Auto Logistics and Supply Chain Management Summit 2003
The Practice of VMI in China
陈 晖
中国物流公司 执行总裁
Agenda
Our understanding of the automotive logistics needs
What is VMI – definition, procedures and benefits
Challenges of VMI in China
Case study
Brief introduction to China Logistics Company
An automotive OEM’s logistics needs cover both inbound and outbound operations of parts and finished vehicles
Plant
Suppliers
Consolidation and Loading Center
Service Parts
Distribution Center
Logistics for Production Parts
Logistics for Service Parts
Logistics for Complete Vehicles
Dealer
Dealer/
Service Station
Bonded Warehouse for Import Parts
Our understanding of the automotive logistics needs
Supply chain management (SCM) is the strategic management tool that coordinates the material and information flows across the value chain to support adaptiveness
“Demand-pull” value chain requires the companies to be flexible and able to “control” a large part or the entire supply chain
Suppliers
Manufacturing
Demand indirectly drives manufacturing volume through forecasts
Warehouse
Wholesale/Retail
“Supply-push” Logistics Chain
Suppliers
B2B Exchange
Manufacturing
Direct Delivery
“Demand-pull” Logistics Chain
Manufacturing driven by actual demand
The rate of supply was set by the manufacturer in advance, based on expected demand
It was the role of the logistics providers to ensure a just-in-time supply of components
The rate of manufacture is determined on a real-time basis by the rate of demand
While this model is more efficient, it requires perfect integration of all logistics operations within one process
Source: Lehman Brothers, . Kearney Analysis
Third-party logistics providers (3PLs) can directly, or through a partner network, provide a range of services
Procurement
Payables management
Supplier payment and consolidated invoicing
Vendor performance monitoring and exception reporting
Joint process improvement with vendors
Overall freight coordination
Full load truck carrying
Less-than-load truck carrying
Small lot (less than 150 pounds) carrying
Order consolidation
Delivery scheduling
Expediting special / rush orders
Returning and reprocessing undeliverable orders
Delivery tracing
Performance and exception monitoring and reporting
Overall inventory management
Optimizing supplier order schedules
Optimizing dealer order schedules
Certification of incoming shipments
Bar coding
Performance and exception monitoring and reporting
Tracking and Reporting Systems accessible via Internet
Material Resource Planning
Order preparation / assembly / consolidation
Sourcing of packaging materials
Printing of corrugate and/or linerboard materials
Labeling
Shrink wrapping of cases and pallets
Freight and Distribution Coordination
Warehousing and Inventory Management
Minor Assembly and Packaging
Procurement
Difference between traditional business model and VMI model
The vendor can view the “real-time” stock level of every item that the customer carries as well as true point of consumption data.
Only order is transmitted to supplier when product is needed.
Inventory Transparency
The vendor is responsible for creating and maintaining the inventory plan.
The customer maintains the inventory plan.
Inventory Plan
The vendor is in total control of the timing and size of the order being placed.
The customer is in total control of the timing and size of the order being placed.
Inventory Replenishment
Under VMI, the vendor generates the order, not the customer.
When a customer needs product, they place an order against a manufacturer.
Purchase Order Placement
VMI
Traditional
Simplest VMI workflow
Manufacturer
Suppliers
2
3
4
1
The manufacturer approves the purchasing terms with suppliers, including the commonly agreed inventory responsibility and maintenance scheme.
The manufacturer sends product activity data to the supplier. This product activity is based on warehouse movement of product consumed at the assembly line level.
Based on the agreed inventory maintenance scheme, the supplier edits, approves and releases the suggested purchase order.
The manufacturer approves this purchase order and send it to the supplier.
Consolidation and Loading Center is commonly used to reduce the complexity in coordinating multiple vendors
Quality of delivery services from vendors to line-side might be different
Vendors’ shipping volume might be very small given more frequent “demand-pull” orders
Vendors might need a large line-side buffer to comprise a full-truck load and make-up a safety stock
Large line-side area is needed to accomplish unpacking, kitting, and possibly sequencing of parts before feeding to assembly line
Individual vendors might rent warehouses for themselves, with limited scale to share with other vendors
Consistent delivery service to line-side
Optimal shipping volume to reduce transportation cost and inventory cost
Reduced requirement on line-side warehouse space
Coordination between suppliers and production line possible to promote synchronization and JIT
How Consolidation and Loading Center Approach Helps
Potential Issues in Simplest VMI Model
Win-win situation can be achieved for both manufacturers …
Planning and ordering costs for the manufacturer go down due to the responsibility being shifted to the vendor
Improved customer service – vendors can better respond to customers’ inventory needs in terms of both quantity and location
Reduced demand uncertainty – by constantly monitoring customers’ inventory and demand stream, the number of large, unexpected customer orders will dwindle, or disappear
The manufacturer is more focused than ever in providing good service and the overall service level is improved by having the right product at the right time
Speed and accuracy of data processing are improved due to computer-to-computer communications
Reduced total logistics cost and improved cash-flow
… and vendors
Smoothing demand – the supplier is able to smooth the peaks and valleys in the flow of goods, and therefore to keep smaller buffers of capacity and inventory.
Better coordination – the supplier has better opportunities to co-ordinate the shipments to different customers, such as scheduling - either postponing or advancing - shipments according to production schedules, customer inventory situations and transportation capacity
Reduced inventory requirements – by knowing exactly how much inventory the customer is carrying, a vendor’s own inventory requirements are reduced since the need for excess stock to buffer against uncertainty is reduced or eliminated
Speed and accuracy of data processing are improved due to computer-to-computer communications
Reduced total logistics cost and improved cash-flow
The binding of customers to vendors – once relationship is established, customers will be reluctant to endure the amount of work needed to switch vendors
Currently, most automotive manufacturers in China consider Consignment Inventory as VMI
VMI are usually used as a method to realize “zero inventory” – while the parts are sitting in manufacturer’s warehouse, vendors are forced to finish the transfer if parts ownership until assembly is done
Consignment Inventory, on the other hand, are the exact practice of most vendors and manufacturers – vendors are not involved in inventory and logistics decisions
Challenges of VMI in China
This concept/belief reveals the transactional relation between suppliers and manufacturers
Price-driven sourcing decision without in-depth understanding of cost structure
Logistics cost and material cost are commonly added up as a lump-sum “CIF price”
Few suppliers are willing to “open cost” to their customers unless margin is very thin
Supply chain management targets forcefully drive suppliers to reduce price to maintain business relation
Payment terms and payment situation constrain suppliers from getting inventory information under consignment inventory
Inventory movement means actual consumption of products, immediately starting the manufacturer payment cycle
Neither manufacturers and suppliers make significant investment in building EDI to facilitate data sharing
Without transparent data sharing and collaborative supply chain planning, lose-lose situation arises due to higher operation (transaction) cost
To avoid the potential conflict between manufacturers and suppliers, an independent third party can be employed to help manage the VMI initiative
Third-party consolidates the shipment from various suppliers
Third party facilitate the information exchange between manufacturer, consolidation and loading center, and the suppliers
Information is neutral to both suppliers and manufacturers, signaling transfer of ownership according to pre-agreed terms
Third-party can help manage inventory, unpacking, kitting, sequencing and delivery to line, milk-running the inbound parts and potentially placing purchase order on manufacturers’ and suppliers’ behalf
Ownership remains unchanged before or after VMI is implemented
However, internal resistance against outsourcing the VMI service remains generally very strong
No common understanding of how third-party can help smooth the VMI operation
Staff currently in charge of inbound logistics are afraid of losing jobs
General belief to hold potential “profit” within the company
No cost benchmark to compare the overall cost under third-party management
Resistance to share inventory data with third-party
A cultural adjustment as well as a significant reorganization of everyday job duties is required to accomplish a major change of company operations
VMI will achieve its acceptance gradually, especially after the anticipated competitive environment in 2-3 years
A Chinese OEM outsourced its inbound logistics to China Logistics for operating assets, skills and better management
OEM — Inbound Logistics
The OEM was preparing for mass production of a new passenger car model on a totally new plant
In the past, the suppliers were asked to deliver all components to the line side warehouse
There are not enough in-house operation staff and space to cope with expansion of production
The management of the OEM would like to focus on manufacturing of vehicles, while outsource most of its logistics to third party
China Logistics refurbished a 4,500 Sq. M. warehouse situated 8 km from the assembly line
In addition, emergency orders can be dispatched within ten minutes of notification and delivered to line side within 30 minutes
Parts are stored, picked and marshalled according to where they are used on the assembly line, with loads configured in direct-to-line order
Scale ramped up from 40 units per day in November 2002 to 180 units in March 2003
In a typical week, the China Logistics team handles more than 3,000 different product lines and makes some 250 just-in-time deliveries to lineside receiving points
China Logistics’ Approach
Situation
Selected Case Studies
There are several different factors to consider in designing an appropriate inventory level
Order—to-delivery lead time
Order size and frequency
Annual throughput
Per SKU demand
Complete vehicle sales volume
Car parc (penetration rate)
Total number of SKUs
Kitting or other needs
Purchasing lead time
Transportation lead time
Purchasing order size and frequency
Customer Needs
Volume Forecast
SKU Complexity
Inbound Process
Solution
Selection
Total Cost
Transportation cost
Warehousing cost
Labor cost
Level of Integration
Source of materials (external suppliers or OEM factory)
Location of suppliers
OEM — Inbound Logistics
Current Operational Characteristics related to Materials Management
20+ domestic and 50 +overseas suppliers
Supplier
1
Customer involving:
Logistics Dept
Quality Dept
Planning Dept
Supplier
X
Supplier
2
Supplier
3
Supplier
22
…
…
Operational characteristics:
Component Supplier — Inbound Logistics
At present, Customer X directly contact a multitude of suppliers, to
Place P/O;
Monitor P/O status, change P/O if necessary;
Receive and unpack parts, store and picking
Inspect and sort parts;
Deliver to assembly line;
Check documentation and finally pay invoice.
It involves functions across the customer:
Production Planning
Quality Control
Logistics and Materials Management
IT
Finance
Major capacity and quality issues arises when 50% annual growth is anticipated
Under-capacity for warehousing space
There are constraints as production capacity needs to be boomed to meet increasing customer demands
Manufacturing flexibility is low
When parts ordered before are already on their way while production plan needs to be changed, either the parts have to go back or the production plan has to remain unchanged since there is no space for the unwanted parts
When parts received are found defected production has not been able to swift to alternative plan as there is little other stock in the factory
Quality has been compromised:
As there is little stock on hand some parts with defects have to be repaired and used, hence quality is not at its best from time to time
Communications consume plenty of time
Each function may have to contact suppliers for their own responsibilities to conduct the previously mentioned activities making the operation less smooth
Component Supplier — Inbound Logistics
Project Roll-out Schedule
Contract negotiation
Supplier agreement negotiation
Setup
Go live
July
Aug
Sept
Main tasks
Warehouse decoration
Office set-up
WMS System fine tuning
Staff training
Procurement of equipments
Internal SOP
Quality inspection capabilities improvement
Main tasks
Price
Process
SOP
KPI
Main tasks
Inventory level
Price and Payment
SOP & KPI
Negotiating contracts, . warehouse, equipments etc.
Starting recruitment
Main tasks
SOP in place
Staff in place
Quality control procedure in place
IT system in place
Facilities and equipment in place
Sept
Component Supplier — Inbound Logistics
The old axiom of “people don’t do what’s expected, they do what inspected” is as true in digital supply chains as in individual performance management.
The key to effective digital supply chain operations - once all the other requisite parts are in place - is to institute a mechanism to monitor performance.
Two considerations should guide the measures. First, they should be customer-centric. Customers do not care if a raw material supplier shorted an order against a blanket PO. They do care if their expectations are not met. Secondly, they must be system measures. In other words, enterprise-wide performance is what counts, not nodes in the chain. Again, the inventory levels of a SKU at a supplier told to provide just-in-time delivery is not as relevant as the rate at which the system responds to customer demand - agility and responsiveness.
