Vmi (vendor managed inventory)

Transportation Research Part E 39 (2003) 363–380
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The impact of vendor managed inventory on transport operations
S.M. Disney
a b

a,*

, A.T. Potter a, B.M. Gardner

b

Logistics Systems Dynamics Group, Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK Transport and Shipping Research Group, Cardiff BusinessSchool, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK Received 19 April 2002; received in revised form 23 January 2003; accepted 28 January 2003

Abstract This paper investigates the impact of a vendor managed inventory (VMI) strategy upon transportation operations in a supply chain. Specifically, the issue of batching to enable better use of transport vehicles is studied.A system dynamics methodology is used to develop difference equation models of three scenarios–– traditional, internal consolidation and VMI. The holistic nature of inventory management within VMI enables batching to minimise transport demand without negatively impacting the overall dynamic performance of the supply chain. Using the concept of cost escapability, it is shown that transport costsavings are possible in both the short and long term. Ó 2003 Elsevier Ltd. All rights reserved.
Keywords: Transport; Vendor managed inventory; Supply chain dynamics; Batching

1. Introduction In supply chains, a trade off exists between the manufacturing and transportation functions. For the smooth flow of materials through a traditional supply chain, deliveries have to be made every ordering periodon an ‘‘as required’’ basis. However, this is likely to result in less than full truckload consignments, which does not optimise the utilisation of the vehicle payload. Conversely, by running full vehicles, the demand for transport is minimised and transport costs are reduced. Batching exists in supply chains because each player makes a ÔrationalÕ decision to
*

Corresponding author. Tel.:+44-29-2087-6083; fax: +44-29-2087-4301. E-mail address: disneysm@cardiff.ac.uk (S.M. Disney).

1366-5545/$ - see front matter Ó 2003 Elsevier Ltd. All rights reserved. doi:10.1016/S1366-5545(03)00014-0

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S.M. Disney et al. / Transportation Research Part E 39 (2003) 363–380

minimise visible costs. This can be achieved in one of two ways. A product can either be routed through aconsolidation centre or batching introduced into the ordering rule to only permit full vehicle loads. However, implementing the latter within a traditional supply chain structure will result in the batching or Burbidge effect (Towill, 1997). This is one of the five fundamental causes of the well-known (and costly) bullwhip phenomenon (Lee et al., 1997a,b), the others being demand signal processing, non-zerolead-times (together being known as the Forrester effect), price promotions and gaming. In this paper we specifically focus on the effect that a vendor managed inventory (VMI) strategy will have on the impact of batching behaviour in the transport operations of a supply chain. One such way in which this transport efficiency/inventory holding trade off can be avoided is to take a holistic view ofinventory levels throughout the supply chain, delegating the control of all inventory, including shipments between echelons to a single point. This is known as a VMI strategy (Waller et al., 1999). This differs from vertical integration, as the participating companies remain autonomous, with the distributor trusting the manufacturer to ensure customer service levels are maintained. The aim of this paperis to study explicitly the transport function within generic supply chain models, covering three different scenarios (a traditional supply chain, a situation where batching occurs within the order rule and a VMI supply chain) and provides some quantification as to their costs and benefits. This study will be carried out using a systems dynamics modelling approach (Richardson and Pugh, 1981). From...