calculating the return on investment for supply chain improvements

CALCULATING THE RETURN ON INVESTMENT FOR SUPPLY CHAIN IMPROVEMENTSUnited States Coast Guard Aviation Logistics Center (ALC)

LCDR Chad Long, Ph.D.Chengbin Zhu, Ph.D.

Distribution Statement A: Approved for public release; distribution is unlimited.

Supply Chain Planning & Forecasting

Best Practices ConferenceOctober 26, 2010


Agenda Coast Guard Background ALC Supply Chain Background Return on Investment Study

Background Methodology Final Metric Costs

Conclusion


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



Coast Guard Background Maritime Safety Maritime Security Maritime Mobility National Defense Protection of Natural Resources



Supply Chain Background

Clearwater6 HC-130H8 MH-60J

Borinquen, PR4 HH-65C

Miami4 HU-25 5 HH-65C3 HC-144A

HITRON9 MH-65C

Savannah5 HH-65CAirfac Charleston

Detroit5 HH-65CAirfac Muskegon

Traverse City5 HH-65CAirfac Waukegan

Cape Cod4 HU-254 MH-60T

Washington1 C-37A1 C-143A

Elizabeth City5 C-130J 5 MH-60J

ALCPDM Line7 HC-130H1 HC-130J9 HU-25 8 MH-60J11 MH-65C2 C-144A

Sitka3 HH-60J

Corpus Christi3 HU-25 3 HH-65C

New Orleans5 HH-65C

Houston3 MH-65C

Atlantic City10 MH-65C1 HH-65DNCR

Kodiak4 HC-130H4 MH-60J4 HH-65CAirfac Cordova

Humboldt Bay3 HH-65C

North Bend5 HH-65C

Airfac Newport

Astoria3 HH-60J

Port Angeles3 MH-65C

San Diego3 MH-60J

San Francisco4 MH-65C

Barbers Point4 HC-130H4 HH-65C

Los Angeles4 HH-65C

Sacramento4 HC-130H

As of September 2010


Mobile, ALOperations5 HC-144ATraining 2 HU-25 4 MH-60T7 MH-65C1 MH-65D



ALC

http://www.uscg.mil/history/stations/AIRSTALApatch.jpg


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


Supply Chain Background First-rate Analytics Collaboration Total Asset

Visibility


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


Return on Investment Prior ROI research ROI- Evaluation Framework ROI Method

Project Objective Evaluate Plan Collecting Data Evaluating Effects ROI Calculations


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, …


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


Prior ROI research ROI Methodology:

Began in 1970s and Refined for Different Industries

A logical and Rational Approach for ROI Accountability

Review Project Object

Develop evaluation plan and baseline data

Data Collection

Isolate effects of Project

Calculate ROI

ROI Report

Evaluation Framework


ROI - Evaluation Framework

1. Reaction and Perceived Value

2. Learning and Confidence

3. Application and Implementation

4. Impact and Consequences

5. Return on Investment

Level: Measurement Focus Value of Information

Measures participants’ reaction to the project

Measures changes in the knowledge skills and attitudes related to technology

Measures changes in on-the-job action and progress with planned actions

Measures changes in business impact variables

Compares project monetary benefits to the project costs

Low

High

QuestionnairesAnd

Surveys

ALC Required in ROI analysis


ROI Method – Project Object

Budget

PART

PART

PART

Budget

PART

PART

PART

Without SCMS

With SCMS:Better Inventory

Control

Coast Guard ALC Objects

: Aircraft Availability

: Cost

Functionality of SCMS:Inventory Control

- Maintenance Schedule- Workforce Training- Back Orders Reduction- ….

- Transportation Cost- Repair Cost- Unnecessary Purchase- ….

Demand Demand

Dollar Value impact

Un-equivalent Inventory Deficiency

Latency Effect

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


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


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%)


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 $95M $99M $106M $110MNote: Cost are based on FY09 with an inflation rate of 5.1%.


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 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

More Initial Inventory

Stable Demand

Part of Initial Inventory is not controllable: caused by

initial inventory and change in 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 FY09

Excessive Inventory Caused by New Purchase(End OF Year)

$28.0M $23.7M

TimeBeginning of the year

End of the year

Excessive Level

Inventory Position

DemandNew Purchase

EIN

TimeBeginning of the year

End of the year

Excessive Level

Inventory Position Demand

New Purchase

EINNote: Cost are based on FY09 with an inflation rate of 5.1%.


ROI Method- Isolating Effect Inventory Deficiency Threshold for Inventory Deficiency

Lead Time Demand Why not Safety Stock - Affected by SCMS itself Inventory DeficiencyID = MAX(0, Lead Time Demand - Inventory

Position) * Unit Price (Repair Cost)FY07 FY09

Inventory Deficiency(End of Year) $18.5M $15.1M



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


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


Costs

* FY10 is through March 31, 2010. Note: Cost are based on FY09 with an inflation rate of 5.1%.

Description FY2006-08 FY2009 FY2010* Recurring Cost Vendor Support and Software maintenance $ - $ 924,548.00 $299,284.23 Business Operations Division Staff $ 147,140.00 $ 180,000.00 $100,214.40 Nonrecurring Cost 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 $ 8,642.40 $ - Business Operations Division Staff $ 294,280.00 $ - $ - Additional Support $1,525,316.30 $ - $ - Total $7,511,824.91 $1,226,904.00 $399,498.63

Total: $9,138,277


Calculations


FY07 FY090.0

50.0

100.0

150.0

200.0

250.0

300.0

28.0 23.7

217.5 218.0

18.5 15.1

DeficiencyUsefulExcessive$M


Calculations


FY07 FY090.0

50.0

100.0

150.0

200.0

250.0

300.0

28.0 23.7

217.5 218.0

18.5 15.1

DeficiencyUsefulExcessive$M

-3.4M

-4.3M


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.

Oct 1, 2009 Oct 1, 2010 Mar 31, 2010

Time period for SCMS Cost

Time period for Cost Savings

Oct 1, 2006


ROI FormulaROI = (Cost Savings – Cost of Investment)

Cost Of Investment

ROI = ($11,600,000 – $9,138,277) $9,138,277

ROI = 27% over the original investment

Break Even Analysis



2008 2009 2010 2011 2012 2013 $-

$5,000,000.00

$10,000,000.00

$15,000,000.00

$20,000,000.00

$25,000,000.00

$30,000,000.00

$35,000,000.00

$40,000,000.00

CostBenefit


Conclusions Coast Guard Improvement Return on Investment calculation

Direct Benefits Indirect Benefits

Questions?


calculating the return on investment for supply chain improvements

Documents

modern coast guard

public release distribution

new department

current missions

cairfac charlestondetroit5

waterway management

tax collection mission

pr4 hh65cmiami4 hu