Strategic inventory levels to satisfy customer requirements Northern

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Strategic inventory levels to satisfy customer requirements Northern Cal OAUG Training Day January 21, 2009 Sridhar Hoskote Partner, Inspirage LLC Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 1 The Oracle APS and Demantra Specialists

Agenda • • • Introduction Business Challenges Supply Chain Need for System Support IO implementation Integrating IO with constrained ASCP Cutover process Results and Summary Q&A Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 2 The Oracle APS and Demantra Specialists

Inspirage is recognized as a premier consulting firm specializing in Oracle Advanced Planning and Demantra Applications. • Founded by former Oracle APS Product Development Senior Managers responsible for design and development of many APS applications • Strategic partnership with Oracle product development in – Areas of new product design and development – Preferred partner for training other System Implementers • Recognized as subject matter experts within the Oracle APS community – Numerous highly successful reference clients – Leadership role in OAUG special interest groups for Advanced Planning and Demantra – Contribute to knowledge sharing by presenting in forums such as OAUG and Oracle Open World conferences Copyright © Inspirage LLC, 2008. Private and confidential. All rights reserved Page 3 The Oracle APS and Demantra Specialists

Inspirage provides the complete expertise of the integrated Oracle forecasting and supply planning solutions Advanced Planning S&OP Monitor plans to actual, collaborate, and respond DM Demand Management, Stats Forecast, Multi-tier Collaboration Workflow, AF/DM, Chaining, Member Management CP Trading Partner Collaboration SNO Strategic Sourcing IO Inventory Strategy PS Detailed Scheduling GOP Schedule, Un-schedule orders Schedule orders Collect Planning Data ASCP Consume Forecast Constrained / Optimized Planning ERP Release orders Distribution/ Service Parts Planning Copyright © Inspirage LLC, 2008. Private and confidential. All rights reserved SO History Page 5 The Oracle APS and Demantra Specialists

Introduction • Source Photonics designs and manufactures wide variety of optoelectronic devices • Broad product line of PON, Telecom, and Datacom transceivers • One of the largest volume suppliers of non-VSCEL based transceivers in the world~ 4 -6 M per year of 1310 nm and 1550 nm transceivers Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 6 The Oracle APS and Demantra Specialists

2006 • • • 2007 Summer 08 November 08 Gl o Pr ba om l O is rde in r g/ Pi lo t. C P iza tim In v Ph ent as or e y. O 2 p tim In v Ph ent as or e y. O 1 p d ne ra i ns t Co Or pr acle od E uc xe ts cu t io n AS C P iza tio n- Oracle footprint Feb 09 Implemented Oracle E business suite in late 2006 and early 2007 Implemented constrained ASCP in 2007 Inventory optimization with demand variability in Summer 08 Integration of IO and ASCP, supplier LT variability in November 09 GOP is slated for early 09 Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 7 The Oracle APS and Demantra Specialists

Business Challenges Customers Scheduled Ship Date Request Date 14 wks LT • • • How much inventory do you need to satisfy request dates? Where do you keep those inventories? How do deal with huge lead time requirements? Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 9 The Oracle APS and Demantra Specialists

Business challenges • Not able to satisfy requirements by request date with current inventory levels • Need to determine and add inventory strategically • Need flexibility in using common materials into large number of finished goods • Customers do not always provide enough lead times • Lead times can be up to 14 weeks Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 10 The Oracle APS and Demantra Specialists

Business challenges • Forecast accuracy and demand stability are quite poor • Supplier delivery performance contributes to uncertainty • Need to rely upon key trading partners to fulfill demands • Exploit the natural build lead times to push inventory away from finished goods • Complex supply chain structure makes it very difficult to plan for inventory levels Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 11 The Oracle APS and Demantra Specialists

Characteristics of supply Chain • Generally 5 to 8 levels deeps • Goes across 3 organizations • Each end item has anywhere from 100 to 400 components • Relatively short manufacturing lead times • Long material procurement lead times • Extensive commonality of components in each family of end products • Same common materials can be packaged into a vast number of finished goods Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 13 The Oracle APS and Demantra Specialists

Several critical complexities to consider Time varying Inventory X Multiechelon Y B A A I C F E D D G C H J Pooling Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Postponement Page 17 The Oracle APS and Demantra Specialists

Need for programmatic inventory calculation • Consider legitimate drivers for inventory requirements such as Service Levels • Consider the entire supply chain BOM structure • Consider uncertainties – namely demand uncertainty and supplier delivery performance • Consider appropriate lead times at various levels • Consider dependent demand propagate need for inventory across the supply chain Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 18 The Oracle APS and Demantra Specialists

Modeling MAPE (Mean Absolute Percent Error) for each product line Via simple probability distribution of lateness Lead Time Variability Demand Variability Strategic Inventory Service Levels Primary driver for setting this was based on OTD Supply Chain BOM using BOM, sourcing, routings Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 20 The Oracle APS and Demantra Specialists

Modeling • Demand Uncertainty – MAPE calculated by comparing history to actual – Default MAPE where there was no history – Varied MAPE to calculate reasonable inventory levels • Supplier Delivery Performance – Set up dummy supplier – In IO plan all purchased parts were sourced using above dummy supplier – Lateness distribution associated with dummy supplier Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 21 The Oracle APS and Demantra Specialists

Important set up for IO to run • Safety Stock method - MRP planned % vs non MRP planned • Lead times – Processing, pre-processing, post-processing, intransit • ABC classes - plan selects items based on ABC classes • Alternate BOMs and Substitutes – made a strategic decision to not consider alternates and substitutes • Forecast error measure MAPE fed at item level • Supplier LT variability – Single supplier source for all buy items – Establish ASL relationships – Feed distribution st supplier level Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 23 The Oracle APS and Demantra Specialists

Other significant set ups • • • Used internal cost roll up instead if actual costs Set up Weights to increase the rolled up costs Carrying costs was set to a global value Set postponement factor to 20 Used profiles to prevent SS calculation on alternate paths and substitute items • Used 24 by 7 calendar in all orgs to smooth out safety stock requirements Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 24 The Oracle APS and Demantra Specialists

Plan options • IO runs with 36 weekly buckets and no period buckets • Penalty factors chosen to derive stable results • No existing supplies or scheduled receipts considered • DP scenarios used to feed MAPE numbers into the plan • Enforce service level plans Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 25 The Oracle APS and Demantra Specialists

Enhanced postponement X X A B LT= 65 days LT= 5 days Postponed SS is in matched sets Both A and B will get SS based on max LT which is A NORMAL POSTPONEMENT Postponed SS is based on LT for each component A and B will get SS based on their LTs ENHANCED POSTPONEMENT Source Photonics used Enhanced Postponement Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 26 The Oracle APS and Demantra Specialists

ASCP plans with IO as input • Constrained ASCP plans with decision rules was already in production • Introduced transient (temporary) safety stock requirements using IO • Objective was to introduce IO as input without significantly affecting plan quality (lateness, inventory etc. ) • Integrating ASCP and IO was a significant effort – Safety Stocks vary across the horizon and finally disappear (transient) – No dedicated supplies created to satisfy SS requirements – The actual supplies are pulled forward instead of creating new supplies. Needed to make room for this effect Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 27 The Oracle APS and Demantra Specialists

Propagated service levels • IO calculates propagated Service Levels to derive SS for buy items • With large number of items at a given level the Service Level tends to go to 99. 99% very fast • Beta factor allowed for tempering the above effect • Source photonics used this factor to fine tune SS levels for buy items Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 28 The Oracle APS and Demantra Specialists

Plan facts • Plans very intricate and a long supply chain – up to 120 days cumulative lead time. • Each end item can have to 300 items • We avoid planning all substitute and alternate paths in IO • Demand variability modeled via MAPE measure • Postponement used to push safety stocks through all levels of BOM (max of 8 levels) • Used ‘enhanced postponement’ logic – lead time specific safety stock for sibling items • We use supplier lead time variability to model delivery performance Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 29 The Oracle APS and Demantra Specialists

Plan facts • Enforce Service Level plans • IO plans approximately 7300 items in 2. 5 hours • Safety Stocks calculated for about 4000 items • Plan horizon is 36 weeks • Demand variability specified via MAPE • Includes both demand supplier LT variability • Do not consider scheduled receipts Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 30 The Oracle APS and Demantra Specialists

Steps taken to make ASCP work • Sized the requirements from safety stocks to make it true transient safety stock • Added additional internal resources to accommodate both regular demands and safety stocks requirements • Used profiles to minimize shared supplies between regular demands and SS requirements • Smoothed safety stock requirements such that system had a chance to consume all supplies within plan horizon Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 32 The Oracle APS and Demantra Specialists

Factors considered to fine tune ASCP • • Lot for Lot Number of supplies to be scheduled Number of times to re-schedule shared supplies Supplies used to satisfy safety stock Demand Supply Window widths Use Optimization Phase dates for pegging Split planned orders to perform safety stock pegging Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 33 The Oracle APS and Demantra Specialists

IO plans Plans with postponement Demand variability only Plans with no postponement, Demand variability only Plans with postponement Demand supplier lead Copyright © Inspirage LLC, 2009. Private time variability and confidential. All rights reserved Page 35 The Oracle APS and Demantra Specialists

Explaining output from IO • Days of supply needed to hold/support manufacturing activities • Instead of verifying exact SS calculations, concentrated on factors that could affect SS and sensitivity of SS due to each factor – Role of lead times in arriving at SS – Importance of Service Levels in calculating SS – Important set up issues that could affect SS – ABC classes, SS method, lead times, types of lead times Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 36 The Oracle APS and Demantra Specialists

ASCP plans Constrained ASCP Plans with postponement Demand variability only Demand supplier lead time variability Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 37 The Oracle APS and Demantra Specialists

Adoption of IO into ASCP plans • Initially fed SS for only buy items into ASCP • Provided a gradual ramp up of SS to give a chance for manufacturing and other resources to react • Made SS requirements transient to avoid pegging to excess – Cut off SS requirements after the longest cumulative Mfg lead time – Set SS to zero for a few buckets prior to end of demands Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 38 The Oracle APS and Demantra Specialists

Results • The overall safety stock planned is in line with expectationsapproximately 6 weeks of inventory in the system • The inventory value matches with the current levels in plan with no postponement • Plans with postponement shows improvement up to 20% in inventory value • Satisfaction of orders by customer request date is expected with a comprehensive execution of IO plans Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 40 The Oracle APS and Demantra Specialists

Summary • Needed a comprehensive inventory planning system to plan and satisfy requirements by request dates • Utilized Oracle Inventory Optimization to plan inventory levels • Used demand supplier lead time variabilities to influence safety stock requirements • Significantly improved customer fulfillment and inventory reduction Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 41 The Oracle APS and Demantra Specialists

Question & Answers? Sridhar Hoskote 510 676 6753 Sridhar. hoskote@inspirage. com Copyright © Inspirage LLC, 2009. Private and confidential. All rights reserved Page 42 The Oracle APS and Demantra Specialists