Transcript Calculating the Return on Investment for Supply Chain

Supply Chain Planning & Forecasting
Best Practices Conference
October 26, 2010
CALCULATING THE RETURN ON
INVESTMENT FOR SUPPLY CHAIN
IMPROVEMENTS
LCDR Chad Long, Ph.D.
Chengbin Zhu, Ph.D.
United States Coast Guard Aviation Logistics Center (ALC)
Distribution Statement A: Approved for public release; distribution is unlimited.
Agenda



Coast Guard Background
ALC Supply Chain Background
Return on Investment Study
 Background
 Methodology
 Final
Metric
 Costs

Conclusion
Distribution Statement A: Approved for public release; distribution is unlimited.
Coast Guard Background


Commissioned 10 cutters in 1790
Department of Treasury
 Revenue
Cutter Service
 Life Saving Service
 Lighthouse Service
 Bureau of Marine Inspection and Navigation


Department of Transportation
Department of Homeland Security
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Coast Guard Background



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
Maritime Safety
Maritime Security
Maritime Mobility
National Defense
Protection of Natural Resources
Distribution Statement A: Approved for public release; distribution is unlimited.
Supply Chain Background
As of September 2010
Port Angeles
3 MH-65C
Astoria
3 HH-60J
North Bend
5 HH-65C
Airfac Newport
Cape Cod
4 HU-25
4 MH-60T
Detroit
5 HH-65C
Airfac Muskegon
Humboldt Bay
3 HH-65C
Traverse City
5 HH-65C
Airfac Waukegan
Atlantic City
10 MH-65C
1 HH-65D
NCR
Sacramento
4 HC-130H
San Francisco
4 MH-65C
Washington
1 C-37A
1 C-143A
Los Angeles
4 HH-65C
Savannah
5 HH-65C
Airfac Charleston
Elizabeth City
5 C-130J
5 MH-60J
San Diego
3 MH-60J
HITRON
9 MH-65C
Barbers Point
4 HC-130H
4 HH-65C
Kodiak
4 HC-130H
4 MH-60J
4 HH-65C
Airfac Cordova
New Orleans
5 HH-65C
Sitka
3 HH-60J
Corpus Christi
3 HU-25
3 HH-65C
Distribution Statement A: Approved for public release; distribution is unlimited.
Houston
3 MH-65C
Mobile, AL
Operations
5 HC-144A
Training
2 HU-25
4 MH-60T
7 MH-65C
1 MH-65D
Clearwater
6 HC-130H
8 MH-60J
Borinquen, PR
4 HH-65C
ALC
PDM Line
7 HC-130H
1 HC-130J
9 HU-25
8 MH-60J
11 MH-65C
2 C-144A
Miami
4 HU-25
5 HH-65C
3 HC-144A
Supply Chain Background
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Supply Chain Background
ALC
Distribution Statement A: Approved for public release; distribution is unlimited.
Supply Chain Background





40,000 different parts in current inventory
Inventory value: $1.2 billion
Inventory contains many slow moving parts with
intermittent demand
Annual spare parts budget of $222M (FY10)
Approximately 16% of parts account for 84% of
the budget
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Supply Chain Background



First-rate Analytics
Collaboration
Total Asset Visibility
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Supply Chain Background

In 2008, the Coast Guard invested in a Supply
Chain Management Solution (SCMS)
 Standardize
purchasing priority
 Remove individual spreadsheet decision making
 Reduce manual inputs
 Use real time data
 Global outlook
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Return on Investment



Prior ROI research
ROI- Evaluation Framework
ROI Method

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


Project Objective
Evaluate Plan
Collecting Data
Evaluating Effects
ROI Calculations
Distribution Statement A: Approved for public release; distribution is unlimited.
Prior ROI research

Traditional ROI:
 Emerging
in 1920s
 Evaluate the payoff of the investments
 ROI= Net Benefit / Programs Cost
 Source of Benefit:
 Tangible
benefits: Increase productivity, Cut cost,…
 Intangible benefits: Customer service, job satisfaction, …
Distribution Statement A: Approved for public release; distribution is unlimited.
Prior ROI research

Problem with SCMS ROI:
 Difficulty
for SCMS ROI:
 More
Intangible Benefit: How well we improve the decision
 Isolate the Effect of SCMS Project: SCMS structure is
complicated
 "Much of the evidence [for payoff] is anecdotal”
- After a study of 861 companies
Distribution Statement A: Approved for public release; distribution is unlimited.
Prior ROI research

ROI Methodology:
 Began
in 1970s and Refined for Different Industries
 A logical and Rational Approach for ROI Accountability
Evaluation Framework
Review
Project
Object
Develop
evaluation
plan and
baseline
data
Data
Collection
Isolate
effects of
Project
Calculate ROI
ROI Report
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI - Evaluation Framework
Level:
Measurement Focus
1. Reaction and
Perceived Value
Measures participants’
reaction to the project
2. Learning and
Confidence
Measures changes in the
knowledge skills and attitudes
related to technology
3. Application and
Implementation
Measures changes in on-the-job
action and progress with planned
actions
4. Impact and
Consequences
Measures changes in business
impact variables
5. Return on
Investment
Compares project monetary
benefits to the project costs
Distribution Statement A: Approved for public release; distribution is unlimited.
Value of Information
Low
Questionnaires
And Surveys
ALC Required
in ROI analysis
High
ROI Method – Project Object
Demand
P
A
R
T
P
A
R
T
Demand
P
A
R
T
Functionality of SCMS:
Inventory Control
P
A
R
T
Without
SCMS
Budget
P
A
R
T
Budget
P
A
R
T
With SCMS:
Better Inventory Control
Coast Guard ALC Objects
: Aircraft Availability
-Maintenance Schedule
- Workforce Training
- Back Orders Reduction
-…. Dollar Value impact
Un-equivalent
: Cost
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- Transportation Cost
- Repair Cost
- Unnecessary Purchase
-….
Latency Effect
Inventory
Deficiency
Excessive
Inventory
ROI Method- Project Object

ALC Objects:
 Reduce
Cost
 Improve Aircraft Availability

SCMS Project:
 Better
Inventory Control Decision
 Contribution to ALC Object:
 Less
Excessive Inventory
 Less Inventory Deficiency
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- Evaluate Plan

Data Items:
 Reduction
of Excessive Inventory in Dollar Value
 Reduction of Inventory Deficiency in Dollar Value
 Comparison between FY07 (before) and FY09 (after)

Requirement for Isolating Project Effect
 Assuming
the benefit will remain the same level during
the whole project life time.
 No Long Term Consideration
 Reduction of Inventory Deficiency in Dollar Value
 Independent of Budget, Initial Inventory and Demand
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- Collecting Data

Source of Data
 Demand
Data (FY07-FY09)
 Purchase Data (FY07-FY09)
 Inventory Position Data (end of years: FY06-FY09)
 Lead Time Data (FY07- FY09)
 Demand Forecasting Data (FY07- FY09)
 Part Price Table (include repair & new buy)
 Dollar Value Adjusted to FY09 (with inflation rate of
5.1%)
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- Isolating Effect

Excessive Inventory
 Initial
Idea: Compare the Change in Excessive Inventory
 Definition of Excessive Inventory:
 EIL
= 2 Year Demand Forecasting+ Lead Time Demand +1
 Lead Time Demand =
Annual Demand Forecasting* Lead Time/365
 EI = MAX(0, Inventory Position – EIL) * Unit Price (Repair Cost)
 Result:
End of Year: FY06
FY07
FY08
FY09
Excessive
Inventory
$99M
$106M
$110M
$95M
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- Isolating Effect

Excessive Inventory
 Why
Excessive Inventory Increase
 Four Source of Increase in Excessive Inventory
 Initial
Inventory Level
 Demand
 Budget
 Inventory Control Policy
Part of Initial Inventory is not
controllable: caused by initial
inventory and change in demand
FY07
FY08
FY09
Initial Inventory
(Beginning of Year)
$200M
$249M
$262M
Demand
(During the year)
$197M
$197M
$198M
Budget
(During the year)
$245M
$241M
$218M
Distribution Statement A: Approved for public release; distribution is unlimited.
More Initial
Inventory
Stable
Demand
Note: Cost are based on FY09 with an inflation rate of 5.1%.
ROI Method- Isolating Effect

Isolate the Effect of Inventory Control

Excessive Inventory Caused by New Purchase (Repair)
 EIN = MIN(New Purchase in the FY, EI)
 Total EIN $= SUM EIN* $ Unit Price (Repair Cost) for all parts
FY07
Excessive
Inventory Caused
by New Purchase
(End OF Year)
FY09
Inventory
Position
Excessive
Level
$28.0M
EIN
Demand
New
Purchase
$23.7M
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Beginning
of the year
Inventory
Position
Time
Demand
New
Purchase
Excessive
Level
Distribution Statement A: Approved for public release; distribution is unlimited.
End of
the year
Beginning
of the year
End of
the year
EIN
Time
ROI Method- Isolating Effect

Inventory Deficiency

Threshold for Inventory Deficiency
 Lead
Time Demand
 Why not Safety Stock - Affected by SCMS itself
 Inventory Deficiency
ID = MAX(0, Lead Time Demand - Inventory Position)
* Unit Price (Repair Cost)
Inventory
Deficiency
(End of Year)
FY07
FY09
$18.5M
$15.1M
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- Isolating Effect



Inventory Deficiency
Should We Exclude the effect of Budget, Demand and
Initial Inventory
No, Because:
 Budget
plus initial inventory is always much more than
Demand
 All Inventory deficiencies are caused by inventory control
decision
Distribution Statement A: Approved for public release; distribution is unlimited.
ROI Method- ROI Calculation

One year Benefit:
 Benefit
in FY09:
(Total EIN $ (FY09)- Total EIN $(FY07))
+ (ID $ (FY09)- ID $ (FY07))
 Project
Benefits in Following Year:
 Assume
with new SCMS, each year generate similar amount
of excessive inventory out of new purchase
 Assume with new SCMS, each year reduce similar amount
of inventory deficiency compared to without new SCMS
 Total Benefit = n * Cost Saving in FY2009
Distribution Statement A: Approved for public release; distribution is unlimited.
Costs
Description
FY2006-08
FY2009
FY2010*
Recurring Cost
Vendor Support and Software maintenance
$
Business Operations Division Staff
-
$ 924,548.00
$299,284.23
$ 147,140.00
$ 180,000.00
$100,214.40
System integration and upgrades
$4,777,052.50
$
$
-
SAS Developer and Rollout Risk Manager
$ 531,106.92
$ 113,713.60
$
-
Web Portal Manager
$
29,512.08
$
-
$
-
Supply Chain Modeling
$ 132,472.66
$
-
$
-
Travel
$
74,944.46
$
$
-
Business Operations Division Staff
$ 294,280.00
$
-
$
-
Additional Support
$1,525,316.30
$
-
$
-
Total
$7,511,824.91
$1,226,904.00
Nonrecurring Cost
* FY10 is through March 31, 2010.
-
8,642.40
$399,498.63
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
Total: $9,138,277
Calculations
300.0
18.5
15.1
250.0
Deficiency
200.0
Useful
$M
150.0
217.5
218.0
28.0
23.7
100.0
50.0
0.0
FY07
FY09
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
Excessive
Calculations
300.0
18.5
15.1
250.0
Deficiency
200.0
Useful
$M
150.0
217.5
218.0
28.0
23.7
100.0
50.0
0.0
FY07
FY09
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
Excessive
Calculations



SCMS costs of investment through March 31st, 2010:
$9,138,277.
Excessive Inventory cost savings extrapolated to
March 31st, 2010: $6,500,000.
Inventory Deficiency cost savings extrapolated to
March 31st, 2010: $5,100,000.
Time period for Cost Savings
Time period for SCMS Cost
Oct 1, 2006
Oct 1, 2009
Distribution Statement A: Approved for public release; distribution is unlimited.
Oct 1, 2010
Mar 31, 2010
ROI Formula
ROI = (Cost Savings – Cost of Investment)
Cost Of Investment
ROI = ($11,600,000 – $9,138,277)
$9,138,277
ROI = 27% over the original investment
Distribution Statement A: Approved for public release; distribution is unlimited.
Break Even Analysis
$40,000,000.00
$35,000,000.00
$30,000,000.00
$25,000,000.00
Cost
$20,000,000.00
Benefit
$15,000,000.00
$10,000,000.00
$5,000,000.00
$2008
2009
2010
2011
2012
Note: Cost are based on FY09 with an inflation rate of 5.1%.
Distribution Statement A: Approved for public release; distribution is unlimited.
2013
Conclusions


Coast Guard Improvement
Return on Investment calculation
 Direct
Benefits
 Indirect Benefits

Questions?
Distribution Statement A: Approved for public release; distribution is unlimited.