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VENDOR MANAGED INVENTORY. Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205 [email protected] (404) 894-4323. TLI Transportation/Distribution/Logistics Short Course Georgia Institute of Technology April 4, 2001. - PowerPoint PPT Presentation
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VENDOR MANAGED INVENTORYVENDOR MANAGED INVENTORY
Anton KleywegtSchool of Industrial and Systems EngineeringGeorgia Institute of Technology
Atlanta, GA 30332-0205
(404) 894-4323
TLI Transportation/Distribution/Logistics Short CourseGeorgia Institute of Technology
April 4, 2001
Here’s what we’ll talk Here’s what we’ll talk about...about... What is “Vendor Managed Inventory” (VMI)? Why are we interested in VMI? What does one need to make VMI work? Case study: Praxair Supply Management Lessons learned
Conventional Inventory Conventional Inventory ManagementManagement
Customer monitors inventory levels places orders
Vendor manufactures/purchases product assembles order loads vehicles routes vehicles makes deliveries
Problems with Conventional Problems with Conventional Inventory ManagementInventory Management Large variation in
demands on production and transportation facilities
workload balancing utilization of resources unnecessary
transportation costs urgent vs nonurgent
orders setting priorities
OHIO
MICHIGANLAKE ERIEDetroit
Cleveland
OHIO
MICHIGANLAKE ERIEDetroit
Cleveland
Conventional Inventory Management -- Day 1
OHIO
MICHIGANLAKE ERIEDetroit
Cleveland
Conventional Inventory Management -- Day 2
Vendor Managed InventoryVendor Managed Inventory
Customer trusts the vendor to
manage the inventory
Vendor monitors customers’
inventory customers call/fax/e-mail remote telemetry units set levels to trigger call-in
controls inventory replenishment & decides
when to deliver how much to deliver how to deliver
OHIO
MICHIGANLAKE ERIEDetroit
Cleveland
Vendor Managed Inventory -- Day 1
OHIO
MICHIGANLAKE ERIEDetroit
Cleveland
Vendor Managed Inventory -- Day 2
Advantages of VMIAdvantages of VMI
Customer less resources for inventory
management assurance that product will be
available when required
Vendor more freedom in when & how to
manufacture product and make deliveries
more uniform utilization of resources better coordination of inventory levels at
different customers better coordination of deliveries to
decrease transportation cost
Applications of VMIApplications of VMI
Chemical Industry air products distribution
carbon black distribution
Petrochemical industry gas stations
Automotive Industry parts distribution
Consumer Products Department and grocery stores
Praxair’s BusinessPraxair’s Business
Not an airline! Air products
“harvest the sky”
produce nitrogen, oxygen, argon, hydrogen, helium, etc.
OxygenOxygen
NitrogenNitrogen
ArgonArgon
Praxair’s BusinessPraxair’s Business
Plants worldwide 44 countries
USA 70 plants
South America 20 plants
Product classes packaged products
bulk products
lease manufacturing equipment
Distribution 1/3 of total cost attributed
to distribution
Praxair’s BusinessPraxair’s BusinessBulk productsBulk products
Distribution 750 tanker trucks
100 rail cars
1,100 drivers
drive 80 million miles per year
Customers 45,000 deliveries/month to 10,000 customers
Variation 4 deliveries/customer/day to
1 delivery/customer/2 months
Routing varies from day to day
Praxair’s BusinessPraxair’s Business
Production Facility A
Praxair’s BusinessPraxair’s Business
Production Facility B
Praxair’s BusinessPraxair’s Business
Deliveries Per Week for Plant A Customers
0
1
2
3
4
5
6
1 6 11 16 21 26 31 36 41 46
customer
num
ber
of d
eliv
erie
s
Praxair’s BusinessPraxair’s Business
Deliveries Per Week for Plant B Customers
00.5
11.5
22.5
33.5
44.5
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86customer
nu
mb
er
of
de
live
rie
s
Praxair’s BusinessPraxair’s Business
Tank Sizes for Plant A
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1 6 11 16 21 26 31 36 41 46
customer
tank
siz
e
Praxair’s BusinessPraxair’s Business
Tank Sizes for Plant B
0
500000
1000000
1500000
2000000
2500000
3000000
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
customer
tank
siz
e
VMI Implementation at VMI Implementation at PraxairPraxair Convince management and employees of new
methods of doing business Convince customers to trust vendor to do
inventory management Pressure on vendor to perform - Trust easily
shaken Praxair currently manages 80% of bulk
customers’ inventories Demonstrate benefits
VMI Implementation at VMI Implementation at PraxairPraxair Praxair receives inventory level data via
telephone calls: 1,000 per day fax: 500 per day remote telemetry units: 5,000 per day
Forecast customer demands based on historical data customer production schedules customer exceptional use events
Logistics planners use decision support tools to plan whom to deliver to when to deliver how much to deliver how to combine deliveries into routes how to combine routes into driver schedules
Benefits of VMI at PraxairBenefits of VMI at Praxair
Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty
VMI reduced customer stockouts
0
5
10
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
after 2 yrs
before VMI
What’sWhat’s needed to make VMI needed to make VMI workwork Information management is crucial to the success of
VMI inventory level data historical usage data planned usage schedules planned and unplanned exceptional usage
Accurate and timely forecasts of future demand Convince management that VMI will be beneficial, and
that it can be implemented successfully Convince customers that VMI will be to their benefit Make good replenishment decisions - decision support
Inventory Routing ProblemInventory Routing Problem
Plants Products Drivers and Vehicles Costs
Transportation cost
Revenue earned
Shortage cost
Inventory holding cost Objective
Choose a distribution policy that maximizes the expected total discounted value (rewards minus costs) over a long horizon
Veh
icle
s
Customers
0,0
2,0
1,1
2,1
1,0
0,1 0,3
2,3
1,3
0,2
1,2
2,2
0
V1(x1,0)
V1(x1,0)
V1(x1,0)
V1 (x
1 ,2)
V2 (x
2 ,1)
V2(x2,0)
V2(x2,0)
V3(x3,0)
V3 (x
3 ,2)0
0
V3 (x
3 ,1
)
V3(x3,0)
0 0
0
0
0
0
0
0
0
Inventory Routing ProblemInventory Routing Problem
Decision making: decide on a regular (daily) basis whom to deliver to when to deliver how much to deliver how to combine deliveries into routes how to combine routes into driver schedules
Important factors to take into account Likelihood of customer stocking out
Consequences if customer stocks out
Impact of today’s decisions on future situation
Benefits of coordinating deliveries to close customers
Georgia Tech researchers have developed methods to solve the inventory routing problem
INVENTORY ROUTING INVENTORY ROUTING PROBLEMPROBLEM
Anton KleywegtVijay NoriMartin Savelsbergh
These papers can be obtained fromhttp://tli.isye.gatech.edu/reports.html
Vendor Managed InventoryVendor Managed Inventory
