Best Practices in Materials Management for Maintenance Operations

Best Practices in Materials Management for Maintenance Operations July 14, 2014 prepared by: Brian Savoie Vice President HIGH PERFORMANCE CONCEPTS, INC. 151 Village Parkway • Building 6 • Marietta, GA 30067 Phone: 770 -859 -0161 • Fax: 770 -859 -0191 • www. hpcinc. com © Copyright 2014. High Performance Concepts, Inc. 1

Topics · Benefits -- What’s Possible? · Customers, Challenges and Objectives · The Maintenance and Material Management Work · Best Practices in Materials Management · How to Learn More © Copyright 2014. High Performance Concepts, Inc. 2

What’s Possible? Improvement Goals, Objectives and Targets Business · Cut management layers in half · Increase employee-to-manager ratio to 23: 1 Maintenance · Reduce maintenance process costs by 10 - 20% · Reduce maintenance process cycle time by 10 - 30% · Reduce re-manufacturing operating budgets by 20% Materials Management · Reduce rejected supplier material to 0. 1% · Reduce inventory carrying costs by 30% · Increase inventory turns on aircraft modification kits by 200% · Improve service levels on aircraft modification kits to 99. 5% · Reduce aviation spares locally and system-wide by 30% -- from Lockheed Martin, Delta Air Lines, Boeing, etc. © Copyright 2014. High Performance Concepts, Inc. 3

Operators, Customers and the Equipment · Utilities – Southern Company, TVA, Duke Power - For business and consumers - Turbines, compressors, pumps, boilers, piping, valves, gauges, etc. · Airlines – Delta, Federal Express, UPS, GE - For business and consumers - Airframe, avionics, jet engines, fuel systems, landing gear, hydraulics · Space Shuttle Operations – United Space Alliance - For NASA, customers - Rocket engines, electronics, airframes, air handling, hydraulics, pneumatics, communications · Rocket and Engine Testing – Sverdrup and ACS - For business and government (GE, P&W, USAF, USN, NASA? ) - Turbines, compressors, pumps, boilers, piping, valves, gauges, jet engines, fuel systems, air handling, hydraulics, rocket engines, electronics, pneumatics, data collection © Copyright 2014. High Performance Concepts, Inc. 4

Business Objectives Schedules Political, Regulatory and Legal © Copyright 2014. High Performance Concepts, Inc. Customers Market Factors Impact Maintenance & Materials Management Supply of Materials & Personnel 5 Products & Services Drivers of Demand

The Materials Management Challenge -- External Factors · Leverage strong interdependency among customers, operators and suppliers · Customers, Products and Services - Customer- or market-driven reduction in cost, lead time and cycle time. - Parts and service demand fluctuations due to routine peaks and valleys, changing economic conditions, specific market events, and new technologies - Installed base changes often - High value, sometimes one-of-a-kind equipment - Numerous configurability issues - Documentation requirements and serial number issues - Extreme environments -- temperature, long run times - High cost of unplanned outages or downtime · Suppliers and Supplier Management - Extremely low volume demand on most items -- suppliers have leverage - Many items have high unit costs, long lead times and single sources of supply · High government regulation -- security, environmental, business/competition © Copyright 2014. High Performance Concepts, Inc. 6

The Maintenance Work Categories - Forecasted Planned Routine Unplanned Activities - Inspect and adjust Remove and replace Tear down Re-manufacture and certify Re-install, re-assemble Test Parts - Rotables - Repairables - Expendables © Copyright 2014. High Performance Concepts, Inc. 7

Processes for Operations, Maintenance & Material Management Operations - Deliver - Fly - Plan - Source - Sell Maintenance - Maintain equipment - Plan maintenance - Provide material - Provide personnel - Provide equipment Materials Management - Warehouse and distribute - Manage inventory - Purchase parts and manage suppliers - Forecast and plan - Outsourcing and insourcing © Copyright 2014. High Performance Concepts, Inc. 8

Business Environment at Arnold EDC -- Materials Management for Maintenance Suppliers and Sub-Contractors Support for Maintenance and Production/Test Maintenance Production/Test Customers -- US Navy, USAF, DOD, GE, P&W To provide effective Materials Management, we first must understand the Business Environment and how the Maintenance Operation is positioned within it. © Copyright 2014. High Performance Concepts, Inc. 9

Material Management Best Practices 1. Best Maintenance Practices 2. Integration 3. Forecasting, Planning and Scheduling 4. Purchasing and Supplier Management 5. Inventory Management 6. Warehousing and Distribution 7. Outsourcing and Insourcing 8. Methodology for Operations Improvement 9. Multi-dimensional Approach 10. Performance Measurement & Management © Copyright 2014. High Performance Concepts, Inc. 10

Best Practices for Materials Management 1. Best Maintenance Practices heavily impact Best Materials Management practices. 2. Integration -- The linkages among Customers, Maintenance, Materials Management and Suppliers have a major impact on the effectiveness of the business and Material Management. 3. Forecasting, Planning & Scheduling -- Employ sophisticated capabilities OR minimize the need for it through integration with business operations, maintenance and suppliers. 4. Purchasing and Supplier Management -- Significant opportunity exists for improvements via process, organizational, information and facilities changes. 5. Inventory Management -- Inventory Pooling, Record Accuracy, Daily Supplier Deliveries and Purchasing and Supplier Management practices can have a major impact on objectives. © Copyright 2014. High Performance Concepts, Inc. 11

Best Practices for Materials Management, continued 6. Warehousing and Distribution -- Best practices include value-added services, organizational alignment with Maintenance, a few basic information systems and proper location, layout and methods. 7. Outsourcing and Insourcing -- Outsource those activities that require significant resources and add little value. Insource the work that requires little resources and adds great value. 8. Methodology to support systematic, comprehensive operations improvement 9. Multi-dimensional Approach to management and improvement. 10. Performance Measurement and Management for results and processes. © Copyright 2014. High Performance Concepts, Inc. 12

Improvement Dimensions Process People -- Activities, linkages and sequence -- Practices, procedures -- Personnel, experience, skills, -- Availability, organization, etc. Strategy Information Facilities -- Key information & information systems -- Needed to execute & measure the process -- Supporting tools, equipment and facilities © Copyright 2014. High Performance Concepts, Inc. 13

# 1 -- Best Practice: Maintenance Best Practices Process People • Total Productive Maintenance – Combine preventative, predictive & proactive • Coordinated, shared operating plans & schedules • Documented procedures • Emphasize safety and environmental compliance • Facilities Services group, with Customer Team • Working teams aligned with customer & production, coordinated with resource pools • Consistency -- Minimal variation by maintenance personnel in completing routine work • Skills, training, and availability of internal & outside resources, matched to maintenance requirements • Partners, including out- and insourcing Strategy Asset Acquisition & Management Maintainability, reliability Support business objectives Information Facilities • Accurate data for parts requirements & actual usage – Job BOMs, planning bills • Maintenance Management System (MMS) • MMS linked with ERP & WMS • Product Data Management (PDM) System – For configuration management • Right size, location, capability © Copyright 2014. High Performance Concepts, Inc. 14

Maintenance Best Practice: Strategic Linkage Goals, Objectives, Targets & Measures Linked to Business Corporate Objectives • Customer Service Maintenance Objectives • Equipment availability (Up-time) • New equipment ready as promised • Reduce Cost • Reduce total maintenance cost/operational hour • Reduce maintenance cost as % of operations costs • Improve Quality • Reduce quality problems due to equipment • Increase Market Share • N/A • Improve Productivity • Reduce unscheduled downtime • High Performance Work Force • Training plan and execution • Safety incident rate • Housekeeping © Copyright 2014. High Performance Concepts, Inc. 15

Operations Business Infrastructure Business Strategy, Goals & Objectives Processes DELIVER FLY PLAN Process People Information Facilities R E • Activities • Sequence • Linkages • Skills • Roles • Organization • Staffing • Needs • Security • Access • Integration • Accuracy • Equipment • Offices • Labs • Plants • Warehouses SOURCE U L T S SELL Performance Measures & Rewards © Copyright 2014. High Performance Concepts, Inc. S 16 Service for Customers • Safety • Quality • On-time • Cost

Maintenance Infrastructure Business Strategy, Goals & Objectives Processes MAINTAIN EQUIPMENT PLAN MAINTENANCE PROVIDE MATERIAL Process People Information Facilities R E • Activities • Sequence • Linkages • Skills • Roles • Organization • Staffing • Needs • Security • Access • Integration • Accuracy • Equipment • Offices • Labs • Plants • Warehouses PROVIDE PERSONNEL U L T S PROVIDE EQUIPMENT Performance Measures & Rewards © Copyright 2014. High Performance Concepts, Inc. S 17 Operational Equipment • Complete • On-time • Cost • Quality

Materials Management Infrastructure Business Strategy, Goals & Objectives Processes WAREHOUSE & DISTRIBUTE MANAGE INVENTORY PURCHASE, MANAGE SUPPLIER Process People Information Facilities R E • Activities • Sequence • Linkages • Skills • Roles • Organization • Staffing • Needs • Security • Access • Integration • Accuracy • Equipment • Offices • Labs • Plants • Warehouses FORECAST & PLAN U L T S OUTSOURCING & INSOURCING Performance Measures & Rewards © Copyright 2014. High Performance Concepts, Inc. S 18 Parts For Maintenance • Right Parts • Quantity • Place • Time

# 2 -- Best Practice: Integrated Suppliers Materials, Maintenance & Operations for the Customer Operations Service for Customers • Safety • Quality • On-time • Cost Integration of: • Processes • People • Information • Facilities • Measurement Maintenance CUSTOMER Operational Equipment • Complete • On-time • Cost • Quality Materials Parts For Maintenance • Right Parts • Quantity • Place • Time SUPPLIER © Copyright 2014. High Performance Concepts, Inc. 19

Integrated Operating Plan • A common language to integrate operational planning and execution. • A document that establishes and communicates the mission in each main operating area and the resources required to accomplish the mission: – Performance measures and targets (e. g. , service levels), agreed upon by Materials Management, Maintenance and Operations. – Skilled people - Facilities - Equipment - Materials - Work plans and schedules - Operating procedures • A tool to predict, measure and control operating costs and results © Copyright 2014. High Performance Concepts, Inc. 20

Operating Plan Development Production or Test Schedule Measure, Analyze & Modify Plan Materials Management & Suppliers Servicing Requirements Maintenance Operating Plan Facility Requirements Equipment, Tool and Part Requirements Methods & Work Measures Scheduled Work Requirements Unscheduled Work Requirements MX Personnel Schedule -- Courtesy of John Hodgson, UPS © Copyright 2014. High Performance Concepts, Inc. Customer 21 Labor Contracts

# 3 -- Best Practice: Forecasting, Planning & Scheduling Process People • Clear definition of maintenance needs • Demand planning for engines (done now? ) & rotables • Coordinated inventory planning -- engine, rotable & expendable levels • Categories of maintenance defined – Overhaul, Event-driven, Daily, Unplanned • CPFR (or Schedule Sharing) from Ops. - Suppliers • Monthly plan & weekly schedule w/capacity for engines & rotables • Flight schedule changes trigger engine, rotable, and expendable inventory level review • Rapid replenishment in place of expend. forecasting • Procurement services and planners/expediters aligned with Maintenance operations, organization and schedules • One organization does planning and scheduling, at least for maintenance and materials management • and maintenance schedulers aligned with material planners & expediters. Strategy Information Sophisticated Capabilities or Minimize the Need • Accurate inventory records and material transactions • Accurate material masters • Linkage of maintenance schedules to: – Job material requirements (Planning BOM) – Job labor requirements • Periodic review of MX category assignments, events and actual material usage to update PBOMs • Algorithms & software to predict lumpy, intermittent demand • Maintenance System link to ERP & WMS systems • Forecasting & Demand Management software • Advanced Planning & Scheduling • Enterprise Service Management software • Internet monitoring of equipment status © Copyright 2014. High Performance Concepts, Inc. Facilities • Local supplier facilities to minimize the need forecasting and planning of less expensive components & supplies • Point of use storage & issuing of frequently-used expendables 22

What is Required for Forecasting and Planning • Timing: Event and cause-based forecasting • Discrete models of each different type of demand, independent and summarized • Activity: Cycles, hours, stress • Equipment: Quantity, workload, location, size, routing • Environment: Temperature, conditions • Planning BOMs based on work orders (Job BOMs) © Copyright 2014. High Performance Concepts, Inc. 23

Demand, Receipts and Inventory Forecasting based on history is like “driving while looking in the rear view mirror. ” © Copyright 2014. High Performance Concepts, Inc. 24

Distribution of Parts Demand Issues 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% % of Parts 20% of the parts account for 80% of the issues. © Copyright 2014. High Performance Concepts, Inc. 25

Forecasting Techniques Are Hard To Apply To Service Parts Part 123 Usage Forecast 1 2 3 4 5 6 7 8 9 10 11 12 Month Part ABC Expendable Forecasting System 1 2 3 4 5 6 7 8 9 10 11 12 Forecast Creation Process -8 statistical models -User entered forecast Usage Month Part ABC Forecast 1 2 3 4 5 6 7 8 9 10 11 12 Month In many cases, forecasting models are designed to generate a flat forecast. This increases the error which drives safety stock up and can dramatically misrepresent demand. © Copyright 2014. High Performance Concepts, Inc. 26

# 4 -- Best Practice: Purchasing & Supplier Management People Process • Strategic & Operational Purchasing • One-day replenishment: Internet & express • Preferred or certified suppliers • JIT II -- Supplier Category Management • JIT II -- Supplier rep. on site (Vendor Managed Procurement) • Organizational alignment with Maintenance • Daily deliveries –Analysts, Buyers, Coordinators • Consignment • Supplier Management – Buying agreements & national accounts – Service level agreements – Performance measures Strategy Partnerships OR Arm’s Length Relationships Information Facilities • E-procurement via Internet • Electronic Data Interchange (EDI) • Commodity and Supplier Management • Trading Exchanges & Marketplaces – Commerce One, Ariba Marketplace – MRO Link, Grainger, TPN Marketplace • 2 -way schedule sharing with vendors • Vendor Supermarket • Space for vendor consignment material • Vendor warehouse on-site or nearby © Copyright 2014. High Performance Concepts, Inc. 27

Example Consignment Opportunities % Affected Accountable Scenario # of Annual Improvement Expendable Company Accountable Over Part #’s Savings @ Inventory Turns Baseline Consigned 14. 4% C. Cost Baseline $0 1. 76 na na 0 Top 3 Suppliers $26, 831, 000 2. 29 30% 36, 000 $3, 864, 000 Top 10 Suppliers $44, 396, 000 2. 85 63% 53, 000 $6, 393, 000 All A Items $36, 731, 000 2. 58 47% 5, 000 $5, 289, 000 All A & B Items $62, 342, 000 3. 82 118% 17, 000 $8, 977, 000 Note: All improvement calculations are based on an inventory of $108 million and 100 k items. © Copyright 2014. High Performance Concepts, Inc. 28

# 5 -- Best Practice: Inventory Management Process People • Supply Chain or Network View • Pooling -- loans/borrows for rotable parts • Daily delivery -- of expendables • Cycle counting programs for accuracy • Special techniques for low usage, hard-toforecast items • JIT II -- Supplier rep. on site • Organizational alignment with Maintenance – Analysts, Buyers, Coordinators Strategy Have a lot, own a lot OR Have a lot, vendors own OR Have & own what’s needed Information Facilities • Inventory Record Accuracy @ 95%+ • Share inventory information with suppliers & pool partners • 2 -way schedule sharing with vendors • Warehouse Management System • Supply Chain Execution Management • Supply Chain Inventory Network • Vendor Supermarket -- Bose, Delta, GE • Space for vendor consignment material • Vendor warehouse on-site or nearby © Copyright 2014. High Performance Concepts, Inc. 29

The Case for Pooling OEM’s Hold All the Cards -- Aviation Example • 80% of spend on parts goes to fewer than 10 vendors. • 80% of parts are used less than 20 times per year. • Traditionally the suppliers have had all the leverage • It is estimated that 30 - 70% of aviation spares could be redundant. • Pooling as done today is part of the solution, but it is labor-intensive, exception-based. • Potential exists to make more strategic, proactive inventory sharing decisions. • Trading exchanges and supporting information systems are key to this concept. -- Courtesy of Ed Wodarski, Xelus Inc. © Copyright 2014. High Performance Concepts, Inc. 30

Steps to Develop a “Proactive Digital Parts Pool” 1. Consolidate needs and availability of parts across multiple groups. 2. Share needs and availability across partner enterprises “reactively. ” 3. Leverage down the total inventory value by developing a proactive pool of parts. -- Courtesy of Ed Wodarski, Xelus Inc. © Copyright 2014. High Performance Concepts, Inc. 31

Trading Community Business Unit A Business Unit B Company #1 Supplier 2 Supplier 3 Business Unit C Trading Community Business Unit X Business Unit Y Supplier 4 Supplier 5 Company #2 Supplier 4 Supplier 6 Supplier 5 Business Unit Z © Copyright 2014. High Performance Concepts, Inc. Supplier 7 Supplier 6 32

# 6 -- Best Practice: Warehousing and Distribution People Process • Alignment of Warehouse personnel to meet • Value Added Services - kitting, labeling, etc. Maintenance needs • JIT parts delivery – Coverage -- 24 * 7 * 365 • JIT kits -- Boeing Apache Helicopter Reman – Service types & levels -- delivery, speed • Custom Kits -- Quick change, verify parts – Location of storage areas • Outsourcing -- 3 PL and 4 PL • Good methods for high productivity – Receive, Inspect, Put Away Strategy – Pick, Pack & Ship Manual, traditional OR Highly automated OR Highly integrated OR Hybrid Information • Automatic ID and Data Collection • Scanners and tracking systems • Point of Issue Systems • Warehouse Management System • Integration with key systems: – Maintenance – ERP: Purchasing, Inventory, Scheduling © Copyright 2014. High Performance Concepts, Inc. Facilities • Proper location & assignment of warehouses -advance supply points, shop supply, electronic supply cabinets • Effective layouts, delivery routes • Proper material handling & storage methods • Mix of conventional & automated equipment 33

Supply. Pro Electronic Supply Cabinet Example © Copyright 2014. High Performance Concepts, Inc. 34

# 7 -- Best Practice: Insourcing & Outsourcing Process People • Have a process for insourcing & outsourcing • Have a clear, multi-year, written agreement • Take small steps, and have GO-NO GO points • Define processes & procedures for daily operations, such as for warranty shipping, insourced part storage, etc. • Clarify roles and responsibilities in detail • Managers for outsourced work • Account manager for insourced work • Develop personnel to support insourced work • Maintain some skills in house to allow for reabsorption of outsourced work Strategy Do All Your Work & Only Your Work OR Do What You Do Best Information • Integrate purchasing, inventory, scheduling systems: – with outsourcing suppliers – with insourcing customers © Copyright 2014. High Performance Concepts, Inc. Facilities • Facilities for outsourcing providers • Facilities and equipment for insourcing 35

# 8 -- Best Practice: Methodology for Operations Improvement The MAXITsm Framework I ORIENTATION II CONCEPTUAL DESIGN & PLAN III DETAILED DESIGNS IV IMPLEMENTATION • Scope & Objectives • Assessment • “The Opportunities” – Reengineering – Fast-Tracks – Infrastructure • Analysis & Synthesis • High-Level Design • Solutions in Principal • Plans, Costs, Benefits • Analysis & Synthesis • Sub-Process Design • “The Program” – Cost & Benefit • Solutions in Detail • Development – Timeline • Ready for Implementation • Installation • “The Projects” • Results • “Long-Term Gains” MAXi. T® is a registered service mark of High Performance Concepts, Inc. © Copyright 2014. High Performance Concepts, Inc. 36

Elements of a Systematic, Comprehensive Approach • • Clearly-defined phases, from planning to implementation Repeatable, documented procedures Standard conventions and notation Vision and strategic direction Issues and opportunities Twin-track: immediate and long-term benefits Multi-dimensional improvement context: – – Processes/Strategy People/Organizations Information and Systems Facilities/Technology © Copyright 2014. High Performance Concepts, Inc. 37

Benchmarking Survey -- Other Facts and Findings Methods or Techniques • ABC types of categories and classifications • Focusing on processes critical to inventory management and turns • Making effective use of supplier inventory and services • Using automated processing and data management capabilities Skills, Experience & Training • Analytical skills • Business knowledge, experience and training • Training and understanding of company-specific concepts, practices and processes • Information systems training Management Practices & Organizational Structure • Performance measures, goals and reward systems • Supply Chain Management concepts, practices and organization • Team-based performance Supply Chain & Supplier Management Practices • 55% of participants have started or completed Consignment Inventory projects • 43% of participants have started or completed “Supplier Direct Ship” efforts • 57% have started Category Management by Suppliers • 77% rated forecasting methods and systems “Useful for many parts” or “Very useful for most parts” © Copyright 2014. High Performance Concepts, Inc. 38

Materials Management Opportunity Profile Process Capability & Capacity Issues Major Process Importance H I G H A MATERIAL REQUIREMENTS PLANNING E MEASURE & MANAGE PLAN & FORECAST Improve to Meet Critical Business Objectives EXPEDITING & NON-STOCK PROCUREMENT INVENTORY TRACKING & CONTROL Priority = High Importance and Significant Issues Improve for Better Performance Continuously Improve for Increased Added Value or Reduced Cost ALLOCATION I BASE STORES ORDERING LINE STATION ORDERING O L O W SUPPLY CHAIN INVENTORY MANAGEMENT U A E I O U Importance: A = Absolutely Important, E = Especially Important, I = Important; O = Ordinary, U = Unimportant Capability & Capacity Issue Ratings: A = Major/critical; E = Especially significant; I = Important/moderate; O = Ordinary; U = Unimportant © Copyright 2014. High Performance Concepts, Inc. 39 Minor

# 9 -- Best Practice: Multi-dimensional Approach to Management and Operations Improvement Process People -- Activities, linkages and sequence -- Practices, procedures -- Personnel, experience, skills, -- Availability, organization, etc. Strategy Information Facilities -- Key information & information systems -- Needed to execute & measure the process -- Supporting tools, equipment and facilities © Copyright 2014. High Performance Concepts, Inc. 40

Multi-dimension Approach to Management & Improvement • Strategic view -- of how maintenance and materials management can support business objectives. • Process Management -- processes, inputs, outputs defined; metrics and roles assigned • Organizational Alignment -- Materials Management aligned with the Maintenance and Operations. • Information Systems -- Capable foundation systems, integrated with business systems • Facilities and Equipment -- Right size, location, capability © Copyright 2014. High Performance Concepts, Inc. 41

# 10 -- Best Practice: Performance Measurement and Management Results • Service Level -- % of the time that maintenance needs were met (right part, place and time) • Cost -- total operating cost, maintenance costs, maintenance cost per productive hour • Processes • Forecasting and Planning -- Actual Demand vs. Forecasted Demand, Order Fill Rate • Purchasing & Supplier Management -- Investment per Equipment Asset $ • Inventory Management -- Inventory Turns, Inventory Value per Equipment Asset $, Availability (Service Level), Obsolescence, Order Fill Rate • Warehousing and Distribution -- Inventory Accuracy, # Picks per hour, # Putaways per hour, Cycle time to fill and order • Outsourcing -- % work outsourced, profits gained or costs reduced • Insourcing -- % work insourced, profits gained © Copyright 2014. High Performance Concepts, Inc. 42

Improvement Objectives & Weights _________________________________ Improvement Objective Priority Weight Improve Inventory Turns 25% 4 turns Service Levels – for End Customer 25% 95% where measures exist Service Levels – for Replenishment -- Kit Issues 10% 95% (97% stretch) where we can measure 97% (99% stretch) Cost/Productivity 20% Reduce by 20% Inventory Accuracy 15% “Item” goal is 95% Order Accuracy 5 Year Goal 5% TBD _________________________________ © Copyright 2014. High Performance Concepts, Inc. 43

Material Management Best Practices 1. Best Maintenance Practices 2. Integration (among Customers, Maintenance, Materials Management and Suppliers) 3. Forecasting and Planning 4. Purchasing and Supplier Management 5. Inventory Management 6. Warehousing and distribution 7. Outsourcing and Insourcing 8. Methodology for Operations Improvement 9. Multi-dimensional Approach 10. Performance Measurement & Management © Copyright 2014. High Performance Concepts, Inc. 44

How to Learn More • Professional Organizations: APICS, AFSMI, CLM, NAPM • Benchmarking -- within other operations in your company • Research and Reading: Aviation Week, etc. • Get data about your own operation • Conferences and Trade Shows • Contact me: Brian Savoie Vice President High Performance Concepts, Inc. Cell: 404. 909. 9286 bsavoie@hpcinc. com www. hpcinc. com © Copyright 2014. High Performance Concepts, Inc. 45