Dimensioning of inventory levels in a VMI relationship at Atlas Copco Tools AB

Abstract: VMI (Vendor managed inventory) is a relationship between vendor and customer where the vendor manage the customer's inventory. After the first VMI rollout in February 2006, Atlas Copco identified problems with the definition of the max – and min inventory levels. The purpose of the thesis is to redefine the max – and min levels and identify the important variables in inventory dimensioning. Atlas Copco Tools VMI relation with the vendor Enics has been studied. Two general types of VMI relationships have been detected from the empirical study. The consignment inventory has been identified to be a self regulated system. In the case where the customer owns their own inventory there is a larger incentive for the customer to control the inventory level with a max level. The results are divided into two sections: Inventory cut up and inventory variables. The max – and min system should be redefined as a max – safety level system. The reason is that the safety level is defined to cover variations in demand and therefore should the vendor not be judged on basis on the ability to keep the inventory level above the safety level. The target level will work as a cycle stock and vary directly with lot size. To optimize the target level the lot size must be optimized. The authors recommend that lot size is determined by an adjustment of the EOQ (Economic Order Quanity) model. This results in an inventory level that shares logistics costs between the participants in the VMI relationship. The adjustment will be based on the delivery batch sizes to help optimize transportation planning and warehouse handling of full pallet at the distribution warehouse. The trade off between the deviation from the EOQ and the gain from the above mentioned factors were considered to be positive.