Business Administration, Business Process and Supply Chain Management Degree Project (master), 15 higher education points, 4FE06E, Spring 2013 Authors: Jeremy Bellina, Olegs Bodins, Soeren Krieger and Mathilde Olivier Tutor: Roger Stokkedal Title: Managing Upstream Supply Chain in Order to Decrease Inventory Level: A Case Study on the Paper Merchant Papyrus Sweden. Background: The research is based on Papyrus Sweden, a paper merchant, which is facing a decrease in the demand of paper products. It was identified that inventory level reduction is now crucial for the company in order to stay in the market. Therefore, Papyrus Sweden is focused on inventory level and tied-up capital reduction in order to decrease costs and increase net profit. Purpose: This thesis aims to analyze the current situation in Papyrus Sweden in terms of inventory level and activities related to suppliers, and prepare recommendations which could help Papyrus Sweden to reduce its inventory level. Method: The data has been collected through interviews with managers from the supply chain department as well as through a data sample from Papyrus Sweden database given to the researchers. All data was analyzed and compared with the literature review. Data received from the database was processed and transformed in Microsoft Excel in order to make the analysis. Results: The analysis identifies issues in material planning methods, safety stock calculation, ABC-XYZ classification and forecast calculation, on which Papyrus Sweden could act in order to decrease its inventory level. Furthermore, the researchers identify two solutions Papyrus Sweden could implement with its suppliers in order to reduce inventory level which are a Service Level Agreement and a Vendor Managed Inventory system. Keywords: inventory level, material planning method, safety stock, ABC-XYZ classification, forecast calculation, replenishment lead time, supplier relationship, information sharing, Service Level Agreement (SLA), Vendor Managed Inventory (VMI) and Collaborative planning, forecast and replenishment system (CPFR).

The elimination of distribution inefficiencies, occurring due to the timing of customers' orders is an important reason for companies to introduce vendor managed inventory programs. By managing their customers' inventories, suppliers may be able to reduce demand variability and therefore distribution costs. We develop technology to measure the effectiveness of distribution strategies. We develop a methodology that allows the computation of tight lower bounds on the total mileage required to satisfy customer demand over a period of time. As a result, companies will be able to gain insight into the effectiveness of their distribution strategy. This technology can also be used to suggest desirable delivery patterns and to analyze tactical and strategic decisions. Secondly, we study the inventory routing problem with continuous moves (IRP-CM). The typical inventory routing problem deals with the repeated distribution of a single product, from a single facility, with an unlimited supply, to a set of customers that can all be reached with out-and-back trips. Unfortunately, this is not always the reality. We introduce the IRP-CM to study two important real-life complexities: limited product availabilities at facilities and customers that cannot be served using out-and-back tours. We need to design delivery tours spanning several days, covering huge geographic areas, and involving product pickups at different facilities. We develop a heuristic and an optimization algorithm to construct distribution plans. The heuristic is an innovative randomized greedy algorithm, which includes linear programming based postprocessing technology. To solve the IRP-CM to optimality, we give a time-discretized integer programming model and develop a branch-and-cut algorithm. As instances of time-discretized models tend to be large we discuss several possibilities for reducing the problem size. We introduce a set of valid inequalities, called delivery cover inequalities, in order to tighten the bounds given by the LP relaxation of the time-discretized model. We also introduce branching schemes exploiting the underlying structure of the IRP-CM. An extensive computational study demonstrates the effectiveness of the optimization algorithm. Finally, we present an integrated approach using heuristics and optimization algorithms providing effective and efficient technology for solving inventory problems with continuous moves.

På en alltmer global handelsplats med allt tuffare kundkrav handskas många företag med utmaningar kopplade till flexibilitet. Kunderna vill ha korta ledtider, stora anpassningsmöjligheter och utmärkt service, naturligtvis till ett lågt pris. Ytterligare en dimension av komplexitet adderas när stora koncerner gör förvärv av mindre bolag, vilket gör att koncernen måste säkerställa att även dessa nya förvärv kan möta kundens krav i samma utsträckning.  En lösning på denna problematik återfinns i litteraturen i konceptet logistikplattform. Konceptet innebär att ett företag arbetar med en centralt framtagen resursbas som sedan servar alla delar av företaget på en mer decentraliserad nivå för att kunna möta kundens krav. Fem viktiga byggstenar i en logistikplattform är central styrning, logistiska koncept, fysisk struktur, logistiska processer och aktiviteter samt informationssystem (Abrahamsson, et al., 2003).  I denna studie beskrivs koncernen Kesko, som i Sverige framför allt är aktiv inom byggbranschen och den tekniska handeln, med varumärkena K-Bygg, K-Rauta, Onninen samt Mark & Infra. Där återfinns denna problematik, speciellt kopplat till förvärv och kapaciteten på centrallagret som servar hela koncernen. Baserat på detta har denna studie syftet att utreda hur Kesko kan använda sig av en logistikplattform för att serva de olika varumärkena samt vad användandet får för konsekvens för centrallagret i Pilängen.  Studien fokuserar framförallt på de logistiska koncepten och den fysiska strukturen inom Kesko. De logistiska koncepten har avgränsats till att handla om försörjningskoncepten lagerhållning, kontinuerlig försörjning, leverantörsstyrt lager, cross-docking samt direktleverans och den fysiska strukturen har avgränsats till att hantera lokaliseringsstrategi, lagerstrategi samt transportstrategi.  Baserat på Keskos kunders, leverantörers samt produkters karaktäristik utformas vilka krav detta ställer på en logistikplattformen. Baserat på denna karaktäristik och krav utreds en ideal bild av Keskos logistikplattform i form av försörjningskoncept och den fysiska strukturen. Sedan utreds hur Kesko i nuläget verkligen arbetar med försörjningskoncepten och den fysiska strukturen. Dessa två versioner, den ideala bilden och nuläget, jämförs sedan i en så kallad gap-analys där skillnader utreds för att upptäcka var förbättringspotential finns och vilka förändringar Kesko kan genomföra för att kunna sägas jobba mot konceptet logistikplattform.  Analysen visar att Kesko är på god väg till det som anses viktigt inom konceptet, men att framtiden ställer stora krav på centrallagret och dess kapacitet. De sex gap som identifierades mellan den ideala och nuvarande utformningen och som ansågs påverka kapaciteten på centrallagret var 1) Användandet av cross-docking, 2) E-handelslagrets lokalisering och transportupplägg, 3) Förädlingsstrukturen, 4) Varumärket K-Byggs sortiment på centrallagret, 5) Varumärket Onninens sortiment på centrallagret och 6) Användandet av extern part för säsongslagring. Utifrån dessa gap formulerades åtta stycken förändringsförslag för hur Kesko kan minimera dessa gap och i och med detta gå mot den mer ideala utformningen. Förslagen visade att centrallagret, för att kunna fungera som en resursbas för Kesko i framtiden, troligen behöver en utökning av antalet pallplatser och plockautomatsplatser, en utökning av antalet in- och utlastningsportar samt utlastningsyta. Genom dessa förändringar förväntas centrallagret bli bättre anpassat för att serva de nuvarande varumärkena inom koncernen men även vara bättre förberett för att serva framtida nyförvärv. / In a business environment which is becoming more and more globalized and with continually increasing customer requirements, companies are dealing with flexibility challenges. Customers want short lead times, a lot of customization and excellent service, everything while keeping prices low. Another dimension of complexity is added when large company groups make acquisitions of smaller companies, which means that the company group must ensure that these new acquisitions also can meet the customer's requirements to the same extent.  A solution to this problem can be found in the literature as the concept of a logistics platform. The concept describes a company working with a centralized resource base that serves all parts of the company at a decentralized level in order to meet the customer's requirements. Five building blocks of a logistics platform are central control, logistics concepts, physical structure, logistics processes and activities, and information systems (Abrahamsson, et al., 2003)  This study describes Kesko Sverige, which is a company primarily active in the construction and technical trade, with the brands K-Bygg, K-Rauta, Onninen and Mark & Infra. The problems described above are also found within Kesko, especially regarding acquisitions and the capacity of the central warehouse, which is a warehouse that serves all brands in Kesko Sverige. Therefore, the purpose of this study is to investigate how Kesko can use a logistics platform to serve the various brands and what the use is for the central warehouse in Pilängen.  The study primarily focuses on the logistical concepts and the physical structures within Kesko. The logistics concepts have been restricted to deal with the distribution concepts warehousing, continuous replenishment, vendor managed inventory, cross-docking and direct deliveries, and the physical structure has been restricted to handle location strategy, inventory strategy and transport strategy.  Based on Kesko's customer, supplier and product characteristics, the requirements for the logistics platform are discovered. Based on these characteristics and requirements, an ideal picture of Kesko's logistics platform in the form of distribution concepts and the physical structure is investigated. It is then investigated how Kesko currently is applying the distribution concepts and the physical structure. These two versions, the ideal state and the current state, are then compared in a so-called gap analysis where differences are investigated to discover where there are areas for improvement for Kesko to be considered working towards the concept of a logistics platform.  The analysis shows that Kesko is well on its way to what is considered important in the concept, but that the future places great demand on the central warehouse and its capacity. The 6 gaps that were identified between the ideal and current state and which were considered to affect the capacity of the central warehouse were 1) The use of cross-docking, 2) The e-commerce location and transport arrangements, 3) The physical structure for value-adding services, 4) K-Bygg's assortment at the central warehouse, 5) Onninen's assortment at the central warehouse and 6) The use of external part for seasonal storage. Based on these gaps, eight proposals were formulated regarding how Kesko can minimize these gaps and hence move towards the ideal state. The proposals showed that the central warehouse, in order to work as a resource base for Kesko in the future, probably needs an increase in the number of pallets and places in the automated picking machine, as well as an increased number of loading and unloading ports and an expansion of the unloading area. By making these changes the central warehouse will be better at serving the current brands and the warehouse will also be better prepared to serve future acquisitions.

[pt] Esta pesquisa trata de duas variantes do conhecido Problema de Roteirização de Veículos com Estoque (do inglês Inventory Routing Problem – IRP). O problema nasce num contexto de um sistema de Vendor Managed Inventory (VMI) no qual o fornecedor é responsável pela gestão de estoques do cliente. Tal problema é a junção dos problemas de transporte e gestão de estoques, que correspondem aos maiores custos em uma operação logística. Destarte este trabalho apresenta um modelo matemático para uma variante do IRP que considera que o fornecedor tem clientes dentro e fora do sistema de VMI. Este caso surge quando para alguns clientes não é interessante a realização do controle de seus estoques dentro do sistema de VMI, somente o atendimento de suas demandas. Além disto, o modelo contempla três diferentes tipos de políticas de gestão de estoques e é capaz de lidar com casos contendo vários períodos e vários veículos. Após sua elaboração, o modelo foi validado em instâncias do IRP, do Problema de Roteamento de Veículos (do inglês Capacitated Vehicle Routing Problem - CVRP) e instâncias próprias para a variante. Foram realizados também estudos sobre os impactos das diferentes políticas de gestão de estoques. Além do modelo matemático, foi desenvolvida uma meta-heurística híbrida que resolve uma variante do IRP considerando vários períodos e vários veículos. Cada movimento considerado durante a meta-heurística é divido em duas etapas, a primeira sendo a modificação da posição de um ou mais clientes nos veículos e períodos e uma segunda etapa que resolve de forma exata um Problema de Fluxo Máximo a Custo Mínimo para a atribuição ótima do volume de carga transportada para cada cliente por cada veículo em cada período. Esta abordagem é então testada em instâncias clássicas para esta variante do IRP, obtendo resultados que comprovam a eficiência do algoritmo. / [en] This research deals with two variants of the Inventory Routing Problem (IRP). This problem comes from the context of a Vendor Managed Inventory (VMI) system in which the vendor is responsible for managing the customer s inventory. It is the combination of transportation and inventory management problems, which correspond to the higher costs in a logistics operation. Hence, this paper presents a mathematical model for an IRP variant, in which the vendor has customers inside and outside the VMI system. This situation is presented when it is not interesting to manage the inventories of some clients within the VMI system, resulting only in meeting their demands. In addition, the model considers three different types of stock management policies and it can comprehend multiple periods and multiple vehicles. After its modelling, the model was validated using IRP instaces, the Vehicle Routing Problem (CVRP) and specific instances for this variant. The impacts of different inventory management policies were also analyzed. In addition to the mathematical model, a hybrid meta-heuristic was developed, which solves an IRP variant considering several periods and several vehicles. Each iteration of the metaheuristic is divided into two stages: the first is modifying the position of one or more customers attended by the vehicles and periods, and a second step that solves a Maximum Flow at Minimum Cost problem, to optimally assign the load volumes transported to each customer in each vehicle in each period. Then, this approach is tested in classical instances for this IRP variant, obtaining results that prove the efficiency of the algorithm.