manage vendor inventory and optimize logistics network to
TRANSCRIPT
Manage Vendor Inventory and Optimize Logistics Network to Create Value in Supply Chain
Management
Chalat W., Sirichai B., Tanoos P., Rawin I.
SCG Logistics Management Company Limited, 1 Siam Cement Road, Bangsue, Bangkok 10800, THAILAND
Abstract. SCG Logistics Management, as a logistics provider, realizes that creating mu-tual benefit is a crucial factor creating a com-petitive advantage for all relevant parties in the chain, especially within upward trend of energy price. SCG Logistics have applied Vendor Managed Inventory (VMI) along with logistics network optimization under new business model to identify and improve the existing problems of customers, which are low truck utilization, high inventory level, etc. The benefits has been proven for all stake-holders under win-win situation, for example decreasing inventory level, lower transporta-tion cost and reducing overhead cost. On the other hand, SCG Logistics has gained addi-tional revenue as well as showed its value-added activities in the supply chain. Never-theless, concept of this project energizes synergy among business units in SCG group in area of supply chain management.
Key Words: Vendor Managed Inventory (VMI), Logistics Network Optimization
1 Introduction
SCG Logistics Management (SCG Logistics), a sub-sidiary of SCG Distribution in SCG group, is dedi-cated to offering total logistical solutions for both in-ternal and outside customers. SCG Logistics have offered a new dimension to modern logistics man-agement, providing accurate delivery with an effi-cient management and strengthened by advanced IT system. (See Diagram 1)Diagram 1
According to SCG Logistics vision, SCG Logistics aims to be a dominant logistics provider in ASEAN with strategic customers. Therefore, the mission of SCG Logistics 2007 is “create new business model through utilize supply chain information”.
Before 2007, each business unit in SCG group took the responsibility in transportation by itself, which had no synergy among business units. From this business model, there were many pains occur in the supply chain such as high transportation cost, high-
energy consumption, and unmanaged demand. Since the mission of SCG Logistics has been launched in 2007, SCG Logistics aim toward part-nership level when doing business with customers under “Supply Chain Alignment” concept. Our goal is to create our customers’ competitive advantages by offering value creation services under seamless operations. (See Diagram 2)Diagram 2
2 Understanding the Situation
SCG Logistics are going to discuss about inter-trans-action among 3 business groups in SCG group as SKK (Cement manufacturer), SKIC (Kraft paper man-ufacturer) and SCG Logistics (Service provider). (See Diagram 3) SKK’s factory located in Saraburi province, central of Thailand buys Kraft paper from SKIC factory in Western region to produce cement bags and supply bulk and bagged cement through-out Thailand. Before 2007, trucks carried bagged cement and Kraft paper were separately managed and mostly carried nothing on the way back to ori-gins. However, there is certain relation between these 2 customers, as SKIC sells Kraft paper to SKK
in order to produce cement bags whereas SKK sells bagged cement to customers located near SKIC’s factory. Transportation from SKIC to SKK was man-aged by SKIC itself regarding CFR term of trading. Bagged cement sold are mostly transported by self-hired trucks of SCG’s dealers and the rest are trans-ported by SCG Logistics. Diagram 3
2.1 Mismatched transportation man-agementPreviously, trucks delivered Kraft paper to SKK went back with empty cargo whereas trucks of SCG Logis-tics and agents sent empty cargo to SKK and deliv-ered bagged cement to western customers. (See Di-agram 4) Diagram 4
2.2 Kraft Inventory Management by SKK
Though SKK purchases kraft paper from SKIC on “SAP” via “KOS” (Kraft Ordering System) on-line system, SKK stilled use manpower to control their Kraft paper stock and usage. Due to lots of docu-ments, SKK had to fill in, SKK decided to update these data into the system in batch basis. This manual process caused burden on SKIC by spending at least 18 days from order placement to invoice is-suance. SKK also pained from high kraft paper in-ventory, 3-Days Safety Stock (THB 7.66 million per month), and large holding cost (THB 0.675 million per month). See Diagram 5.Diagram 5
2.3 Low transportation share in SCG Logistics’ service offering in West-ern region
Diagram 6For many years, SCG lo-gistics has of-fered trans-portation ser-vice to Western region agents but failed to gain significant transportation share as most agents own
trucks. See Diagram 6 They preferred to use owned truck to pick up bagged cement at factory unless SCG logistics can offer better deal. Without goods flow from west to central, SCG Logistics had less chance to compete with agents’ truck fleet. Western market was the weakest area of SCG logistics at that time.
From the above situation, there were many disad-vantages occurred to all parties as follow.(See Diagram 7)Firstly, SKK, SKIC, and Agent got uncompetitive transportation cost.Secondly, SKK pained from high kraft paper inven-tory, and large holding cost.In addition, SCG Logistics had very low transporta-tion share at 3% in western region.
Finally, all parties pained from high-energy con-sumption (Deadhead at 50%).Diagram 7
Since 2007, SCG Logistics has started to offer logis-tics service to SKIC and realize the hidden opportu-nity from this scenario and stepped toward improve-ment and change management
3 Develop methods
3.1 Solution DesignAfter offering transportation service to SKIC in 2007, SCG Logistics has seen opportunity to improve pains of all stakeholders by listing all possible alter-natives.
3.1.1 All possible alternativesSCG Logistics listed two possible alternatives in-
cluding SCG Logistics’ backhaul management and VMI (Vendor Managed Inventory) to improve above pains of all stakeholders. Finally, SCG Logistics chose VMI to solve the problem because VMI method had high level of effectiveness and effi-ciency, while backhaul management had low level of effectiveness and efficiency.
VMI was evaluated to be high level of effectiveness and efficiency because SCG Logistics can manage order in case orders of both sides are not equal. For example, in case order of bagged cement more over than order of kraft paper, SCG Logistics will order
more kraft paper to fill gap between bagged cement and kraft paper. On the other hand, backhaul man-agement cannot manage order for matching head-haul and backhaul because kraft ordering plan and bagged cement sale plan rely only on customers. SCG Logistics cannot do anything in case orders of both sides are not equal.
3.1.2 Business modelDefinition of VMI is “VMI, instead of the customer
monitoring its inventory for the purpose of trigger-ing replenishment orders, the vendor assumes re-sponsibility for these activities.” (DFPIM Article, by Mark K. Williams)
Conceptually, SCG Logistics buys Kraft paper from SKIC and sells to SKK when product is needed. SKK will eliminate burden in holding inventory and SCG logistics matches paper delivery with bagged ce-ment delivery back to western region. With VMI, SCG Logistics is able to manage transportation effi-ciency, which leads to freight cost competitiveness. SCG logistics will manage Kraft paper ordering in or-der to match with bagged cement ordered by SCG agent. Inventory level and freight saving from back-haul management are balanced to get the optimum benefit. See Diagram 8.
Diagram 8
3.1.3 How to apply VMI (Vendor Managed Inven-tory) in practical
Before VMI will be applied to operation process, the ordinary process is that production planner will plan the cement bag production and order kraft pa-per from SKIC. Then checker of SKK will receive and dispatch kraft paper for cement bag production. Next step, SKK cement bag producer will deliver ce-ment bag to SKK cement plant. At the same time, SKK cement plant will deliver bagged cement from SKK cement plant to agents / dealer in western re-gion. From the existing process, SCG Logistics found that one important process is that there is a method/knowledge in conversion production plan-ning into kraft paper consumption, which sticks with one person (SKK production planner). According to the ordinary process, trucks will have many trips with empty cargo. (See Diagram 9)
Diagram 9
Furthermore, stock layout of SKK in warehouse area is not systematic. Even though SKK has more than 20 SKUs of kraft roll to be raw material in ce-ment bag production line. Consequently, long pick-ing time for raw material preparation was found. (See Diagram 10)
Diagram 10
In 2007, SCG Logistics has offered logistics service to Paper business by applying the VMI concept in transportation area. The VMI process is that SKK will
provide the production planning of cement bag to SCG Logistics and SCG Logistics will calculate the amount of Kraft paper consumption by using calcu-lation model, created by SCG Logistics. (SCG Logis-tics went to study the process of cement bag pro-duction planning from SKK production planner and then transferred this tacit knowledge to explicit knowledge in form of calculation model.) After SCG Logistics gets kraft paper consumption information, SCG Logistics will decide the appropriated inventory level by taking into account dealer’s bagged cement order pattern. (See Diagram 11) In addition, the sys-tematic layout is designed to reduce picking time and increase inventory accuracy. (See Diagram 12)
Diagram 11
Diagram 12
3.2 Implementation
After first few months of implementation, SCG Lo-gistics faced many problems; result in number of shipment matching that not meet target at the starting point. However, SCG Logistics can achieve target at 100% within 4 months because every party provides great cooperation, and management committee grants strongly support. In addition, SCG Logistics always apply TQM tools such as PDCA process, and FMEA (Failure Mode Effect Analysis) according to our TQM consultant team’s sugges-tions. (See Diagram 13, 14)
Diagram 13
Diagram 14
Unmatched order between kraft paper and bagged cement
Even SCG Logistics tried to smooth kraft paper or-der to match bagged cement order, SCG Logistics could do only 68% backhaul (before implementing this model, SCG Logistics had only 4% backhauling) due to fluctuate bagged cement demand and ce-ment bag production plan. By coordinate with SCG Network to order in advance, SCG Logistics are able to know the number of trucks SCG Logistics need for delivering bagged cement, so SCG Logistics can ad-just our kraft paper order to match with these num-bers. However, to prevent mismatched transporta-tion, SCG Logistics tries to expand customers to construction materials section to increase backhaul for kraft paper.
Backlog
SCG Logistics will take full responsibility on order-ing Kraft paper from SKIC. It is expected that at least 10% of inventory will be reduced from appro-priated safety stock identified. Moreover, SCG Logis-tics will manage the optimum level of inventory (Min/Max Stock) when compared with cost saving from backhaul management. In addition, because cement bag production sometimes does not use to-tal roll of Kraft paper at one time, SCG Logistics need to manage these remaining kraft paper. SCG Logistics coordinate with SKK to relay plan for stock-ing area. SCG Logistics separate full-roll paper area from partial-roll paper area and separate stocking area by Kraft paper SKUs. SCG Logistics still re-sponsible for full-roll kraft paper and SKK is respon-sible for partial-roll paper.
Long queuing time for product palletizer Our trucks could not complete both transportation
legs (one leg for Kraft paper and another leg for bagged cement) within one day because the trucks wasted their time in queuing at SKK plant and un-loading bagged cement at destinations. With un-doubted benefits, SCG Logistics submits advanced order to SKK for product preparation. In addition, SKK provides not only pallets for faster bagged ce-ment loading and unloading, but also special queu-ing for our trucks at the time of loading bagged ce-ment.
Long holiday effect Due to long holiday in February, Chinese New
Year Festival, with unexpected situation, SCG Logis-tics could not matched kraft paper order with bagged cement order. This is because SKK operated
during this period, while Agents were not opened to receive bagged cement products. According to this situation, SCG Logistics applied FMEA process to prevent this failure in April, which is the month of Songkran Festival (Thai New Year). SCG Logistics tried to order more kraft paper and accelerate sales order of bagged cement in the period before Songkran Festival. Therefore, no delivery transac-tion occurred in the Songkran Festival, and match-ing percentage was completely 100%, while SKK can produce cement bag during this period from its stock. (See Diagram 15)
Diagram 15
4 Result & Benefits
From implementing supply chain alignment con-cept, SCG Logistics can create benefits to all parties in the chain. (See Diagram 16)
4.1 SKK - Cement manufacturerSKK relieves inventory burden and receives 10%
discount for kraft paper transportation from SCG Lo-gistics.
4.2 SKIC – Kraft paper manufacturerSKIC gets freight discount from SCG Logistics at
the same rate as SKK (10%).4.3 SCG AgentsThey get freight discount 25% from SCG Logistics
for quick win. In the long run, they can reduce in-vestment in their truck fleet as using SCG Logistics is more cost efficient than own truck. This saving provides better sale advantage upon their competi-tors. Therefore, SCG can sell more bagged cement.
4.4 SCG LogisticsFinally, transportation share of SCG Logistics in
western region increases from 3% to 15%. Further-more, SCG Logistics have incremental revenue, THB 574 million per year from kraft paper management and THB 12 million per year from bagged cement transportation. SCG Logistics also have better truck utilization, 100% matching from previously 4%. Further, our trucks also gain more monthly income from better utilization.
4.5 OverallAll relevant parties in this supply chain have
gained lower energy consumption. Deadhead per-centage of all parties has decreased from 50% to 13% after implementing this model. In other words, diesel consumption can be saved around 120,000 liter per year.
Diagram 16
5 Key Learning
According to SCG Logistics’ first VMI project with SKK, there are a few major key learning as below. (See Diagram 17)
Diagram 17
1. Third party logistics has the ability to create Win – Win – Win situation in the supply chain process. The benefits has been proven for all stake-holders, for example decreasing inventory level, lower transportation cost, reducing overhead cost, and higher transportation share. This is because SCG Logistics realizes that creating mutual benefit
is a crucial factor creating a competitive advantage for all relevant parties in the chain.
2. Concept of this project energizes synergy among business units in SCG group in area of sup-ply chain management. Cooperation tends to be successful when top executives are supporting the cooperation. Fortunately, all business unit presi-dents in SCG group realize that creating mutual benefits is an important thing in upward trend of en-ergy price. Therefore, all business unit presidents give strong support to this project.
3. Free flow of information is one of key success factors in this project. For instance, early communi-cation to SCG Logistics of production planning and bagged cement order changes is a factor to the suc-cess of inventory control and matching process. That is why SKK, SKIC, and SCG Logistics have a meeting regularly to discuss any change of plans, and evaluate results together.
6 Roll-out
SCG Logistics has plans to apply Vendor Managed Inventory (VMI) to other cement plants throughout Thailand. In the fourth quarter of 2008, SCG Logis-tics plans to apply VMI to cement plant in southern part of Thailand. For Year 2009, SCG Container Busi-ness will be our target customer in applying VMI to energize synergy among business units in SCG group in area of supply chain management. (See Di-agram 18)Diagram 18
References
1. CFPIM Article – Making consignment and vendor-managed inventory work for you, By Mark K.Williams
Glossary
VMI Vendor Managed InventorySCG Logistics SCG Logistics Manage-
ment Co., Ltd.SKK The Siam Cement (Kaeng Khoi)SKIC Siam Kraft Industry Co., Ltd.KOS Kraft Ordering System