Buyers to suppliers: Manage my inventory

By By Christopher Reilly -- Purchasing, 7/13/2000

Buyers in the CPI are faced with the challenge of ensuring that suppliers deliver the right product at their plants (to the right place) and at the right time.

For some buyers, the process from product ordering to delivery entails several phases of effort. Inventory levels must be tracked and compared to production forecasts to determine how much product is needed. Product must be ordered, which can require several phone calls and faxes to a supplier. Then there's the paperwork. For each delivery, purchase order, certificate of analysis, materials safety data sheet (msds), and bill of lading must be coordinated and maintained.

In order to get the best deals on price, buyers may have to buy product in higher volumes, which could mean that they have to warehouse drums, intermediate bulk containers (IBCs) or tanks of product until it is needed by operations. This can present additional problems. Product can become damaged in storage, and your company may have to pick up the cost. Also, flammable and hazardous materials have a nasty habit of leaking or exploding. Storing large inventories of these products greatly increases the possibility of an accident.

For these reasons and many others, buyers in the CPI are turning to their suppliers for help with inventory management.

Benefits of VMI

The benefits of vendor-managed inventory (VMI) are many for chemical buyers. Buyers are usually able to reduce a large portion of inventory from their books, because the supplier warehouses the product right up until the customer uses it. Buyers also can benefit from the reduction in paperwork, phoning in product orders and following up to see that they are delivered where and when they're needed.

Buyers also gain the experience and resources of their suppliers by having them handle inventory levels. Often, inventory and logistics are areas suppliers are better equipped to handle. By using increasingly sophisticated ERP business management software and other tools, VMI often results in the development of more efficient inventory and supply management, which can shave significant savings off the total cost.

VMI also can result in better business relations with suppliers. Because most VMI arrangements involve the sharing of production or demand information between customer and supplier, buyers and sellers can better align their businesses for mutual success.

For example, with their customers' detailed production forecast information, suppliers can plan their deliveries (and coordinate them with other customers' deliveries or in accordance with the demand projection) and apply cost-reduction techniques, such as bulk buying of raw materials, combining product delivery with other products, and warehousing materials for demand surges, etc. All of these techniques and more may result in savings, which may, in turn, be passed along to the buyer.

VMI essentially takes inventory out of the production equation for buyers. Buyers no longer have to worry about tank levels or when to schedule new shipments. The supplier handles that. By monitoring the customer's tank (often using sophisticated telemetry equipment), suppliers know when inventory levels are low. When they reach a certain point, usually agreed upon with the customer, the supplier schedules a delivery and the truck shows up at the customers' site to replenish the tank.

VMI in action

Based on the many benefits of VMI, buyers are beginning to negotiate deals with their suppliers and forge contracts that include vendor-managed inventory.

One such buyer, H. Dale Hartough, director of purchasing at Catalytica Pharmaceutical's Greenville, N.C., location, has developed some arrangements with distributors as well as direct materials suppliers, in which they manage inventory used by the plant.

"We were purchasing a lot of our bulk solvents from suppliers located in the Midwest and Texas," Hartough says. "We require bulk quantities of product and we don't have a rail site at our plant." Hartough explains that the plant had been experiencing supply difficulties due to some production spikes at the plant. These spikes were caused by rapid demand for some of the company's pharmaceutical products.

To remedy the problem and keep the solvent tanks full, Hartough has made some deals with distributors, under which they dedicate railcars of solvents to Catalytica's demand requirements. "They house the railcars at their rail siting and dedicate a truck to deliver the solvents to us with a 24-hour turnaround," he says.

"This has been a real help to us in terms of delivery reliability, and at the same time, the distributor was able to get us a better price for the materials because they were buying in bulk," Hartough says. "It is truly a win-win situation."

"Distributors are more adept at the logistics business than we are," Hartough says. "They're better equipped to manage our inventory requirements, and if they're willing to work with us, then I don't see any reason not to have them take care of that part of our business," he says.

"Because of the good service we have been receiving, we're beginning to consolidate some of our business through distributors," he says. "This seems to work better for us, because we get a lot of help with handling our volume needs."

In addition, Hartough says that he is looking closely at having distributors manage more of the plant's inventory, "Particularly when it involves a shipment of certain commodity items sourced from off-shore suppliers."

Because shipments from off-shore suppliers can often take weeks to reach their U.S. destinations, Hartough says this plan would cut down on leadtimes and give him more confidence that the plant has enough material available.

Under the plan, Catalytica would share demand requirements and other information with the distributor. "They would work with our approved off-shore suppliers to secure the material for us, stock it, and manage the inventory in accordance with our needs," he says.

Hartough also has put his plan into action. He describes a recent compromise reached with one of the company's specialized intermediate suppliers, located in the Middle East. "We were having delivery problems," he says. "And in order for them to keep our business, we required that they either work with one of our distributors or warehouse a shipment of product locally on their own.

Under this arrangement, which is essentially a consignment inventory program, the supplier owns the material until it is actually used by Catalytica. The procedure involves getting the supplier to commit to double the normal demand for the material. "If we're buying a container a month, we try to get a container load a month in advance," he says. "We do this because our production schedule jumps around a lot."

"We don't want the material in our inventory. We're trying to keep our inventory levels down," Hartough says. "But we do want it close by in the event of a demand spike or an emergency."

Hartough says that the ultimate alternative was to qualify another supplier or keep a large "safety stock" of expensive, specialized pharmaceutical intermediate material themselves. "We'd like to avoid that if we can," he says.

On-site service

Hartough at Catalytica is having his plant's inventory managed by suppliers in another way. Hartough has contracted with Praxair Corp., an industrial gas manufacturer based in Danbury, Conn., to handle Catalytica's nitrogen requirements.

Hartough says that Praxair has installed an on-site nitrogen generation unit and storage tanks at Catalytica's Greenville, N.C., plant, at Praxair's cost. The unit is maintained and controlled by Praxair personnel. "We're charged a monthly rental fee for the service," says Hartough. Contracts of this sort usually last five to seven years, he adds.

Catalytica uses its nitrogen demand in a variety of applications and has many varying requirements for certain purities of product, as well as varying volume requirements when demand spikes. "We have times when we're using more nitrogen than the generation unit can supply," Hartough says.

In this situation, Hartough says that Praxair will meet his company's demand requirements by sending a truck to supply additional nitrogen gas to the facility. Praxair has already installed a backup tank for liquid nitrogen on the premises. "This is a backup for both safety and quality," Hartough says. Demand spikes are fairly frequent, and Hartough says he has been debating whether to have another gas generation unit installed as well as an expansion of the capacity held by the backup tank. "Business has been growing," he says.

What are the main challenges to providing this type of inventory management? According to Mark Young, vice president, operations for Praxair Corp.'s North American Industrial Gas business, the challenges mainly involve changing usage rates, developing strong communications with the customer. "Customer product usage rates often change significantly with changes in demand, and this is usually not anticipated by the supplier," Young says. "If something goes wrong and there are not close, reliable communications between the supplier and the customer, the supply of product may be compromised," he says.

In terms of cost savings gained by the customer from suppliers' on-site inventory management, Young says this varies widely among customers. "Depending on the product usage rates and usage patterns, there can be significant cost savings attributed to on-site industrial gas generation," he says. "Key factors that determine savings include flow rate, product purity and pressure requirements. For this reason, managed inventory and on-site generation units themselves are largely tailored to customers' specifications."

Tank telemetry

Tank telemetry certainly isn't a new concept.

In the U.S. alone there are more than 20 telemetry suppliers, which mainly base their systems on cellular and radio wave transmissions and have been in business providing inventory monitoring services for several years. Because radio and cellular transmissions are regional in nature, companies with multiple locations located across the country may have to deal with many telemetry providers.

However, one company has come up with a new way to gather inventory data and do it on a global basis. ControlSAT, based in Herndon, Va., is a technology company that manufactures and markets satellite-based inventory monitoring telemetry systems, and according to company sources, the idea has been met with sizeable success in the past few months.

Here's how ControlSAT's system works: orbocomm Global, L.P., ControlSAT's parent company, owns a network of 36 del fluorocarbon satellites orbiting the Earth. The satellites are spaced to orbit the polar planes, tropical planes, equatorial plane and about 45 degrees in between, providing total coverage of the Earth.

ControlSAT installs hardware on customers' tanks designed to relay inventory data to those satellites. Then, once per day, data is sent via the satellite network to a central monitoring computer, then on to the supplier through a secure Internet link. Data that suppliers receive show their customers' inventory levels in tanks around the world.

When product inventory levels fall below a certain point, the supplier receives notification to replenish the material in the tanks. In this way, the supplier can proactively schedule its own deliveries. With its daily running inventory and materials needs forecast it can streamline supply.

"One advantage of our system is that you can plug it into existing monitoring equipment and be up and running in just a few hours," says John C. Brummerhop, marketing manager at ControlSAT. "You don't have to interrupt the current infrastructure, you don't have to run cable out to the tanks, and you don't have to get a new telephone number dedicated to inventory monitoring," he says.

Another advantage of ControlSAT's system, according to the company, is that chemical suppliers can standardize their vendor managed inventory telemetry offering with one telemetry supplier for all of its customers' locations around the world. Brummerhop explains that in the U.S., telemetry companies are regionally based. "Chemical suppliers may have to use two or more telemetry suppliers for its customers' plants located in various regions," he says.

Brummerhop says that ControlSAT's global scope is an added feature if questions or problems arise and support is needed. "Suppliers can deal with one company 24 hours a day, seven days a week, whether something has gone wrong in Malaysia, Europe, the U.K. or here in the U.S.," Brummerhop says.

The system also has some built-in fail-safes. If the inventory data is not received by the system on the first try, ControlSAT's transmitter will continue to transmit until the data is received. "Also, like e-mail, you receive a message to let you know that the data hasn't gone through," Brummerhop says.

If the inventory level in that tank does get to a critical level before the tank sends the info to the customer, the system will automatically send a page, e-mail or fax to a designated contact at the chemical supplier company. This signals to the supplier contact that there may be a problem at that specific tank, which may need servicing or other attention.

If tank inventories get to a critical level and the supplier contact doesn't respond to the system's page, messages are sent to a secondary contact after a specified period of time.

How do buyers feel about ControlSAT's global tank telemetry system? According to Brummerhop, "Purchasing professionals just know that it works. Just as they don't want to have to worry about their inventory, buyers don't want to have to worry about telemetry." And for chemical suppliers, Brummerhop says, "If they're looking to trust their inventory management data gathering system, we're making sure they can trust it."

The benefits of the system are many for some customers, according to its proponents, but it's not designed for everyone.

The system is not for time-sensitive data collection. Brummerhop explains that readings with ControlSAT's system take approximately 10-15 minutes to go through the system. "It's near real time," he says.

Brummerhop stresses that the system is not designed for critical orders. "If you're a customer and you need a delivery in 15 minutes, the telemetry system won't help you-you're just not using a big enough tank," he says.

Shell Chemical and ControlSAT offer VMI