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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
Here’s what we’ll talk 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
Management
Customer
monitors inventory levels
places orders
Vendor
manufactures/purchases product
assembles order
loads vehicles
routes vehicles
makes deliveries
Problems with Conventional
Inventory Management
Large variation in demands
on production and
transportation facilities
workload balancing
utilization of resources
unnecessary transportation
costs
urgent vs nonurgent orders
setting priorities
MICHIGAN
Detroit
LAKE ERIE
Cleveland
OHIO
Conventional Inventory Management -- Day 1
MICHIGAN
Detroit
LAKE ERIE
Cleveland
OHIO
Conventional Inventory Management -- Day 2
MICHIGAN
Detroit
LAKE ERIE
Cleveland
OHIO
Vendor 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
Vendor Managed Inventory -- Day 1
MICHIGAN
Detroit
LAKE ERIE
Cleveland
OHIO
Vendor Managed Inventory -- Day 2
MICHIGAN
Detroit
LAKE ERIE
Cleveland
OHIO
Advantages 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 VMI
Chemical Industry
air products distribution
carbon black distribution
Petrochemical industry
Automotive Industry
gas stations
parts distribution
Consumer Products
Department and grocery stores
Praxair’s Business
Not an airline!
Air products
“harvest the sky”
produce nitrogen, oxygen, argon, hydrogen, helium,
etc.
Praxair’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 Business
Bulk 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 Business
Production Facility A
Praxair’s Business
Production Facility B
Praxair’s Business
D e liv e r ie s P e r W e e k f o r P la n t A C u s t o m e r s
n u m b e r o f d e liv e r ie s
6
5
4
3
2
1
0
1
6
11
16
21
26
c u s to m e r
31
36
41
46
Praxair’s Business
D e liv e r ie s P e r W e e k f o r P la n t B C u s t o m e r s
4 .5
n u m b e r o f d e liv e r ie s
4
3 .5
3
2 .5
2
1 .5
1
0 .5
0
1
6
11
16
21
26
31
36
41
46
cu s to m e r
51
56
61
66
71
76
81
86
Praxair’s Business
T a n k S iz e s f o r P la n t A
90000
80000
t a n k s iz e
70000
60000
50000
40000
30000
20000
10000
0
1
6
11
16
21
26
c u s to m e r
31
36
41
46
Praxair’s Business
T a n k S iz e s f o r P la n t B
3000000
ta n k s iz e
2500000
2000000
1500000
1000000
500000
0
1
6
11
16
21
26
31
36
41
46
51
c u s to m e r
56
61
66
71
76
81
86
VMI Implementation at Praxair
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 Praxair
Praxair receives inventory level data via
Forecast customer demands based on
telephone calls: 1,000 per day
fax: 500 per day
remote telemetry units: 5,000 per day
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 Praxair
10
5
Dec
Nov
Oct
Sept
Aug
July
June
May
Apr
after 2 yrs
Mar
0
before VMI
Feb
Before VMI, 96% of
stockouts due to customers
calling when tank was
already empty or nearly
empty
VMI reduced customer
stockouts
Jan
What’s needed to make VMI work
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 Problem
Products
Drivers and Vehicles
Costs
Transportation cost
Revenue earned
Shortage cost
Customers
Plants
Inventory holding cost
0
0,0
Vehicles
0
1,0
0
2,0
V1(x1,0)
V1(x1,0)
V1(x1,0)
0
0,1
V2(x2,0
)
0
0,2
V3(x3,0)
0,3
0
0
0
1,1
1,2
1,3
0
2,1
V2(x2,0
)
0
2,2
V3(x3,0)
Objective
0
Choose a distribution policy that maximizes the expected total
discounted value (rewards minus costs) over a long horizon
0
2,3
Inventory 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
PROBLEM
Anton Kleywegt
Vijay Nori
Martin Savelsbergh
These papers can be obtained from
http://tli.isye.gatech.edu/reports.html
Vendor Managed Inventory