Inventory Routing as the way forward
How new technology can bridge the gap between planning and execution
An ORTEC White PaperMarnix du Clou, Ilona Scholte and Janneke Lagerwaard Global Industry Leaders Oil, Gas and Chemicals
2 ORTEC Inventory Routing as the way forward
Table of contents
1. Introduction 3
2. Vendor Managed Inventory 4
2.1 Supply chain collaboration 4
2.2 What is vendor managed inventory? 4
2.3 BenefitsofswitchingtoVMI 5
2.4 Vendormanagedinventoryinpractice 5
2.5 Whatiscustomerinventorymanagement? 5
2.6 Whatisfleetmanagement? 5
3. Integrating planning and execution 6
3.1 Customerinventorymanagement:focusonplanning 6
3.2 Customerinventorymanagement:focusonexecution 7
3.3 Customerinventorymanagement:integratingplanningandexecution 7
3.4 Fleetmanagement:focusonplanning 8
3.5 FleetManagement:focusonexecution 8
3.6 Fleet management: integrating planning and execution 9
4. Integratingcustomerinventorymanagementandfleetmanagement 10
4.1 Supplier results 10
4.2 Customer results 10
4.3 Tangible results - case studies 10
4.4 What could be next? 11
5. Changing the way you work 12
5.1 Whyisthereaneedtochange? 12
5.2 Effectivechangemanagement 12
5.3 Resourcesandsystems 12
5.4 Productsandprocesses 12
5.5 Peopleandculture 12
5.6 Managementandorganization 12
6. Conclusion 14
3 ORTEC Inventory Routing as the way forward
Industry Challenges and Market Drivers
Today’s economic environment poses quite some challenges to the Oil and Gas industry. Historically low
crudepricesputagreatpressureonthedownstreamoilandgasoperations.Fortunatelymostoftheoiland
gasdownstreamorganizationshaveshowntohavetheflexibilitytohandlethesechallenges.Inthepast
yearsthedownstreamindustriesdemonstratedtohavethecapabilitytomaketherefineriesmoreefficient
and to introduce smarter supply chains and distribution processes. Given the current challenging market
circumstances,thesebusinessdriversremainutmostrelevantasisunderlinedbytherecentstudyofDeloitte
MarketPoint(2014).AccordingtoDeloitte,OilandGascompaniescontinuetofocusonreducingtheoverall
costs.ItisnotwithoutreasonwhyOilandGascompanieshavelookedatasmartersupplyordistribution
operationssinceseveralstudiesindicatethatsupplychaincostsaccountsforuptoapproximately70%of
theoverallcostandtransportationcostsareasignificantpartofthis.
Optimizingthedistributionandtransportationcostsremainshighoneveryexecutive’sagendanowadays.
ThisaccountsformanycompaniesofprocessindustriesandinparticulartheIndustrialGasindustry.
AccordingtheGlobalIndustryGasMarket2014-2018(2014)theCAGRisforecastedat7,3%fortheperiod
between2013and2018.Furthermore,thisreportindicatesthatthemainbusinesschallengeforthisindustry
are the high distribution costs.
Inordertoreducethedistributioncostandtoimprovethesupplychaintheindustryisseekingtointroduce
newtechnologiesandinnovations.AccordingthelogisticstudyperformedbyCapGeminiConsulting(2012,
p15),“shippersareseekingincreasinglyrelevantsupplychaininnovationsthatreducecostsaswellasvalue
add.”Onewaytodriveinnovationistoorganizethesupplychaindifferentlyandtoviewitfromtheend-
customerfirst.Oneofthesupplychainconceptsthatfollowsthis“demand-pullstrategy”iscalledVendor
ManagedInventory(VMI).VendorManagedInventoryhasthekeyelementof“demandforecasting”fully
embeddedandhasalreadybeensuccessfullyappliedintheretailindustry.Onewell-knownexampleisthe
companyWal-Mart,whichoftenhasbeenusedasabenchmark.Wal-Martservicesabouta100million
customersandhasagloballyintegratedsupplychainnetwork,whereVMIplaysavitalrole.
Followingtheexampleoftheretailindustry,alsoOilcompaniesimplementedtheVMIconceptfortheirfuels
distributionandjustrecently,alsoIndustrialGascompaniesintroducedtheVMIconceptintotheirsupply
chains. Customer implementation in both industries shows that staggering cost reductions can be achieved.
ThemainbenefitofVMIisthatithandlesstockreplenishmentandrouteschedulinginasingleenvironment.
Ontopofthisbenefit,thisconceptalsoincreasestheflexibilitywhenitcomestocustomerdeliverytimes
and the overall delivery volumes.
ThiswhitepaperdescribesthesupplychainconceptofVendorManagedInventoryinfulldetailand
describessomeexamplesofcombiningplanningandexecution.Thelastpartofthiswhitepaperalso
expoundsthevalueofeffectivechangemanagementprogramsinordertobringaboutimperative
operational,technologicalandcollaborativechangesthatarekeytoasuccessfulimplementation.
1.
References:DELOITTE MARKETPOINT
(2014), Oil Prices in Crisis
- Considerations and
Implications for the Oil and Gas
Industry. Houston
SANDLER RESEARCH (2014),
Global Industry Gas Market
2014-2018. Dallas
CAPGEMINI CONSULTING
(2012), 2013 Third-Party
Logistics Study: Results and
Findings of the 17th annual
Study. Atlanta
4 ORTEC Inventory Routing as the way forward
Vendor Managed Inventory
Supply chain collaboration
Traditionally, companies have set up relatively static supply chains because they were unable to handle
amoredynamicwayofworking.This,however,ischangingduetotheincreasingleveloftransparency
offeredbynewtechnologies.Supplychaincollaborationreferstoanytypeofhorizontalcooperationbetween
producers,logisticserviceprovidersandcustomersthatisaimedatimprovingdistributionefficiency.
Itcanalsorefertothecollaborationbetweenmultiplelogisticsserviceprovidersintheareaofintermodal
transportorsharedloads.Oritmayevenrefertocollaborationbetweendifferentproducersinordertoshare
assets,swaploads,exchangedeals,oruseeachother’sdepotsforloadingactivities.Itistrendssuchas
these, in addition to the need to reduce CO2 emissions, that has led to an increase in programs designed to
improvecustomerintimacyandaligntransportationwithproductionactivities.Oneofthebestexamplesof
thiscollaborationisVendorManagedInventory(VMI),whosedefinitionisexaminedinmoredetailbelow.
What is Vendor Managed Inventory?
Recently,AMRResearchindicatedthattheglobaleconomicdownturnandtheneedforimprovedinventory
visibilityandefficiencyhasledtoaresurgenceinvendormanagedinventoryprograms.Sowhatdoes
theterm‘vendormanagedinventory’actuallymean?Athighlevel,itcanbedescribedas:...ameansof
optimizingsupplychainperformancewherebythesupplierisresponsibleformaintainingcustomer’s
inventorylevels.Thesupplierhasaccesstothecustomer’sinventorydataandisresponsibleforgenerating
replenishmentorders.TheactualobjectiveofaVMIprogramistoboostfillrateperformance,e.g.increase
deliveryefficiencyfromsuppliertoendcustomerinordertolowercustomerreplenishmentcosts.
Thisconceptisnottobeconfusedwithconsignmentstock,whichisstockthatisheldatthecustomer
site but owned by the supplier until such time as it is sold or used by the customer.
Inactualfact,vendormanagedinventoryismorethanjustalogisticsconceptbecauseithasanimpacton
andrequiresinvolvementfromothernon-logisticaldepartments.Financewillneedtobeintheloopbecause
2.
Figure 1:
Vendor Managed
Inventory
2.1
2.2
Plant/Depot Fuel/GasStation
Sales Stock
Delivery Goods
Data analysis Delivery Notice
5 ORTEC Inventory Routing as the way forward
thedeliveriesmadewillaffectthecustomer’saccountbalance.Inaddition,salesandcustomerservice
operations will need to change the way in which they communicate and interact with customers.
Ifacompany’sVMIprogramistobesuccessful,thesetypesofoperationalchallengesmustbeaddressed.
BenefitsofswitchingtoVMI
Companiescanreaphugebenefitsbyswitchingtoavendormanagedinventoryrelationshipwiththeir
clients.Forthecustomer,VMIresultsinincreasedprofitabilityasaresultofreducedinventoryand
administrativecosts,fewerstock-outsorshortages,andincreasedsales(fordistributorsandretailers).
Forthesupplier,VMIdeliversincreasedprofitabilityasaresultofincreasedsales,reducedoperatingcosts
andstrongercustomerrelationships.Andforbothparties,VMIprovidesbetterinformationforplanning
(e.g.demandvisibility)andacloser,moreeffectiveworkingpartnership.Andinexchangefortheirtrustto
deliverontime,companiescanmakequitesignificantreductionsintransportationandinventorycosts,
althoughtheamountsavedwillvaryaccordingtoindustry.Intheretailsector,whereinventorycostsare
about12%oftheoverallcosts,VMIsavingswillbelowerthaninthefuelssectorwhereinventorycostsare
nearer80%.TransportationsavingscanalsoberealizedbyswitchingtoamoreefficientVMIoperationatthe
terminals and depots.
Vendor managed inventory in practice
Forvendormanagedinventorytoworkinpractice,organizationsneedtoimplementeffectivecustomer
inventorymanagementandfleetmanagementprocesses.However,itisimportanttoclarifywhatwemean
bythesetermsandtodistinguishtherolethattheyplayintheultimategoalofboostingfillrateperformance
and increasing customer service.
What is customer inventory management?
Customerinventorymanagementistheprocesswherebythesuppliertakesonresponsibilityformanaging
acustomer’sinventorylevels.Forthisprocesstoworkeffectively,thecustomermustplaceagreatdealof
trustinthesuppliertoreplenishtheinventorybeforeastock-outoccurs.Thesupplier,inturn,mustexercise
goodjudgmentaboutwhenastock-outislikelytooccuranddeterminetheoptimaltrade-offbetween
deliverysecurityanddeliveryefficiency.Ingeneral,themostefficientreplenishmentisachievedwitheither
afulltruckloadorafullcustomertank,althoughotherfactorsmaycomeintoplay,suchasthecostof
ownership,pricefluctuationsetc.
Whatisfleetmanagement?
Fleetmanagementisthetermusedtodescribetheselection,management,allocationandroutingof
vehiclesthatarerequiredtodelivergoodstothecustomer.Anumberofimportantdecisionsregardingthe
fleetneedtobemadeinordertoensurethatcustomersreceivethecorrectoradequatequantitiesontime.
Decisionsregarding:thenumberandtypeofvehiclesrequiredtofulfillallcustomerorders;theassignment
ofvehicle/drivertoaspecificdeliveryroute;theoptimaldeliveryroutesequence.Eventhesourceofvehicles
needtobedecidedupon,e.g.ownfleetversushiredfleet,becausetheaddedflexibilityofhiringinvehicles
willinevitablyresultinhighercosts.Effectivefleetmanagement,therefore,isallaboutfindingtheidealtrade-
offbetweenflexibilityandcosts,whileensuringthatresourceassignmentandvehicleroutingareplannedin
the most optimal way.
2.3
2.4
2.5
2.6
6 ORTEC Inventory Routing as the way forward
Integrating planning and execution
Thepreviouschapterdescribedcollaborativevendormanagedinventoryandsomeofthehighlevelbenefits
thatcanbeachievedbyhandingoverreplenishmentresponsibilitytothesupplier.Thissectionwillnowfocus
ontwokeysupplychainsilos-customerinventorymanagementandfleetmanagement-andthewayin
whichcompanieschoosetomanagetheseprocesses,i.e.planninginadvanceorfocusingonexecution.We
willdiscusstheadvantagesanddisadvantagesofthebothmethodsbeforehighlightingthemerits
ofintegration.
Itisimportanttonotethatcompaniesoftendifferinthewaythattheychooseimplementandoperatetheir
processes.Someorganizationsareverymuchfocusedonplanning(onedaytooneweekinadvance),
whileotherorganizationsprefertofocussolelyonexecution(nextshifttoalmostreal-time).Itisquiterare
tofindcompaniesthathavefullyintegratedthesetwofunctions.Similarly,companiestendtosetup
separatecustomerinventorymanagementandfleetmanagementdepartments,whichmeansthat
operationaldecisionsaboutcustomerdemandandtheactualdeliveriesaremadebydifferentpeople.
Thiscanresultinalackofcohesionbetweenthetwo,whichwewilllearnmoreaboutlateroninthissection.
Customer inventory management: focus on planning
Customerinventorymanagementplanningistypicallyconcernedwithfixedfrequencydeliveriesand
representsthetraditionalwayofworkingformostcompaniesthatsupplyslowmovingconsumergoods.
Inthefastmovingconsumergoodsindustry,however,thistypeofplanningisquitedifficulttoimplement
andthereforeitisoftenleftoutaltogether.Companieswillgenerallyperformdemandplanningatastrategic
level in order to allocate supply on a monthly basis and on occasion, though somewhat rarer, inventory and
demand planning will be done on a more operational level, i.e. weeks or days ahead.
Inthecaseofslowermovingproducts,customerinventoryplanningisallaboutdeliveringagreedvolumes
atafixedfrequency,basedonpredefineddeliverystrategies.Insomecases,acompanymayuseasimple
forecastingalgorithmtoestimatedeliveryvolumes,i.e.averageusageperday.Onatacticallevel,theymay
createterritoriesandassignfixeddeliverydaystothem,butthistendstobetheextentoftheiroptimization
efforts.
3.
Figure 2:
Integrating planning
and execution
3.1
Customer Inventory Management
1 day - 1 week ahead Same day - real time
ExecutionPlanning
Fleet Management
7 ORTEC Inventory Routing as the way forward
Theadvantageofthisapproachisthatitprovidesahighdegreeofcertaintyforachievingon-timedeliveries,
whichleadstoenhancedcustomerservice.Thedownsideisthatquiteoftenthedeliveryvolumesaresmall
andthereforeinefficient.Butbyswitchingfromfixedfrequencydeliveriestoforecastingestimateddelivery
dates,companiescanactuallyincreasetheiraveragedeliverysizebyover20%.
Customer inventory management - planning
Advantages: Delivery certainty, high levels of customer service
Disadvantages: Inefficient deliveries
Customer inventory management: focus on execution
Companiesthatfocussolelyonexecutionfortheirinventoryreplenishmentaretypicallyconcernedwith
deliveryatsafetystock.Thismethodofworkingistraditionallyusedinthefastmovingconsumergoods
industry, where customers call in their last-minute orders or telemetry is used to calculate the required
deliverydate.Thebenefitofthisapproachisthatitenablescompaniestocreatejust-in-timedeliveries,with
larger and more precise volumes.
However,thisrelianceonreal-timeinformationdoescarryacertainamountofrisk.Firstly,thereisthe
technicalriskofinterrupteddataflows(wheretelemetryetc.isinuse).Secondly,thereistheoperational
riskassociatedwithcreatingplanssoclosetoexecution.Ifmultiplecustomerscallintheirordersatthe
sametime(justbeforeaweekend,priortotheholidays,beforetheonsetofacoldspelletc.)thenthiswill
undoubtedlycauseworkloadbalancingissues.Withouttheforesightofadvancedplanning,additional
resources will be required to make these deliveries on time and prevent customer stock-out situations.
Furthermore,thisplanningapproachlackstheflexibilitytorespondtochangesindemandpatterns.
Customer inventory management - execution
Advantages: On-time delivery, large quantities, exact volumes
Disadvantages: High risk of stock-outs, inefficient workload balancing
Customer inventory management: integrating planning and execution
Previously,weexaminedhowcompaniestypicallyperformtheircustomerinventoryplanningandwelooked
attheadvantagesandassociatedrisksofeachmethod.Wewillnowinvestigatethebenefitsofintegrating
thesetwoplanningapproaches,whilealsohighlightingthepotentialrisksofchoosingnottointegrate.
Allcompaniesneedtoanticipateandplanforpeaksinproductdemand.Butbysolelyfocusingonexecution,
thesesamecompanieswillbelessequippedtohandleanysurgesthatmayarise.Similarly,ifaterminalis
temporarily shut down this will also impact product availability, resulting in longer lead times and the need
toensurethatotherdepotsarecoveringtheshortfall.Whetheritisasupplierorproductionbusiness,all
departmentsneedtobekeptinthelooptoensurethecorrectdeliveryquantitiescanbemet.Ifthisprocess
isnotmanagedeffectivelyandefficiently,therewillbeanincreasedriskofstock-outsattheterminalor
depot. This in turn will adversely impact customer deliveries and customer service levels.
Byintegratingtheplanningandexecutionfunctionsforcustomerinventorymanagement,however,
companies will be better prepared to deal with the extra workload should product demand increase.
Furthermore, by uniting the people involved in the planning process, it will be possible to balance volume over
3.2
3.3
8 ORTEC Inventory Routing as the way forward
days,weeksandregionsandgainabetterunderstandingoftherequiredproductlevelsforeachsite.This
informationcanbeusedtoprovidevaluableinputfortheproductionprocess,thepurchasingdepartment
andtheprimarytransportationgroup.Eachfunctionwillbebetterpreparedtoanticipatedemandandthe
dispatcherwillbebetterequippedtodealwithlastminutechanges,whilebeingawareoftheexactdelivery
volumesthatarerequiredforeachcustomeratanyspecificpointintime.
Customer inventory management - integrating planning and execution
Advantages: Volume balancing, advanced knowledge of stock requirements
Lack of integration: High risk of stock-outs, inability to deliver to customers
Fleet management: focus on planning
Mostcompaniestendtofocusonrouteplanningandoptimizationbecausethisiswhereguaranteed
efficiencyimprovementscanbemade.Byimplementingtherightsolutiontocreategeographicallyclustered
routes,companiescanreducekilometersandplanningtimebyatleast10%.Andthisisperhapsthebest
way to simultaneously lower carbon emissions and reduce costs.
However,therearetwodistinctdisadvantagesofoptimizationsoftwarethatisusedtoplanroutesin
advance. Firstly, the solutions only take into account and schedule unplanned ‘must-go’ orders, e.g. the
ordersthatareactuallyduefordelivery.Theylacktheconceptofopportunistic‘may-go’orders,e.g.orders
thatmaybedeliveredtodayorduringthenextfewshiftsbutwhichdonotactuallyhavetobedelivereduntil
later.Asaresult,thesoftwaredoesnothavethecapabilitytosignificantlyenhancethesavingsthatcanbe
made.
Theseconddisadvantageofjustfocusingonrouteplanningisthatmanyoftheactualroutesaredisrupted
duringexecutionduetoemergencies,breakdowns,last-minuteorders,trafficconditions,andotherunforeseen
events.Andtheseadhocchangesoftenresultinsub-optimalplans,astheimpactofthechangesmadecan
notbeassessed.Iftheselastminutechangescouldbeincorporatedintherouteschedules,theplanningwould
bemorerobust,moreoptimalandmorecosteffective.
Fleet management - planning
Advantages: Optimally clustered routes, reduced kilometers and transport costs
Disadvantages: Lacks concept of ‘may-go’ orders
Fleet Management: focus on execution
Nowadays,trackandtraceprogramsarefrequentlyusedtoassistcompaniesinmanagingtheirroute
schedulesduringtheexecutionphase.Theincreaseintheuseofonboardcomputersmeansthatbusinesses
cancallupawealthofinformation,suchas:vehiclelocation,speed,theactivitiesbeingperformed,andthe
typeofstockbeingtransported.Furthermore,thedispatchercanviewallvehiclesonadigitalmaptoassist
inexecutinganyplanningactions.Notonlydoesthishelptoimproveoverallperformancebutitalsoprovides
ahugeboostforsafetyandcomplianceduetoincreasedinsightandtransparency.
3.4
3.5
9 ORTEC Inventory Routing as the way forward
However,themaindisadvantageofthesetypesofprogramsisthelackofintegrationcapabilities.Anumber
ofsimpletrackandtraceprogramscanbefoundonline,butitisnotpossibletointegratethemwiththe
mainplanningsystem.Asaresult,anyadhocrouteordeliverychangesmadeduringexecutioncanbe
communicatedviaalerts,buttheplanswillnotbeautomaticallyupdatedandcertainlynotre-optimized.
Fleet management - execution
Advantages: Greater insight & transparency, increased compliance & safety
Disadvantages: Lack of integration with planning system, impact assessment of ad-hoc changes
Fleet management: integrating planning and execution
Thetrendtowardsintegratingplanningandexecutionforvehicleroutinghasbeengrowingforanumber
ofyears.Thisgrowthisstillongoingandnewdevelopmentsarebeingreleasedonacontinualbasis.For
thisreason,companiesshouldmaintainagreatdealofforesightwhenselectingaplanningsolutionand
aimtochooseasystemthatwillbeabletocovertheircurrentrequirementsaswellasanypotentialfuture
developments.
Themostimportantbenefitofanintegratedsystemisthatitenablestheplannertostaywithinthetarget
KPIsbyhandlingreal-timechangesmoreeffectively.Byintegratingtheplanningandexecutionfunctions
forvehiclerouting,companieswillbenefitfromacontinuousfeedbackloopthatenablestheplannertosee
theimpactofanydeviationsfromthecurrentplan,e.g.intheeventofadelayduetocongestion,thesystem
willdetermineiftheremainingdeliverieswillstillbeontimeandwhetherthedriverislikelytoexceedhis
maximumnumberofpermittedworkinghours.
Fleet management
However,anotherbenefitofintegratingplanningandexecutioncanbefoundinarecentdevelopment.
Beyondutilizingstatisticalcongestionpatterndata,planningsystemsarecurrentlyalsocapabletointegrate
real-timetrafficinformation,i.e.theimpactofadverseweatherontheroadnetwork;roadclosuresdueto
accidents;plannedroadworksetc.Withaccesstothiskindofreal-timeinformationtheplanningsystems
arecapabletocreatemoreoptimalroutesequences,startingtimes,andplansthatmirrorstherealitiesof
execution.
Fleet management - integrating planning and execution
Advantages: Continuous feedback loop, better handling of unforeseen changes
Lack of integration: Difficulty in managing KPIs effectively, inability to respond to last minute changes
3.6
10 ORTEC Inventory Routing as the way forward
Integrating customer inventory management and fleet management
Nowadays,therearedifferentopinionsregardingthebestwaytointegratecustomerinventorymanagement
andfleetmanagement.Somewouldarguethatthemosteffectivesolutionistohouseallfunctional
requirementswithinasingle(ERP)system.Butothersexpoundtheneedforarobust,bestofbreedsolution
thatmeetsthespecificrequirementsofthebusiness,whileofferingahighdegreeofuserflexibility;andone
thatshouldincludeoptimizationcapabilitiesandbeabletoprocessexecution-relateddata.Butonethingis
certain,theintegrationofcustomerinventorymanagementandfleetmanagementwillonlyworkifitisfully
cooperativewithERPsystem.
Supplier results
Wehavealreadycomeacrossthebenefitsofintegrationinprevioussectionsofthisdocument.Butto
reiterate,oneofthemostvaluableisworkloadbalancing.Basically,thisisallaboutmaximizingdelivery
efficiencybymeansofjust-in-timedeliveriesorpulleddeliveries.Bycreatingamoreevenlybalanced
workload,companiescanreducethenumberofspotcontracts(forvehiclesandresources)thatareneeded
tocoverpeaksindemand,whichimmediatelytranslatesintolowersupplycosts.Otherbenefitsinclude
improvedforecastaccuracyandimprovedcustomerservicelevels.
Customer results
Thecustomerisalsosettoreapnumeroustangiblebenefitstoo:reducedorderingcosts,increasedfillrates,
fewerstock-outsituations,andlowerinventorylevels,whichaltogetherleadstoimprovementsincustomer
loyalty.Bytakingcareoftheclientandsavingthemmoney,thesupplierbecomesmoreofastrategicpartner
in the client’s business and this is a unilateral goal.
Tangible results - case studies
US Petroleum distributor
This company implemented an integrated customer inventory planning and vehicle routing system with
thefollowingresults:a30%decreaseinthenumberofdeliveries;a39%increaseintheaveragedeliveryper
customer;a27%overallmileagereduction;and99.5%deliveryreliability.Thistranslatesintohigherlevels
ofcustomerservice,areductioninthenumberofvehiclesrequired,adecreaseinfuelconsumption,and
thereforelowercarbondioxideemissions.
European cylinder distributer
Thiscompanyimplementedforecastingandrouteoptimization,includingworkloadbalancing,butexcludingany
integrationwithexecution.Theywerestillabletoachievethefollowingresults,despitetheseasonalimpactofthe
LPGcylinderindustryandthelackofintegrationwithexecution:a7%decreaseinthenumberofdeliveriesand
routes;a6%increaseindeliveryvolumes;a10%reductioninplanningtime;a26%decreaseinkmdriven;anda
whopping43%riseintheaveragevolumeperkm.
Themainreasonthatthedistributerchosenottointegratewithexecutionwasduetothedifficultyof
trackingstockoncustomersites.Radiofrequencyidentification(RFID)couldbeapotentialsolutionto
4.
4.1
4.2
4.3
11 ORTEC Inventory Routing as the way forward
overcomethischallengebuttheactualimplementationcostswouldlimitthevalueofreducingthese
numbersanyfurther.However,inabulkenvironmenttelemetrydevicesarereadilyavailableandcanbe
implemented at a reasonable cost.
Other industries
Intheanimalfeedindustry,anumberofcompanieshaveimplementedintegratedsatellitemeasuringand
vehicleroutingandoptimization,usingthedatatofeedintotheproductionplanningsystemsattheirmills.
SimilartoLPG,thevendingmachineindustryisalsoimpactedbytemperaturefluctuations,e.g.inwarm
weather vending machine usage is higher, whereas home heating systems are used more during the cold
weather.Theseindustriescouldbothbenefitfromfocusingmoreonexecutionbymovingawayfromfixed
frequencydeliveries.
Andafinalexampleisthewasteindustrywherethereisagrowingtrendofprivatization.Inplaceoffixed
weeklyroundstocollectwastefromtheroadside,councilsnowemploycontractwastemanagement
providerstoemptyundergroundcontainerswhentheybecomefullofrubbish.Withthisnewtrend,waste
managementcompaniescanalsobenefitfromthesamesystemsthatusedintheOilandGasmarket,with
onlyafewchangesrequiredtoadaptvehiclecapacities.
What could be next?
Revenuemanagementisanothertechniquethatcanhelpcompaniestoincreaseprofitabilityandcreatea
strategic,competitiveadvantage.Itisusedbyanumberofsectorsbutperhapsthemostcommonisthe
airlineindustry,whereticketpricesvarydependingonclassoftravel(economy,business)andhowsoon
in advance the ticket is purchased, etc. This is a very dynamic pricing strategy that is wholly based on
forecastingdemand.
Asimilarapproachcouldalsobeusedinotherindustriestoinfluencethecustomer’spurchasingdecisions.
Takeforexamplelargesupermarketchainsandthewaytheyadvertiseandpricetheirhomedeliveryslots
accordingtodaysoftheweekandtimesofday(eveningordaytime).Othercompaniescouldadoptasimilar
approachfornon-VMIcustomersinordertoofferlastminutedeals,i.e.ifavehiclewillbeonroute,inthe
vicinity,withsparecapacity.Youcouldevengoastepfurtherandproactivelyapproachcustomerswithdeals
sothattheyplacetheirorderswhenitismoreconvenientforthesupplier.Thesearejustafewexamplesof
new techniques in business that could help companies to continue to innovate and achieve the results they
desire.
4.4
12 ORTEC Inventory Routing as the way forward
Changing the way you work
Why is there a need to change?
Despitetheobviousbenefitsofintegratingplanningandexecution,themajorityofbusinessesarestill
continuingtoworkintraditionalsilos.Companieswithastrongplanningculturearenottakingadvantageof
availablereal-timeinformationandoftenlackflexibilitywhenexecutingtheirplans.Conversely,companies
with excellent execution capabilities need a change in philosophy to integrate a process that is, at its core,
groundedinplanning,andforthistowork,theplanningroleneedstobecomemoreofadataanalystrole.
Effective change management
Iforganizationswanttoincreasetheirfinancialandoperationalperformancebyintegratingtheirprocesses,
theyneedtotackleallareasoftheirbusiness,whichmeans:themanagementandorganizationofthe
company,theemployeesanditsculture,productsandworkprocesses,andfinallyresources.
Resources and systems
Ifwebeginbylookingatresourcesandsystems,whichiswhatmostcompaniestendtofocuson,wewill
seethatitisimportanttobuildastrongfoundationwiththeappropriateITinfrastructureandtheright
softwaresolution(s).Thesystemthatischosenshouldprovideseamlessintegration,automatedforecasting
andplanning,transparency,insight,morecontrol,greaterefficiencyandareducednumberoferrors.But
systemsareonlypartoftheprocessandarenotsufficientontheirowntobringabouttherequiredchange.
Products and processes
Acompany’sproductsandprocessesmustalsobeexamined.Makesureallrelevantpartiesinthecustomer
supplychainareinvolvedindefiningthelogisticsprocesses.Assessthelevelofcustomersatisfactionby
engaging with the customers and any other relevant internal departments in order to build a true customer
partnership, where the right product is delivered at the right time, at a lower cost to both the customer and
thesupplier.Itisimportanttoprovideincentivesforthecustomertogoalongwiththechangeand,more
critically,forthesuppliertodeliveronthepromisedbenefits.
People and culture
Whenmanagingthechangeprocess,youshouldneverunderestimatetheimportanceofpeopleandculture.
Companyemployeeswillneedtoadapttheirwaysofworking,becauseultimately,itisallaboutdoingthings
differentlybyanalyzing,communicatingandincreasingknowledge.Inlogisticscompanies,thedispatchers
havebeendoingthejobformanyyearsandoftenstartedoutasdriversoradministrativestaff.Theypossess
awealthofvaluableinformationandarereallygoodatwhattheydo.Butinordertobringaboutthechange
your company desires, they need to take a step back and look at customer demand management and vehicle
routingfromanmoreanalyticalpointofview.Andtheyneedtodrivetheplanningsystemtocreateplansthat
automaticallyovercometheroutinganddeliverychallengesthattheytypicallyfaceonadaytodaybasis.And
indoingso,thisshouldresultingreatercustomerservice,higheremployeesatisfactionandreducedcosts.
Management and organization
Finally,managementcommitmentandsupportiskeytothesuccessofanychangeprogram,but
unfortunatelyitsimportanceisoftenunderestimated.Itmaywellbecitedaspartofthecriticalsuccess
5.
5.1
5.2
5.3
5.4
5.5
5.6
13 ORTEC Inventory Routing as the way forward
factorsbutasachangeactivity,itisalmostalwaysabsentfromtheprojectplan.Themanagementteam
needstounderstandthereasonforchange,howsuccesswillbedefinedandhowtheycancontribute.
Withouttheirbuy-inandsupport,itwillbevirtuallyimpossibletobringaboutchangeinthelowerechelonsof
theorganization-thatincludesthedrivers,thedispatchers,thecustomerserviceclerks,etc.Doallrelevant
partiesunderstandwhytheirprocessesarechangingandhowthisfitsintothebiggerpicture?Whatneedsto
happentoensurethateverysinglepersonintheorganizationiscommittedtochange,irrespectiveoftherole
they play?
ManagementmustanswerthesequestionsandthenimplementtherelevantKPIstoensurethattheyget
therightresults.Thereisnopointinjustfocusingontruckutilizationorontonsdeliveredperkmdriven,but
ratherfocusmustbegiventotheentirevaluechain,whichshouldincludecustomersatisfaction,number
ofstockouts,supplycostsetc.Andiftheygetthisright,theresultswillspeakforthemselves:increased
managementcontrol;increasedcustomerloyalty;andincreasedmargins.Pivotalelementshereareclear:
managementvision,continuouscommunicationandaneffectivechangemanagementprogram.
14 ORTEC Inventory Routing as the way forward
Conclusion
Bywayofconclusion,theprocessofswitchingtoanintegratedsystemforcustomerinventorymanagement
and vehicle routing is not without its challenges. However, by integrating these components into a multi-
user,multi-site,real-timeenvironment,companiescanrealizesubstantialbenefitsandcreateoptimalvalue.
Andatatimewhenorganizationsacrosstheglobeneedtocarefullymanagetheirexpensesandstrivefor
excellence,thisisaprojectwellworththeeffort.
6.
15 ORTEC Inventory Routing as the way forward
About the authors
MarnixduClouandIlonaScholteareGlobalIndustryLeadersOil,GasandChemicals.JannekeLagerwaard
isformerGlobalIndustryLeaderOil,GasChemicals.Theyallhaveextensivesupplychainknowledgeand
experience in the Oil, Gas and Chemicals industry.
About ORTECORTECisoneofthelargestprovidersofadvancedplanningandoptimizationsolutionsandservices.
Ourproductsandservicesfullyoptimizefleetroutinganddispatch,vehicleandpalletloading,workforce
scheduling,deliveryforecasting,logisticsnetworkplanning,andwarehousecontrol.Weofferstand-alone,
custom-madeandSAP®certifiedandembeddedsolutionsthataresupportedbystrategicpartnerships.
Our750employeessupportover1,800customersworldwidefromofficesinEurope,NorthAmerica,
SouthAmerica,andAsiaPacific.
ORTECworldwide
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