Can new technology bridge the gap between planning and execution in distribution and inventory management in the downstream fuel retail sector? Leading software provider ORTEC believes it can, and recently hosted an informative webinar on smart inventory management presented by Janneke Meesters.
Businesses across the world are all keen to introduce greater efficiency in their day to day processes. Companies in the logistically complex downstream fuel sector are among them. Many executives have attempted to implement automated or streamlined processes, particularly for their inventory management and vehicle routing, with mixed success. Janneke Meesters of ORTEC recently offered her company’s perspective on successfully implementing a more efficient approach to vendor managed inventory.
Introducing Vendor Managed Inventory
Vendor Managed Inventory (VMI) programs have enjoyed something of a resurgence of late, thanks, in part, to the economic recession. Generally speaking, VMI is a means of optimising supply chain performance whereby the supplier is responsible for maintaining a customer’s inventory levels. The typical VMI system gives a supplier access to the customer’s inventory data and makes them responsible for generating replenishment orders. VMI is not to be confused with consignment stock, which is owned by the supplier until it is sold or used by the customer. There are several advantages to utilising VMI. Perhaps the most important benefit is the potential for improvements in fill rates from the supplier to the customer, which decreases the number of deliveries needed. In addition, using VMI frequently yields a decrease in stock-outs, inventory levels and overall supply chain costs.
In order to use VMI successfully, companies need to involve their logistics teams and other departments, including the customer service unit, sales force and accounting. It can be challenging to build a case for VMI, particularly if a company’s sales force is concerned about the system’s ability to provide the required level of customer service. However, the benefits of VMI far outweigh the challenges because it provides a rare opportunity for a true partnership with the customer. In a high value business such as fuel, inventory costs can represent up to 80% of a company’s overall costs. By helping businesses to understand how VMI
can substantially improve efficiencies and reduce transportation and handling costs, companies can create a win-win situation for both the supplier and the customer.
The Key Silos
In order to understand how a VMI system works in practice, it’s best to use an example. Consider a secondary fuel distribution operation with depots located around a geographical area. A VMI system hosts information about the company’s fuel station deliveries, tank readings, customer deliveries and sales information, which is automatically sent back to the planning department. Replenishment orders are automatically generated by the system, but can be manually changed if required. These unplanned orders are optimised and allocated to existing delivery routes for maximum efficiency. This example illustrates a fairly standard process flow, which consists of four key quadrants: planning (including C-level strategic planning as well as day to day planning), two facets of preparation, and execution. Typically, the planning process takes place no more than a few days or shifts ahead of time, while execution is during the same day and close to real time. Companies can be distinguished as having a strong planning culture or an excellent execution capability - rarely are the two facets tightly integrated. As with planning and execution, fleet management and customer inventory management are often separate departments, each with their own goals and challenges.
Inventory Management
By integrating these four key business functions, significant benefits can be achieved. In a dynamic, fast-moving operation, inventory and demand planning is not an easy process. In most cases, it can be done on a strategic level with supply allocation taking place monthly. On occasion, though it is somewhat rarer, inventory and demand planning can take place on a more operational level: weeks or days ahead. In the case of slower moving products, customer inventory planning is typically concerned with delivering agreed volumes at a fixed frequency, based on predefined delivery strategies and territories. Simple forecasting measures can be used to calculate delivery volumes and, if the delivery frequencies are determined correctly, this offers a simple method to ensure that the customer receives the right products on time, a service which the customer values. In both situations efficiency improvements are certainly possible. On the other side of the spectrum are companies that are solely focused on execution for their inventory replenishment. These types of companies respond as effectively as possible when receiving their customer’s replenishment orders and, while telemetry assists in this process and customers tend to trust the technology, there is still the technical risk of interrupted data flows. More importantly, multiple customers will often place simultaneous orders during certain periods: a fuel service just before the weekend or a price increase, for example, or an LPG order for home heating when temperatures start to drop. Without the foresight of advanced planning, additional resources will be required to make these deliveries on time and prevent customer stock-out situations.
It is clear that a lack of integration between planning, execution and customer inventory management results in inefficiencies and a reduced level of customer service. It is important to anticipate and plan for peaks in demand. By integrating planning and execution, companies can ensure that in the event of demand increases, they are adequately prepared for the extra workload.
Fleet Management
Fleet management is a further aspect where operational gains can be made. In this respect, traditional route planning and optimisation is quite common. In fact, ORTEC has found that its customers are often able to save up to 10% on their transportation costs by using route optimisation alone. The traditional process, however, lacks the concept of opportunistic ‘may go’ orders that could significantly advance the savings that can be made. In addition, planned routes should be intelligently executed in order to take into account unpredicted emergencies, irregular traffic, last minute orders or other unforeseen events.
On the execution side of fleet manage-ment, real-time vehicle information about progress, traffic and incidents is much more common. The relevant parties can be notified via instant alerts that can be viewed in the system. In many cases this information does not relate back to the original plan, which means it is difficult to respond effectively to these situations and any deviations from the plan lack intelligent cost control. The benefit of integrated planning and execution is clear: a continuous feedback loop, intelligent responsiveness, and clarity on the cost impact of each decision.
Note that it is important to be aware of future technological developments in the integration of planning and execution. The availability of real-time information, such as predictive or real-time traffic information, continues to advance and improve. When companies take the step of integrating planning and execution for both inventory and fleet management, ORTEC has found tangible benefits for both suppliers and customers. The customer benefits include increased fill rates, improved service levels, fewer stock-out situations, lower inventory levels and reduced ordering costs. For the supplier, there are numerous benefits, such as a more balanced workload, lower supply costs, improved forecast accuracy and improved customer service levels. For example, an ORTEC customer in the United States implemented an integrated system of customer inventory and fleet management. The results were a 30% decrease in the number of deliveries, a 39% increase in the average delivery per customer, a 27% overall mileage reduction and 99.5% delivery reliability.
Changing the Way You Work
Despite the obvious benefits of integrating planning and execution in a VMI environment, this concept is far from common practice for many businesses. In fact, a large number of companies continue to work in traditional silos for their planning and execution. Companies with a strong planning culture are not taking advantage of available real-time information, whereas those with excellent execution capabilities need a change in philosophy to integrate a process that is, at its core, grounded in planning. In order to implement an integrated process, change is required in several key areas: management and organisation of the company, its employees and culture, its products and work processes, and its resources. An integral part of this process is to build a strong foundation with an appropriate IT infrastructure and the right software solution(s). A good foundation results in better integrated planning that is automated and transparent. This will result in more insight, more control, a higher level of efficiency and a reduced number of errors.
The implementation of a system that integrates these processes can help in building a true customer partnership, where the right product is delivered at the right time, at a lower cost to both parties. It is important to provide incentives for the customer to go along with the change and, more critically, for the supplier to deliver on the promised benefits. Internally, a company’s employees will need to change their existing practices, despite those processes having been built up over many years. This is not always easy and the organisation and its employees must approach inventory routing from a more analytical point of view rather than simply responding to individual questions from customers or drivers. Instead of acting like a fire-fighter and reacting to a fire, they are asked to operate under a plan that enables the proactive execution needed to prevent fires in the first place. Finally, management support is key to success. The management team needs to understand the reason for change, how success will be defined, and how they can contribute. Pivotal elements here are clear: continuous communication and an effective change management program.
When transferring to an integrated system for inventory management there will be a number of challenges. However, there will also be substantial rewards, from better customer service and reliability through to significant cost improvements on the bottom line. At a time when every company needs to carefully manage its expenses and strive for excellence, this is a project well worth the effort.
About ORTEC
ORTEC is a leading provider of advanced planning and scheduling solutions for the oil, gas and chemicals industry and other sectors, such as retail, transportation, consumer goods, and waste recycling. Established in 1981, the company has offices in Europe, North America, Asia and the Southeast Asia, with 1,550 clients worldwide including Coca-Cola, TNT, BP, Air Liquide and Shell.
For more information on how ORTEC can help you to increase asset utilisation while improving customer service levels, forecast accuracy and reducing mileage, CO2 and supply/ ordering costs, visit ORTEC’s website and download a free white paper on
ORTEC Inventory Routing: www.ortec.com/inventoryrouting.
This article appears in the Q3 2011 issue of PETROLWORLD Magazine.
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