1. CALCULATING THE RETURN ON INVESTMENT FOR SUPPLY CHAIN IMPROVEMENTS United States Coast Guard Aviation Logistics Center (ALC) LCDR Chad Long, Ph.D. Chengbin Zhu, Ph.D. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Planning & Forecasting Best Practices Conference October 26, 2010

2. Distribution Statement A: Approved for public release; distribution is unlimited. Agenda  Coast Guard Background  ALC Supply Chain Background  Return on Investment Study  Background  Methodology  Final Metric  Costs  Conclusion

3. Distribution Statement A: Approved for public release; distribution is unlimited. Coast Guard Background  Commissioned 10 cutters in 1790  Department of Treasury  Revenue Cutter Service  Life Saving Service  Lighthouse Service  Bureau of Marine Inspection and Navigation  Department of Transportation  Department of Homeland Security Distribution Statement A: Approved for public release; distribution is unlimited.

4. Coast Guard Background  Maritime Safety  Maritime Security  Maritime Mobility  National Defense  Protection of Natural Resources Distribution Statement A: Approved for public release; distribution is unlimited.

5. Supply Chain Background Clearwater 6 HC-130H 8 MH-60J Borinquen, PR 4 HH-65C Miami 4 HU-25 5 HH-65C 3 HC-144A HITRON 9 MH-65C Savannah 5 HH-65C Airfac Charleston Detroit 5 HH-65C Airfac Muskegon Traverse City 5 HH-65C Airfac Waukegan Cape Cod 4 HU-25 4 MH-60T Washington 1 C-37A 1 C-143A Elizabeth City 5 C-130J 5 MH-60J ALC PDM Line 7 HC-130H 1 HC-130J 9 HU-25 8 MH-60J 11 MH-65C 2 C-144A Sitka 3 HH-60J Corpus Christi 3 HU-25 3 HH-65C New Orleans 5 HH-65C Houston 3 MH-65C Atlantic City 10 MH-65C 1 HH-65D NCR Kodiak 4 HC-130H 4 MH-60J 4 HH-65C Airfac Cordova Humboldt Bay 3 HH-65C North Bend 5 HH-65C Airfac Newport Astoria 3 HH-60J Port Angeles 3 MH-65C San Diego 3 MH-60J San Francisco 4 MH-65C Barbers Point 4 HC-130H 4 HH-65C Los Angeles 4 HH-65C Sacramento 4 HC-130H As of September 2010 Distribution Statement A: Approved for public release; distribution is unlimited. Mobile, AL Operations 5 HC-144A Training 2 HU-25 4 MH-60T 7 MH-65C 1 MH-65D

6. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Background

7. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Background ALC

8. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Background  40,000 different parts in current inventory  Inventory value: $1.2 billion  Inventory contains many slow moving parts with intermittent demand  Annual spare parts budget of $222M (FY10)  Approximately 16% of parts account for 84% of the budget

9. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Background  First-rate Analytics  Collaboration  Total Asset Visibility

10. Distribution Statement A: Approved for public release; distribution is unlimited. Supply Chain Background  In 2008, the Coast Guard invested in a Supply Chain Management Solution (SCMS)  Standardize purchasing priority  Remove individual spreadsheet decision making  Reduce manual inputs  Use real time data  Global outlook

11. Distribution Statement A: Approved for public release; distribution is unlimited. Return on Investment  Prior ROI research  ROI- Evaluation Framework  ROI Method  Project Objective  Evaluate Plan  Collecting Data  Evaluating Effects  ROI Calculations

12. Distribution Statement A: Approved for public release; distribution is unlimited. Prior ROI research  Traditional ROI:  Emerging in 1920s  Evaluate the payoff of the investments  ROI= Net Benefit / Programs Cost  Source of Benefit: Tangible benefits: Increase productivity, Cut cost,… Intangible benefits: Customer service, job satisfaction, …

13. Distribution Statement A: Approved for public release; distribution is unlimited. Prior ROI research  Problem with SCMS ROI:  Difficulty for SCMS ROI: More Intangible Benefit: How well we improve the decision Isolate the Effect of SCMS Project: SCMS structure is complicated "Much of the evidence [for payoff] is anecdotal” - After a study of 861 companies

14. Distribution Statement A: Approved for public release; distribution is unlimited. Prior ROI research  ROI Methodology:  Began in 1970s and Refined for Different Industries  A logical and Rational Approach for ROI Accountability Review Project Object Develop evaluation plan and baseline data Data Collection Isolate effects of Project Calculate ROI ROI Report Evaluation Framework

15. Distribution Statement A: Approved for public release; distribution is unlimited. ROI - Evaluation Framework 1. Reaction and Perceived Value 2. Learning and Confidence 3. Application and Implementation 4. Impact and Consequences 5. Return on Investment Level: Measurement FocusValue of Information Measures participants’ reaction to the project Measures changes in the knowledge skills and attitudes related to technology Measures changes in on-the-job action and progress with planned actions Measures changes in business impact variables Compares project monetary benefits to the project costs Low High Questionnaires And Surveys ALC Required in ROI analysis

16. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method – Project Object Budget PARTPART PARTPART PARTPART PARTPART PARTPART PARTPART Without SCMS With SCMS: Better Inventory Control Coast Guard ALC Objects : Aircraft Availability : Cost Functionality of SCMS: Inventory Control -Maintenance Schedule - Workforce Training - Back Orders Reduction -…. - Transportation Cost - Repair Cost - Unnecessary Purchase -…. Demand Dollar Value impact Un-equivalent Inventory Deficiency Latency Effect Excessive Inventory

17. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Project Object  ALC Objects:  Reduce Cost  Improve Aircraft Availability  SCMS Project:  Better Inventory Control Decision  Contribution to ALC Object: Less Excessive Inventory Less Inventory Deficiency

18. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Evaluate Plan  Data Items:  Reduction of Excessive Inventory in Dollar Value  Reduction of Inventory Deficiency in Dollar Value  Comparison between FY07 (before) and FY09 (after)  Requirement for Isolating Project Effect  Assuming the benefit will remain the same level during the whole project life time.  No Long Term Consideration  Reduction of Inventory Deficiency in Dollar Value  Independent of Budget, Initial Inventory and Demand

19. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Collecting Data  Source of Data  Demand Data (FY07-FY09)  Purchase Data (FY07-FY09)  Inventory Position Data (end of years: FY06-FY09)  Lead Time Data (FY07- FY09)  Demand Forecasting Data (FY07- FY09)  Part Price Table (include repair & new buy)  Dollar Value Adjusted to FY09 (with inflation rate of 5.1%)

20. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Isolating Effect  Excessive Inventory  Initial Idea: Compare the Change in Excessive Inventory  Definition of Excessive Inventory: EIL = 2 Year Demand Forecasting+ Lead Time Demand +1 Lead Time Demand = Annual Demand Forecasting* Lead Time/365 EI = MAX(0, Inventory Position – EIL) * Unit Price (Repair Cost)  Result: End of Year:FY06FY07FY08FY09 Excessive Inventory $95M$99M $106M$110M Note: Cost are based on FY09 with an inflation rate of 5.1%.

21. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Isolating Effect  Excessive Inventory  Why Excessive Inventory Increase  Four Source of Increase in Excessive Inventory Initial Inventory Level Demand Budget Inventory Control Policy FY07FY08FY09 Initial Inventory (Beginning of Year) $200M$249M$262M Demand (During the year) $197M $198M Budget (During the year) $245M$241M$218M More Initial Inventory Stable Demand Part of Initial Inventory is not controllable: caused by initial inventory and change in demand Note: Cost are based on FY09 with an inflation rate of 5.1%.

22. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Isolating Effect  Isolate the Effect of Inventory Control  Excessive Inventory Caused by New Purchase (Repair) EIN = MIN(New Purchase in the FY, EI) Total EIN $= SUM EIN* $ Unit Price (Repair Cost) for all parts FY07FY09 Excessive Inventory Caused by New Purchase (End OF Year) $28.0M$23.7M Time Beginning of the year End of the year Excessive Level Inventory Position Demand New Purchase EIN Time Beginning of the year End of the year Excessive Level Inventory Position Demand New Purchase EIN Note: Cost are based on FY09 with an inflation rate of 5.1%.

23. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Isolating Effect  Inventory Deficiency  Threshold for Inventory Deficiency Lead Time Demand Why not Safety Stock - Affected by SCMS itself Inventory Deficiency ID = MAX(0, Lead Time Demand - Inventory Position) * Unit Price (Repair Cost) FY07FY09 Inventory Deficiency (End of Year) $18.5M$15.1M Note: Cost are based on FY09 with an inflation rate of 5.1%.

24. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- Isolating Effect  Inventory Deficiency  Should We Exclude the effect of Budget, Demand and Initial Inventory  No, Because: Budget plus initial inventory is always much more than Demand All Inventory deficiencies are caused by inventory control decision

25. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Method- ROI Calculation  One year Benefit:  Benefit in FY09: (Total EIN $ (FY09)- Total EIN $(FY07)) + (ID $ (FY09)- ID $ (FY07))  Project Benefits in Following Year: Assume with new SCMS, each year generate similar amount of excessive inventory out of new purchase Assume with new SCMS, each year reduce similar amount of inventory deficiency compared to without new SCMS Total Benefit = n * Cost Saving in FY2009

26. Distribution Statement A: Approved for public release; distribution is unlimited. Costs * FY10 is through March 31, 2010. Note: Cost are based on FY09 with an inflation rate of 5.1%. Description FY2006-08 FY2009 FY2010* Recurring Cost Vendor Support and Software maintenance $ - $ 924,548.00 $299,284.23 Business Operations Division Staff $ 147,140.00 $ 180,000.00 $100,214.40 Nonrecurring Cost System integration and upgrades $4,777,052.50 $ - SAS Developer and Rollout Risk Manager $ 531,106.92 $ 113,713.60 $ - Web Portal Manager $ 29,512.08 $ - Supply Chain Modeling $ 132,472.66 $ - Travel $ 74,944.46 $ 8,642.40 $ - Business Operations Division Staff $ 294,280.00 $ - Additional Support $1,525,316.30 $ - Total $7,511,824.91 $1,226,904.00 $399,498.63 Total: $9,138,277

27. Distribution Statement A: Approved for public release; distribution is unlimited. Calculations Note: Cost are based on FY09 with an inflation rate of 5.1%. $M

28. Distribution Statement A: Approved for public release; distribution is unlimited. Calculations Note: Cost are based on FY09 with an inflation rate of 5.1%. $M

29. Distribution Statement A: Approved for public release; distribution is unlimited. Calculations  SCMS costs of investment through March 31 st, 2010: $9,138,277.  Excessive Inventory cost savings extrapolated to March 31 st, 2010: $6,500,000.  Inventory Deficiency cost savings extrapolated to March 31 st, 2010: $5,100,000. Oct 1, 2009Oct 1, 2010Mar 31, 2010 Time period for SCMS Cost Time period for Cost Savings Oct 1, 2006

30. Distribution Statement A: Approved for public release; distribution is unlimited. ROI Formula ROI = (Cost Savings – Cost of Investment) Cost Of Investment ROI = ($11,600,000 – $9,138,277) $9,138,277 ROI = 27% over the original investment

31. Break Even Analysis Note: Cost are based on FY09 with an inflation rate of 5.1%. Distribution Statement A: Approved for public release; distribution is unlimited.

32. Conclusions  Coast Guard Improvement  Return on Investment calculation  Direct Benefits  Indirect Benefits  Questions? Distribution Statement A: Approved for public release; distribution is unlimited.