diversifying customer base
Export opportunities are worthwhile Price commitment in Korean Won Risk of COGMA to absorb currency risk ($/Won) exporting for 6 months Current demand decreased by almost 40% Short Term Alleviate currency risk, rationalize capacity in US Decisions Long term Expand capacity to minimize risk and diversify customer base 19
Minimize short term risks Pricing Strategy Set up price based on previous six month exchange rate plus cost of hedging Agreeonlimits (e.g. ±5%) outside ofwhichcontract contract could be re negotiated Hedge using Won futures for 6 month periods Capacity rationalization Consolidate US plants to free up capital Consider selling off underutilized assets 20
China plant is a viable long term option Criteria Plant Expansion in US New Plant in China Outsourcing to 3 rd party in China Manufacturing Cost 4 9 10 Logistics Cost 3 9 9 Quality Control 10 7 5 Responsiveness to Customers 4 9 7 Protection of Core Competency 10 8 3 Currency Fluctuation Risk 9 7 7 Management 10 6 9 TOTAL SCORE 50 55 48 Time is ripe to enter China Evaluate best entry mode Greenfield/JV/acquisition 21
Build a new plant in China Benefits Approx. 40% cost saving Lower lead time, faster customer response with Korean customer New market ktopportunity in local lmarket kt Creates a real option and natural hedge Considerations i Quality focus on continuous improvement Intellectual property prefer green field/jv Management cultural and expectations differences Currency hedge the currency risk 22
Recommendations & Implementation Plans
Improve the 3 focus areas Supply chain optimization Eliminate CDC, start direct shipments Begin VMI at each assembly plant (ship EOQ quantities) Material risk minimization Discontinue direct steel buy from China Restructure contract with currentsteel distributor Encourage customer to be the material buyer Diversify customer base Hedge foreign exchange risk (Won/USD) Set up manufacturing facility in China Background Supply Chain Materials New Markets Recommendations Risks 24
Let s put the plan in action Background Supply Chain Materials New Markets Recommendations Risks 25
Risk mitigation plan
Buffer to manage supply chain risks RISKS IN SUPPLY CHAIN Disruption in short term supply flow VMI implementation issues such as training of personnel and information system functioning Labor issues with closing CDC/consolidating plants MITIGATION PLAN Implement pilot test tbf before shutting down CDC or any plant Allocate employees from CDC to VMI projects or other expansion units CONTINGENCY PLAN Increase FG inventory during transition phase Keep CDC functional as a back up option 27
Mitigate material risk MATERIAL COST RISK Unable to restructure contract with distributor Steel price increases MITIGATION PLAN Arrange take or pay contracts with distributor Renegotiate contracts with customers to pass on material costs CONTINGENCY PLAN Qualify alternate local source and/or distributor 28
Pool & hedge export risk RISK WITH EXPORTS Exchange rate variations Regulations and intellectual property issues in China Quality control risks MITIGATION PLAN Hedge using futures market & collar customer contracts Consideration i joint venture with iha local lcompany in China Benchmarking with current plant in the US to ensure quality of production CONTINGENCY PLAN Aggressively pursue new revenue opportunities in China/India 29
Thank You!
COGMA can be competitive Eliminate CDC and start direct shipment to assembly plants Adopt VMI at assembly plants Restructure contract with local steel distributor Hedge against foreign exchange risk Build production capacity in China to capture international markets and to hedge the demand risk Annual savings of over $4.9M can be achieved Export market brings top line growth and risk hedging 31
COGMA has been a strong performer Started 100 years ago as a farm equipment repair business Reputation for careful data collection and analysis Diversification into auto components in 1945 CAGR of 15% over last 30 years Sustained quality levels, innovation and continuous improvement culture 32
Threats galore Strengths Excellent quality and service Data driven decision making and planning Stronggrowth growth in last 30 years Weaknesses Higher cost structure t in auto components business Complete dependence on US auto market Opportunities Weaker dollar International expansion Threats Increasing globalization Auto customers demand for China prices Increasing freight costs 33
Focus on 3 core areas Our Solution Supply chain hi Mt Material ilik risk Diversifying if i optimization minimization customer base Background Supply Chain Materials New Markets Recommendations Risks 34
Key Supply Chain Flow Assumptions COGMA incurs the cycle stock cost in 2 assembly plants under JIT strategy No demand or lead time variation no safety stock required Kits can be made up easily and quickly without CDC The holding cost in transit iti is $1.5 per unit per day COGMA and assembly plants work 5 days/week, 50 weeks a year 35
Supply chain cost computations Transportation Costs FTL & JIT EOQ & JIT FTL & VMI EOQ & VMI Transportation Costs Direct, JIT Direct, VMI Gouda > Feta $219 $724 $219 $724 Gouda > Roquefort $3,150 $971 Chester > Feta $153 $606 $153 $606 Chester > Roquefort $875 $512 Brie > Feta $175 $647 $175 $647 Brie > Roquefort $2,100 $792 Provolone > Feta $284 $826 $284 $826 Provolone > Roquefort $1,225 $605 Feta > > Roquefort $2,625 $2,625 $1,774 $1,774 Gouda > > Mozzarella $1,575 $686 Feta > Mozzarella $2,100 $2,100 $1,586 $1,586 Chester > Mozzarella $700 $458 $5,556 $7,528 $4,191 $6,163 Brie > Mozzarella $1,750 $723 Holding Costs Provolone > Mozzarella $525 $396 Gouda > Feta $2,400 $725 $2,400 $725 $11,900 $5,143 Chester > Feta $2,400 $607 $2,400 $607 Holding Costs Brie > Feta $2,400 $649 $2,400 $649 Gouda > Roquefort $300 $974 Provolone > Feta $2,400 $827 $2,400 $827 Chester > Roquefort $300 $513 Feta > Roquefort $1,200 $1,200 $1,776 $1,776 Brie > Roquefort $300 $795 Feta > Mozzarella $1,200 $1,200 $1,589 $1,589 Provolone > Roquefort $300 $608 $12,000 $5,207 $12,965 $6,172 Gouda > Mozzarella $300 $689 Pipeline inventory Chester > Mozzarella $300 $459 Gouda > Feta $2,400 $2,400 $2,400 $2,400 Brie > Mozzarella $300 $726 Chester > Feta $1,800 $1,800 $1,800 $1,800 Provolone > Mozzarella $300 $398 Brie > Feta $1,200 $1,200 $1,200 $1,200 $2,400 $5,160 Provolone > Feta $2,400 $2,400 $2,400 $2,400 Pipeline inventory Feta > Roquefort $6,000 $6,000 $6,000 $6,000 Gouda > Roquefort $1,200 $1,200 Feta > Mozzarella $4,800 $4,800 $4,800 $4,800 Chester > Roquefort $600 $600 $18,600 $18,600 $18,600 $18,600 Brie > Roquefort $1,200 $1,200 Total Logistics Costs $36,156 $31,335 $35,756 $30,935 Gouda > Mozzarella $600 $600 Chester > Mozzarella $600 $600 Brie > Mozzarella $1,200 $1,200 Provolone > Mozzarella $300 $300 $6,300 $6,300 Total Logistics Costs $20,600 $16,603 36
Supply chain cost computations FTL & JIT EOQ & JIT FTL & VMI EOQ & VMI Direct, JIT Direct, VMI Cycle Stock Cost Cycle Stock Cost Feta 9600 2807 9600 2807 Roquefort 1200 2889 Roquefort 1200 1200 1776 1776 Mozzarella 1200 2271 Mozzarella 1200 1200 1589 1589 2400 5160 12000 5207 12965 6172 Transport Cost Transport Cost Gouda > Roquefort 3150 971 Gouda > Feta 219 724 219 724 Gouda > Mozzarella 1575 686 Chester > Feta 153 606 153 606 Chester > Roquefort 875 512 Brie > Feta 175 647 175 647 Chester > Mozzarella 700 458 Provolone > Feta 284 826 284 826 Brie > Roquefort 2100 792 Feta > Roquefort 2625 2625 1774 1774 Brie > Mozzarella 1750 723 Feta > Mozzarella 2100 2100 1586 1586 Provolone > Roquefort 1225 605 5556 7528 4191 6163 Provolone > Mozzarella 525 396 Pipeline Inventory Cost 11900 5143 Gouda > Feta 2400 2400 2400 2400 Pipeline InventoryCost Chester > Feta 1800 1800 1800 1800 Gouda > Roquefort 1200 1200 Brie > Feta 1200 1200 1200 1200 Gouda > Mozzarella 600 600 Provolone > Feta 2400 2400 2400 2400 Chester > Roquefort 600 600 Feta > > Roquefort 6000 6000 6000 6000 Chester > > Mozzarella 600 600 Feta > Mozzarella 4800 4800 4800 4800 Brie > Roquefort 1200 1200 18600 18600 18600 18600 Brie > Mozzarella 1200 1200 Total Logistics Cost 36156 31335 35756 30935 Provolone > Roquefort 600 600 Provolone > Mozzarella 300 300 6300 6300 Total Logistics Cost 20600 16603
Current supply chain 38
Cost can be reduced by 62% over 2009 Options Transportation cost Cycle stock holding cost In transit holding cost Total cost/day Savings/day FTL & JIT $5,556 $22,800 $37,200 $65,556 $0 EOQ & JIT $8,688 $7,571 $37,200 $53,459 $12,098 FTL &VMI $4,945 $23,322 $37,200 $65,467 $89 EOQ & VMI $8,077 $8,093 $37,200 $53,370 370 $12,187 187 Direct, JIT $11,900 $3,600 $12,600 $28,100 $37,456 Direct, VMI $6,298 $6,320 $12,600 $25,219 219 $40,338 At Holding Cost of $3/unit/day / at Feta and $4.5/unit/day / at assembly plants, no change in transportation costs 39
Worst case no CDC trumps best CDC Logst Co ost Option 4 5 5 Logistics Cost Difference Option 4 & 5 25000 30000 30000 25000 20000 15000 10000 5000 0 5000 10000 15000 20000 25000 15000 20000 10000 15000 5000 10000 2.695 1.435 Holding Cost 0.175 Transportation cost 0 5000 5000 0 10000 5000 10000 5000 15000 10000 9Worst case direct JIT shipments are still better than best case CDC shipments (transition at transportation cost > $3.325/mile & holding cost <$1.01/unit/day) <$1 01/unit/day)
Restructure the supply chain Eliminate CDC and adopt VMI at customer plants Transport directly from manufacturing plants to assembly plants Use EOQ shipping quantities Hold additional inventory at customer location as part of VMI Benefits Annual supply chain cost savings of $4.90M Improved customer responsiveness due to shorter lead times Minimize environmental impact due to shorter travel Considerations Cost and efforts to implement VMI Cost and efforts to eliminate CDC 41
Price increase boosts savings Name of Variable % Increase in variable % Change in cost savings (+/ ) Unloading charges at US port 10% 5.1% An increase of 10% in steel prices almost doubles the potential cost savings Transport cost from plant to port 10% 20.2% Overseas transit time in days 10% 44.5% Price of steel 10% 92.9% 42
Additional costs outweigh benefits Direct Import Additional Cost Upfront implementation cost $ 20 K HR cost of managing direct purchase $120 K per yr. Increase in cycle stock due to $270 K per yr. long lead time of delivery Estimated Additional Cost Benefit from this project $392 K per yr. $238 K per yr. This project is not feasible in terms of cost 43
Hedge currency risk Pricing Strategy Set up price based on previous six month exchange rate plus cost of hedging. Agree on limits (e.g. ±5%) outside of which contract could be re negotiated. Hedge using Won futures for 6 month periods. Dollar per Won Exchange Rate Fluctuation range ~5% 44
Let s expand in China Criteria Plant Plant Outsourcing Expansion in Expansion in to 3 rd party US China in China Manufacturing Cost 4 9 10 Logistics Cost 3 8 8 Quality Control 10 7 5 Responsiveness to Customers 5 8 7 Protection of Core Competency 10 8 4 Currency Fluctuation Risk 7 9 9 TOTAL SCORE 39 49 43 Time is ripe to expand into China Go with a Greenfield project/acquisition as means to entry 45
China provides a 40% cost advantage China Plant US Plant Manufacturing Cost 60% of US Plant 100% Material Cost 70% of US market 100% Transportation Cost to Australia / Middle East Transit Time to Australia / Middle East $165 per ton $210 per ton 20 days 35 days Expected manufacturing cost at China plant: ~59% of US plant 46
Fluctuation is wider in CNY KRW 47
Further export opportunities may exist Due to Export Opportunities, COGMA is able to Expand plants in USand export to destination locations. Set up a new plant in China. Outsource manufacturing to a third party in Asia. Consideration / Risk Current Plant Capacity : A company should utilize current Capacity effectively before considering expansion elsewhere. Laws / Regulation when operating a plant in China. Investment and Source of Fund. 48
Modes of Entry into China Modes of Entry Joint Venture Pro Sharing cost and risk Access to partners knowledge and asset Political acceptable Con Divergent goals and interest of partners Limited equity and operational control Difficult to coordinate globally Greenfield Complete equity and operational control Protection of technology and knowhow Ability to coordinate globally Potential political problems and risks High development costs Slow entry speed Acquisition Same as green-field(above) Same as green-field (above), except speed Fast entry speed Post-acquisition integration problem 49
Benefits galore! Direct shipments with VMI Restructuring steel purchase contract Total supply chain cost savings of ~$4.9M Improved delivery to customers Closer collaboration with customers Reduction in steel price volatility risk Ensured supply of raw material Expansion into Korea and China Less reliance on US market Further cost reduction achieved through Chinese plant 50