Powertrain

Volvo Powertrain

VMI Implementation at Volvo Powertrain

Fredrik Olofsson
Volvo Powertrain
Project Manager for Inbound Supply and Logistics
Document: Volvo Powertrain - Best Practice Factory
Date: 10/25/2006 1
 Powertrain

The Volvo Group Organisation

AB Volvo

Business Mack Renault Volvo Volvo Volvo Volvo Volvo Financial

Areas Trucks Trucks Trucks Buses CE Penta Aero Services

Trucks

Business 3P
Units

Powertrain

Parts

Logistics

Information Technology

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 2
 Powertrain

Strong positions in all areas

DCX Mercedes + Setra Caterpillar

FAW Volvo Bus Komatsu

Volvo Group IRIS Bus Case & New Holland

Dongfeng Motors Neoman Volvo CE

Paccar > 16 ton Scania > 12 ton Deere

Brunswick Volvo Powertrain Volvo Aero

Volvo Penta DC Powersystems

y World leading in development
and production of selected
Yanmar Caterpillar engine components.

Cummins Cummins y Engine components from Volvo

Aero is included in 80% of all
Caterpillar Scania 9-18 l larger civil aircrafts.
Document: Volvo Powertrain - Best Practice Factory
Date: 10/25/2006 3
 Powertrain

Volvo Powertrain Structure

Göteborg
Göteborg
-- Volvo
Volvo Powertrain
Powertrain HQ
HQ
-- Volvo
Volvo Division
Division HQ
HQ
-- R&D
R&D Köping
Köping
-- Purchasing
Purchasing -- Transmissions
Transmissions
Hagerstown
Hagerstown
-- Mack Skövde
Skövde
Mack PTD
PTD HQHQ
-- Engines -- Engines
Engines
Engines
-- Transmissions -- Foundry
Foundry
Transmissions
-- R&D
R&D
-- Purchasing
Purchasing

Vénissieux
Vénissieux // StSt Priest
Priest // Limoge
Limoge
-- Renault V.I. PTD HQ
Renault V.I. PTD HQ
-- Engines
Engines
-- Foundry
Foundry
Employees
Employees -- R&D
R&D
Sweden 4.450 -- Purchasing
Purchasing
Sweden 4.450 Curitiba
Curitiba
France
France 2.100
2.100 -- Engines
Engines
USA
USA 1.200
1.200
Brazil
Brazil 150
150

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 4
 Powertrain

VMI – A definition

“Vendor Managed Inventory (VMI) is a concept and process for consumption-based

Supply Chain Management. It requires the supplier to maintain inventories within a
predefined and mutually agreed thresholds based on a min/max-range. The supplier
can freely deliver within this indicated range” (Odette definition)

General VMI scope:

ƒ VMI can be realized with customer-, supplier- or 3PL-owned stock
ƒ Terms and conditions for transport may vary

In VPT we limit our scope to a VMI process where the supplier takes full responsibility for
the supply chain including ownership of the stock and responsibility for the transport
and warehousing of their goods.

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 5
 Powertrain

VMI Implementation - Overview

To be able to create value to Volvo Powertrain and its suppliers through a robust VMI
set-up it is essential to review the following steps:

ƒ VMI process Third/Second First Tier

Tier Suppliers Suppliers
ƒ Warehousing solutions Final Assembly
Component
ƒ Transport solutions Plants
Plants

ƒ INCOTERMS
ƒ External IS/IT support VMI Europe
Interface Overseas
ƒ Material Control

Components:
Components ƒ Engines
ƒ Axles
Information ƒ Gearboxes
ƒ Cabs

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 6
 Powertrain

Background to VMI implementation

ƒ Customers demand for flexibility increases

– Firm time-fence (ex. RT 4 hours)
– Variations
ƒ Capital tied-up is driven by the uncertainties in supply
ƒ Transport time from suppliers 1-5 days
ƒ Cost for management of emergencies is high
– Administration
– Rush transports
– Production disturbances
– Effect on work morale
ƒ Variations in supply demand is high, plan vs. real consumption
ƒ Supply chain delivery performance is low

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 7
 Powertrain

Why VMI? - Mutual Interest

To deal with the high demand volatility, the supply chain needs to be highly integrated
to reduce the bullwhip effect, i.e., the increased fluctuations along the supply chain

“Bullwhip Effect”
Fluctuations of Demand

••Increased
Increasedinventory
inventory
Reduced fluctuations ••Increased
Increasedhandling
handling
caused by VMI cost
cost
••Sub-optimised
Sub-optimised
production
productionand
and
transportation
transportation
••Material
Materialshortage
shortage
••Poor information
Poor information
sharing
sharing

Customer Tier1 Tier2 Tier3

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 8
 Powertrain

VMI – VPT Supply Information

VMI Vserves
o lv o P o w eas an
r t r a in absorber
, Vo lv o D iv is io n , Tof
r a ndemand
s m is s io n P r ovariance
d u c t io n

A m p litu d e s
M ont
A m p li t u d e s B e a m s
300
m a n u f a c tk
beam s

250 s c h e d u le

200

150

100

50

0
1999525

2000016

2000026

2000036

2000045

2000055

2000064

2000074

2000084

2000094

2000104

2000114

2000124

2000134

2000144

2000154

2000164

2000174

2000184

2000194

2000204

2000214

2000224

2000234

2000244

2000254

2000264

2000274
Material Call-Off

VPT Manufacturing Batches

V o lvVPT
o P oAssembly
w e r t r a i n Consumption
C o r p o r a t io n
2 7 / 1 1 / 2 0 0 5 /1

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 9
 Powertrain

VMI - Supply Process, Information and Components

VMI replaces the vendor delivery stock and the present stock at VPT. The VMI
inventory (vendor owned) could be localized within or outside VPT. One
component might also have several customers within VPT and can be stored at
one or several locations.
Components
Vendor Production Vendor refills own VPT Production
inventory at or near
customer

Inventory*
Inventory*
Internal
Internal Internal
Internal VMI Internal
Internal
VMI
Raw
Raw
material
material
production
production
process
process
Buffer
Buffer
production
production
process
process
X
Delivery
Delivery
stock
stock
Inventory*
Inventory*
VMI
VMI
X
Present
Present
stock
stock
production
production
process
process

Information
Inventory levels and
material requirements

*Min and max including safety stock

Document: Volvo Powertrain - Best Practice Factory
Date: 10/25/2006 10
 Powertrain

VMI Process, Warehousing and Transports - Options

First Option Second Option

ƒ Supply to each VPT warehouses ƒ Utilization of a VPT warehouse for
global supply
ƒ No drop and take off
ƒ Optimum cost for most of the parts ƒ For some small flows that require grouping
or for highly unbalanced flows
-> Optimization of, at least, the major flow for
one site

This implies that the warehouse should be located in the plants, but some
transport optimization can occur before.

Third Option
ƒUtilization of an external HUB (VLC or others)
ƒTo be justified by a global optimization
at a Volvo AB scale

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 11
 Lean Logistics – Inbound Supply and Logistics
Powertrain

Study recommendations - Summary

ƒ Develop warehousing facilities and systems that supports VMI and EMS at each
site
ƒ Create a global VMI process
ƒ Short term: Keep the current FCA supplier set-up with a addendum to current
purchasing contracts.
ƒ Long term: Renegotiate delivery term for VMI suppliers on case-by-case from ‘FCA’
to DDU/DDP ‘Warehouse including warehousing and insurance’ INCOTERMS 2000
ƒ Use existing system at Transmission manufacturing
ƒ Develop global VMI tool for VPT

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 12
 Powertrain

VMI – Baseline Operating Model

PipeChain
Vendor VPT
Net
Net Delivery
Delivery Suggestions
Suggestions 1
Plan replenishment based on (EDI: DELINS/DELFOR)
(EDI: DELINS/DELFOR)
delivery suggestions Demand => PipeChain via
business system

2 Ship
Ship Goods
Goods
Despatch
Despatch Note
Note
(EDI:
(EDI: DESADV/AVIEXP)
DESADV/AVIEXP)

Goods
Goods Receipt
Receipt
3 Inventory
Inventory
Inventory Levels Inventory
Levels VMI
Vendor VMI
Vendor Despatch Note
Despatch Note No.
No.
(EDI:
(EDI: STOACT/INVRPT)
STOACT/INVRPT)

Goods
Goods Issue
Issue
Inventory
Inventory Levels
Levels
4
Despatch
Despatch Note
Note Inventory
Inventory
VMI
(EDI: STOACT/INVRPT)
(EDI: STOACT/INVRPT) VMI

Create Invoice
5 Invoice
Invoice based
based onon VPT
VPT despatch
despatch
note
note no.
no.
(EDI:
(EDI: INVOIC)
INVOIC)

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 13
 Powertrain

Information to be communicated
ƒ Inventory balance
ƒ Goods receipts
ƒ Goods issues
ƒ Dispatch note numbers
ƒ Delivery suggestions

Means of communication
ƒ EDI messages
– DELINS/DEFOR
– AVIEXP/DESADV
– STOACT/INVRPT
ƒ PipeChain features
– Web Access
– PipeChain B2B set-up

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 14
 Powertrain

Other systems changes

¾ Goods Receiving
™ Identification of the VMI package
™ Mark the package (system wise) as a VMI package
™ Separate routing to the inventory system, i.e. separate vendor and VPT owned stock
™ “Virtual” goods receipt of vendor owned stock, i.e. goods is placed in the VMI but no
economic transactions
are generated = stock is still vendor owned
™ Cancellation of deliveries
™ Warnings for under/over deliveries

¾ Goods issue
™ Consumption takes place when goods is withdrawn from the VMI, i.e. goods issue
™ Goods receipt takes place at the same time as consumption
ƒ At consumption the VMI balance is reduced and the VPT balance is increased
ƒ At consumption a fictitious despatch note no. is created
™ Records regarding (economic) transactions are generated at consumption
™ Possibility to consume complete package or specific quantity
™ Consumption of inventory is updated per part/vendor

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 15
 Powertrain

Other systems changes

¾ Warehouse
™ VMI part localisation
™ FIFO
™ Traceability
™ Block possibility, i.e. a package must be able to block for rejection or quality inspection
purposes (for
example)
™ Stock transfer inside the VMI inventory without causing any consumption transactions

¾ Inventory Balance
™The inventory balance must be separated to show vendor owned and VPT owned inventory

¾ Invoicing
™ Invoicing takes place at consumption of inventory, i.e. at goods receipt (not “virtual” goods
receipt)
™ The vendor invoices VPT based on the communicated despatch note numbers identifying
each goods issue
ƒ Invoicing frequency is vendor specific and stated in the agreement between the parties
™ The invoice and goods issue relationship is verified

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 16
 Lean Logistics – Inbound Supply and Logistics
Powertrain

Other areas to be developed

ƒ Supplier selection
ƒ Communication kit to suppliers
ƒ Commercial and logistic agreements
ƒ Develop negotiation and implementation strategy
ƒ Perform training
ƒ IS/IT development
ƒ Document VAT, customs and other government regulations
ƒ Future: self-billing?

Document: Volvo Powertrain - Best Practice Factory

Date: 10/25/2006 17