Sapphire -Improve Supply Chain Efficiency With Vendor Managed Inventory

Improve Supply Chain Efficiency
with Vendor-Managed Inventory

Bruce Rishel, CSCP
May 5, 2008

People. Processes. Technology. Results.

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Proprietary and confidential. © 2008 Perot Systems. All rights reserved. All trademarks are the property of their respective owners.

VMI Defined

• The 11th Edition APICS Dictionary defines
the synonymous term “consigned stocks” as
follows:
Inventories, generally of finished goods, that
are in the possession of customers, dealers,
agents, and so on, but remain the property of
the manufacturer by agreement with those in
possession. Syn: consignment inventory,
vendor-owned inventory


Scope

• The impact of VMI on the supply
chain
• Business benefits, costs and
incentives
• VMI process flow
• SAP master data, configuration
and execution to support VMI


Drivers

• Reduced inventory holding costs
Done right, VMI can
lead to many supply
chain improvements
• Increased supply chain visibility and
there by fewer stock outs
• More frequent replenishments leading
to more predictable demand
• Improved customer service
• Lower overall warehouse and
transportation costs


Reduced Inventory Holding Costs

• Cost of capital tied up in
inventory
• Cost of warehouse space
holding materials
• Cost of writing off potentially
obsolete inventory.


Visibility

• VMI increases the visibility to
actual sales
• VMI reduces forecasting errors
that often lead to the bullwhip
effect.


Replenishment

• Frequent replenishment is possible
because the vendor has direct access
to the retailer’s stores and can see
directly the customer’s purchases
without having to wait on purchase
orders or forecasts from the retailer.
• By increasing the frequency of
replenishment, total inventory in the
supply chain is reduced because less
inventory needs to accumulate to
meet fluctuating demand


Customer Service

• Companies using VMI agreements
with their vendors are better assured
of meeting customer demand
because their vendors are
immediately aware of inventories in
need of replenishment.
• Rather than planning to an inaccurate
forecast, vendors see the stock
reduction and are better able to meet
replenishment needs and
appropriately and efficiently plan for
these needs.


Importance

“thanks to improvements in technology, firms now have timelier and
The potential
better information about buyers. Speedier market intelligence and
importance of production in smaller batches allows firms to match supply to changing
vendor managed conditions. This makes huge stocks unnecessary and minimizes the
inventory on the lurches in inventories that were once so destabilizing.
supply chain can … on average, more than half the improvement in the stability of
not be overstated economic growth in the countries they studied is accounted for by
diminished inventory cycles. That something so workaday as supply-
chain management could have so marked an effect might seem a dull
conclusion. But dullness is a virtue, because technological
improvement is irreversible. This means the greater stability it provides
is likely to be permanent.”
“The Turning Point.” The Economist 20 Sept 2007.


Challenges

• Inventory levels at vendor vs.
retailer
• Priority alignment
• Reduced retailer control


Considerations

• Does the firm implementing VMI have the
supply chain clout to facilitate the change to a
VMI model
• Are the vendor and retailer systems
integrated in such a way to enable
information to be quickly shared
• Are the terms of the VMI agreement spelled
out contractually so all parties involved
understand their responsibilities
• Is there a process and team in place to
handle any disagreements that should occur


Process Flow - VMI Replenishment


Process Flow - VMI Fulfillment


SAP Solution - Setup

• Master Data
– Material master
– Purchasing info records
– Source lists
• Configuration
– Stock determination


SAP Solution – Material Master


SAP Solution - Material Master


SAP Solution – Info Record


SAP Solution – Source List


SAP Solution – Configuration


SAP Solution – Process: MRP

• Run MRP
– Create vendor consigned “K” stock
purchase requisition
– Convert purchase requisition to
purchase order
– Purchase order informs supplier of
need for inventory and are not used
to pay for the materials


SAP Solution – Process: Receiving

• Receipt into inventory
– Receive against consignment
purchase order into supplier owned
inventory using SAP transaction
MIGO
– Same process used when receiving
company owned stock against a
replenishment purchase order
– If using SAP warehouse
management, the same transaction
performs the putaway as when
receiving company stock


SAP Solution – Process: Fulfillment

• Sales order fulfillment
– Sales orders created to consume inventory
– ATP checks company owned and supplier
owned materials
– A single delivery against the sales order can
include both company and supplier owned
materials
– Stock determination decides which stock is
consumed first
• Supplier Payment
– Goods issue against the delivery creates the
accounting document used to pay the
supplier


Take Home Thoughts

• Minimal master data and few
configuration settings required to set up
VMI in SAP
• VMI can be managed side by side with
company owned stock, one can take
priority over the other
• Successful VMI partnerships focus on
process and overall supply chain benefit
creating a win-win situation for all parties
involved


Sapphire -Improve Supply Chain Efficiency With Vendor Managed Inventory

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