Quick stock-control course, Komatsu Europe introduces the ‘overnight-delivery ratio’

In 2010 Komatsu Europe, owned company by Komatsu Ltd. (Japan), manufacturer of machines for the construction and mining industries, decided to introduce the ‘overnight-delivery ratio’ as KPI (key performance indicator) and consequently as key factor in stock-control. What this meant in practice is that the focus was shifted to making sure that urgent orders had to be delivered to the end-customer the morning after an order was placed, independently from where the stock was held. This was nothing less than a revolution since off-the-shelf availability had hitherto been the KPI for Komatsu Europe towards its distributors. The project started gradually with pilot distributors, and afterwards it has been progressively expanded to almost all our European network. Paolo Coracina, senior manager, distributor support and procurement at Komatsu Europe, is rather happy with its  results so far.  

Komatsu Europe’s spare parts central distribution centre for the EMEA region is located at Vilvoorde, from where Komatsu Europe supplies spare parts for all Komatsu mining, construction and utility machines other than super-large shovel excavators, fork-lift trucks and forestry equipments to distributors in EMEA region, with the exception of South Africa and the Gulf countries. 200,000 SKUs (stock-keeping units)  are moving at the central warehouse. For most of the spare parts, Komatsu can guarantee off-the-shelf availability. Only in the case of some larger items, such as frames, large booms and arms, the lead-time is longer. Spare parts are supplied off-the-shelf up to ten years from the time of purchase of the machine, but orders for components for much older machines are by no means unusual.  

Komatsu Europe services its customers using a network of independent distributors. There are around 50 in all, spread across the EMEA. As a rule of thumb, in Europe there is one distributor for each country, except for Germany, which has several. P. Coracina: “Until 2010 we had a situation where a customer ordered a spare part with his local distributor, who would guarantee off-the-shelf availability of around 70%. Items that he was unable to supply immediately were ordered from the EMEA distribution centre in Vilvoorde and sent to the customer per express delivery. In effect, each link in the supply chain functioned more-or-less independently of one another. We measured whether we were meeting our guarantees regarding off-the-shelf availability to distributors, and whether the distributors themselves did towards the end-customer. In 2010 Komatsu Ltd. requested us to discontinue this method of working, and to take the service provided to the end-customer as target-point for each stage of the supply chain. The KPI since then introduced was the overnight-delivery ratio.” 

The overnight-delivery ratio means that, irrespective where stocks are held, the customer must receive the delivery of his spare-part order the morning after the order is placed. It is a function of the consolidated availability of a certain part on the supply chain, but also of the logistic capability to deliver the part from the stocking location to the required destination. The introduction of this system had major impacts on stock-control, not least for the distributors.  P. Coracina: “Our distributors’ willingness to adopt a different method of working was an essential precondition for successful implementation of the project. We do not have our own distribution network. We distribute machines and spare parts using independent distributors, so you can’t just steamroller something like this through. Moreover, the project would have a major impact on the internal layout of their warehouses. Hence the critical importance, first and foremost, of clearly communicating the impacts and benefits to our distribution partners.” 

Same tool, better output 

Komatsu Europe has supported the software tool Logility to manage ‘fast and middle movers’ since some time in the past. With this tool, the company was able to determine the inventory level needed to be held in stock at the central warehouse. Komatsu Europe has also been collecting retail demand and Distributors inventory data, allowing a second independent pyramid of the Logility system to determine the inventory of local fast and middle movers to be held at each Distributor. The consolidated inventory management was introduced by defining stock responsibilities by product type (consumables at Distributors and functional parts at KEPO).  

However, Komatsu Europe needed to improve three key points: 

  1. capability to drive the Logility system in order to adapt its response depending on forecasted changes of market trends  
  2. capability to improve the inventory planning for slow movers, combining OEM technical expertise with statistical tools 
  3. confirm set-up and improve the multi-echelon planning capability of the consolidated KEPO-Distributors inventory 

In order to step-up with the above challenges, Komatsu Europe called in the consultancy Möbius. 

P. Coracina: “Today’s market conditions require that  we are highly responsive, with capability to translate macro Sales and Operation Plan (HANSEI) into micro planning and that we are capable to manage structural reforms also in the inventory deployment scheme. We called Möbius in to help us review the set-up of our planning tool, to complete our planning capability on the areas not covered by Logility and eventually to train our planners with state-of-the-art methodologies. The aim was to be able to react to changes in the market, by adjusting in an easy way  a limited number of parameters of the planning system. Since the crisis, the ratio of demand of spare parts  has changed, shifting towards more mining machines. On the other hand, demand for construction and utility machine parts has slackened owing to the general downward trend in the European construction sector. A change of this kind has a major impact on planning and also on warehousing operations, since miningindustry components require larger warehouse premises.” 

Jurgen De Bruyne, Möbius: “As well as calculating new parameters, it was also essential to adapt processes around the software. We had to ensure the system would continue to provide sound stock-control. Especially in case of  Komatsu distributors, we expanded the reporting component further. Now the system includes not only KPIs for management reports, but also for managing the planning system. Essentially, the Check portion of the Plan-Do-Check-Act cycle has been strengthened, allowing improved capability to adjust the planning system.” 

Distributors on board 

Komatsu had to implement significant improvements in the logistic performance in certain European areas, had to change part of the warehousing spaces, but the main complexity was to involve Distributors and have them accept and believe in the new inventory deployment scheme. One of the most important changes for them is that henceforth they would no longer stock functional parts, mainly slow-movers, at their own warehouses. These items would be stored centrally and despatched as needed. On the other hand they are responsible of the availability of consumables, mainly fast movers.  

P. Coracina: “We started with our five largest distributors. Big portion of the functional parts  were returned to the central warehouse at Vilvoorde, as distributors stock only consumables. It is advantageous from their point of view, since their inventory risk is greatly reduced. However, this does not detract from the fact it was a major change. In some instances we had to defer launch of the project launch slightly, as we needed to allow our distributors time to adapt their warehousing arrangements, and to prepare for an increased level of  stock of certain parts. Distributors send us a file every week, indicating their stock levels and their retail sales orders. Whereas previously we worked on the basis of the availability reported by distributors, which amounted to no more than a broad-brush figure per distributor, nowadays we make our calculations based on the availability of each item. In this way we get a much better overview of the true overnight-delivery ratio per article or per category.” The balance of the project itself is definitely positive. The overnight-delivery ratio is now up to 96%, compared with a previous average of 90%.  P. Coracina: “The safety stock of fast-movers has declined by 15% to 20%. But what’s just as important is that we now procure far fewer consignments by air cargo, because we now get better inventory planning by virtue of the changes made to Logility. Stocks of slow-movers have of course increased, because our distributors no longer keep slow movers in stock locally. In this respect, too, Möbius helped us by calculating the optimal reordering point for slow-movers.” 

The next hurdle

By expanding and fine-tuning Logility, Komatsu Europe now has a sound basis on which to continue rolling out its stock-control strategy at the distributors.“In order to define which parts need to be kept in stock at distributors and in what quantities, we could operate by relying entirely on the calculations made by Logility, but we’ve not done that. We decided to integrate the mathematical model into the policy we wished to pursue in relation to which product types the distributors should take responsibility to stock. In other words, we do not seek only to keep the optimal stock level at Distributors: we also want to encourage them actively to promote specific items on the market. In particular, where a component faces stiff competition on the market, the stock should be kept at Distributors and they need to make active efforts to penetrate that market. Thus, our sales initiatives sometimes differ from what the calculations of the mathematical model might suggest, but the model does help us to make well-informed decisions about stocks”, Coracina explains. 

Now that the new method of operating has been implemented at the five largest Distributors, attention can turn to the rest of the distribution network. “In the meantime, the head office in Japan decided to ramp the overnight-delivery ratio up further to 98%. Among other things, this implied that slow-movers, and especially ‘very’ slow-movers, which are currently stocked centrally in Japan, would be transferred over to the regions – hence to Vilvoorde in the case of the EMEA region – in order to be able to service local markets even faster. The adjustments made in Logility and the entire planning process thus came not a moment too soon. In the future, we will need to be able to control stocks even more efficiently, and this especially for the slow-movers where the balance between achieving good service level and minimizing risk of obsolescence is critical”, Paolo Coracina concludes.µ

Disclaimer: This article has been published in the print edition of the Dutch Value Chain magazine, 2012 Q4.

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