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2011 Chairman’s Quality Award 1 Logistics Strategy to the Supply of ISF to Brazilian OEMs Belt: Thales de Toledo Verga EBU Mid Range Brazil

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Page 1: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

2011 Chairman’s Quality Award

1

Logistics Strategy to the Supply of ISF to Brazilian OEMs

Belt: Thales de Toledo VergaEBU Mid Range Brazil

Page 2: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

3/22/2016 7:06:52 PM2

DFSS Project Review

Project Name: Define Logistics to Import ISF from China to Brazil.

Green Belt: Thales de Toledo Verga

Sponsor: Luis C. Faraj

Program Name: Hawkeye / Veneto

Program Leader: Thales T. Verga

DFSS MBB: Ana Paulo Marimoto

Team Members: Luis Chain - Mktg & Sales Exec. Manager

Lucio Nubile - Operations Director

Airton Cardoso - Quality Exec. Manager

Sonia Fanhani - Controler

Sidclei Silva - Finance Manager

Eneida Trichtl - Order Entry & Materials Mngr

Adilson Carvalho - Logistics Supervisor

Alexandre Balista - Tax Planning Supervisor

Ricardo Schalch - Sales Manager

Rosane Rodrigues - IT Manager

Andre B Campos - Product Engineer

Adriano Rishi - Engineering Director

Ana Paula Marimoto - DFSS MBB

Page 3: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Objective:

Ensure the ISF logistics from China to Brazil will be profitable to CMI and meet OEM´s expectations in

terms of competitiveness, firm period and inventory (safety stock) prompt availability.

Belt: Thales Verga Type: DFSS

Sub-BU: Midrange Entity: Midrange

Days to Close: 58 Project Avoidance: $42 M

Major Improvements:

– Transfer pricing avoidance to import ISF from China to Brazil: $ 620 / engine (average);

– Firm period reduced in 60% (from 12 to 5 weeks);

– Inventory (safety stock) transfered from China to Brazil (prompt availability);

– Mitigation of risks w/ both Customs strikes and in transit delays (delivery on time);

– Reduction of exposure to ex-rate volatility (prices firmed in USD, not in local currency R$).

Page 4: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Project Background

Those are the issues for CBL to supply ISF to the Brazilian OEMs:

� Transfer Pricing: The Brazilian importer (in this case CBL) must earn a minimum mark-up of

60% on each product subjected to manufacturing. Therefore, transfer pricing in Brazil (PRL60)

eliminates the pricing competitiveness for ISF.

– The 1st target of this Project is to eliminate transfer pricing applicability by using a bonded

warehouse in Brazilwith the OEM as a formal importer of the ISF.

� Inventory availability: Brazilian OEMs require inventory of engines in Brazil to avoid shortage of

engines in their assembly lines. To avoid shortage of ISF (made in China), OEMs are requiring 4 –

5 weeks inventory in Brazil (due to potential Customs strikes, in transit delays, etc...).

– The 2nd target of this Project is to transfer inventory from China to Brazil by using a bonded

warehouse in Brazil.

Page 5: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Project Background

Those are the issues for CBL to supply ISF to the Brazilian OEMs:

� Firm period: Brazilian OEMs accept a firm period of 5 weeks for engines produced in Brazil. ISF

imported from China would require at least 12 weeks due to the additional 8 - 9 weeks for sea

freight and Customs clearance. CBL´s competitors produce engine in Brazil and they can offer the

4 weeks firm period. Therefore, OEMs do not accept 12 weeks firm period for the ISF.

– The 3rd target of this Project is to reduce firm period for ISF to achieve 5 weeks

by using a bonded warehouse in Brazil.

Page 6: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Measure Phase

� Concept Generation: define logistics options available to import ISF

� Cause & Effect Matrix: evaluate logistics options & impact over business

� Pugh Concept: select the best logistics option

Page 7: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Measure Phase

� Process Map: definition of the best logistics option chosen

� FMEA to the best logistics option chosen

Page 8: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Analyze Phase� The best logistics option is the one when “OEM imports ISF from China by

using a bonded warehouse and upfit is supplied by BFCEC.

DO´s DONT´s

Transfer Pricing (PRL60) is notapplicable.

OEM must be involved in the importprocess as the formal importer.

Inventory belongs to the OEM afterlocalization.

Inventory belongs to CMI until ISF is cleared by the OEM in the bondedwarehouse.

CMI safety stock (inventory) is based in the bonded warehouse in Brazil (quick availability)

OEM has to open a branch in thebonded warehouse (CNPJ) for clearance at Customs.

Firm period and lead time reducedto meet OEM expectations.

Get from CMI approval for a bondedwarehouse (it is necessary to theimport process).

Price: in USD for engine, avoidingexposure to ex-rate (conversionfrom USD to Real).

Negotiate w/ OEM approval to thisnew logistics process (OEM becomes the formal importer).

There is an extra-cost in the engineto include bonded warehouse in theprocess (USD200 / engine).

Page 9: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Analyze Phase

� Cost avoidance: USD 42 M from 2012 to 2015 (estimated).

� Annual cost avoidance: USD 10.5 average (estimated).

Avoidance to the transfer pricing per Shop Order

(USD 620 average)

Page 10: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Control Plan

• MAN: bonded warehouse implemented in Jan/12;

• Agrale: bonded warehouse to be implemented in Aug/12.

Find control plan below for the bonded warehouse implementation to Agrale.

Page 11: Six Sigma 2011 PowerPoint template AWARD (Thales de Toledo Verg

Lessons Learned / Shared

� The inclusion of the Brazilian bonded warehouse in the ISF logistics flow from China to Brazil is

the best choice to meet local OEM’s requirements while bringing the best positive financial return

to Cummins.

� it eliminates the transfer price applicability (sales price w/ 60% mark-up over cost) and

therefore leverage the ISF competitiveness in Brazil from a cost standpoint;

� it reduces Cummins exposure to ex-rate volatility because OEM pays for the ISF in USD

(price does not have to be converted from US to the local currency - Real);

� it enables Cummins to reduce the firm period from 12 to 5 weeks, which is the same firm

period offered by competitors with engines made in Brazil;

� it transfers the iventory (safety stock) from China to Brazil, giving to the local OEMs the

same reliability offered by Cummins´competitors with engines made in Brazil.

� it mitigates potential delivery delays associated to risks like Customs strikes and in transit

delays because safety stock is based in Brazil.