Tuesday, December 22, 2009

Carlisle’s Non-Profit Practice at Ten

How It Works and Why We Do It
By Ann Budner


Preface by David Carlisle

I thought it would be fitting to capstone the year with a blog on giving back. Ann Budner leads our charge in non-profit. I believe there are two different approaches that one can take in giving: (1) understanding why it is good to give, and/or (2) treating it purely selfishly, based entirely on what you get back. I do it for (2). The picture to the right is of our Minuteman Arc barn crew (http://www.minutemanarc.org/). It was taken last week during our holiday lunch in my office. We all sat around our boardroom table and ate pizza and drank cider. Today we had eight people representing a fairly broad mixture of intellectual and developmental disabilities doing barn work at our horse farm. During lunch I asked the crew if Minuteman was going to have a holiday party for everybody. They all responded “no” they are not having a holiday party. Instead, they will be helping prepare food for the homeless; they were all quite proud of this. Makes you think. They all felt great, too, about giving something back. We’ve had crews from Minuteman for over 10 year now. They love the barn and the animals here. I feel better about myself every passing moment. It is purely selfish.
___________

It’s hard to believe that we’ve had a non-profit consulting practice at Carlisle for ten years. Most of our motor vehicle clients don’t know about it. Many of our non-profit clients ask us, “What do motor vehicles have to do with non-profits anyway?” Although we are proud of our non-profit work, we intentionally keep a low profile. Our non-profit work is not a vehicle for publicity or sales, but rather an expression of our business ethics and corporate strategy. That’s why it’s been so successful and has grown to involve all three of our offices and so many of our employees.

In graduate school, I took a course on philanthropy and learned the term “enlightened self-interest.” Daniel Yankelovich, the public opinion researcher, says, “Enlightened self-interest is when you make a profit by meeting a need, by fulfilling a social function.” This idea has been around for generations. It is the concept that the most successful philanthropy happens when the company not only feels good about its contribution, but also benefits, either through increased profits, business connections, or an improved public image. The current lingo is “corporate social responsibility” or CSR. Research shows that the most successful CSR programs are tied to a company’s strategy.

Maybe David is right and it is purely selfish. Our non-profit practice has met our business needs by helping us to recruit talented (and community-minded) young people and providing them hands-on training. It also helps us internally with project staffing. But, on a deeper level, our non-profit practice has lasted because it is linked to our business strategy. It helps define who we are as a company. We are committed to delighting ALL of our clients. When we do, we delight ourselves.

How It Works

I was hired to lead Carlisle’s Non-Profit Practice in 1999, after ten years working in various senior level positions in the non-profit sector. I am the only employee dedicated to the practice. Our other employees cycle in and out of the Non-Profit Practice based on their interests and other project commitments. We particularly encourage our junior level staff to work on non-profit projects. These projects are great opportunities to learn project management, presentation, and other consulting skills in a safe environment. Additionally, each of our two US offices participates in a service day every summer (Read more about our Non-Profit Practice at http://www.carlisle-co.com/np-overview.php).

Internally, we consider work on our non-profit projects equivalent in value to our billable projects. We charge our non-profit clients either a very small fee as a token of mutual commitment, or no fee at all. In purely financial terms, we lose money on our Non-Profit Practice, but gain in many other ways. The program has involved 51 employees and has expanded to all three of our offices: Boston, MA; Southfield, MI; and Frankfurt, Germany.

Sample Projects

Our non-profit specialties include: outcomes measurement, strategic planning, strategic fund development, and logistical analysis. Our expertise reflects our knack for making quantitative information sensible and useful. If you think this is valuable to our motor vehicle clients, it is equally if not more so to our non-profit clients! While non-profit workers tend to be more service than number-oriented, they are under tremendous pressure from donors and tight budgets to be more efficient and to prove the impact of their services.

We have been proud to work with Focus: HOPE in Detroit for over seven years. Along with conducting a strategic review of their First Step/Fast Track basic skills program and researching options for GED training and testing services, we improved the logistics of their food delivery program. Focus: Hope provides supplemental food to 41,000 individuals each month through various channels. Our task was to make the agency deliveries - which criss-crossed all of metropolitan Detroit and went as far as Flint and Lansing - as efficient as possible. The existing process under-utilized delivery capacity and Focus: Hope struggled to meet demand. In order to increase delivery outreach, we evaluated and introduced process efficiencies that dramatically increased delivery capacity without adding cost. In the end, we found 23% extra truck capacity and 172% extra van capacity per month. Translated, this meant that Focus: Hope only had to use the truck 15 days a month to fulfill their existing orders.

Last year we completed an outcomes measurement project for the Detroit Historical Society (DHS). We surveyed their members to help DHS understand their membership better and develop segment-based marketing strategies. We secured funding for a survey incentive, which helped garner over 800 responses. We designed a web-based survey, analyzed the results and investigated cross-demographic trends. We then presented our findings to the DHS leadership. Robert Bury, CEO, described our work as “invaluable.” Our results provide DHS with a baseline for recruiting and help them target their events to different member segments. All grant proposals now mention the Membership Survey. Grant makers view it very positively, especially since it was done on a pro bono basis. http://www.detroithistorical.org/

Samuel Frank, who led the DHS project, traveled for three weeks to Bolivia in November to help the International Orphanage Union (IOU). The IOU builds self-sustaining orphanages, supported mainly through exports to the US (such as hardwood and Bolivia’s Best coffee). Samuel’s responsibilities included guest ambassador, business network development, micro-business strategy development, and low-tech engineering. Early data shows that the audience for Bolivia’s Best Coffee is already broadening, based on social media and organic searches. We were pleased to support Samuel’s good work by granting him “on-call” status during his absence. This is another example of how our company values community service. http://www.boliviasbestcoffee.com/

Why We Do It

So, why go to all this trouble? We’re a small firm and don’t have a lot of excess capacity sitting around. Plus, we actually lose some money in the process. OK, it does distinguish us when recruiting new employees and it’s a valuable training opportunity. But the truth is simpler and less selfish than that: It’s who we are. It’s what we believe in. It all comes down to this: our Non-Profit Practice meets both our strategic and our personal goals. Hey, what are we all here for – as business people and simply as people – if we’re not making the world a better place?

Wednesday, December 16, 2009

Parts Proliferation and Inventory – Part 2

Or, Give Me a Lever Long Enough and a Fulcrum On Which to Place It, and I Shall Move the World – by Paul Gurizzian



Introduction

Last week I made the case that if Archimedes (an ancient Greek mathematician, physicist, engineer, inventor, and astronomer) were a modern day motor vehicle service-parts inventory manager; his lever would be eliminating parts proliferation. This means working with product engineering to reuse existing parts rather than releasing new or superseded parts into the catalog when new and modified vehicles are introduced. I then went on to show, with lots of facts and data, that by reducing the number of parts released for new vehicles, from industry laggard to best-in-class, an OEM can:
  • Reduce parts inventory by up to 30%
  • Reduce operating costs by $50 million over the duration of each vehicle’s life
  • Improve and sustain system fill at over 98%
Well, this week we are on the same topic, but this time the focus is on how you can achieve these results. To provide this insight, I present best practices from our European Aftersales Conference (EAC) and North American Service Parts Conference (NASPC) from the past several years. These best practices are broadly put into areas of focus: 1) Stopping the creation of new parts, and 2) Eliminating unneeded existing parts.

Focus #1: Stop the Creation of New Parts

“An ounce of prevention is worth a pound of cure” is a well know idiom. Preventing parts from being born is much more powerful than subsequently eliminating unneeded parts (the second focus). Below are some of the best practices implemented by OEMs over the past few years that may well be relevant for you.

Release Engineering Organization Integrated With Service Parts – Organizational silos between vehicle product engineering and service parts are a key driver of proliferation. This is particularly a problem for service parts business units that provide supply chain support to multiple vehicle business units, when each has their own product engineering function. To address this issue at one OEM, the engineering release staff that was formerly fragmented in each business unit was realigned into the parts division. This group now has responsibility for parts reuse and creating data, tools, and standards to mitigate unnecessary parts across the entire company.

Product Development Process That Includes Parts Reuse Gates – OEMs have documented and prescriptive product development processes with specific gates for cost, quality, and other product attributes. However, at many of these companies, service parts is not a stakeholder in the product development process. As you would expect, there has not been an effective engineering incentive to reuse parts. To change this, parts reuse has been added into the product delivery process at a leading OEM and is reviewed at each gate in the process. The parts organization now has a voice in the product development process.

Metrics and Incentives to Encourage Reuse at the Point Parts Are Created – You know the old business adage, “what you do not measure, you cannot manage”. For one OEM, the parts division worked with executive management to incorporate a part reuse metric into each of their vehicle business units’ key measurements. Parts reuse is now a key metric reviewed by the senior management of each vehicle business unit and the performance on this measure impacts compensation for executives outside of the aftersales group.

Systems and Data to Make Finding Similar Parts Easy – As another preventive measure, one OEM enhanced the functionality of its product development system to allow engineers to easily search for existing and similar parts. The system and the data structure allows for sophisticated searches based on combinations of part function, name, dimensions, weights, materials and other key attributes. The point being is that it’s as easy, or easier, to reuse a part than it is to create a new part.

Training to Create Awareness – Most people want to do the right thing. They just need to know what the right thing is. At one OEM, ongoing training is provided to all stakeholders in vehicle development and service parts who create parts. The purpose of the training is to teach the business case of why everyone should be concerned about service parts and reuse. This training is emphasized by executive management and attendance is tracked.

Focus #2: Eliminate Unneeded Existing Parts


Who doesn’t love prevention? But the simple reality is that many of you have a current parts proliferation problem and the time and support to create change outside of your organization is daunting. Given this, what have OEMs done to eliminate existing parts?

The Special Case of Mergers & Acquisitions – Acquisitions bring special challenges to parts supply chain executives. In a matter of months a new set of several hundred thousand parts can be added to the catalog. In many cases, these parts are common to existing parts at the parent company, but the time and cost to identify these are a challenge. Aftersales is involved in the acquisition process at one OEM. In fact, they have gone so far as to have specific contract language in place authorizing the review and substitution of parts, plus access to drawings and supplier data during the due diligence and subsequent integration stages.

Common Systems to Support Parts Standardization – Let’s discuss mergers some more. Without common systems at merged and acquired companies, parts are eliminated via the brute force method: one engineer and one part at a time. A key enabler for parts reuse at companies that are formed from acquisitions is the development of common service parts systems that include the purchasing, materials, and warehouse management functions. One OEM reports that parts standardization was one of the “low hanging fruit” opportunities afforded by common systems. This made it possible to identify multiple part numbers en masse with common supplier reference numbers.

OEM Original Parts Brand to Cover Multiple Vehicle Brands – One of the causes of high part count for companies is unique packaging and part numbers for each part-brand combination. To minimize part count, while at the same time maintaining their commitment to a multi-brand business model, one OEM created an “OEM Original Parts” brand. This common package brand covers about 90% of the part count and 65% of the revenue. The remaining 10% of parts that are of the highest visibility with the end user, representing 35% of revenue, still maintain the individual brand identity. So, in most cases several parts are now covered by the OEM Original Parts brand and compressed to one part.

Releasing Serviceable Assemblies Rather Than Components – A way to reduce part count complexity is by bundling component parts into subassemblies and kits. One OEM has pursued this philosophy aggressively. Take a radiator fan assembly for example. Rather than releasing 16 unique component part numbers, this OEM releases a single part; the radiator fan assembly. Combining parts to take out proliferation complexity is easy. Striking the right balance with the customer’s cost of repair needs is the challenge. This OEM has developed a set of business rules to guide rational decision making.

Bottom Line

Last week I made the case, with the help of Archimedes, that reducing parts proliferation can have a profound positive impact on inventory, operating costs and service. This week I discussed a series of best practices from a diverse set of OEMs, highlighting leading practices on how results were achieved.

Some practices were focused on stopping the creation of new parts and these include:
  • Release engineering organization integrated with service parts
  • Product development process that includes parts reuse gates
  • Metrics and incentives to encourage reuse at the point parts are created
  • Systems and data to make finding similar parts easy
  • Training to create awareness
Other practices were focused on eliminating unneeded existing parts:
  • The special case of mergers & acquisitions
  • Common systems to support parts standardization
  • OEM original parts brand to cover multiple vehicle brands
  • Releasing serviceable assemblies rather than components

Tuesday, December 8, 2009

Parts Proliferation and Inventory Or, Give Me a Lever Long Enough and a Fulcrum On Which to Place It, and I Shall Move the World


Introduction

Archimedes of Syracuse (287 BC – 212 BC) was an ancient Greek mathematician, physicist, engineer, inventor, and astronomer. He is regarded as one of the leading scientists and mathematicians of history. Among many achievements, Archimedes is credited with saying about the lever, “Give me a place to stand on, and I will move the world.” If Archimedes were a modern day motor vehicle service-parts inventory manager, I wonder what lever he would use to move inventory levels, operating costs, and service levels.

It might well be parts proliferation or, more specifically, working with product engineering to reuse existing parts rather than releasing new or superseded parts into the catalog when new and modified vehicles are introduced. In this week’s blog we look at the impact of parts proliferation on:
  • Inventory levels
  • Operating costs
  • Service levels
  • The entire supply chain
In next week’s blog we will provide several best practice OEM case studies on what these companies are doing to reduce parts proliferation.

Summary

Inventory Managers, if Archimedes were alive today, reducing parts proliferation would be the lever he would be using to reduce inventory, reduce operating costs, and improve service throughout the extended supply chain. Reducing the number of parts released for new vehicles, from industry laggard to best-in-class can:
  • Reduce your parts inventory by up to 30%
  • Reduce your operating costs by $50 million over the duration of each vehicle’s life
  • Improve and sustain your system fill at over 98%
Parts Proliferation and Inventory Levels

The graph below shows the relationship between the number of new parts introduced per new model and total service-parts inventory for nine relevant comparable motor vehicle OEMs. In 2009, we asked North American Service-Parts (NASPC) OEMs for the average number of new parts that are released when a new model is introduced. This is an average over the past few years and you can see on the X-axis that the count ranges from less than 500 part numbers for OEM #5 to nearly 9,000 for OEM #3. This is an enormous range.

The Y-axis shows OEMs’ average service parts inventory level in 2008, measured in months of supply (MOS). Obviously, OEM #8 with about 2.5 MOS is in a better position than OEM #7 at 7.0 MOS.

The dark blue trend line on this chart tells an interesting story. It is a linear regression for eight of the OEMs. OEM #7 is a bit of an outlier in terms of inventory, fill, and business model and is excluded from the trend line calculation. The line is upward sloping as you move to the right. This makes sense; more parts getting added to the catalog each year means more inventory, because the OEM is spreading demand over more parts, resulting in more slower-moving parts and fewer faster-moving parts.

Beyond the common sense direction of the trend line, let’s consider the slope of the blue line. Suppose you have $1 billion in annual parts sales. If you are near OEM #5, #8 or #9, you are holding about $135 million of inventory assuming a 50% gross margin. But, if your are OEM #6 or #3 you are holding $220 million for this same billion dollars in sales. This is an incremental $85 million of inventory. The simple calculation suggests that this is a 60% plus penalty in inventory. However, as practical matter there are other factors also impacting this result. For this reason I have banded the trend line in light blue to indicate there is a range of impact. Let’s convert all of this Archimedean math to a simple statement: Reducing the number of parts released for new vehicles to the best-in-class level can reduce your parts inventory by a very significant amount – 30% is not out of the question.

Parts Proliferation and Operating Costs

By the way, Archimedes, our inventory manager, is also responsible for reducing operating costs. Beyond inventory benefits, reducing parts proliferation also eliminates operating costs. In fact, three motor vehicle service-parts OEMs from both North America and Europe have independently estimated over the past several years that there is between a $7,000 and $10,000 savings associated with not creating each new part. These cost savings include engineering set-up costs and end-of-life scrap costs (but not inventory holding costs). These OEMs use this $7,000 to $10,000 value as an input into new part and parts change approval processes.

In our graph above, at one extreme OEM #3 creates about 8,500 new parts per new vehicle launched while OEM #9, at the other end of the spectrum, creates only 1,000 new parts. This is a difference of 7,500 parts per new vehicle introduction and, at $8,500 (mid-point of the range) per part, this represents a potential cost savings of nearly $64 million. To summarize, Archimedes can save a poor performing OEM more than $50 million in operating costs over the duration of each vehicle’s life if he can move the organization to reuse parts at the level of a best performing OEM.

Parts Proliferation and Service Levels

Okay, Archimedes, our 21st century inventory manager, has shown us the value of reducing inventory and operating costs by holding the line on new parts. But, what about service? To illustrate this issue, we look at data from motor vehicle service parts OEMs in Europe.

OEM X is a volume automaker selling and servicing in Europe. OEM X has provided system fill to its European dealers (i.e., from Poland to the United Kingdom) at over 98% for about five years running, while consistently improving inventory turns. In fact, their reported performance was so good (unbelievably good) that our European Aftersales Conference (EAC) participants asked us to audit their metrics and processes to understand how OEM X could achieve such outstanding results.

In short, we found OEM X does many things well, including supplier management, to drive high fill. However, they are unique in one specific area: low parts proliferation. The chart above is a comparison of OEM X to another volume automaker selling parts in the United Kingdom (the UK is representative of other markets). It shows the cumulative count of parts that are required to satisfy total line demand. What we see is that only 24,000 part numbers are required by OEM X to fulfill 98% of demand. In contrast, a comparable OEM requires 31,000 part numbers to cover this same 98% demand level. In other words, because of parts proliferation controls, OEM X has to effectively manage about 25% fewer parts than its peers to cover most customer needs. As a consequence, OEM X consistently achieves one of the highest system fill and inventory turns performance levels across the Continent. According to Archimedes, limiting parts proliferation is a key lever to increasing service.

Impact on the Entire Supply Chain

The effects of parts proliferation on inventory, operating costs, and service impact all supply chain partners (suppliers, distributors, and dealers); not just OEMs. By reducing part count-related complexity, suppliers have lower manufacturing costs. Both direct activities (e.g., number of machine set-ups) and indirect activities (e.g., material handling and bill of material maintenance) are reduced. With demand concentrated on fewer parts, both dealers and distributors need to hold less inventory to achieve a target fill. Alternatively, they can invest in the same inventory and achieve higher off-the-shelf fill. Also, beyond the obvious benefits to customers, there are second order effects from higher off-the-shelf fill, such as lower premium transportation costs resulting from fewer emergency orders placed by dealers on behalf of customers.

Archimedes’ parts proliferation lever not only moves the OEM world, it also moves the supplier, distributor, and dealer world.

Wednesday, December 2, 2009

Heavy Truck and Auto Parts Sales Outlook 2010 – The Politics of Parts


We are looking at some growth in 2010 for heavy truck parts and auto parts, but we might be missing the opportunity for more significant growth. Why? Two reasons: (1) we will grow in 2009 simply because it is the bottom of the hole and everything looks like up from here, and (2) we might not realize our growth potential because our pace for climbing out of this hole has a lot to do with consumer confidence.

We recently finished two “collaborative” parts sales forecasts for 2010 – 2012; one for auto parts sales, and another for heavy truck parts sales. The process was interesting and consisted of two rounds of participation. First off, we provided the OEMs data on sales “drivers” (things like fuel prices and miles driven) and what we saw as implications. The OEMs then critiqued our drivers and our implications. In the second round, we mentally “ingested” all these drivers and took a whack at forecasting each OEM’s year-over-year parts sales for 2010 (the red “Carlisle” line in the top chart). Each OEM was given a code so that the final results were blind. The OEMs then provided their blind forecasts, which, generally, were less bullish than ours. For the most part, we all agreed that 2010 looks better than 2009 when looking at year-over-year parts sales.

Many of the big drivers of a parts sales upturn seem to stem from consumer confidence. Consumer confidence drives increased spending, which drives increased retail sales and production, which translates into more goods to be moved for HT, and more new retail sales for auto.

The OE auto parts sales forecast differs significantly from the heavy truck forecast. It is simpler. The light vehicle sales market is selling below the replacement rate of 15 million units or so. In fact, just getting to the replacement level of sales would be great; all we need is some more consumer confidence to get to this level.

Heavy truck parts sales service the general economy. We need to move more freight over the roads to drive increased parts sales; more construction, more consumption, more manufacturing, more jobs, more use of parked trucks. Coupled with some positive signals in a somewhat recovering economy, new emissions regulations could hasten fleet replacement, and a surge in HT parts sales. However, even with all this, modal trends do not favor a return to the good old days. Warren Buffett just bought the Burlington Northern Railroad. He’s a pretty smart billionaire. Buffett thinks that evolving market conditions favor more rail and more intermodal.

Going back to the top chart, the big difference between the bullish “Carlisle” forecasts and the OEM forecasts is all about the speed of the recession recovery. There’s good news here and some not-so-good news.

The Dow hit 10,000 again in October and people don’t feel so poor anymore. The big question is how this growth in paper wealth will translate into spending. The last few months have shown some expected improvements in certain fundamentals of the economy, but we’ve had some disappointments on some of the soft things that ultimately drive consumer confidence. Things could be better.

Consumer confidence with the present situation is at a very low point. Why? Hey, we missed the bullet and avoided a depression with Obama’s controversial economic stimulus. The meltdown of the economy was certainly a top worry for many consumers, but now we are on to the next score of worries. Americans are worried about the government going broke. Thomas Friedman (I still really do not care for him) described this as the Warren Buffett principle:
The Warren Buffett principle: Everything I’ve ever gotten in life is largely due to the fact that I was born in this country, America, at this time with these opportunities for its citizens. It is the primary obligation of our generation to turn over a similar America to our kids.
Obama’s job approval numbers are also at a low point. It was not enough for him to dodge the depression bullet; much of his magic was all about change (that really is not happening), trust, brilliance, and hoped-for decisiveness. Few see the brilliance or “change” with his indecisive efforts in healthcare reform efforts. Afghanistan war policy is another matter. Healthcare reform is all about same-old-same-old compromises. Afghanistan is pretty much all about Pakistan. So, folks - call them consumers - have lost trust in him. Even the NY Times is riding hard on Mr. Middling. Maureen Dowd has some new nicknames for him, and Paul Krugman never drank the Obama Kool-Aid. Obama’s job approval is tanking, and this will have a significant negative impact on consumer confidence … now that we all know it will take 2 years for the jobs to come back. Since we are a consumer economy, this will snowball into lagging GDP, and continued consumerism belt-tightening (that dreaded Keynesian paradox). Consumer confidence will just have to reflect reality and not partly trust, respect, and hope.

Bottom Line: Pretty much everybody agrees that we should see year-over-year parts sales growth in 2010. The big question is, how much? There are certain certainties out there that guarantee a slower recovery: a still bursting mortgage bubble and very high unemployment. Offsetting this anchor is pretty much a lone soldier: consumer confidence. How much growth? It pretty much depends on Barack Obama. Is he a Jimmy Carter? Or the good parts of Bill Clinton?

In the next few weeks we will scratch beneath the surface and look at key parts sales driver