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POLITECNICO DI MILANO

MANAGEMENT ENGINEERING DEPARTMENT

REINGENEERING ANALYSIS WITHIN THE VENDOR

MANAGEMENT INVENTORY HELD BETWEEN RHIAG AND

SPESSO GASKETS SINCE 2012

Professor: Ing. Riccardo Mangiaracina

Master thesis from:

Charis Ivonne Sanchez

Matr. 820294 Academic year 2014/2015

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INDEX

1 Acknowledgements ................................................................................................................................... 1

2 Executive Summary ................................................................................................................................... 5

3 RHIAG ......................................................................................................................................................... 8

3.1 Rhiag Group .................................................................................................................................... 8

3.1.1 History ..................................................................................................................................... 10

3.1.2 Group business model ......................................................................................................... 11

3.2 In Italy: Rhiag SpA ........................................................................................................................ 12

3.2.1 Product Management ........................................................................................................... 13

3.2.2 Information system ............................................................................................................... 14

3.2.3 Corporate strategy ................................................................................................................ 15

3.2.4 Organizational Structure ...................................................................................................... 16

4 SPESSO Gaskets s.r.l ................................................................................................................................. 26

4.1.1 History ..................................................................................................................................... 26

4.1.2 Business Model ..................................................................................................................... 28

4.2 Relation between Spesso Gasket and Rhiag Italy .................................................................. 28

5 As Is process ............................................................................................................................................ 30

5.1 Repackaging .................................................................................................................................. 30

5.2 Vendor Management Inventory (VMI) ....................................................................................... 30

5.2.1 Initial Considerations ............................................................................................................ 31

5.2.2 VMI process ........................................................................................................................... 36

5.2.3 Parallel Process .................................................................................................................... 37

6 Blueprint of the process and reengineering suggestions ........................................................................ 38

7 KEY PERFORMANCE INDICATORS (KPI’s) ................................................................................................. 41

7.1 Fill Rate .......................................................................................................................................... 42

7.2 Inventory turnover ......................................................................................................................... 44

7.2.1 Application in Business (4) .................................................................................................. 45

8 ANALYSIS OF ACTUAL PERFORMANCE VMI PROCESS ............................................................................. 47

8.1 Measurement Fill rate for The Italian and the Asiatic range, in the actual VMI process.... 49

8.2 Measurement of the inventory turnover for The Italian and the Asiatic range, in the actual

VMI process ............................................................................................................................................... 52

8.3 Comparison Between Rhiag and Spesso Service level .................................................................... 54

9 POINTS OF IMPROVEMENT ..................................................................................................................... 57

10 possible solutions ................................................................................................................................ 58

11 Determine The most accurate solution ............................................................................................... 60

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12 Cost analysis ........................................................................................................................................ 70

12.1 cost of inventory .............................................................................................................................. 70

12.2 Allocation and dispatch cost ............................................................................................................ 72

12.3 Operative Supply Chain cost ............................................................................................................ 73

12.4 Loss of sales cost.............................................................................................................................. 73

12.5 Transportation cost ......................................................................................................................... 73

12.6 Margin cost ...................................................................................................................................... 73

13 RESULTS ............................................................................................................................................... 75

14 Conclusions .......................................................................................................................................... 76

15 Bibliography ......................................................................................................................................... 77

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1 ACKNOWLEDGEMENTS

First of all, to my family for their constant support through all the years of my life, all my

achievements will be always dedicated to them. To my father for the trust placed in me, and

his wise counsel, to my mother for her infinite love and for being my model, my brother Ivan

to be more than a brother, a friend and to my brother Edgar for always being there when I

needed.

To my colleagues of the motor team in Rhiag, without your support and help, nothing of this

project would have been possible, specially to my boss Fabio Pedroncelli, that guide me

along the development of the thesis . To all my professors, colleagues and friends.

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2 EXECUTIVE SUMMARY

2.1 INTRODUCTION This thesis provides an evaluation of the actual VMI process applied between Rhiag and

Spesso Gaskets since 2012, in order to determine its effectiveness through the

measurement of the key performance indicators (See chapter 5), and also to determine

possible points of improvements, analyze possible solutions and suggest feasible

applications (See chapter 6)

VMI implementation was created with the scope of increasing Rhiag Inventory turnover and

the service level concerning certain products, and also giving more information to Spesso

Gaskets so they can also control and reduce their own inventories (win-win strategy).

The VMI process in Rhiag have had changes all over its implementation, always with the

scope of learning from the market and staying ahead of the latest methods of optimization

of operations. As it will be shown along this project, the results acquired until now satisfied

the initial expectations. Although there still been some improvement points that can even

increase the performance, thus exceeding the initial expectations of the VMI implementation.

For the analysis of this improvements, a first description of the process was done, taking

into account the subdivision of the components, the steps from the requirement to the

acquisition of the products, and the reasoning behind each implementation, after a the

process description, the BPM diagrams was printed, in order to summarize the information

flow, form this diagram some improvement points where identified and possible solutions

where suggested.

This points of improvements where focused on analyzing if a complex sub process (sell of

the parts of the assembled products) that actually is held by Rhiag, worth to continue as it

is or instead should be directly held by SPESSO gaskets, although some margin is lost. For

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this dissertation a cost analysis was provided, and as a conclusion a formal suggestion

based on the costs was delivered.

2.2 OBJECTIVES

The scope of this project is to analyze the performance of actual VMI process held by Rhiag

and Spesso Gaskets since 2012. Calculating the Inventory turnover index and the service

level, for both, VMI and non VMI products, in this way to demonstrate the success of the

VMI implementation.

Also analyze the processes performed in order to achieve the VMI scope, detect the points

of improvement, propose possible reengineering models and evaluate the suitability of each

proposal, in term of cost.

2.3 METHODOLOGY

For acquiring the scope of the project it have been established a procedure, developed as

following:

Description of both companies; Rhiag s.r.l and Spesso Gaskets s.r.l (Chapter4

and Chapter5)

In this 2 first Chapters is done a General description of each company with their

history and their business model, also a short description of how both companies

started to make business together and a general description of the VMI process

implementation.

Description of As Is process (Chapter 6)

In this chapter is written at first the process of repackaging, later the considerations

for the VMI process; the lot size, the calculation of the ROP, within others. And finally

the complete VMI process, taking into account the previous considerations.

Define Key performance indicators (Chapter 8)

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From the general scope of the area, the Key performance indicators are defined, and

later on the metrics to measure each of them.

Analyze the data of the As Is process for VMI and non VMI process. (Chapter 7)

In this chapter the description made in chapter 6 is printed into a BPM diagram, and

some suggestions for improving the process are done.

Calculate for both cases the inventory turnover and the service level. Make

conclusions (Chapter 9)

In this process the results of the data collected from Rhiag’s data base is shown,

comparing the metrics defined for the KPI’s: monthly Inventory turnover index and

monthly fill rate index (service level), for the past 3 years. Through this data an

analysis of the success of VMI implementation is done.

From the As Is diagrams analyze point of improvement and propose possible solutions. (Chapter 9, Chapter 10, Chapter 11) In this chapter the considerations of chapter 7 are analyze, also evaluating the data

related to each solution.

Cost analysis (Chapter 12) For each possible improvement a cost analysis is done, in order to determine its

feasibility, then the solution with the best result is chosen in order to do the proposal

for the process reengineering.

Results (Chapter 13) Results of Cost analysis of Chapter 12 are written. Is it better to reengineer the

process or is better to continue with the actual methodology?

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3 RHIAG

3.1 RHIAG GROUP

Rhiag is an international Group and a European leader in the distribution and sale of parts

for cars and industrial vehicles in the independent automotive aftermarket.

The distribution model, centered on strong relationships with main suppliers and component

producers, guarantees speedy delivery of an extensive range of products to their clients,

and is managed by a logistic network of 11 central warehouses and 220 distribution

branches serving over 83,000 clients.

The Group’s supply chain has been developed upon a “pull” type model, which

ensures on the one side a consistent maintenance of optimal stock levels and on the other

side the maximum efficiency of the distribution system and the ability to quickly meet the

clients' needs.

At the level of the supply chain Rhiag ranks among manufacturers of components and spare

parts dealers, not thus having a real outlet to the final customer.

The Company holds a leading position on the Italian, Czech, Slovak, with an especially

strong on Swiss, Hungarian, Ukrainian, and more limited on Romanian market. The Group's

international presence corresponds to a strategic choice aimed to match the distribution

activity in mature and stable markets, such as Italian and Swiss where growth is primarily

by the acquisition of market share, to that in markets with high potential for development

with leaders of growth implicit is growth of the markets

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Figure 1 Actually the company operates in 10 different countries: Italy, Spain ,

Switzerland, Bulgaria, Czech Republic , Slovakia , Hungary , Ukraine , Romania and

Poland .

Rhiag IAP SpA is the most important company of the Rhiag Group. It operates in Italy

through Rhiag and its subsidiaries: Bertolotti, InSIAMO and Rhiag Engineering.

In Eastern Europe, it operates in the Czech Republic through Elit CZ and CZ Autokelly, in

Slovakia through Elit Autokelly, in Hungary by Lang and its subsidiary Car -Go , Ukraine and

Romania through Elit Romania and In Switzerland operates through Rhiag RGL.

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Figure 2 Structure of Rhiag group, RHIAG Italy, BERTOLOTTI Italy, ERA Italy, RHIAG

Switzerland, ERA Spain, ELIT Czech Republic, ELIT Slovakia, ELIT Ukraine, ELIT

Romania, ELIT Poland, LANG Hungary, AUTO KELLY Czech Republic, AUTO KELLY

Slovakia, AUTO KELLY Bulgaria

3.1.1 History

The Rhiag Group was founded in 1962 in Italy, focusing initially on the progressive

extension of the product range and the expansion of the distribution network.

Towards the end of the ‘70s, the international expansion began with entry into the

Swiss market.

In 1995, with the acquisition of the Elit Group, Rhiag entered the Eastern European

markets, in particular the Czech Republic, Slovakia and Ukraine.

ERA Italy ERA Italy

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In 1999, in order to further strengthen its position in Italy, Bertolotti was acquired –

which was among the leading operators in the Italian independent automotive

aftermarket.

In 2000, the Group further expanded its international presence with the acquisitions

of Elit Romania and the Hungarian Group Lang.

In August 2010, Auto Kelly CZ and the subsidiary Auto Kelly Slovakia were acquired,

with the Group becoming the leading independent distributor in the Czech Republic

and Slovakia.

In 2013, through the opening of a warehouse in Sofia by Auto Kelly BG, Rhiag Group

entered the Bulgarian market.

At the beginning of 2014 the Group starts the operations in Poland under the brand

Elit PL.

Finally, on 16th October 2014 Rhiag Group finalized the acquisition of the aftermarket

distributor ERA, an Italian company, internationally orientated, and specialized in

electric and electronic parts.

3.1.2 Group business model

The business model consists in purchasing parts from component producers, stocking them

in the Group warehouses, distributing the parts to the branches and finally selling them

to clients.

The products handling within and among the central warehouses, the regional warehouses

and the branches is constantly monitored through advanced IT systems, which ensure the

correct placement of the items and efficient picking and shipping according to the delivery

deadlines.

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Timing and volumes concerning supply is managed through a consolidated database, with

continually updated calculation procedures, ensuring a sufficient level of stock at the

different points of the distribution chain.

3.2 IN ITALY: RHIAG SPA

Rhiag S.p.A. It is operating for nearly fifty years in the independent distribution parts dealing,

in particular, cars, trucks and tractors. The canal "Independent" collects all market

participants are not linked to car manufacturers and therefore not part of their care.

Figure 3 Placing Rhiag within the supply chain of spare parts

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Rhiag aims to have the greatest range possible in order to ensure the greater coverage in

terms of fleet and then to customer requests. all The range of original quality or matching

the original in accordance with Law BER 2002, which allows to apply these products also in

the warranty period vehicle. The 85000 references already cited can be divided, for context

application in automotive, truck and engine.

The distribution network constitutes the heart of the company and is constituted by two

Central warehouses, 3 hubs and 17 branches, with a total volume of cargo storage of more

than 300,000 m3 and 20 million units handled annually. The central warehouses are located,

Milan Siziano (PV) and subsidiaries scattered in almost all regions of Italy. Such breadth

throughout the country allows you to make deliveries within 24 hours in 48h peninsula and

on the

Figure 4 Warehouses, Branches and Hubs location

3.2.1 Product Management

For the range of products, Rhiag’s strategy aims to have the largest possible assortment,

so that they can cover all customer inquiries. Given the variety of products and the fact that

they come from different suppliers, Rhiag decided to use its own code, called telephone

code (CT), to optimize the management.

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To facilitate the activities of management of the range, the products are classified according

to different dimensions:

Commercial classification: identifies the family of the product (eg pads, filters, etc.)

Quantitative Classification (ABC)

turnover class

logistic class

cost of sales class

Statistical Classification: was realized in order to divide the items into categories

that did not depend on the turnover. This classification allows to highlight certain

types of articles that require special handling. For items that fall into this category

you cannot make the automatic supply because suppliers have stopped producing

them, or because they are already on the market topping, ie codes that replace

other items

3.2.2 Information system

In support of all business activities, Rhiag decided to use an ad hoc information system, in

this way for every need you can purchase a dedicated software.

The base platform on which it was implemented the information system is an IBM AS /

400, which are associated with other software components such as:

Demand Solutions, the demand forecast

Tec-Com, the network for on-line transactions between manufacturers / distributors

Airone, for the management of flows between branches

In parallel to the AS / 400, for two years in the branches is used as an information system

called Easystore, that automatize the faces of reception, picking and shipping.

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3.2.3 Corporate strategy

In the early decades, the company has based its strategy on an ever-increasing demand

and always increasing development.

Today, the context in which it operates has changed: the question is stationary, the

replacement market in Italy is now saturated and the recent financial crisis leads

consumers to seek ever more economic solutions.

For this Rhiag tried to create a competitive advantage over its competitors by focusing on:

Product Quality

High level of service

Stable reports with key customers

Currently, given the competition from car companies, corporate strategy aims to defend the

independent market looking to create partnerships with its customers. From this Rhiag pays

particular attention to issues concerning the construction of a logistic service / efficient

distribution network, the constant expansion of the range and the definition of convenient

services for customers.

Factors that mainly affect a partnership in the automotive sector are:

The size of the range

Low delivery lead time

Sales Support

Additional services for customers partners

Financial media in support of the expansion of the customer (eg. Payment

extensions)

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The goal of the strategy is therefore to build Rhiag leadership of differentiation, not based

on reducing costs, but the high quality and the offer of providing value-added services to the

customer.

3.2.4 Organizational Structure

Rhiag S.p.A. is composed by more than 500 members, without the agents, one-firm, about

90, who make up the company's sales force. The organization chart illustrated below,

shows the functional structure, whose directions report directly to the CEO

Figure 5 Organizational Chart Rhiag SpA

The three staff departments of Rhiag are:

The direction of information technology (IT) is responsible for internal

maintenance, the ad hoc development of specific applications for AS400, the care

of the website; it is also the manager processing of data in the central data-base.

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The management control of management: its activities relate to the accounting,

administration and debt collection.

The direction of human resources dedicated to the selection, training and

development

staff; it is also to be in charge of the service supervision.

Secretary: deals with reception services and room management. And the resource

to be referred to in case of need of information on Meeting schedules and other

issues the organization of the working environment.

The following describes the main activities carried out by some of the business functions:

3.2.4.1 Logistics

It covers both the management, organization and maintenance is concerned with both the

management, organization and maintenance of the two central warehouses and

of the 17 subsidiaries of the company, that the coordination of the physical flows of goods.

In each of the poles of storage is a manager who runs the Centre for as for the various

activities, depicted later.

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Figure 6 Activities performed by the warehouse (Orders refer to customer orders, not to

supplier ones)

In the branches, the logistics manager establishes classification parameters of the

products, the management policies of the warehouses, storage techniques and draw up

the regulations of the structures.

For the realization of the links between central warehouses and branch offices, the

direction

of logistics makes contracts with external transport companies, able to guarantee high

performance of service in terms of delivery times.

3.2.4.2 Commercial

It deals with the conduct of trade policy with the aim of expanding the park customers and

retain existing ones by offering them the purchasing conditions studied specifically on their

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situation. To better understand a variety of customers Rhiag, the marketing department has

created three classifications, each with objectives different:

Figure 7 Commercial classification

Classification for networks:

This type of classification divides customers according to the type of products purchased;

this allows to associate each of them to a particular network commercial. The types of

network you are in turn classified into:

· Automotive Network, made up of products from the fields of: Steer, Electrical and Chemical.

· Network body, composed of the products belonging to the sectors: Bodywork. Auto Body and Industrial Vehicles.

· Technical Network, composed of the products Motor and Industrial Vehicles.

The management of the three networks is entrusted to the sales force, made up of agents

distributed throughout the country that deal to offer products and contracts sales with

customers. The sales force is organized by areas of sale, or in geographical areas covered

entrusted to a team of agents supervised by area manager. With regard to the automotive

network and bodywork, the corresponding areas are six, while for the network technique are

two.

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The agents are very specialized, dealing within a certain area of a particular sector, this

implies that a customer is being served by multiple agents depending the type of product

treated.

In accordance with this subdivision agents, about 90 in total, are classified by type

specialization in automotive, automotive and bodywork, bodywork, Technical Agent (Engine

products and VI), sole agent (all products). This force structure sale allows the penetration

of the entire national territory with experienced staff each type of product.

The classification for networks allows splitting customers by product type Purchase:

· Spare Parts Dealer generic (Automotive Products)

· Adjustment (Motor Products)

· Spare Parts Dealer Specialist V.I. (Products V.I.)

· Spare Parts Dealer Specialist Body (Body Products)

· Spare Parts Dealer Specialist Electric (Electrical Products)

· Spare Parts Dealer Mixed

· Spare Parts Dealer generic V.I.

· Generic and Motor Spare Parts Dealer

· Spare Parts Dealer generic V.I. and Engine

Classification by revenue

The classification by total turnover with Rhiag divides customers:

· Partner (annual turnover in excess of € 300,000 purchase)

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· Customer Friend (turnover between € 150,000 and € 300,000)

· Independent Client (turnover below € 150 000)

Classification strategy adopted Rhiag

The classification of customers for strategy adopted Rhiag generates three types of

classes:

· Customer 3R (Officine "in place")

· Customer 3C (Officine "right" body)

· Customer Partner InSIAMO

Figure 8 Relation between different client classifications

The spare parts dealers in these categories are all partners Rhiag.

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Another activity carried out by the commercial division, which aims to increase sales,

the definition of "plus". It is of particular facilities that are agreed between the agent and the

customer, and regulated by a contract signed earlier this year. This document provides for

the definition of a target annual turnover in buying of a certain product category.

The annual target is broken down into sub-goals bimonthly and the achievement of each of

these Rhiag dispenses towards the customer credit note. As with other trade actions is also

the plus diversified in function of the client to which is proposed; There are, in fact, the plus

market (payable to all general customers), plus the loyalty (payable only to customers 3R)

and plus VMI (for members of the consortium InSIAMO).

It appears evident that the customers VMI, to the close working relationship we have

undertaken with the best Rhiag purchasing conditions. It 'important to remember that, the

value of plus, is not It established arbitrarily agent but is regulated by the internal regulations

Rhiag.

For customers 3R another type of facility delivered during the signing of the contract is tied

to awards of different nature that the customer agrees directly with the agent.

3.2.4.3 Marketing

Automotive marketing division is subdivided into four sectors:

· A1: management of shock absorbers, clutches, belts, kit distribution

· A2: management of the pads

· A3: management filters, air conditioners, heat-engine components

· A4: management of the cooling / chassis, water pumps and thermostats.

· Body.

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These divisions, respectively for Automotive, Commercial Vehicles and Motor. They serve

to determine:

· The range

· The sale price

· Promotional activities

· Contracts with suppliers

· The first purchase on the basis of technical and scientific knowledge

· The production of catalogs, price list and information material for customers.

The goal of marketing is to offer products and services tailored for spare parts dealers to

meet the demands of the end user. For this, the division pays particular importance in the

selection of the range of products and in the quality of suppliers. The major difficulties in the

management and expansion of the range reside age of vehicles in circulation, which

decreases dramatically, and the need to raise the supplies quickly.

To ensure product quality in the selection of suppliers, the marketing strategy focuses on the selection of original equipment manufacturers, or company they make products for car manufacturers.

Once selected suppliers marketing division establishes the marginalization of each product

line, the parameter which is usually fixed irrespective the volume of sales.

3.2.4.4 Supply Chain

The supply chain in Rhiag is the function that links the company with actors upstream and

downstream in the supply chain.

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Figure 9 Organizational Supply Chain Chart

The activities that characterize this function can be divided mainly into three areas:

Purchasing and supplier relationships

As regards the upstream side of the supply chain, the supply chain shall undertake orders

and is therefore directly responsible for the level of stocks in this structures stock. Supplies

are managed by the team, which are responsible as well as the average balance of each

distribution center, also of lost sales. Procurement policies depend on product

characteristics and are the result of the intersection of the studies of seasonality Articles,

sales forecast and promotional campaigns.

Distribution

This activity consists in the allocation of the stock in the distribution system once you arrived

in warehouse after purchase. For each article It is defined as the minimum and maximum

amount to be kept in each tank, function the desired coverage and geographical location,

also in anticipation of future direct transfers between branches as efficiently as possible. The

definition of such parameters triggers a supply branch whenever the stock falls below the

minimum level, which material flows are managed by logistics. A rather critical is the

distribution of new products: the complexity at the level of purchase that It affects the product

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manager also extends to distribution, not having to available historical data. In these cases,

the preferred way is to keep the centralized

much as possible using the system of replenishment to supply the one or the other branch

in, If the deficiency amount (remember that in 24 hours you can deliver across

Italy, while 48 islands).

Customer relationships

With regard to the downstream side of the supply chain instead within the Supply Chain

created the service Vendor Managed Inventory. It is a project commissioned by the

consortium InSIAMO, offering customers the option of a support in the management of their

stocks. In particular, with the service VMI, called Integrated Logistics, Rhiag undertakes to

establish the level of the stock to keep points of sale in function of the consumption.

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4 SPESSO GASKETS S.R.L

Spesso Gaskets it’s a company manufacturer of flat gaskets and joints for OEM and

aftermarket applications. Their scope is to sell engines to an increasing number of world

class customers in the truck, automobile and motorcycle markets.

Figure 10 Products distribute by Spesso Gaskets

4.1.1 History

1920’s In 1926, Mr. Clemente Spesso, grandfather of current Spesso’s Chairman,

establishes a workshop in downtown Torino to supply the growing Italian auto

industry

1950’s starting from the 1950’s, Spesso grows consistently its business in the

Independent Aftermarket, quickly becoming market leader in Italy in Head Cylinder

Gaskets and Gaskets Sets.

1980’s all major quality certifications are obtained. The premium quality of its products

enables Spesso the company to expand the business in Original Equipment, starting

a partnership with Fiat Iveco.

The company relocates in the current 9,000 sqm plant to adapt to the sharply

increasing sales.

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2000’s The Company acquires important know-how in product development and

manufacturing through the strategic alliance with the Japanese leading company

Ishikawa Gasket. Spesso so becomes the first Italian Manufacturer of Multi-Layer

Steel Head Cylinder Gaskets for Original Equipment. Processes with new machines

that enables Advance Coating to the Gaskets, further increasing their quality. New

equipment for gasket coating/drying and the introduction of the Toyota Production

System (Lean Manufacturing) enables Spesso to manufacture with the highest

quality, flexibility and reliability.

2010’s the vision that drives work at Spesso is applying Lean Management

companywide, to empower all people and increase the flow to all our customers. As

a Lean company we always strive to meet and exceed our customer requests. The

award from Iveco/CNH as best “Vendor Managed Inventory (VMI) Supplier” is a

tangible result of Spesso’s lean efforts for continuous improvement and innovation.

The Company also focuses on R&D in sustainable technologies, with Customers,

Suppliers, Partners and Universities. Besides gaskets, fuel cells are also an area of

interest.

Today, Spesso is investing in sustainable technologies, with Customers, Suppliers,

Partners and Universities. Besides gaskets, fuel cells are also an area of interest.

Figure 11 Spesso Gaskets history since 1920

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4.1.2 Business Model

Lean Management is a way of thinking and acting to strive for continuous innovation

of products and processes. The results are higher quality, better service, and lower

cost flowing to the customers. All people in SPESSO are involved and empowered

in the daily efforts to constantly improve both of manufacturing processes and all

other activities in the company, from product development to accounting, from sales

& marketing to purchases.

Spesso Gaskets tend to establish close partnerships with the customers to fully

understand their needs and team up with them in the competition on their markets.

The same they do with their suppliers, so creating an extended lean enterprise

responding rapidly and flexibly to the demands of their customers. They can supply

their products in batches down to one piece: there is no such thing as a minimum

batch in Spesso, they want to give their customers exactly what they need, when

they need it, nothing more.

4.2 RELATION BETWEEN SPESSO GASKET AND RHIAG ITALY

The supply Report Between Rhiag and Spesso Gaskets started in 2001 with small furniture

related to specific products, most of them brand Iveco-fiat, for Rhiag, it was a traditional

management with closed orders done once a month with lead time from 60-90 days.

In 2006 Spesso gaskets began producing range seal kits for Asian veture under Japanese

licenses also with a traditional management as described above. In 2009-2010, following

the closure of a previous supplier, entire range of production (kits, gaskets) has been

transferred from Rhiag to Spesso, and at that point was born the need to study management

models more evolved, able to manage the work process for the kits assembled and

management of open orders, so they can ensure, short lead time, more frequent emissions

orders, and a top level of service.

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In 2011 they began feasibility studies to identify a simpler management model and suited to

the needs both of which Rhiag and Sesso, early results have occurred in the following

months.

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5 AS IS PROCESS

5.1 REPACKAGING

For some products from Erling, Reinz, Corteco Federal Mogul. Spesso repackages the items

with the aim of selling them with the Rhiag’s brand. For these kind of products, Rhiag makes

the order directly to the supplier, the supplier delivers Spesso, Spesso makes the packaging

and after send the goods with Rhiag’s packing and the invoice of the service Rhiag, The

vendor sends the invoice directly to Rhiag.

Currently the package you agree to a projection of sales (Forecast)

Figure 12 Repackaging process

Problem: When the product is not any more in the original package, we cannot return it to

the supplier in case of write off.

Solution: Do not do the packaging until there a direct order from the customer

5.2 VENDOR MANAGEMENT INVENTORY (VMI)

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5.2.1 Initial Considerations

Consideration 1. Every year Rhiag place an open order to SPESSO Gaskets s.r.l

according to the forecast for the whole year, for each Code (kits made with different

products). This framework order is useful for:

Have an estimated value of purchase (Rhiag and SPESSO)

Estimate load resources (personnel, equipment, raw materials)

Have under control the call-off

Consideration 2. The different references are divided in different families depending on

their yearly consumption.

K1, fast moving products (more than 999 pieces/year)

K2, medium movers (sales from 121 to 999 pieces/year)

K3, medium low movers (sales from 30 to 121 pieces/year)

Class A, low movers (sales less than 30 pieces/year)

For each code K is set a minimum stock that is calculated each day:

𝑹𝑶𝑷𝑲𝟏 =𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑠𝑎𝑙𝑒𝑠

30∗ 63 𝑔𝑖𝑜𝑟𝑛𝑖

𝑹𝑶𝑷𝑲𝟐 =𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑠𝑎𝑙𝑒𝑠

30∗ 77 𝑔𝑖𝑜𝑟𝑛𝑖

𝑹𝑶𝑷𝑲𝟑 =𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑠𝑎𝑙𝑒𝑠

30∗ 90 𝑔𝑖𝑜𝑟𝑛𝑖

32

Consideration 3. For slow moving products (less than 30 pieces/year) Class A, Rhiag

established a minimum stock that is modified by Rhiag periodically.

Consideration 4. All of this codes for Rhiag are divided into Class T and class F, where

33

Class F are kits that don’t need components provided by Rhiag as subcontractor,

Process

Figure 11 Process for Components type F

34

Class T are kits that need components provided by Rhiag as subcontractor.

Process

Figure 12 Process for Components type T

35

Consideration 5. To calculate Service Level,

Rhiag calculate the number of days with stock = 0 for each code, if this number of days is ≤

7, the row is positive otherwise the row is negative. If the row is negative, the number of

days with stock 0 is counted and added to ND, otherwise is not considered.

Service Level = ND

TD where,

ND: Is the total number of days with stock 0 (only for negative rows)

TD: total days

In 2015 Service level below 82% activates the penalty

Consideration 6. The Lots quantity stipulated by Spesso as following:

Table1 production lot size SPESSO gaskets

Consideration 7. As Rhiag buys some products that have to be repackaged by SPESSO,

but although this products still Rhiag’s property, Rhiag have created in the system a

Average Batch

>200 100

>100 50

>75 40

>20 30

>15 20

>10 15

>5 10

>2 5

>0,5 3 or 5

<=0,5 2 or 5

36

warehouse 95, in this warehouse Rhiag can control the products that still their property but

are in SPESSO warehouse.

5.2.2 VMI process

1. Every day Rhiag sends to Spesso a file with the following information:

Rhiag Stock (m2 + branch)

Consumption month

Consumption year

For each product the classification (K A or D)

Code + Description

Average monthly sales (6 months)

Minimum safety stock (PR)

2. With this information Spesso Calculate the ROP (Reorder Point) for the products type K

and depending on the stock level, Spesso decide besides producing a Lot or not (See 2

consideration). The same for the product class A, but instead of calculating the ROP they

compared the minimum stock stipulated for the year with the actual stock level.

3. If the Stock is less than The ROP for product class K, or minimum Stock for product class

A, Spesso produces a LOT and delivered to Rhiag, each day SPESSO (See consideration

4. After they send this products to Rhiag’s Central Warehouse.

5. Each day SPESSO sends to RHIAG the “bolla di vendita” and “Reso di confezionamento”

which means

Bolla di vendita: This are the products that the Spesso sell to Rhiag Class T or Class

F, (see consideration 4), in each of the cases the system takes the components from

the supplier, 159 to the status shipped to the central warehouse.

37

Reso di confezionamento: Are the products that Spesso repackaged to Rhiag, they

just receive the articles put them in Rhiags boxes and send it to Rhiag, when Rhiag

insert this Reso the products turn to the status shipped to the central warehouse.

6. Rhiag Supply Chain department register them in the system, and wait for the warehouse

to receive the products and register the entrance of them to the stock, this information goes

directly into the flow send to SPESSO, every single day, in this way SPESSO have the

actual data to determine if the level of Stock is under the ROP or if they have to send another

order.

5.2.3 Parallel Process

1. As they need some components from Rhiag to produce the Kits, they send every

week, a list with the quantity for each product class T that they required from Rhiag,

from this List Rhiag verify if they are available in the central warehouse, and send to

them the required available quantities. If they are not available Rhiag don’t send

anything and in some cases Kits cannot be done (1.Suggestion: Analyze cost of

losing this sales Vs cost of margin lost)

2. Rhiag send this components to SPESSO and register them as a sell.

3. Then SPESSO returns the products with the procedure describe previously.

38

6 BLUEPRINT OF THE PROCESS AND REENGINEERING SUGGESTIONS

For the identification of the critical success factors (CSF), and the key Performance

Indicators (KPI’s), it have been decided to make a VMI diagram for each process hold with

SPESSO, and in this way identify the parts of the process that creates

39

Daily process of VMI Information Flow

In the information flow there are set all products requirement also those ones that they cannot produce because Rhiag have not

supply its parts.

40

Weekly process of Material Requirement

There’s no other option when the components are not available

It’s important to find a way to control if the quantities that they are requiring, are in the correct amount (logistic problems, over

stock problems etc.)

41

7 KEY PERFORMANCE INDICATORS (KPI’S)

To identify the performance that a supply chain should deliver, we need to measure different

indicators and analyze them. Linking supply chain KPIs by the proper analysis gives better

understanding of the issues and mistakes happened in history and recording these changes

and root causes is very important

What are the purposes of creating KPIs though?

1. to measure performance

2. As a measurement system designed to change behavior

3. To create and ensure alignment with overall business goals and strategy

4. As a driver of future improvement

While an orientation to one group of KPIs or another is somewhat natural and to be

expected given the nature of business, the market, customer expectations, competitive

activity, the strategy of the company, level of maturity and many other factors, the

challenge is to blend a mix of these KPIs to properly measure those things that are of the

most value to the organization as well as having a balanced approach and not missing a

measure that has the capacity to ‘blind side’ the business.

Since is understand and accept the mantra “you can't improve what you don't measure,"

measuring the right things is one of the first steps to generating improvement. This applies

across any business and of course this applies in the supply chain area.

From table2 all the different attributes from the supply Chain that should be measure in order

to know if the area is having a good performance, are analyze, although the two metrics

highlighted

42

Table2 General Supply Chain KPI’s

From table 2 we chose the 2 metrics that are constantly measured within Rhiag Supply

Chain that are the Fill rate and the Asset turn, in Rhiag this two metric are called; Fill Rate

and the Inventory turnover.

To assess the level of service to the customer, Rhiag calculates every month a Fill Rate for

the requests of the customers that approached to the company. The Fill Rate as stated

before, calculates the service to the customer on the base of the confirmed order lines. In

general, it is the ratio between the “lines on service” and the “ordered lines”. For an order

line it is understood as a part of order (row of the order) containing the quantity of a product

that must be delivered to a customer.

7.1 FILL RATE

The Fill rate can be calculated in different levels, such as to understand the different

dimensions of analysis of the indicator that enables Rhiag to measure the performance in

different points of the distribution system. Currently Rhiag evaluates 4 different fill rates as

explained below:

Attribute Definition Matrics

Delivery performance

Fill rates

Perfect Order Fulfilment

Supply Chain

Responsiveness

The velocity at which the supply chain provides products to

the customerOrder fulfilment Lead Times

Supply Chain response time

Production Flexibility

Cost of Goods Sold

Total SC Management Cost

Value-added Productivity

Warranty/Return Processing Cost

Cash-to-cash cycle Time

Inventories Days of Supply

Asset Turn

Supply Chain Assets

Management Efficiecy

The effectiveness of an organisation in managing asset to

support demand satisfaction. This includes the management

of all the assets: fixed and working capital

Supply Chain

Reliability

Supply Chain

Flexibility

The performance of the supply Chain delivering: The correct

product, to the correct customer, at the correct condition and

packaging, and with the correct quantity documentation

The agility of a supply chain in responding to marketplace

changes to gain or mantain competitive advantages

Supply Chain Costs The cpst associated with operating the supply chain

43

First level Fill Rate (subsidiaries): The first level fill rate is calculated only according to the

availability of products in the subsidiaries of the company. The idea is to calculate the ratio

between the total orders with positive (OK) availability and the total requests performed by

the customers.

Second level Fill Rate (Subsidiaries + Hub): The second level fill rate is calculated by

adding the availability of the products in the Hub of the network system of the company;

this means that the Fill Rate considers the products that are not available in the subsidiaries

but that are present in the next level of the distribution system. The formula for the calculation

of the indicator is the same than in the case of the first level, obviously considering the

availability of the Hub.

Third Level Fill Rate (Subsidiaries + Hub + Central Warehouse M2): The third level of

the fill rate includes the availability of the products in the central warehouse of Siziano. The

indicator is calculated for the products that are not available either at the subsidiaries or the

Hub of the company, but that are present in M2. As with the other cases the formula for the

calculation of the fill rate remains the same, measuring the #of orders with a positive

availability answer (including M2) divided into the total number of requests.

Fourth level Fill Rate (Rhiag network): The last level of the fill rate calculated by the

company includes all the distribution network of the company. The problem with the current

system of Rhiag, is that the subsidiaries located in an specific region of the country cannot

see the availability of products in all the warehouses of the company so that the subsidiaries

can check the stock levels in the Hub and the central warehouse and if they don’t find the

product, they might think it is not available, even though it is present in another warehouse.

Therefore, the fourth level fill rate is calculated with the OK answers to all the requests

looking at the availability of products in all the warehouses of the system.

In general it is important to consider that the four levels of the fill rate are incremental by

nature, this means that the fill rate can be diagramed as the composition of different levels

44

that intervene progressively in the fulfillment of the order lines (Subsidiaries-Hub-M2-Other

Subsidiaries). The structure can be seen in the fill rate in two ways:

a) If a certain level of the system fulfills the order of the customer, then all the

successive levels will also fulfill it (e.g. if the first level fill rate is 100% then the

second, third and fourth will also be 100%).

b) If a certain level does not fulfill the order of the customer, then the next level is

added progressively and the capacity to fulfill the order is again evaluated.

For the definition of an order line as “on service” t is important to distinguish into 3 different

cases:

a) Potential fill rate: An order line is considered as “on service” if at least 90% of the

requested quantity is available. The incremental concept of the fill rate still holds

in this case; the quantities in the different levels are added and divided into the

quantity ordered by the customer.

b) Theoretical fill rate: An order line is “on service” if the item has a positive

theoretical stock (not taking into consideration other possible variables such as

items already committed with other customers, etc.)

Effective fill rate: Another important element of the fill rate calculation, that considers the

quantities that are invoiced to the customer within an specific time limit (e.g. an item that is

not available at the moment but that can be delivered in a short period of time (4 hours or

less).

7.2 INVENTORY TURNOVER

The Inventory turnover is a ratio showing how many times a company's inventory is sold

and replaced over a period. The days in the period can then be divided by the inventory

turnover formula to calculate the days it takes to sell the inventory on hand or "inventory

turnover days."

In Rhiag the Inventory Turnover is calculated as following:

45

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =Sales

Inventory

7.2.1 Application in Business (4)

A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product

line or marketing effort. However, in some instances a low rate may be appropriate, such as

where higher inventory levels occur in anticipation of rapidly rising prices or expected market

shortages.

Conversely a high turnover rate may indicate inadequate inventory levels, which may lead

to a loss in business as the inventory is too low. This often can result in stock shortages.

Some compilers of industry data (e.g., Dun & Bradstreet) use sales as the numerator instead

of cost of sales. Cost of sales yields a more realistic turnover ratio, but it is often necessary

to use sales for purposes of comparative analysis. Cost of sales is considered to be more

realistic because of the difference in which sales and the cost of sales are recorded. Sales

are generally recorded at market value, i.e. the value at which the marketplace paid for the

good or service provided by the firm. In the event that the firm had an exceptional year and

the market paid a premium for the firm's goods and services then the numerator may be an

inaccurate measure. However, cost of sales is recorded by the firm at what the firm actually

paid for the materials available for sale. Additionally, firms may reduce prices to generate

sales in an effort to cycle inventory. In this article, the terms "cost of sales" and "cost of

goods sold" are synonymous.

An item whose inventory is sold (turns over) once a year has higher holding cost than one

that turns over twice, or three times, or more in that time. Stock turnover also indicates the

briskness of the business. The purpose of increasing inventory turns is to reduce inventory

for three reasons.

Increasing inventory turns reduces holding cost. The organization spends less money

on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be

sold.

46

Reducing holding cost increases net income and profitability as long as the revenue

from selling the item remains constant.

Items that turn over more quickly increase responsiveness to changes in customer

requirements while allowing the replacement of obsolete items. This is a major

concern in fashion industries.

When making comparison between firms, it's important to take note of the industry,

or the comparison will be distorted. Making comparison between a supermarket and

a car dealer, will not be appropriate, as supermarket sells fast moving goods such as

sweets, chocolates, soft drinks so the stock turnover will be higher. However, a car

dealer will have a low turnover due to the item being a slow moving item. As such

only intra-industry comparison will be appropriate.

47

8 ANALYSIS OF ACTUAL PERFORMANCE VMI PROCESS

For the analysis it have been divided the 2 production lines (Italian and Asiatic range)

received from Spesso gaskets:

Italian Range: kit Gaskets, Gaskets kit, composed of more than 50

components/reference some of which are supplied by Rhiag

Asiatic Range: Kit Gaskets, composed from several components, most of them

difficult to obtain as they are coming from the Far East. (None of them is supply by

Rhiag)

The VMI approach began with the Italian range which from 2012 has progressively

increased in 2015 from 27% to 92% of the total part number (PN) (see Table 3). For the

Asiatic range, the work has been more complex because it consists of a high number of PN

with low power consumption and lead time of components over 90 days. For 2015 it is

estimated to reach 70% of the total of items in VMI

Table3 % of VIM products in time for Italian range

GI 02/01/2012 07/03/2013 02/04/2014 31/08/2015

VMI 155 246 300 347

NON VMI 418 130 83 32

% VMI 27% 65% 78% 92%

GAMMA ITALIANA

48

Table4 % of VIM products in time for Asiatic range

Graph1 % of kits for Italian and the Asiatic ranges in VMI over time

At the beginning of the VMI implementation 100% of the kits from the “Italian range” had

some components supplied by Rhiag. Although history have shown that the costs and the

operations are reduced if the supplier; SPESSO, is responsible for the management of the

components, so along the past years the supply of the components for some products from

“Italian range” have been removed from Rhiag management (this means move from type T

to type F) as is shown in the following table.

Table5 % of products turn into F over time for Italian range

GE-GT-GS 02/01/2012 07/03/2013 02/04/2014 31/08/2015

VMI 25 88 159 244

NON VMI 462 325 269 226

% VMI VMI 5% 21% 37% 52%

GAMMA ASIATICA

0%

20%

40%

60%

80%

100%

01/01/2012 01/01/2013 01/01/2014 01/01/2015

% V

Mi

Year

GAMMA ITALIANA

GAMMA ASIATICA

GI 02/01/2012 07/03/2013 02/04/2014 31/08/2015

TIPO T 573 376 383 379

TIPOF 0 73 80 84

%TIPO F 0% 16% 17% 18%

GAMMA ITALIANA

49

Although it have been an important evolution in the process, it’s still missing a lot, especially

in fast movers products, from the following analysis we want to show the performance of

each group in terms of the KPI’s defined previously. Also for the Italian Range we want to

show the evolution of the products turned into Class F.

8.1 Measurement Fill rate for The Italian and the Asiatic range, in the actual VMI

process

For this analysis it’s taken the data from January of 2013, from both, Italian and Asiatic

range, and the results are the following:

50

Table6 evolution of the fill rate from 2013 to 2015, for both Italian and Asiatic range

Gen 13 87,0% Gen 13 85,7%

Feb 13 87,2% Feb 13 85,7%

Mar 13 87,8% Mar 13 85,9%

Apr 13 88,4% Apr 13 86,9%

Mag 13 88,8% Mag 13 85,6%

Giu 13 88,0% Giu 13 84,3%

Lug 13 87,4% Lug 13 83,9%

Ago 13 88,9% Ago 13 85,8%

Set 13 88,6% Set 13 85,0%

Ott 13 87,9% Ott 13 85,0%

Nov 13 87,9% Nov 13 84,2%

Dic 13 88,5% Dic 13 85,2%

Gen 14 86,8% Gen 14 84,0%

Feb 14 84,9% Feb 14 83,4%

Mar 14 87,3% Mar 14 84,4%

Apr 14 88,5% Apr 14 84,1%

Mag 14 88,5% Mag 14 83,6%

Giu 14 88,3% Giu 14 82,6%

Lug 14 87,9% Lug 14 83,4%

Ago 14 89,2% Ago 14 84,6%

Set 14 86,5% Set 14 84,0%

Ott 14 86,9% Ott 14 85,4%

Nov 14 87,3% Nov 14 85,2%

Dic 14 87,0% Dic 14 84,5%

Gen 15 88,3% Gen 15 83,3%

Feb 15 85,8% Feb 15 84,1%

Mar 15 86,5% Mar 15 84,5%

Apr 15 87,3% Apr 15 83,8%

Mag 15 87,8% Mag 15 83,0%

Giu 15 87,9% Giu 15 83,4%

Lug 15 86,8% Lug 15 83,0%

Total 87,6% Total 84,4%

ITALIAN RANGE ASIATIC RANGE

51

Graph2 evolution of the fill rate from 2013 to 2015, for both Italian and Asiatic range

In general is shown that the Fill Rate in the Italian range (87,59%) have a better performance

than the Asiatic range (84,43%). As it is shown in table3 and table 4 actually the Italian

Range have 92% of its products in VMI while the Asiatic Range have just the 52% of its

products in VMI, we will like to analyze if it exist a correlation between this performance and

the VMI implementation.

Graph3 evolution of the fill rate from 2013 to 2015, Italian range

0,78

0,8

0,82

0,84

0,86

0,88

0,9

Ge

n 1

3

Feb

13

Mar

13

Ap

r 1

3

Mag

13

Giu

13

Lug

13

Ago

13

Set

13

Ott

13

No

v 1

3

Dic

13

Ge

n 1

4

Feb

14

Mar

14

Ap

r 1

4

Mag

14

Giu

14

Lug

14

Ago

14

Set

14

Ott

14

No

v 1

4

Dic

14

Ge

n 1

5

Feb

15

Mar

15

Ap

r 1

5

Mag

15

Giu

15

Lug

15

Fill Rate

ITALIAN RANGE ASIATIC RANGE

0,82

0,83

0,84

0,85

0,86

0,87

0,88

0,89

0,9

Fill

Rat

e

ITALIAN RANGE

2013

2014

2015

52

Graph4 evolution of the fill rate from 2013 to 2015, Asiatic range

8.2 Measurement of the inventory turnover for The Italian and the Asiatic range, in

the actual VMI process

For this analysis it’s taken the data from January of 2013, from both, Italian and Asiatic

range, for all types of products, later on it will be demonstrated that for a more precise and

complete analysis, is necessary to distinguish the fast mover from the low mover products,

due to the different behaviors of each one of them. The following table show the evolution

of the inventory turnover from 2013 to 2015, for both Italian and Asiatic range without

distinction:

0,8

0,81

0,82

0,83

0,84

0,85

0,86

0,87

0,88Fi

ll R

ate

ASIATIC RANGE

2013

2014

2015

53

Table6 evolution of the inventory turnover from 2013 to 2015, for both Italian and Asiatic range

Graph5 evolution of the Inventory turnover from 2013 to 2015, for both Italian and Asiatic

range

Mese IR Mese IR

201301 5,58 201301 5,12

201302 5,41 201302 5,20

201303 5,23 201303 4,01

201304 4,80 201304 4,05

201305 4,74 201305 4,13

201306 5,08 201306 4,66

201307 4,77 201307 4,26

201308 4,85 201308 4,07

201309 4,69 201309 4,50

201310 4,70 201310 4,30

201311 4,68 201311 4,24

201312 5,35 201312 4,78

201401 4,88 201401 4,62

201402 4,68 201402 4,75

201403 4,69 201403 4,98

201404 4,61 201404 5,03

201405 4,69 201405 4,75

201406 4,89 201406 4,69

201407 5,02 201407 4,64

201408 5,28 201408 5,37

201409 4,83 201409 4,62

201410 4,77 201410 4,67

201411 4,65 201411 5,08

201412 5,00 201412 4,79

201501 4,78 201501 4,53

201502 4,34 201502 4,44

201503 4,65 201503 4,29

201504 4,53 201504 4,02

201505 4,33 201505 3,84

201506 4,61 201506 3,91

201507 5,12 201507 4,23

STANDARD DEV 0,30 STANDARD DEV 0,41

ITALIAN RANGE ASIATIC RANGE

54

From table 6 can notice that also for Italian Range, the average Inventory Turnover is higher,

and the deviation is lower, this shows a better performance. From previous analysis (table3

and table 4) actually the Italian Range have 92% of its products in VMI while the Asiatic

Range have just the 52% of its products in VMI, we will like to analyze if it exist a correlation

between this performance and the VMI implementation.

8.3 COMPARISON BETWEEN RHIAG AND SPESSO SERVICE LEVEL

As we describe before the fill rate considered previously, is the one that Rhiag offer to their

own clients. In this project we also want to analyze the difference between the service levels

that the supplier (SPESSO) offer to Rhiag compared to the service level that Rhiag offer to

their own final customers.

For Calculating the service level between Rhiag and SPESSO is used the following formula:

𝑆𝑒𝑟𝑣𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙 =Number of lines delivered (at list 95% of the quantity requiered)𝑖𝑛 𝑡ℎ𝑒 𝑟𝑒𝑞𝑢𝑖𝑒𝑟𝑒𝑑 𝑑𝑎𝑦

𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑙𝑖𝑛𝑒𝑠 𝑤𝑖𝑡ℎ 𝑟𝑒𝑞𝑢𝑖𝑒𝑟𝑒𝑑 𝑑𝑎𝑦

The assessment of the service level is monthly and is calculated as rows delivered on time,

over the total order lines sent to SPESSO. An order line is considered in service if it delivers

at list 95% of the quantity ordered by the date of scheduled delivery, to which have been

added 8 days of tolerance. The expected date of delivery is the higher between the delivery

date requested by Rhiag, and date of sending the order to SPESSO plus the lead time with

which the SPESSO guarantees to supply the material. The minimum level required to

SPESSO is equal to 82% after the first three months of application, then is controlled

annually.

55

Considering this policy, we have calculated also the service level from SPESSO to Rhiag

and we compared with the Fill Rate before mentioned. The results where the following:

Table7 evolution of the service level from 2013 to 2015, from SPESSO to Rhiag and from Rhiag to its final customers

Graph6 evolution of the service level from 2013 to 2015, from SPESSO to Rhiag and from

Rhiag to its final customers

GI Rhiag SPESSO GI Rhiag SPESSO GI Rhiag SPESSO

Gen 13 87,0% 87% Gen 14 86,8% 91% Gen 15 88,3% 92%

Feb 13 87,2% 80% Feb 14 84,9% 74% Feb 15 85,8% 89%

Mar 13 87,8% 74% Mar 14 87,3% 93% Mar 15 86,5% 89%

Apr 13 88,4% 83% Apr 14 88,5% 67% Apr 15 87,3% 95%

Mag 13 88,8% 98% Mag 14 88,5% 84% Mag 15 87,8% 79%

Giu 13 88,0% 93% Giu 14 88,3% 72% Giu 15 87,9% 92%

Lug 13 87,4% 73% Lug 14 87,9% 98% Lug 15 86,8% 82%

Ago 13 88,9% 84% Ago 14 89,2% 65%

Set 13 88,6% 93% Set 14 86,5% 92%

Ott 13 87,9% 91% Ott 14 86,9% 100%

Nov 13 87,9% 88% Nov 14 87,3% 88%

Dic 13 88,5% 80% Dic 14 87,0% 86%

2013 2014 2015

56

From graph 6 is clearly noticed that Rhiag have minimize the effect of the variation of the

service level, through good stock policies. This means the safety stock in Rhiag warehouse

have been enough to cover the demand when the supplier is not able to do it.

This shows a great potential in terms of reducing Rhiag stock by reducing the variability on

the service level given from SPESSO to Rhiag

57

9 POINTS OF IMPROVEMENT

As it had been analyze at the end of chapter 6, there are some factors to consider for the

reengineering of the VMI process.

From the first BPM diagram it have been detected that:

1a. in the information flow there are set all products requirement also those ones that they

cannot produce because Rhiag have not supply its parts.

And from the second diagram it has also been identify that:

2a. there is double transportation cost; the one from the supplier to Rhiag and the one from

Rhiag to SPESSO. So, Why not sending directly components of the kits from suppliers to

Suppliers to Spesso?

2b. there is no other option when the components required by SPESSO are not available in

Rhiag’s warehouse. So, is it better to lose some margin but let SPESSO find all components

for the kits?

2c.Is important to find a way to control if the quantities that SPESSO is requiring, coherent

in order to reduce logistic problems and over stock problems.

58

10 POSSIBLE SOLUTIONS

The common factor in points 1a, 2a and 2c, is the difficulties provided by the VMI process

in products Class T (see chapter 6 figure 12).

In the following analysis products Class T and products Class F will be evaluated

independently after that the result can be as following:

Case 1 Products Class T have better inventory turnover and better service level than

Products Class F

Evaluation of transportation costs Vs. Financial cost of the increase of inventory, to

see if is better to send the products directly from the supplier to la SPESSO

In this case SPESSO should continue making the distribution of the kits.

Case 2 Products Class T have better inventory turnover but worst Service Level than

Products Class F

To see if is better to let SPESSO find the supplier of all the components of for

the kits.

Evaluation of transportation costs Vs. Financial cost of the increase of inventory,

to see if is better to send the products directly from the supplier to la SPESSO

If SPESSO supply Kit Components If Rhiag supply Kit Components

Increase of sales due to better SL Gain of the margin of the components

Gain Operative Cost supply Chain department Save of Inventory Cost

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Case 3 Products Class T have better Service Level but worst inventory turnover than

Products Class F

To see if is better to let SPESSO find the supplier of all the components of for the

kits.

Case 4 Products Class F have better Service Level and better inventory turnover than

Products Class T

To see if is better to let SPESSO find the supplier of all the components of for

the kits.

Evaluation of transportation costs Vs. Financial cost of the increase of inventory,

to see if is better to send the products directly from the supplier to la SPESSO

If SPESSO supply Kit Components If Rhiag supply Kit Components

Save of Inventory Cost Gain of the margin of the components

Gain Operative Cost supply Chain department Increase of sales due to better SL

If SPESSO supply Kit Components If Rhiag supply Kit Components

Save of Inventory Cost Gain of the margin of the components

Gain Operative Cost supply Chain department

Increase of sales due to better SL

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11 DETERMINE THE MOST ACCURATE SOLUTION

In order to analyze which is the most feasible solutions from the ones mentioned previously,

we detected exactly in which references the changes where done. For Rhiag fast and slow

mover products are distinguished by the Logistic Class by the analysis ABC. This analysis

is based in the consumption from the las 12 months, in pieces not in value. Depending on

the following table:

For understanding a bit the correlation between logistic Class and inventory turnover we

calculate this indicators for each class, and the results where the following:

Class A Fast mover products

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Graph7 evolution of the Inventory turnover from 2013 to 2015, for both Italian and Asiatic

range for fast mover products

Graph8 evolution of the Fill Rate from 2013 to 2015, for both Italian and Asiatic range for

fast mover products

As we can notice from the graphs Rhiags decision have been to raise inventory in Fast

movers products in Asiatic Class the result of this decision was an important elevation in

the Service level and just an insignificant decrease in the inventory turnover. This is an

excellent result.

Class B Medium mover products

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Graph9 evolution of the Inventory turnover from 2013 to 2015, for both Italian and Asiatic

range for medium mover products

Graph10 evolution of the Fill Rate from 2013 to 2015, for both Italian and Asiatic range for

fast mover products

As we can notice from the graphs Rhiags have raised the inventory in Medium mover

products for both Ranges; for Asiatic and Italian, the result of this decision was a constant

elevation in the Service level and also decrease in the inventory turnover. For evaluating

the success of this decision is necessary to do a cost study

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Class C Slow mover products

Graph11 evolution of the Inventory turnover from 2013 to 2015, for both Italian and Asiatic

range for slow mover products

Graph12 evolution of the Fill Rate from 2013 to 2015, for both Italian and Asiatic range for

fast mover products

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Finally for low mover products, instead, not raising inventory policy have been applied, but

the subject of study from this project is precisely in this category due all the products that

have been turned from class T into Class F are low mover products. From the general graph

of products class C is identify that the service level is stable in time while the inventory

turnover have had a low increase, through this project we want to identify if this increase is

due to the decision previously mentioned.

For the accomplishment of this scope we selected a sample of products turned into Class F

and products remaining on Class T for the Italian range (at the beginning almost all products

from Italian range where Class T) for this selection we took a sample of C1 2 codes, C2 3

codes, C3 3 codes, C4 8 codes, C5 9 codes, C6 18 codes, and the results where the

following.

Table8 evolution of the Fill Rate from 2013 to 2015, for a sample of products from

Class T and Class F

MONTH T F MONTH T F MONTH T F

Gen 13 51% 54% Gen 14 51% 51% Gen 15 57% 48%

Feb 13 54% 51% Feb 14 51% 52% Feb 15 55% 51%

Mar 13 67% 55% Mar 14 54% 44% Mar 15 55% 51%

Apr 13 56% 55% Apr 14 52% 48% Apr 15 49% 59%

Mag 13 63% 52% Mag 14 58% 63% Mag 15 68% 57%

Giu 13 58% 53% Giu 14 55% 48% Giu 15 56% 49%

Lug 13 55% 49% Lug 14 61% 55% Lug 15 62% 57%

Ago 13 62% 53% Ago 14 53% 70% ago-15 59% 50%

Set 13 62% 49% Set 14 60% 54% set-15 50% 52%

Ott 13 56% 49% Ott 14 49% 58%

Nov 13 57% 56% Nov 14 43% 54%

Dic 13 65% 47% Dic 14 58% 51%

SERVICE LEVEL 2013 SERVICE LEVEL 2014 SERVICE LEVEL 2015

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Graph13 evolution of the Fill Rate from 2013 to 2015, for a sample of products from

Class T and Class F

From the Graph 12 can be noticed a clear increase of the service level for products Type T

and a clear decrease in the service level for products type T, this means that along the time

products that where turned into class F have had a better performance rather than products

remaining in class T in terms of service level. Also the increase ratio was calculated through

a linear adjustment, the results are: for products that where change from Class T into Class

F the general service level have increased in a ratio of 0,0006X and for the products

remaining in Class T there have been a decrease of 0,0009X, where X is the period.

With the formulas,

y(products T)= -0,0009x + 0,5791

y(products F) = 0,0006x + 0,5199

Can be calculated future service level.

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With the same sample of codes it was calculate the inventory turnover obtaining the

following results:

Table8 evolution of the inventory turnover from 2013 to 2015, for a sample of products

Class T and Class F

Month F T Month F T Month F T

Gen 13 2,98 3,52 Gen 14 3,42 4,47 Gen 15 4,55 3,37

Feb 13 3,55 3,96 Feb 14 3,33 5,06 Feb 15 3,71 3,72

Mar 13 3,43 3,47 Mar 14 3,66 4,71 Mar 15 3,82 4,11

Apr 13 2,49 3,52 Apr 14 3,19 4,46 Apr 15 3,94 3,85

Mag 13 2,45 3,32 Mag 14 3,31 4,45 Mag 15 2,57 3,21

Giu 13 2,94 3,94 Giu 14 3,31 5,07 Giu 15 2,32 3,22

Lug 13 3,21 3,43 Lug 14 3,80 4,69 Lug 15 2,44 3,17

Ago 13 3,03 3,56 Ago 14 4,33 5,17

Set 13 3,29 3,12 Set 14 4,16 4,80

Ott 13 3,61 3,41 Ott 14 4,19 4,24

Nov 13 3,65 3,53 Nov 14 4,90 3,62

Dic 13 3,37 3,94 Dic 14 4,69 3,95

INVENTORY TURNOVER 2013 INVENTORY TURNOVER 2014 INVENTORY TURNOVER 2015

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Graph 14 evolution of the inventory turnover from 2013 to 2015, for a sample of products

Class T and Class F

For inventory turnover index we can see that both groups have had a significant increase,

this due to the implementation of the VMI, although for products type F the increasing

coefficient is much bigger, this means that although VMI have had a good impact in the

general process, the articles that where been turned into F class have a better performance

that the articles that remained in class T. the general inventory turnover index have

increased in a ratio of 0,0057X and for the products remaining in Class T and a 0,0207X for

products turn into Class F, where X is the period.

In order to make a forecast of future inventory turnover for each type of products, we find

out the following formulas:

y(products T) = 0,0057x + 3,8468

y(products F) = 0,0207x + 3,1422

In conclusion for both types of products have had an increment of the inventory turnover

index, and instead just for the products type F the service level have a tendency to grow.

Although the slope is not high for either of them, the tendency of products type F is to have

a better service level in the future and the tendency for products type T is to have a lower

service level in the medium term future.

According to the possible solutions mentioned at the beginning of chapter 11 and through

the analysis done in Chapter 12 we can determine that the Case 4, is the one that we should

use in our analysis, due that products Class F have better Service Level and better inventory

turnover than Products Class T.

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So as it is mentioned in chapter 11 the cost analysis should be as following:

In the next chapter we will evaluate the 2 scenario, first if Rhiag continue supplying the

components of the kits, so this means all products type T. As we saw in our previous analysis

for products type T the inventory turnover index have increase in a rate of y(products T) =

0,0057x + 3,8468 and the service level have reduce in a rate of, y(products T)= -0,0009x +

0,5791, so we should project this formula in terms of one year so in can be measured the

decrease on inventory costs and the increase of sales margin due to the increase of the

service level.

After this we should add the operative cost to the option of supplying the components to

SPESSO and subtract the margin loosed by not doing the operation.

As following will be the formula for calculating cost in terms of stock inventory of letting

SPESSO supply the components from their own suppliers, thus turning products to type F.

For this consideration we assume the scope of the each curve as the monthly increase in

terms of Inventory turnover.

Inventory Cost reduction = (0,0207 − 0,0057) ∗ Average stock = (0,015) ∗ Average stock

If SPESSO supply Kit Components If Rhiag supply Kit Components

Save of Inventory Cost Gain of the margin of the components

Gain Operative Cost supply Chain department

Increase of sales due to better SL

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For Calculating the variation in the monthly sales the approach was basically the same, is

considered the scope of the each curve as the increase in terms of service level. Also we

assume that the increase of service level is

Sales monthly increase= Average monthly sales *(0,0006- (-0,0009))- Average monthly

sales

This two formulas will be used in the next section to compared the inventory cost and the

increase of sales for both, T and F Class

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12 COST ANALYSIS

In the cost analysis is taken into account:

Cost of inventory

Allocation and dispatch cost

Operative Supply Chain cost

Loss of sales cost

Margin cost

Transportation cost

12.1 COST OF INVENTORY

For this calculation are considered the holding costs. These costs are related to the space

required to hold inventory, the cost of the money needed to acquire inventory, and the risk

of loss through inventory obsolescence. Most of these costs are also included in an

overhead cost pool and allocated to the number of units produced in each period. More

specifically, holding costs include:

Cost of space. Perhaps the largest inventory cost is related to the facility within which

it is housed, which includes warehouse depreciation, insurance, utilities,

maintenance, warehouse staff, storage racks, and materials handling equipment.

There may also be fire suppression systems and burglar alarms, as well as their

servicing costs.

Cost of money. There is always an interest cost associated with the funds used to

pay for inventory. If a company has no debt, this cost represents the foregone interest

income associated with the allocated funds.

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Cost of obsolescence. Some inventory items may never be used or will be damaged

while in storage, and so must be disposed of at a reduced price, or at no price at all.

Depending on how perishable the inventory is, or the speed with which technology

changes impact inventory values, this can be a substantial cost.

For Rhiag: All this cost have been estimated in average as 13% of the value of the stock,

so, for determining the cost that having the components in stock we should multiply the

average monthly stock that we have of these components times this 13%

As this information is confidential we will let the formula in terms of X

Total Stock over cost of components = 0,13 * X1

Where;

X1 = Average monthly stock of components (value)

In addition as we saw in Chapter 12, there is a monthly growth on the inventory turnover of

products type F of 0.015, in comparison with the products type T, this means a monthly

average increase of 0,4%. If we assume that the sales remain constant we can deduct that

this will be the gain reduction on the inventory. So for the kits the stock will have a 0,4% less

inventory cost. This means the save

Total Stock Over cost of having kits T instead of having kits F = 0,004* X2

Where;

X2 = Average monthly stock of products type T (value)

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12.2 ALLOCATION AND DISPATCH COST

For the logistic department, this cost have been estimated by amount of part numbers

(PN) requested in each order and in the same way is paid to the company who

outsourced the service. The cost are the following:

o Allocation cost: 0,472 Eur for each PN requested

For the calculation of the total allocation cost due to products Class T we

calculate the total part numbers requested for this type of products and

multiplied by the times that each part number is requested in average

Dispatch cost: 0,281 Eur for each PN requested

For the calculation of the total dispatch cost due to products Class T we

calculate the total part numbers sent to SPESSO gaskets for this type of

products and multiplied by the times that each part number have been sent in

average.

As the information of the amount of dispatch and arrivals is also confidential, let the

formula indicated as following:

Over cost of dispatch and allocation = 0.472 * Y1 + 0,281 * Y2

Where;

Y1= Total part number of components that are requested in order to have availability to

supply SPESSO’s demand each month

Y2= Total part number sanded to SPESSO each month

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12.3 OPERATIVE SUPPLY CHAIN COST

For the operative Supply chain cost we consider:

A supply Chain Planner that invest 6h/week to work in the process

A supply Chain team leader that works 1h/week

12.4 LOSS OF SALES COST

For calculating this cost as we saw in Chapter 4 there is a reduction on the

12.5 TRANSPORTATION COST

For the calculation of the transportation cost we consider the cost spent on sending

components to SPESSO (which in this case will be the extra cost), and the frequency in

the shipments. The frequency in the shipments is around once a week and for each

shipment the average price is 80 Euro. So the over cost in transportation cost, by making

products Class F instead of Class T will be:

Monthly over cost of Transportation= Number of shipments during the month * shipment

cost

Monthly over cost of Transportation = 80 Eur * 4 = 320 Eur/month

12.6 MARGIN COST

For the margin cost it’s considered the margin of the components; this means the difference

between the costs of the kits with components Rhiag and the cost of the kits with

components acquired directly from SPESSO. Then it should be multiplied by the average

monthly sales (in quantity).

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In this case, there have been stabilized that the suppliers from Rhiag will maintain the same

price of the products for a given forecast made from Rhiag, also is stipulated a margin cost

from SPESSO of 5% from the cost of the components that actually are supplied by Rhiag

(From the total price of the kits 40% is from Spesso suppliers and 60% of components

supplied from Rhiag).

As all of this data is confidential we decide to define the formula as following:

Monthly earn on margin cost = Z* 0,4 * 0,05 = Z*0,02

Where;

Z= Total monthly sales of products Class T

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13 RESULTS

For the calculation of the results, we compared the costs that are actually spent with the

products type T, that would not be spent if the products where all type F (Cost of inventory,

Allocation and dispatch cost, Operative Supply Chain cost, Loss of sales cost,

Transportation cost) and compared them with the cost that Rhiag is wining by suppling the

components (Margin cost)

The final formulas to compare will be the following:

Cost that would not be spent if the products where all type F= ((0,13 * X1) + (0,004* X2) +

(0.472 * Y1 + 0,281 * Y2) + 320 Eur/month) - Z*0,02

Where;

X1 = Average monthly stock of components (value)

X2 = Average monthly stock of products type T (value)

Y1= Total part number of components that are requested in order to have availability to

supply SPESSO’s demand each month

Y2= Total part number sanded to SPESSO each month

Z= Total monthly sales of products Class T

With all the available data, the company has detected that the cost of suppling the

components to SPESSO gaskets is higher than the margin gain sending the products

directly.

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14 CONCLUSIONS

As first conclusion we can say that in general VMI implementation has been a success in

the company. The better performance in the inventory rotation and the service level in the

Italian range that is the one that have had almost all the implementation VMI. Also from this

analysis is noticed that the VMI implementation is more useful for slow mover products, due

to the more uncertainty in terms of demand.

As second conclusion we can say that the variability of the supplier is much more higher

than the variability on Rhiag service level, this means that Rhiag have minimize the effect of

the variation of the service level, through good stock policies so the safety stock in Rhiag

warehouse have been enough to cover the demand when the supplier is not able to do it.

This shows a great potential in terms of reducing Rhiag stock by reducing the variability on

the service level given from SPESSO to Rhiag

The most significant conclusion is the one of reducing the total general cost of the products

by stop supplying SPESSO the components and instead letting them to buy the components

directly from the supplier. This conclusion was obtained by in first instance a process

analysis latter on a Cost analysis.

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15 BIBLIOGRAPHY

WEB PAGES

http://investors.rhiag.com/ENG/Gruppo/Pages/Sintesi.aspx

http://www.rhiag.com/

http://spesso.com/home_spesso_gaskets/about/

http://www.investopedia.com/terms/i/inventoryturnover.asp

https://en.wikipedia.org/wiki/Inventory_turnover

http://www.ijaiem.org/volume2Issue1/IJAIEM-2013-01-28-059.pdf

http://www.globallogisticsmedia.com/articles/view/supply-chain-kpis--the-stuff-you-

really-need-to-know

http://www.eurorepar.it/il-decreto-monti-un-occasione-per-risparmiare-sul-tuo-

tagliando-auto

RHIAG RESOURCES

Rhiag financial statements 2013/2014. Rhiag Group.

Rhiag data base (AS 400)