Welcome!

Joining us today:

Ray Adams
SAP IBU Chemicals

David Hrivnak
Associate Systems Analyst
Eastman Chemical Company
Traci Purdum, Senior Editor
ChemicalProcessing.com
A 6 Sigma Approach to
Inventory Optimization
Ray Adams, SAP IBU Chemicals

David Hrivnak, Eastman Chemical Company

 Best Practices: Combination of People,
Process and Technology

D  Define Project Goals

M  Measure the Current Process

A  Analyze and Determine Root Causes

I  Improve the Process, Eliminate Defects

C  Control Future Process Performance

© 2010 SAP AG. All rights reserved. / Page 4

 DEFINE: Rising Inventories and costly
expediting to meet customer service targets
1.5 400.00

1.45
350.00

1.4
Invy/Sales Ratio
IPEX Price Index 300.00
1.35

1.3
250.00

1.25

200.00
1.2

1.15
150.00

1.1

100.00
1.05 Source: US Bureau of Census Inventory to
Shipments Ratio, ICIS Pricing
1 50.00

© 2010 SAP AG. All rights reserved. / Page 5

 MEASURE: Performance Indicator Summary –
Effectiveness/ Efficiency Balance

Chemicals (n=25)
Category Metric
Average Q1

On-time Delivery Performance-to-Customer Request Date (by total orders delivered)

Supply Chain (%) 81.8% 95.6%
Effectiveness
Forecast Accuracy (%)
79.7% 95.0%
Order Fulfillment Lead Time – Make-to-Stock (days)
5.0 1.3
Order Fulfillment Lead Time – Configure-to-Order (days) 5.9 2.8
Supply Chain
Responsiveness
Order Fulfillment Lead Time – Make-to-Order (days) 20.8 5.6
Order Fulfillment Lead Time – Engineer-to-Order (days) 80.0 *
-
Total Inventory – Days of Supply (days) 91 37
Inventory Carrying Cost (% of revenue) 3.1% 0.7%
Inventory Analysis Inventory Obsolescence Cost (% of revenue) 0.6% 0.1%

Inventory Write-offs (% of revenue) 0.01% *

Revenue Loss due to Stock-outs (% of revenue) 3.83% 0.46%

Warehouse Management Cost (% of revenue) 0.52% *

Transportation Spend (% of revenue) 9.23% 0.02%

Supply Chain Execution
Performance
Expedited Transportation Spend (% of revenue) 0.12% *

Demurrage/ Penalty/ Fine-related Charges (% of revenue) 0.04% *

* indicates insufficient number of data points for calculation

© SAP 2007 / Page 6
 ANALYZE: Review Inventory Management
Policies

40%
35% Increasing supply
chain performance
30% 26% 27%

20%
13%
10%

0%
General Rules ABCD Safety Stock Multi-echelon
Classification and EOQ Inventory
calculators Optimizarion

Most common approaches

Source: Aberdeen Group, 2006

© 2010 SAP AG. All rights reserved. / Page 7

 IMPROVE: Multi-Echelon Inventory
Optimization
Calculate the optimal safety stock throughout the supply chain to meet a target
service level for all intermediate and finished products taking into account
uncertainty of demand and supply

Process Steps

1 2 3
Multi-echelon
Basic Safety Stock Advanced Safety Stock
Inventory Optimization
Planning Planning

■ Single product, single location
■ Integrated with Supply Network
Planning run
■ Can produce static or time-
dependent values
■ Typically fixed safety stock or
re-order point based
■ Time-dependent values
■ Optimize safety stock for a
single product across network
■ Based on forecast and delivery
variability and desired service
levels
■ Builds in the concept of service
levels and demand variability
with Mean Absolute Deviations
■ Balance inventory and service
levels
■ Considers entire network at all
levels simultaneously
(manufacturing, distribution, s
upply)
■ Factors in all forms of
variability –
supply, demand, manufacturin
g and lead times
■ SAP Enterprise Inventory
Optimization (SAP EIO) by
Smartops

© 2010 SAP AG. All rights reserved. / Page 8

CONTROL: Analytics and optimization characterize
variability at the right level of granularity

Inputs Commonly SmartOps Calculated Factors

Available Impacting Inventory
• Forecast History Demand
• Forecast Error, Bias
Intelligence
• Sales History and Intermittency
Module

• Order Date
• Ship Date • Lead Time Mean and
Supply/Production
• Receipt Date Variability
Intelligence
Module • Schedule Attainment
• Planned Production Loss % Mean and
• Actual Production Variability

Service
• Global Service Objective Level • Stocking Point
• Unit Cost & Margin Optimization Service Level Targets
© 2010 SAP AG. All rights reserved. / Page 9
 The Goal: “Fix the Mix”

Optimization is not across-the-board inventory reductions;

correcting the product mix is critical to meeting service objectives

Change in Inventory Level by Item

(SmartOps vs. Actual)
60%
46%

40%
Change in DOH Inventory

More
Needed
20% 15% 13%
11% 13%
8%
2% 4%

0%
-3%-5%
-6% -7% -7%
-12% -10%
-20% -16% -14%
-18% -18% -19% -19%
-25%
-21% -23% -25%
Less
-25%
-28%
-30%
-33% -31% -30% -30%
-33%
Required
-40% -35%
-40%
-43%

-60%
Items

© 2010 SAP AG. All rights reserved. / Page 10

 Who is
 A global manufacturer of
chemicals, plastics and fibers
headquartered in
Kingsport, Tennessee

 A company dedicated to economic

success, environmental stewardship
and social responsibility

 A leading producer of
coatings, adhesives, specialty
plastics and cellulose acetate fibers

 A manufacturer of PET polymers for

packaging

 The first company to commercialize

a gasification facility in the U.S., in
1983, which is operating at industry-
leading performance
© 2010 SAP AG. All rights reserved. / Page 11
 What We’ll Cover …

Achieving the Right Balance – Why Eastman chose SAP Enterprise

Inventory Optimization by SmartOps® (SAP EIO)

Project Tools and Processes: A Six Sigma Journey

SAP Linkage

Reporting – Measures and Dashboards

Wrap-up

12
© 2010 SAP AG. All rights reserved. / Page 12
 What Is the Supply Chain Role in Inventory
Management?

The supply chain role is to:

 Manage inventory and trade-offs to an optimal inventory investment
 Manage inventory and trade-offs to serve customers at a
desired level
 Manage key stakeholders: Finance, businesses, sales, and manufacturing
 Taking the guesswork out of inventory management and basing decisions on real
data, and real numbers
 Needed a tool that provided the requisite
algorithms to conduct mathematical
“what-if” scenarios

© 2010 SAP AG. All rights reserved. / Page 13

13
 Achieve the Balance

Some key Customer service level

stakeholders:
• Customers
• S&OP Determine
• Supply chain optimal
inventory
• Procurement strategy
• Logistics
• Manufacturing
• Business
Manufacturing cost Inventory Cost
Check
results and Execute the
act to optimal
reoptimize strategy
the strategy

14
© 2010 SAP AG. All rights reserved. / Page 14
 Key Initiatives

To optimize material flow from raw material supply to delivery of finished goods
 Focus on principles, vision, and linkage
 Enable the supply chain with advanced/next generation tools, data, and processes

© 2010 SAP AG. All rights reserved. / Page 15

15
 Multiple Projects Focused on the Initiative

Inventory
Inventory
Analysis &
Optimization
Reporting
Software
Tools
Implementation Next
& Business Generation
Process Data
Design Sales and Warehouse
Operations
Planning

Working Supply
Capital Planning
Reporting

© 2010 SAP AG. All rights reserved. / Page 16

16
 Eastman Chooses an SAP Solution Extension

SAP Enterprise Inventory Optimization (EIO) by SmartOps®

 A stochastic multistage, multi-inventory model that recognizes inventory targets at
one location affect, and are affected by, targets at different locations. To minimize
the need for excess safety stock, this model uses an efficient computational
process where multiple mathematical equations are solved simultaneously to reveal
optimal inventory targets

 A scientific, mathematical approach to the

inventory discussion
 Explore impact of choices:
 Business
 Operational
 Procurement
 Customer service
• Enable a forward look regarding inventory strategy
• Optimization of inventory working capital

© 2010 SAP AG. All rights reserved. / Page 17

 Started with a Pilot/Proof of Concept

Work began: July 2008

 Pilot area: 90 items, 15 plants/warehouses

Manual models of pilot area: Oct 2008

 Decided upon major parameters and settings

Automated pilot area: Feb 2009

Concluded pilot project: May 2009

Company wide rollout: June 2009

SharePoint reporting: Oct 2009

SharePoint dashboard: Dec 2009

18
© 2010 SAP AG. All rights reserved. / Page 18
 Parallel Project Efforts

Business Process Design Software Tool

using Six Sigma Implementation &
 S&OP Configuration
 Business process design team  Technical team
 Supply chain management  Business process design team
 Supply planning  Supply chain management
 Manufacturing
 Procurement
 Software implementation team

19
© 2010 SAP AG. All rights reserved. / Page 19
 Business Process Design Using Six Sigma

Define
 Stakeholder matrix
 Interview guide and plan
 The Affinity Diagram (KJ Analysis) – key
process needs to meet

Conceptualize
 Process concept generation to meet key needs

Design of the business process

Optimize – Testing and improving the process

Control – Establishing the control plan for the process

20
© 2010 SAP AG. All rights reserved. / Page 20
 KJ Analysis Summary – The Business Process
Must …

Be based on sound input

 Forecast
 Inventory visibility
 Mathematical assumptions

Facilitate a discussion on what our strategy should be

 Serve customers at the right level
 Set targets to minimize our inventory investment
 Maximize profitability

Focus on good execution and deal with contingency

needs effectively

Have strong communication channels

Drive change management

© 2010 SAP AG. All rights reserved. / Page 21

21
 Business Process Summary Slide

22
© 2010 SAP AG. All rights reserved. / Page 22
 SAP EIO Integration

SAP SCM Data

Demand Sales & Forecasts Warehouse
Planning (Inventories)

SAP EIO
Connector

Safety Stock
SAP Target
ERP Material Master Data Upper Limits
BOM Data
Plant data SAP EIO
Calculate SharePoint
Safety Stocks Limits Reporting

23
© 2010 SAP AG. All rights reserved. / Page 23
23
 Supply Chain Data

S Supply Path Static Data

Stocking Point Static Data
• Lead time mean
• Target service level
• Total lead time std deviation
• Service time • Service time
• Holding cost percentage • Packaging Bill of Material
• Inventory unit cost (BOM) ratio
• Unit of Measure (UoM) • Yield
• PBR (Periods Between • Batch size
Review) • Reliability
• Attributes (STAGE and others)
Supply Path Time Varying Data
• Maximum process capacity
Stocking Point Time Varying Data CF CF CF
• Minimum process quantity
• Forecast mean • Sourcing fraction (ratio)
• Forecast standard deviation • Planned receipts
• Minimum required stock C

Process Point Static Data

© 2008 SmartOps Corporation. All rights reserved. • Manufacturing BOM
Confidential and Proprietary 24
© 2010 SAP AG. All rights reserved. / Page 24
 Supply Chain Data

• Using BOM data

• Shows product
relationships
• Blows materials
back to dirt

© 2010 SAP AG. All rights reserved. / Page 25

25
 Update Master Data

Eastman added data

26
© 2010 SAP AG. All rights reserved. / Page 26
 Inventory Measures
1. Inventory level status – Current Inventory against limits
2. Percent in control – % of KGs in control – weighted
3. Percent touched safety stock – Percent of items that touched safety
stock in last 90 days

27
© 2010 SAP AG. All rights reserved. / Page 27
 Inventory Over Time for Stream or Subgroup

Adhesives Stream Inventory

90,000 Adjusted for CTO

80,000

70,000

Total
Thousands KGs

60,000 Finished Goods

Raw Matl

50,000

40,000

RM increase
30,000
due to restock
Pips & Pygas

20,000
MAY

MAY

MAY
SEPT

SEPT

SEPT
FEB

JUNE

FEB

JUNE

FEB

JUNE
MAR

MAR

MAR
APR

APR

APR
DEC

DEC
AUG

AUG

AUG
OCT

OCT

OCT
JAN

JAN

JAN
JULY

JULY

JULY
NOV

NOV

2007 2008 2009

© 2010 SAP AG. All rights reserved. / Page 28

 Inventory Detailed Charts Report

29
© 2010 SAP AG. All rights reserved. / Page 29
Project Benefits
Initial results are consistent with our expectations

Demonstrating relationship of forecast accuracy, customer service, master

data, and inventory investment

Identifying the right number, and identifying levers to improve the

summation of the variables

Accelerating the rollout to other groups within our company using black
belts

30
© 2010 SAP AG. All rights reserved. / Page 30
7 Key Points
Master data is critical and expect to spend significant amounts of time to correct

Accurate forecasts are foundational to optimizing inventories

Technical changes have been easier to overcome than business process redesign

Measures and dashboards helpful to speed adoption

SAP EIO by SmartOps while a good tool, is NOT a silver bullet

SAP connectivity is not a simple out-of-the-box connection

Expect continual iterations and loops; MANY small steps and changes are needed
to complete the journey

31
© 2010 SAP AG. All rights reserved. / Page 31
 Questions?

Thank you for attending. We will contact you when slides from
this Webcast are available to download.

© 2010 SAP AG. All rights reserved. / Page 32