Breaking the Binds
- 1. October 2014 Breaking the Binds: Achieving Working Capital ReleasethroughSparesOptimization Asolutionforasset-intensiveindustriesinchallengingandremoteenvironments By Igor Queiroz, Weber Pimenta, EkaterinaYukhanova & Len Pannett In todays competitive business environment, enterprises are under extreme pressure to become more profitable. Asset-intensive industries increasingly have to reduce their working capital, improve reliability and minimise downtime. Achieving satisfactory uptime in operations is necessary to achieve those goals but it is not enough: cost savings are needed and optimising maintenance, operations and repair (MRO) spares is a proven approach to do realise those.
- 2. THE COMPLEX SITUATION The ideal state of operations for any company is one where processes, people and technology are integrated across Original Equipment Manufac- turers (OEMs), third-party suppliers and service providers, with each component fully coordinated and running like a well-oiled machine. Many com- panies aspire to this level of maturity but struggle to achieve better harmony in their key activities within their supply chain. The challenges are many: overstocking, obso- lescence, stock-outs, and erratic and unplanned demand. These are compounded where usage information is unreliable because of the poor qua- lity of master data and transaction records, lax and inefficient procurement processes, and a lack of meaningful communication between internal functions. The unorthodox characteristics of spa- re parts demand and supply then turn the reple- nishment process into a complex task. 2 Figure 1: Complex situation of supply chains, especially in remote areas THE PAIN POINTS Four principal issues are common to operations with extensive inventory and MRO spares acti- vities, particularly those in asset-intensive indus- tries such as infrastructure, mining, oil and gas, and energy production. 1. Inaccurate, incomplete or misleading mas- ter data Master data management is the foundation stone of effective, efficient and economic operations, and many companies data is less than reliable and often a mess. With stock accuracy a critical KPI in the service and maintenance environment, inaccurate data leads to a misleading picture, cau- sing over-buying and over-inflated safety stockpi- les. Managing spares inventory levels optimally becomes practically impossible where stock data is incomplete or error-ridden, with the result that working capital is tied up unnecessarily.
- 3. Records of fixed asset must have a link directly to the relevant spares details, contributing to overall stock management and helping to avoid obsoles- cence. Problems occur in ERP systems when, for instance, processes to create and update item data are not closely controlled, and where free- -text is permitted to describe them, resulting in multiple entries for the same item. Where data is sub-standard, the scope for cost savings and process efficiencies becomes limited. 2. Poor integration between key functions causing unplanned demand The main players in an integrated inventory mana- gement organisation are: Sourcing and Procurement Finance and Asset Management Operations and inventory management All too often, each has its own misaligned goals and agendas, collaboration between them is la- cking, and the different performance objectives all lead to sub-optimal inventory management, high procurement costs and excessive stock holding. Similarly, there is often a lack of understanding in the organisation of the forces at play in each of the functions. Language difficulties, and va- rying commercial and international cultural nor- ms, particularly in situations where operations are remote from headquarters, complicate matters. Conflicts then occur between sites, causing du- plication or scarcity of inventory where and when it is needed, and ultimately waste. Improving the collaboration between the supply chain functions, with internal customers and, where suitable, external suppliers, especially in 3 the maintenance and engineering areas, quickly realises opportunities for a simultaneous reduc- tion in inventory costs and an improvement in service levels. That collaboration extends to ha- ving open and common communication between sites, employing tools and techniques to ensure alignment across language and cultures. 3. Procurement inefficiencies and warehouse issues All too often, the Procurement function is blamed erroneously for the non-availability of spares. Lo- cal procurement staff are often guided by their global Head Office on safety stock levels and the use of preferred suppliers, with advice conflicting with the realities and practicalities on the ground. The supply base may be fragmented and service level agreements not adhered to, or even be non- -existent, resulting in inefficiencies and waste. Moreover, overly complex procurement systems and misaligned processes in the same organiza- tion exacerbate the situation. Stock outs are a common feature in these situa- tions mainly due to poor inventory management and forecasting. Conversely, overstocking will arise from a lack of data and outdated processes. In parallel, obsolescence is often managed retro- actively rather than proactively, or even when it is actually occurring, resulting in many unusable parts in the inventory, thereby increasing wa- rehousing costs. 4. Long, undefined and ambiguous lead times For MRO spares, long lead times are often the norm, especially when dealing with operations across international borders, particularly in emer- ging markets where infrastructure is less than ide-
- 4. al. As a result, spares are often not in the right place at the right time, with a resultant friction between the supply chain, procurement and end user communities, ultimately affecting operations and service levels. All of these factors impact on the ability of the enterprise to function at the desired level. There may be surplus stock of some vital spares and, at the same time, frequent stock outs of others. The lack of a fully functional re-stock process is more than inconvenient: it can be very costly. ADDRESSINGTHE COSTS Organizations are always striving to become more profitable: improving revenue generation is clearly one goal but when opportunities for increased sa- les are scarce and market conditions depress pri- ces for commodities, costs must be contained and systems of processes made more efficient overall. Reducing the costs of ordering, storing and main- taining spare parts is a critical element in contai- ning the costs of maintenance and repair opera- tions. In turn, optimal spares management will not be possible without a clear understanding of all the moving parts of the inventory management system, the various events that affect it, and the actions and hurdles faced when planning, reques- ting, purchasing and receipting of spare parts. However, pressured day-to-day operations do not always allow time for internal teams to examine the critical problem areas closely, and a lack of planning and forecasting, inefficient buying, and poor inter-departmental communication are not always visible to those immersed in it. Based on our experience in the extractives sec- tors, we have found that companies typically have an excess of 10% to 30% in spare parts by value above the levels necessary to maintain operations with a reasonable level of risk. At the same time, we have also found that critical parts are normally below the required levels to protect asset availabi- lity, and non-critical parts are frequently above the necessary level of stock. By engaging directly with the organisation facing these challenges, on-site at their operations, we can build trust and assist operational management to collaborate and identify the issues that are im- portant to each of them. From that start, priority issues can be tackled in a co-ordinated manner, ty- pically by a small, dedicated, on-site team of expe- rienced inventory and supply chain specialists. This may be at the mine, the production platform, or at the construction site. The team will use a structu- red approach for data collection, analysis and, by using a tuned optimisation tool which minimises software costs, resolve them sustainably. In paral- lel, the on-site managers are guided in the ongoing use of the analytical tool, adapting its parameters to changes in the situation of the operations. We have also found that a key means of ensuring collaboration between maintenance, inventory and supply chain management is to instil a com- mon understanding that inventory optimization is not simply inventory reduction, and that it only works when inventory is first identified and mana- ged across all parts of the supply chain. SUCCESS FACTORS Every organisation wants to free up their working capital, and many choose to optimise their MRO
- 5. spares to do so. However, few achieve the le- vels of success that they look for. In mid-size, asset-intensive businesses in remote locations, traditional methods of optimising stock levels and replenishment systems do not apply. It is our view that there are typically four key success fac- tors necessary to lower costs, reduce stock levels streamlined procedures and satisfy service level requirements: 1. Employing a dedicated, experienced, multi-cultural, hands-on work team, embedded on-site at the clients premises, which develops a rapport with the local team, digs deep and un- derstands the real problems. 2. Collecting and analysing data, starting with ensuring the accuracy of stock data and then employing a simple analytical tool to simulate the inventory processes, before optimising the- se to provide the necessary new processes and accompanying stock levels. This tool should not require staff to have any technical knowledge, and the staff should be trained on how to use the tool in order to be confident and self-sufficient. 3. Aligning the various parts of the supply chain operations and implementing workable and sustainable solutions across all components, from purchasing and operations, to disposal. 4. Providing occasional on-going assurance and guidance to ensure that new processes are embedded sustainably. These can be carried out through periodic local audits, or remotely with dashboard-style reports. By working through these steps, with the right team, and ensuring that changes are embedded and sustainable, MRO optimisation targets can be achieved. THE NORDGOLD CASE STUDY Nordgold (LSE: NORD) is an international pure- play, emerging-markets gold producer, estab- lished in 2007 and publicly traded on the London Stock Exchange. Over the last few years, it has expanded rapidly through carefully targeted acquisitions and organ- ic growth, achieving a rate of growth unmatched in the industry during that period. Nordgolds gold production increased to from 717 thousand ounc- es in 2012 to 924 thousand ounces in 2013. The Company operates nine mines in Russia, Ka- zakhstan, Burkina Faso and Guinea and it employs more than 10,000 workers. With changes in the commodity market and with a view to improve its cost basis, Visagio was en- gaged by Nordgold to investigate the utilization and management of spares at two mines in Bur- kina Faso over a ten-week period, starting with theTaparko mine in Burkina Faso, located 200 km from the capital, Ouagadougou.
- 6. At that mine, sixty percent of the purchases are imported and many orders take three to four months to arrive by rail or road from the port of Abijan, in neighbouring Cote dIvoire, or from Tema in Ghana. At the outset, the situation at the mine site was found to be typical: the database of spares was not reliable, the criticality of spares was ill- defined, their re-reorder points werent planned, and there were several outdated processes, with unclear roles and responsibilities. Installed at the mine site,Visagio engaged with the local manage- ment team to fully understand the issues on-site in depth, and then develop a pragmatic approach using our proprietary MRO Optimisation tool. By following our methodology (see Figure 2), the MRO Optimisation tool was used to simulate the inventory processes and the parameters of that inventory. These rules included unit cost per item, forecasted usage, actual consumption, in- ternal and external lead times, and the service level requirements from the supplier. From this basis, the stock parameters were opti- mised, with a continual evaluation of actual versus mapped consumption. The resulting workbook become the main modelling and optimization tool, helping to identify issues and their root caus- es, with the result that unnecessary items are not purchased, stock levels are reduced over time, and the management of obsolete stock is trans- formed. Inter-departmental collaboration is also significantly improved by clearly and openly defin- ing roles and responsibilities, and by empowering the staff through up-skilling inventory manage- ment skills. Figure 2:TheVisagio approach to MRO Optimisation
- 7. www.visagio.com Copyright 息 2014 Visagio All rights reserved EkaterinaYukhanova is the Procurement Director at Norgold and has led that function since 2011. She was previously the Head of Raw Materials Supply in Severstal, the mining division of Severstal-Resurs, and she is a former consultant at A.T. Kearney, where she was part of the operations and purchasing practice. Len Pannett is a Partner atVisagio, focussed on helping clients with their operational strategy challenges, particularly in the areas of supply chain and complex programme management. He also has 11 years previous experience in engineering management in the defence sector. Working with clients across the globe in a broad cross section of industry sectors, he is a Chartered Engineer and an APICS CSCP Practitioner. Len holds an MBA, and has undergraduate degrees in Electronic Engineering and Mathematics. Igor Queiroz is a Project Manager at Visagio EMEA, with considerable expertise in inventory management, and warehouse and transportation design and optimisation. He has delivered projects for key clients in the Mining, Oil & Gas and Retail sectors. Igor holds an MBA in Logistics, Operations and Technology from COPPEAD and RSM Erasmus, and a B.Sc in Computer Science. Weber Pimenta is a Managing Partner at Visagio and has considerable experience in the oil & gas, mining, biofuels and pharmaceuticals indus- tries, delivering projects worldwide. He is a supply chain specialist, with expertise in supply chain and operations transformation, network optimization, S&OP planning and implementation, demand forecasting, warehousing and inventory management. He holds a Master Degree in Industrial Engineering from UFRJ and is a Guest Speaker at Ohio State University on Supply Chain and Logistics matters. 4 The analysis of the stock done byVisagio allowed us to quickly respond to demand from the end-users. We saved in excess of US$ 1.5 million in one quarter of 2014 due to their support. The tool created by Visagio was very helpful, and we could quickly create requisitions for the restocking process. Monthly stock monitoring allows us to see where we can improve the stock position and resolve issues with end users on an on-going basis. Yvan S辿vin, Logistics Director, Nordgold - Burkina Faso