Keep the “Hard Workers” moving! An analysis to solve the Inventory Routing Problem on Returnable Transportation Items in the Supply Chain of Johma.

Haagen, S.H.M. van (2012) Keep the “Hard Workers” moving! An analysis to solve the Inventory Routing Problem on Returnable Transportation Items in the Supply Chain of Johma.

Abstract:Johma Salades is the biggest salad producing company in the Netherlands. During negotiations with their logistic service provider Müller Fresh Food Logistics (MFFL) on total transportation costs, MFFL noticed the opportunity to create savings for Johma by improving the return flow of Returnable Transportation Items (RTI). The items under consideration in this research are the secondary packages called CBL-crates, consisting of multiple types that differ in size. The discussed problem encountered by Johma is formulated as: Johma has limited insight in, and limited control over, the use of Returnable Transportation Items within the continuously changing Supply Chain. This causes a lack of control and more costs than legitimated. Knowledge on the current use of RTI in the supply chain is the starting point in managing their future use. This brings up the goal of this research: Developing methods for analysis, that contribute to an efficient use of Returnable Transportation Items along the Supply Chain of Johma. The acquired information can be used as input in the negotiations with different stakeholders. Context information Products of Johma are packed in RTI and shipped by MFFL from the production facility of Johma to the different customer locations. The collection of RTI at these locations remains the responsibility of the supplier who is legitimated to order a truck as long as the amount they sent to the customers exceeds the amount collected. The RTI is transported to the cleaning facility of Habé. Johma uses two types of RTI, Long Term Rentals (LTR) and Short Term Rentals (STR). In case the inventory levels at the cleaning facility are not enough to cover for total production demand, Johma has the opportunity to hire an additional amount of STR. If we account for a Cost of Capital (COC) of 5% on the deposit money paid by Johma for LTR-RTI, the STR-RTI are roughly 9 times as expensive as LTR-RTI. Indication of a saving opportunity for Johma The data analysis on the situation of 2011 shows that current LTR-RTI contracts are not in line with the observed demand. We identified three parameters that influence the optimal rental policy; 1) required time to create/deplete a truckload, 2) the proportion of LTR- versus STR-costs and 3) the number of RTI necessary as work-in-process. This last parameter is determined by the cycle time at the customers’ warehouses and the demand patterns at the production plant of Johma. We estimate a saving opportunity of 50% of almost €43.000 by contracting LTR-RTI that complies with current demand. The method followed to determine the optimal rental policy consists of eight steps, namely: 1. Clear the outstanding balances 2. Gather data 3. Determine the required time to create/deplete a full-truckload 4. Determine the proportional costs between LTR- and STR-RTI 5. Determine the cycle time and the required work-in-process 6. Set the number of LTR- and STR-RTI according to Kirby (1959) 7. Compare the costs of both situations 8. Adjust the contractual agreements accordingly Model to solve an instance of the Inventory Routing Problem We translated the practical situation of Johma and its difficulties to a more general problem, an instance of the Inventory Routing Problem (IRP) based on the model of Lee et al (2003). The objective function of this IRP aims to minimize total transportation and rental costs. The influence of customers and suppliers who participate in the pooling system are not considered explicitly but their influence is modeled as an exogenous process. Conclusions The mathematical Mixed Integer Linear Problem-formulation in solved for multiple problem instances that resemble the situation of Johma as close as possible. Nevertheless, we had to makes some assumptions due to the absence of enough (reliable) data. From this, we concluded: - The experimental results support the hypothesis that it is possible to gain improvements by adjusting the current LTR-contracts. With 95% certainty we can realize savings between €5.676 and €5.856 if we move from the current LTR-RTI levels to the levels determined with the method of Kirby (1959). - A decline of 40% in average inventory at Johma if we change the number of LTR-RTI to the proposed situation, a desirable situation to keep the RTI moving through the supply chain. Recommendations RTI-management is no core-business activity and increasing control over RTI from the perspective of Johma is difficult. Not only caused by the limited share of Johma compared to other participants, but mostly because the RTI flow in the external environment, outside Johma’s direct control. If we combine this with the fact that not all customers participante into the pooling model, the recommendations to improve Johma’s control, are summarized as: - Start actively promoting the membership of the pool provider Pool Service for customers of Johma. To increase chances of success, Johma could work together with other suppliers and include the pool provider in this process. - Johma may consider negotiation on a different pricing structure with the cleaning facility Habé and logistics service provider MFFL (both 50% shareholder of the cleaning facility in Holten), by introducing a ‘one-way-rental’ fee. The pool operator charges suppliers a variable price on a ‘per trip’ basis, with the operator responsible for collecting empty units after delivery. - Before such a system is implemented, Johma still has the obligation to return the proper amounts of RTI on LTR-contract to Pool Service so the contracts can be changed towards the proposed future RTI-levels. These LTR-levels should be determined every year, based on expected long term demand-rates. A yearly check on the contracts and forecasts and more awareness of important cost factors increases the insight of Johma and decreases total costs. Keeping the number of RTI, also known as “Hard Workers”, up to date decreases cycle times and keeps the RTI moving in the different supply chains.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
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