Implementation of a VMI production and distribution control system

This paper is concerned with the implementation of VMI within a grocery supply chain. We use the Time Benefit analysis tool to identify the particular products most suitable for VMI control from within the suppliers product range. Practical issues concerning the production and distribution process are highlighted. A production and inventory control system is selected and refined and realised via a spreadsheet application. Necessary data for enabling VMI is collated and presented to the production planner by the existing supply chain ERP system and entered into the spreadsheet-based VMI DSS. The DSS then advises the production scheduler on production and distribution targets for both VMI and non-VMI customers. Herein we report on the design and installation of the VMI DSS within the real-world supply chain. INTRODUCTION In a seminal presentation by Magee (1958, pp298) he discusses “Authority over Inventories” in relation to a conceptual framework for designing a production control system. Quoting directly from the text: “Frequently there is argument as to who should control inventories. For example, should it be the sales organisation or (some) other unit that draws on the stocks and wants to be sure they are there, or the operation that supplies the stock point and wants to feed it economically? There is probably no resolution to this question as stated; the difficulty is that both (players) have a legitimate interest. It is possible to restate the question slightly (differently) and (thereby) reach a solution. (For example), the user has to be sure the material he needs will be there. He has corresponding responsibility to state what his maximum and minimum requirements will be. Once these limits are accepted as reasonable, the supplier has the responsibility of meeting demand within these limits, making whatever use he can of the flexibility that (holding the) inventory provides. Thus both (players) have a share in the responsibility for and control over a stock unit. One specifies what the maximum and minimum demands on the stock unit will be; the other has the responsibility of keeping the stock unit replenished but not overloaded as long as demand stays within the specified limits”. What Magee had described is now embedded within the modern supply chain strategy known as Vendor Managed Inventory (VMI). Other terms in use to describe such centralised inventory control include, Efficient Consumer Response, Quick Response and Collaborative Planning, Forecasting and Replenishment. VMI has become popular in the last 15 years following the success of industrial examples mainly by top retailers in the grocery sector. However, there is often some resistance to implementing VMI, since it is frequently the case that customers expect the supplier to bear the total cost of implementation, but to cream off the benefits for themselves (Clark and Hammond, 1997). This paper is concerned with the identification and exploitation of the flexibility that the VMI scenario offers in an industrial setting. It is important to identify the most suitable products to * Corresponding Author; Email [email protected], Tel +44(0)29 2087 6310, Fax +44(0)29 2087 4301 Disney, S.M., Holmström, J., Kaipia, R., Towill, D.R., (2001), "Implementation of a VMI production and distribution control system", International Symposium of Logistics, July 8-10, Saltsburg, Austria, ISBN 085358 099 5. manage in VMI mode in order to maximise the chance of success of a VMI implementation. Therefore, in the first instance the Time Benefit analysis tool (Kaipia, Holmström and Tanskanen, 2001) will be described and exploited to determine which particular products are best suited to the VMI scenario. We then investigate the impact that the migration to VMI will have upon the production planning process at the supplier. A VMI production planning and inventory control system is then selected, refined and incorporated into a simple Decision Support System (DSS) to cope with the particular issues prevalent in the supply chain. THE INDUSTRIAL CASE STUDY This presentation is based on an implementation of a VMI supply chain planning DSS within a Finnish grocery supply chain. Our point of departure is the investigation and selection of nonseasonal products (i.e. the products that have a long life cycle) from the VMI supplier’s product range. This was appropriate as some of the product range only had a demand near annual religious/cultural events and in this pilot study it was felt that these products were unsuitable for VMI in the first instance. For this project the industrial partner conducted this filtering exercise. WHERE SHOULD VMI BE IMPLEMENTED? The next stage of implementation is to determine where VMI is the most suitable within the everlasting product range. The companies need to know what products should be replenished according to VMI principles. Also whether the implementation should concern the whole product range or only a part of it. A method is therefore needed to identify in which supply chains and on which products the potential benefits of VMI are biggest. This was achieved by application of the Time Benefit Analysis Tool, Kaipia et al (2001). Essentially, this is a technique that quantifies the time that can be gained by moving away from order based material flow control to inventory and sales based material flow control. Figure 2, shows the output of the analysis tool as applied across the product range. It can be seen from the results that VMI is best suited to (typically low demand) products that suffer from the Bullwhip Effect (Lee, Padmanabhan and Whang, 1997) as the time benefit is greater here. The time benefit is calculated by working backwards through the re-order point equation for a traditional order based supply chain and comparing it what would happen in a VMI supply chain. Specific details on the logic of this can be found in Kaipia et al (2001) and have been omitted here for brevity. The Time Benefit tool can be used to identify potential VMI supply chains at either the product level or the product group level. Review of current production and distribution system Investigation of production and inventory economics Investigation of current PIC system / process Investigation of seasonality Selection of everlasting products Application of Time Benefit to identify suitable pilots Selection of a suitable production control system Implementation All partners Industrial partners