National Oilwell Varco, the Houston, Texas-based supplier of equipment and components used in oil and gas drilling and production, has implemented a total inventory management solution (TIMS) that has improved customer satisfaction while reducing inventory, freight and transaction costs.

The most important operational change required a shift from a problematic centralized planning and purchasing system to a decentralized process that leverages front-line business intelligence at more than 140 locations worldwide. In fact, National Oilwell Varco's centralized planning and purchasing approach was jeopardizing the company's worldwide customer service. Centrally planned stocking levels failed to meet service requirements resulting in local stock purchases that distorted consumption level information. To meet customer requirements, field branch locations bypassed business process rules resulting in increased costs, SKUs and vendors.

National Oilwell Varco's supply chain management group was challenged to improve turn rates, inventory quality ratio, and the company's return on investments by improving the worldwide planning and purchasing process. Part of the challenge was to develop a solution that was simple enough for all field branch locations to learn and understand.

To better understand the company's inventory needs, the SCM group first stratified all items into six categories ranging in quality from prime inventory critical to customer needs to "deadest of dead" inventory. All items classified as surplus, hardcore or dead inventory became the responsibility of the SCM group to centrally source, redeploy, sell, liquidate or return to suppliers. The group created a tool for redeployment of passive material requisitions (RPM) that intercepts all inventory requisitions for surplus inventory and redeploys existing assets to more active locations. Any item considered dead stock is blocked from purchase in the SAP enterprise resource planning system and must be filled from existing dead stock.

To handle all other inventory, the SCM group enhanced its ERP system to allow each field branch to manage its own replenishment. Called Zplan, the tool creates a weekly process whereby the field inventory planner reviews and approves, or rejects, inventory purchases being made centrally by the SCM group in Houston. Zplan is also armed with graphical warnings that indicate potentially bad planning, distressed inventory and over-requisitioning field requirements. Zplan thereby completes the communication loop between the buyers and the field users to provide better market intelligence in the planning process.

To further redeploy and reduce inventory, the SCM group implemented an inventory process for field branch locations using the RPM tool. Items considered dead stock in one field branch location move to locations with an open stocking requirement or less than maximum stock levels. The SCM group complemented the solution by creating a surplus inventory web site where dead stock can be offered to the public in a clearance sale effort.

TIMS has provided sustainable improvements in return on investment, inventory turn rates, and inventory quality ratio. Return on inventory investment has increased several points because of the continued focus and reduction in slow moving inventory. Furthermore, these improvements resulted in increased operating profit for each field location and improved the company's overall margin due to the redeployment of surplus material. Despite an overall reduction in inventory customer service has remained superior. Not only have order fill rates improved, but the company has gained better planning information closer to the point of consumption along with better local market intelligence. Maverick purchasing has practically been eliminated. The company can now leverage its spend with suppliers to further reduce costs, inventory levels and SKUs. National Oilwell Varco's internal metrics has shown that the company's customer satisfaction levels are at 98 percent as measured by order accuracy and on-time delivery.