VENDOR MANAGED INVENTORY

1. 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

2. 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

3. Customer monitors inventory levels places orders Vendor manufactures/purchases product assembles order loads vehicles routes vehicles makes deliveries Conventional Inventory Management

4. 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

5. MICHIGAN Detroit LAKE ERIE Cleveland OHIO

6. Conventional Inventory Management -- Day 1 MICHIGAN Detroit LAKE ERIE Cleveland OHIO

7. Conventional Inventory Management -- Day 2 MICHIGAN Detroit LAKE ERIE Cleveland OHIO

8. 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

9. Vendor Managed Inventory -- Day 1 MICHIGAN Detroit LAKE ERIE Cleveland OHIO

10. Vendor Managed Inventory -- Day 2 MICHIGAN Detroit LAKE ERIE Cleveland OHIO

11. 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

12. 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

13. Oxygen Nitrogen Argon Praxair’s Business • Not an airline! • Air products • “harvest the sky” • produce nitrogen, oxygen, argon, hydrogen, helium, etc.

14. 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

15. 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

16. Praxair’s Business Production Facility A

17. Praxair’s Business Production Facility B

18. Praxair’s Business

19. Praxair’s Business

20. Praxair’s Business

21. Praxair’s Business

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. INVENTORY ROUTING PROBLEM Anton Kleywegt Vijay Nori Martin Savelsbergh These papers can be obtained from http://tli.isye.gatech.edu/reports.html

29. Vendor Managed Inventory