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  • 1. 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 chalatw@scg.co.th Abstract. SCG Logistics Management, as a logistics provider, realizes that creating mutual benefit is a crucial factor creating a competitive 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 busi- ness model to identify and improve the existing problems of customers, which are low truck utiliza- tion, high inventory level, etc. The benefits has been proven for all stakeholders under win-win situ- ation, for example decreasing inventory level, lower transportation cost and reducing overhead cost. On the other hand, SCG Logistics has gained additional revenue as well as showed its value-added activities in the supply chain. Nevertheless, concept of this project energizes synergy among business units in SCG group in area of supply chain management. Key Words: Vendor Managed Inventory (VMI), Lo- gistics Network Optimization
  • 2. 1 Introduction SCG Logistics Management (SCG Logistics), a subsidiary of SCG Distribution in SCG group, is dedicated to offering total logistical solutions for both internal and outside customers. SCG Logistics have offered a new dimension to modern lo- gistics management, providing accurate delivery with an ef- ficient management and strengthened by advanced IT sys- tem. (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 Lo- gistics 2007 is “create new business model through utilize supply chain information”. Before 2007, each business unit in SCG group took the re- sponsibility 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 unman- aged demand. Since the mission of SCG Logistics has been launched in 2007, SCG Logistics aim toward partnership level when doing business with customers under “Supply Chain Alignment” concept. Our goal is to create our cus-
  • 3. tomers’ 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-transaction among 3 business groups in SCG group as SKK (Cement manufacturer), SKIC (Kraft paper manufacturer) 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 ce- ment bags and supply bulk and bagged cement throughout Thailand. Before 2007, trucks carried bagged cement and Kraft paper were separately managed and mostly carried nothing on the way back to origins. However, there is cer- tain 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 fac- tory. Transportation from SKIC to SKK was managed 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 transported by SCG Logistics. Diagram 3
  • 4. 2.1 Mismatched transportation manage- ment Previously, trucks delivered Kraft paper to SKK went back with empty cargo whereas trucks of SCG Logistics and agents sent empty cargo to SKK and delivered bagged ce- ment to western customers. (See Diagram 4) Diagram 4
  • 5. 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 documents, 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 issuance. SKK also pained from high kraft paper inventory, 3-Days Safety Stock (THB 7.66 million per month), and large hold- ing cost (THB 0.675 million per month). See Diagram 5. Diagram 5 2.3 Low transportation share in SCG Lo- gistics’ service offering in Western re- gion Diagram 6 For many years, SCG logistics has offered trans- portation service to Western region agents but failed to gain significant
  • 6. transportation share as most agents own trucks. See Dia- gram 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 logis- tics at that time. From the above situation, there were many disadvantages occurred to all parties as follow. (See Diagram 7) Firstly, SKK, SKIC, and Agent got uncompetitive transporta- tion cost. Secondly, SKK pained from high kraft paper inventory, and large holding cost. In addition, SCG Logistics had very low transportation share at 3% in western region. Finally, all parties pained from high-energy consumption (Deadhead at 50%). Diagram 7 Since 2007, SCG Logistics has started to offer logistics ser- vice to SKIC and realize the hidden opportunity from this scenario and stepped toward improvement and change management
  • 7. 3 Develop methods 3.1 Solution Design After offering transportation service to SKIC in 2007, SCG Logistics has seen opportunity to improve pains of all stake- holders by listing all possible alternatives. 3.1.1 All possible alternatives SCG Logistics listed two possible alternatives including SCG Logistics’ backhaul management and VMI (Vendor Managed Inventory) to improve above pains of all stake- holders. Finally, SCG Logistics chose VMI to solve the prob- lem because VMI method had high level of effectiveness and efficiency, 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 or- der 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, back- haul management cannot manage order for matching head- haul and backhaul because kraft ordering plan and bagged cement sale plan rely only on customers. SCG Logistics can- not do anything in case orders of both sides are not equal. 3.1.2 Business model Definition of VMI is “VMI, instead of the customer moni- toring its inventory for the purpose of triggering replenish- ment orders, the vendor assumes responsibility 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 pa-
  • 8. per delivery with bagged cement delivery back to western region. With VMI, SCG Logistics is able to manage trans- portation efficiency, which leads to freight cost competitive- ness. 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 backhaul manage- ment are balanced to get the optimum benefit. See Dia- gram 8. Diagram 8 3.1.3 How to apply VMI (Vendor Managed Inventory) in practical Before VMI will be applied to operation process, the ordi- nary process is that production planner will plan the cement bag production and order kraft paper from SKIC. Then checker of SKK will receive and dispatch kraft paper for ce- ment bag production. Next step, SKK cement bag producer will deliver cement 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 region. From the existing process, SCG Logistics found that one im- portant process is that there is a method/knowledge in con- version production planning into kraft paper consumption,
  • 9. which sticks with one person (SKK production planner). Ac- cording 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 cement bag production line. Consequently, long picking time for raw material prepara- tion was found. (See Diagram 10) Diagram 10
  • 10. In 2007, SCG Logistics has offered logistics service to Pa- per business by applying the VMI concept in transportation area. The VMI process is that SKK will provide the produc- tion planning of cement bag to SCG Logistics and SCG Lo- gistics will calculate the amount of Kraft paper consumption by using calculation model, created by SCG Logistics. (SCG Logistics went to study the process of cement bag produc- tion planning from SKK production planner and then trans- ferred this tacit knowledge to explicit knowledge in form of calculation model.) After SCG Logistics gets kraft paper con- sumption information, SCG Logistics will decide the appro- priated inventory level by taking into account dealer’s bagged cement order pattern. (See Diagram 11) In addi- tion, the systematic layout is designed to reduce picking time and increase inventory accuracy. (See Diagram 12) Diagram 11
  • 11. Diagram 12 3.2Implementation After first few months of implementation, SCG Logistics faced many problems; result in number of shipment match- ing 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 man- agement committee grants strongly support. In addition,
  • 12. SCG Logistics always apply TQM tools such as PDCA pro- cess, and FMEA (Failure Mode Effect Analysis) according to our TQM consultant team’s suggestions. (See Diagram 13, 14) Diagram 13 Diagram 14 Unmatched order between kraft paper and bagged ce- ment Even SCG Logistics tried to smooth kraft paper order to match bagged cement order, SCG Logistics could do only 68% backhaul (before implementing this model, SCG Logis- tics had only 4% backhauling) due to fluctuate bagged ce- ment demand and cement bag production plan. By coordi- nate 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 adjust our kraft paper order to match with these numbers. Howev-
  • 13. er, to prevent mismatched transportation, SCG Logistics tries to expand customers to construction materials section to increase backhaul for kraft paper. Backlog SCG Logistics will take full responsibility on ordering Kraft paper from SKIC. It is expected that at least 10% of inven- tory will be reduced from appropriated safety stock identi- fied. Moreover, SCG Logistics will manage the optimum lev- el of inventory (Min/Max Stock) when compared with cost saving from backhaul management. In addition, because cement bag production sometimes does not use total 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 stocking 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 responsible 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 ce- ment) within one day because the trucks wasted their time in queuing at SKK plant and unloading bagged cement at destinations. With undoubted benefits, SCG Logistics sub- mits advanced order to SKK for product preparation. In ad- dition, SKK provides not only pallets for faster bagged ce- ment loading and unloading, but also special queuing for our trucks at the time of loading bagged cement. Long holiday effect
  • 14. Due to long holiday in February, Chinese New Year Festi- val, with unexpected situation, SCG Logistics 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. Ac- cording to this situation, SCG Logistics applied FMEA pro- cess 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 transaction occurred in the Songkran Festival, and matching percentage was completely 100%, while SKK can produce cement bag during this period from its stock. (See Diagram 15) Diagram 15
  • 15. 4 Result & Benefits From implementing supply chain alignment concept, SCG Logistics can create benefits to all parties in the chain. (See Diagram 16) 4.1 SKK - Cement manufacturer SKK relieves inventory burden and receives 10% discount for kraft paper transportation from SCG Logistics. 4.2 SKIC – Kraft paper manufacturer SKIC gets freight discount from SCG Logistics at the same rate as SKK (10%). 4.3 SCG Agents They get freight discount 25% from SCG Logistics for quick win. In the long run, they can reduce investment in their truck fleet as using SCG Logistics is more cost efficient than own truck. This saving provides better sale advantage upon their competitors. Therefore, SCG can sell more bagged cement. 4.4 SCG Logistics Finally, transportation share of SCG Logistics in western region increases from 3% to 15%. Furthermore, SCG Logis- tics 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 previous- ly 4%. Further, our trucks also gain more monthly income from better utilization. 4.5 Overall All relevant parties in this supply chain have gained lower energy consumption. Deadhead percentage 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.
  • 16. 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 stakeholders, for example decreas- ing inventory level, lower transportation cost, reducing overhead cost, and higher transportation share. This is be- cause SCG Logistics realizes that creating mutual benefit is
  • 17. a crucial factor creating a competitive advantage for all rel- evant parties in the chain. 2. Concept of this project energizes synergy among busi- ness units in SCG group in area of supply chain manage- ment. Cooperation tends to be successful when top execu- tives are supporting the cooperation. Fortunately, all busi- ness unit presidents in SCG group realize that creating mu- tual benefits is an important thing in upward trend of ener- gy 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 communication to SCG Logistics of production planning and bagged cement order changes is a factor to the success of inventory control and matching process. That is why SKK, SKIC, and SCG Logis- tics 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 Logistics plans to apply VMI to cement plant in southern part of Thailand. For Year 2009, SCG Container Business will be our target customer in ap- plying VMI to energize synergy among business units in SCG group in area of supply chain management. (See Dia- gram 18) Diagram 18
  • 18. References 1. CFPIM Article – Making consignment and vendor-man- aged inventory work for you, By Mark K.Williams Glossary VMI Vendor Managed Inventory SCG Logistics SCG Logistics Management Co., Ltd. SKK The Siam Cement (Kaeng Khoi) SKIC Siam Kraft Industry Co., Ltd. KOS Kraft Ordering System