VMI - How To Determine Alarm Levels

ORBIT Logistics
VMI - Vendor Managed Inventory
SCM - Supply Chain Management

How to Determine Alarm Levels

© ORBIT Logistics Americas, LLC. Dipl.-Ing. Klaus-Peter Jovi 2007

Given Values

Step 1: collect the following data

► Storage capacity (Note: nearly all tanks/silos can
only used up to 90% or 95%)
► Average consumption of your customer
► Your lead time (The time you need to deliver
product from point of order entry to product ready
to use in tank)
► Replenishment amount (how much is one
truckload)


Considering Values

Step 2: You should now have a list like this:

► Storage capacity: xxx lb
► Average consumption: xxx lb/day
► Lead time xxx day
► Replenishment amount xxx lb


Alarm levels

ORBIT Logistics allows you to set up 3
different alarms:

Minimum Inventory
Replenishment Order Point
Replenishment Plan Point

These Points can be calculated as follows:


Calculating levels

Step 3: Minimum Inventory

You and your customer should agree upon a level
that should not be under-run. If so you should be
able to deliver before your customer have to stop
production.
Calculate the level as follows:
► Minimum Inventory = Average consumption * Lead time
If you need more security add amount X.


Calculating levels

Step 4: Replenishment Order Point

As you assured to your customer not to under-run
the Minimum Inventory this point can be calculated
as follows:
► Replenishment Order Point = Average consumption *
Lead time + Minimum Inventory
If you need more security add amount X


Calculating levels

Step 5: Replenishment Plan Point

This Alarm can be used as a pre Alarm for the Order
Point or e.g. if your customers silo is very large, set
this point where a full truckload would fit in the silo.
► Replenishment Plan Point = Storage Capacity –
truckload


Example 1

You collected following data (only example!)

► Storage capacity: 200,000 lb
► Average consumption: 8,000 lb/day
► Lead time 5 day
► Replenishment amount 45,000 lb


Example 1

truckload

Minimum Inventory = 8,000 lb/day * 5 day
= 40,000 lb
Add additional security amount 10,000 lb
40,000 lb + 10,000 lb = 50,000 lb


Example 1

truckload

= 8,000 lb/day * 5 day + 50,000 lb
= 90,000 lb
90,000 lb + 5,000 lb = 95,000 lb


Example 1

truckload

Repl. Plan P. = 200,000 lb - 45,000 lb
= 155,000 lb


Example 1
Inventory
200,000 lb

150,000 lb

RLT* RLT*
100,000 lb
Transport
Batch Size

50,000 lb

Order 1 Order 2 Order 3

5 days 10 days 15 days Time
RLT*…replenishment lead time


Example 1

You can see that in this example the
replenishment is only a little bit more than the
amount your customer consumes, but you
never hit the Minimum Inventory.
This means you have a secured replenishment
process at a minimum possible stock level.


Example 2

Imagine now you serve the same customer
like in Example 1 however this customer now
consumes a lot more.

► Storage capacity: 200,000 lb
► Average consumption: 12,000 lb/day
► Lead time 5 day
► Replenishment amount 45,000 lb


Example 2

truckload

Minimum Inventory = 12,000 lb/day * 5 day
= 60,000 lb
60,000 lb + 10,000 lb = 70,000 lb


Example 2

truckload

= 12,000 lb/day * 5 day + 70,000 lb
= 130,000 lb
130,000 lb + 5,000 lb = 135,000 lb


Example 2

truckload

Replenishment Plan Point
= 200,000 lb - 45,000 lb
= 155,000 lb


Example 2
Inventory
200,000 lb

RLT*
150,000 lb

Transport
100,000 lb Batch Size
RLT*

50,000 lb

Order 1 Order 2



Exemplo 2

In this Example the customer consumed a lot
more than you replenished.

If your customer consumes more
than you can replenish in that time
Average consumption * RLT > Replenishment amount
You have to place additional orders
or increase the Minimum Inventory Level.


Example 2
Inventory
200,000 lb

RLT* Transport RLT*
150,000 lb
Batch Size

Transport
100,000 lb Batch Size

50,000 lb

Order 1 Order 2



Example 2
Inventory
200,000 lb

RLT* RLT* RLT* RLT* RLT*
150,000 lb

100,000 lb

50,000 lb Order 2 Order 3 Order 5

Order 1 Order 4 Order 6



Example 2

You see the process needs a few orders to
stabilize, once this has happened you can
lower the alarm levels, however be sure
keeping the distance between Minimum Level
and Order Point close enough to let the system
create orders at both levels.


Contacts and Addresses Americas

ORBIT Logistics Americas, LLC.
2620 Chandler Grove Dr. NE
Buford, GA 30519

Managing Director Vice President Operations:
Dr. Silvio Stephan Dipl.-Ing. Klaus Peter Jovi
Dipl.-
phone: +1-678-608-3362 phone: +1-678-608-3196
cell: +1-404-216-0588 cell: +1-770-539-4757
Skype: silvio_stephan_orbit
E-mail: jovi@orbitlog.com
E-mail: stephan@orbitlog.com

Service / Technology:
Helmut Born
E-mail: born@orbitlog.com
phone: +49 2171 360 - 361

Contacts and Addresses Europe

ORBIT LOGISTICS Europa GmbH
Maybachstraße 27
D-51381 Leverkusen
phone: +49 / 2171 360 - 0
cell: +49 / 2171 360 - 500

International Business Development:
Dr. Silvio Stephan phone: +49 2171 360-170
cell: +49 151 1215 7317

Managing Director / Technology
Dipl.-Ing. Joachim Klasen
Dipl.-
E-mail: klasen@orbitlog.com
phone.: +49 2171 360 - 110
cell: +49 171 486 0839

Managing Director / Sales & Marketing
Dipl.-Ing. Hans-Joachim Rudolf
Dipl.- Hans-
E-mail: rudolf@orbitlog.com
phone: +49 2171 360 - 140
cell: +49 171 486 3516

VMI - How To Determine Alarm Levels

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VMI - How To Determine Alarm Levels