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VENDOR MANAGED INVENTORY. Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205 anton.kleywegt@isye.gatech.edu (404) 894-4323. TLI Transportation/Distribution/Logistics Short Course Georgia Institute of Technology April 4, 2001.
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VENDOR MANAGED INVENTORY Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205 anton.kleywegt@isye.gatech.edu (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
Customer monitors inventory levels places orders Vendor manufactures/purchases product assembles order loads vehicles routes vehicles makes deliveries 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 Problems with Conventional Inventory Management
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
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
Vendor Managed Inventory -- Day 1 MICHIGAN Detroit LAKE ERIE Cleveland OHIO
Vendor Managed Inventory -- Day 2 MICHIGAN Detroit LAKE ERIE Cleveland OHIO
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 Advantages of VMI
Applications of VMI • Chemical Industry • air products distribution • carbon black distribution • Petrochemical industry • gas stations • Automotive Industry • parts distribution • Consumer Products • Department and grocery stores
Oxygen Nitrogen Argon 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 BusinessBulk 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
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 • 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 Praxair • Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty • VMI reduced customer stockouts
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
Customers 0 0 0 0 0,0 0,1 0,2 0,3 V1(x1,0) V3(x3,0) V2(x2,0) V2(x2,1) V3(x3,1) 0 0 0 0 Vehicles 1,0 1,1 1,2 1,3 V1(x1,0) V1(x1,2) V3(x3,2) 0 0 0 0 2,0 2,1 2,2 2,3 V1(x1,0) V2(x2,0) V3(x3,0) Inventory 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
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