REDUCING SHIPMENT VARIABILITY THROUGH LEAN LEVELLING

Fabian Brenninkmeijer & Melissa Botero

May 25, 2017
AGENDA
1. Research Question and Context
2. Methodology
3. Results
1. Variability
2. Transportation Cost
3. Service Level
4. Inventory

4. Conclusion
5. Q&A
1. RESEARCH QUESTION
Will a consistent, pre-determined customer shipment profile based on the Lean
Levelling principle reduce variability and enable improvements in:

Transportation cost
Inventory
After
Service levels Before

Number of
Shipments

Time
1. RESEARCH CONTEXT
Consumer goods industry:
High shipment variability
Large number of SKUs
Frequent Promotions
Scope: 1 VMI lane of a typical customer
Lean Literature
Focus of
Lean Literature

Raw Retailer Retail

Supplier Plant Consumer
Materials DC Store

Thesis Scope
2. METHODOLOGY / APPROACH
1. SKU Segmentation:
By # of cases delivered
Top 50% SKUs 100%
80%

Volume %
60%
40%
20%
0%

0%
3%
7%
10%
13%
17%
20%
23%
27%
30%
33%
37%
40%
43%
47%
50%
54%
57%
60%
64%
67%
70%
74%
77%
SKU %

Cumulative VMI Sales Top SKUs

2. METHODOLOGY / APPROACH
2. Simulation
Various order policies based on fixed % of Top SKU demand
Fixed Trucks Follow lean leveling principle
Variable Tucks Follow the process logic of VMI system
Top SKUs Shipments by Week
15
Number of Shipments

10

-
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 1 2 3 4 5 6 7 8
Week
Actual # Trucks Fixed # Trucks
2. METHODOLOGY / APPROACH
2. Simulation (continued) ORDER POLICY
Fixed Amount (Average*X%) FIXED SHIPMENTS
X%
TOP SKU Weekly Frequency
50% DEMAND
TOTAL (1-X)% CURRENT ORDER POLICY VARIABLE SHIPMENTS
DEMAND
50% SLOW MOVERS
DEMAND CURRENT ORDER POLICY VARIABLE SHIPMENTS

3. Evaluation
Performance of different order policies vs actual (variability and 3 KPIs)
3. RESULTS
Sensitivity Analysis: KPIs Change (%)
Feasible Region
4%
2%
0%
10% 20% 30% 40% 50% 60% 70% 80% 90%
-2%
Change %

-4%
-6%
-8%
-10%
-12%
-14%
Fixed % of Top SKUs Demand

Transportation Cost On Time Service Level

VMI Service Level Inventory Value Customer DC
3.1 VARIABILITY
Top SKUs VARIABILITY (Fixed 75% of Top SKU Demand):

Shipments by Week 75%

50%
25%
Number of Shipments

15

10

-
11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 2 4 6 8
Weeks
Actual # Trucks

DYNAMICS: IMPROVEMENT (Fixed 75% Top SKU Demand):

% Fixed Shipments = Variability Coefficient of variation: 31% 16%
50% Reduction
3.2 TRANSPORTATION COST VS.

MAIN ASSUMPTION:
Contracted rate < Spot Market rate
Probability of spot market delivery is reduced by the same % of fixed shipments

DYNAMICS:
% Fixed Shipments = Number of contracted shipments = Average price per load
CONTRACTED TRANSPORTATION VS.
Number of spot market deliveries SPOT MARKET

POTENTIAL SAVINGS (Fixed 75% of Top SKU Demand):

Annual savings of 1% of total transportation costs
Potential savings in contracted rates resulting from improved planning capabilities
3.3 SERVICE LEVEL: ON-TIME
MAIN ASSUMPTION:
Fixed Shipments are more likely to arrive on-time Improved Planning
Economies of repetition

Probability on- time: Variable Shipments: 94% (current performance)

Fixed Shipments: 98% (root cause analysis)

DYNAMICS:
% Fixed Shipments = On-time Service Level
a

RESULTING SERVICE LEVEL (Fixed 75% of Top SKU Demand):

96% (vs 94% actual)
3.4 INVENTORY
Customer DC

DYNAMICS:

Inventory
Shipment Frequency = Inventory VS. % Fixed Shipments = Inventory

Time

POTENTIAL SAVINGS (Fixed 75% of Top SKU Demand):

10% ($940K) Inventory value reduction with the optimal policy

Potential for additional inventory savings for sponsor company due to reduction in
Top SKUs volatility
4. CONCLUSION
Lean leveling reduces shipment variability
Finding the right ratio of fixed vs variable shipments is crucial
Evaluation criteria should be balanced to benefit both buyer and seller
Optimal solution 75% fixed Top SKU shipments

Transportation Cost 1% Reduction - $6,500 per year

Inventory Customer DC 10% Reduction - $940 K

Service Level 2% Improvement - 96%

Potential additional savings: freight rate and sponsor company inventory

Q&A
APPENDIX
Variability Total Shipments
Total Shipments by Week
25

20
Number of Shipments

15

10

-
11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 2 4 6 8
Weeks

Actual # Trucks New Policy # Trucks

Inventory Levels
Top SKU Inventory Value
6,000,000
Inv Value

4,000,000
2,000,000
-
11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 2 4 6 8
Week
Top SKUs Real Top SKUs Fixed Top SKUS Hybrid

Total Inventory Value

20,000,000
Inv Value

15,000,000
10,000,000
5,000,000
-
11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 2 4 6 8
Weeks
Total Inv Real Total Fixed Total Hybrid
Scenario Evaluation
Fixed Hybrid Fixed Model Hybrid Model Fixed vs Hybrid
KPI Actual Shipments
100% Average 75% Average Vs Actual Vs Actual
Number of Shipments
Shipments/Year 684 702 684 18 - 18
Percentage of fixed shipments/Year 0% 57% 43% 57% 43% 14%
COV of weekly shipments 31% 15% 16% -15% -14% -1%
Transportation Costs
Total Transportation Cost/Year 896,216 910,841 889,676 $ 14,625 $ (6,541) $ 21,165
Average Transportation Cost/Shipment 1,310 1,297 1,301 $ (12.8) $ (9.6) $ (3.2)
Service Level
On-Time Service Level 93.9% 96.5% 95.9% 2.6% 1.9% 0.6%
VMI Service Level 98.1% 98.6% 98.5% 0.6% 0.5% 0.1%
Inventory at Customer DC -
Average (cases/week) 202,619 207,428 179,281 4,809 (23,338) 28,147
COV of inventory level (cases) 12% 8% 9% -3% -3% 0%
Total Number of Top SKU cases delivered 1,433,457 1,534,358 1,372,753 100,901 (60,704) 161,605
Min (USD/week) 10,237,380 10,347,589 10,276,272 $ 110,209 $ 38,892 $ 71,317
Average (USD/week) 12,782,906 13,367,597 12,259,533 $ 584,691 $ (523,373) $ 1,108,064
Max (USD/week) 15,829,899 15,569,052 14,669,825 $ (260,847) $ (1,160,074) $ 899,226
Sensitivity Analysis
Sensitivity AnalysisNew Order Policy
% Fixed Average: 10% 20% 30% 40% 50% 60% 70% 80% 90% 75%
Shipments
Percentage of fixed shipments
1.4% 8.7% 15.3% 22.3% 28.7% 34.8% 39.9% 45.6% 51.0% 42.8%
/Year
COV of weekly shipments
-9.8% -10.0% -11.2% -11.9% -12.7% -13.1% -13.6% -14.4% -15.2% -14.1%
(Difference: Hybrid - Actual)
Transportation Costs
Average Transportation
Cost/Shipment (Difference: Hybrid
$ (0.3) $ (1.9) $ (3.4) $ (5.0) $ (6.4) $ (7.8) $ (8.9) $ (10.2) $ (11.4) $ (9.6)
- Actual)
Service Level

On-Time Service Level 94.0% 94.3% 94.6% 95.0% 95.2% 95.5% 95.8% 96.0% 96.3% 95.9%

VMI Service Level 92.2% 93.5% 94.7% 95.9% 96.8% 97.6% 98.3% 98.9% 99.4% 98.5%

Inventory at Customer DC
Average cases/week
(56,598) (52,985) (49,398) (45,523) (40,956) (36,418) (28,162) (16,804) 2,810 (23,338)
(Difference: Hybrid - Actual)
COV of inventory leve in cases
-2.0% -2.3% -2.2% -2.3% -2.3% -2.5% -2.7% -3.4% -3.4% -3.1%
(Difference: Hybrid - Actual)
Average Change USD/week
(1,543,143) (1,439,280) (1,330,705) (1,216,336) (1,089,559) (938,712) (683,955) (291,235) 348,971 (523,373)
(Difference: Hybrid - Actual)
Top SKU
Top SKUs Shipments
Cases

2000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Weeks

Actual VMI Fixed 75%

Top SKU Inventory Value

Inventory USD

60,000

10,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
(40,000)
Weeks

Actual Inventory Inventory 75%