VENDOR MANAGED INVENTORY Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA (404) TLI Transportation/Distribution/Logistics Short Course Georgia Institute of Technology April 4, 2001

Here’s what we’ll talk about... l What is “Vendor Managed Inventory” (VMI)? l Why are we interested in VMI? l What does one need to make VMI work? l Case study: Praxair Supply Management l Lessons learned

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

Problems with Conventional Inventory Management l Large variation in demands on production and transportation facilities l workload balancing l utilization of resources l unnecessary transportation costs l urgent vs nonurgent orders l setting priorities

OHIO MICHIGAN LAKE ERIE Detroit Cleveland

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

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

Vendor Managed Inventory l Customer < trusts the vendor to manage the inventory l Vendor < monitors customers’ inventory n customers call/fax/ n remote telemetry units n set levels to trigger call-in < controls inventory replenishment & decides n when to deliver n how much to deliver n how to deliver

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

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

Advantages of VMI l Customer < less resources for inventory management < assurance that product will be available when required l 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 l Chemical Industry < air products distribution < carbon black distribution l Petrochemical industry < gas stations l Automotive Industry < parts distribution l Consumer Products < Department and grocery stores

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

Praxair’s Business l Plants worldwide < 44 countries < USA 70 plants < South America 20 plants l Product classes < packaged products < bulk products < lease manufacturing equipment l Distribution < 1/3 of total cost attributed to distribution

Praxair’s Business Bulk products l Distribution < 750 tanker trucks < 100 rail cars < 1,100 drivers < drive 80 million miles per year l Customers < 45,000 deliveries/month to 10,000 customers l Variation < 4 deliveries/customer/day to < 1 delivery/customer/2 months l Routing varies from day to day

Praxair’s Business Production Facility A

Praxair’s Business Production Facility B

Praxair’s Business

VMI Implementation at Praxair l Convince management and employees of new methods of doing business l Convince customers to trust vendor to do inventory management l Pressure on vendor to perform - Trust easily shaken l Praxair currently manages 80% of bulk customers’ inventories l Demonstrate benefits

VMI Implementation at Praxair l Praxair receives inventory level data via < telephone calls: 1,000 per day < fax: 500 per day < remote telemetry units: 5,000 per day l Forecast customer demands based on < historical data < customer production schedules < customer exceptional use events l 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 l Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty l VMI reduced customer stockouts

What’s needed to make VMI work l Information management is crucial to the success of VMI < inventory level data < historical usage data < planned usage schedules < planned and unplanned exceptional usage l Accurate and timely forecasts of future demand l Convince management that VMI will be beneficial, and that it can be implemented successfully l Convince customers that VMI will be to their benefit l Make good replenishment decisions - decision support

Inventory Routing Problem l Plants l Products l Drivers and Vehicles l Costs < Transportation cost < Revenue earned < Shortage cost < Inventory holding cost l Objective < Choose a distribution policy that maximizes the expected total discounted value (rewards minus costs) over a long horizon Vehicles Customers 0,0 2,0 1,11,1 2,12,1 1,0 0,10,10,30,3 2,32,3 1,31,3 0,20,2 1,21,2 2,22,2 0 V 1 (x 1,0) V 1 (x 1,2) V 2 (x 2,1) V 2 (x 2,0 ) V 3 (x 3,0) V 3 (x 3,2) 0 0 V 3 (x 3,1) V 3 (x 3,0)

Inventory Routing Problem l 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 l 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 l 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

Vendor Managed Inventory