INNOVATION IN THE SUPPLY CHAIN –FOCUS ON DISTRIBUTION

1. INNOVATION IN THE SUPPLY CHAIN –FOCUS ON DISTRIBUTION Presented by: Bill Tallman, President, William H. Tallman & Associates, Inc. Date: February 17, 2009

2. Supply Chain • ABSTRACT • ITEMS WORTH NOTE: • 3 million jobs lost in homebuilding industry since 2005. • Housing starts down 34% in 2007 vs. 2005. • Real estate market value is down and has not reached a bottom. Owners may defer selling.

3. Supply Chain • THE CHALLENGE: • New houses will be fewer. • Homeowners will be reluctant to sell. • PERHAPS WE CAN TAKE SOME COSTS OUT OF THE PRODUCTION AND DISTRIBUTION PROCESS AND REDUCE THE PRICE TO THE CUSTOMER! • Would this kindle some interest in the customer to buy?

4. Supply Chain • SUPPLY CHAIN ABSOLUTES • Prepare process map / flow chart of the process. • Does each step add value? • If each step does not add value , does it provide a necessary operational audit trail? • If it does neither of the above – stop it. • Develop an accurate, up-to-date forecast • Quality estimate • Trend / regression analysis • Product category (ABC) • Product mix (P/N, Size, Style, Color, etc.).

5. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Make sure your ERP system has a robust Supply chain module. If it does not, get one. • Buyers / buyer planners must have access to the forecast. • Perform ABC Analysis to determine ABC vendors. • Reduce the “Cost of Quality.” • Establish Six Sigma concepts in the Purchasing process

6. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Certify all “A” vendors within six months. • Implement a cost reduction program. • Implement a lead time reduction program (internal / external). • Implement an inventory reduction program. • Institute the concept of “proprietors” of the various categories of inventory.

7. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Implement an inventory turnover improvement program. • Finished Goods, 8-12 turns per year. • Maintenance, Repair and Operational Supplies (MRO), 4-8 turns per year • These are starting points. The more turns the better. • Implement a Cost of Goods (COGS) Reduction Program. • Direct Labor • Direct Material • Direct Overhead

8. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Implement a consignment Inventory Program. • On site • Vendors location • Implement a vendor managed inventory (VMI) program. • Perform a warehouse / distribution center analysis. • Physical layout, aisles (one-way?) wide enough, too wide? • Lighting location (green consideration) • Using the 3rd dimension properly? • Know OSHA requirements • Know Capacity (pallet spaces – use the “cube” wisely

9. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Provide 60 hours of training / year / person • Implement a performance based green and lean environment. • Assign “Champions” • Identify responsibilities • Determine deliverables • Accomplished with existing staff • Do not reduce staff because of productivity improvements. You will need them to accommodate the additional business you will receive • Determine time frames for accomplishment

10. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Build a project plan to document all the initiatives that will be undertaken. • Work breakdown structure (WBS) • Critical Path • Resources • Milestones • Dispose of all obsolete and slow moving inventory. (See Appendix for “How To.”

11. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Investigate the Production / Distribution Process. • Order entry • Production • Receiving / Shipping • Transportation / Distribution • FOB Issues (Who owns the product enroute?) • Establish use of a Customs Broker at Point of Entry (POE) for off- shore materials • Expeditious handling • Shorter lead times

12. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Think Green and Lean • Implement improvements • Recycle products where possible • Efforts must be cost and results justified • Establish responsibility for HAZMAT • Ordering • Receipt • Storage • Issue • Usage • Return • Disposal

13. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Investigate supplier / vendor data base. • Reduce the number to three (3) • All three receive business • Provide for business continuity in case of shortfall • Determine inventory carrying / ownership costs • Cost of capital 8.0% • Cost of obsolescence 8.5% • Salaries, wages, benefits 3.5% • Depreciation / deterioration 1.5% • Insurance (inventory and building) 1.2% • Warehousing storage facilities and services 1.5%

14. Supply Chain • SUPPLY CHAIN ABSOLUTES (Cont’d) • Determine inventory carrying / ownership costs (Cont’d) • Loss and shrinkage 3.5% • Material handling 1.8% • Inventory control 1.5% • Federal / state asset tax 1.5 • National average 32.5% • Range was 25 to 40%

15. Supply Chain • SUPPLY CHAIN CONSIDERATIONS • Form or join a purchasing consortium / business association • Form or join an inventory disposition consortium / business association • Form or join a political action committee (PAC) or lobbying group • Establish a plan to migrate the purchasing process to performance based blanket orders, multi-year contracts

16. Supply Chain • SUPPLY CHAIN CONSIDERATIONS (Cont’d) • Perform feasibility study to determine if “Procurenment Cards” would be practical for small purchases.

17. Supply Chain • APPENDIX • ThePareto Principle • The Breakthrough Promise of 16X • How to Develop an Inventory Reduction Program • Developing an accurate, up—to-date forecast • Performing an ABC Analysis • How to determine the active and inactive inventory • How to develop the inventory disposition program • How to Introduce New Products • How to Retire Old Products

18. Supply Chain • APPENDIX (Cont’d) • Managing the Bill of Materials • Reporting on How We Did • Cost / Benefit Analysis • Cost Containment / Reduction / Tracking • Cost of Materials in Future • The CPI (Consumer Price Index) • SGA / GA Expenses • WHT Bio