Sapphire Rishel Improve Supply Chain Efficiency With Vendor Managed Inventory

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

People. Processes. Technology. Results.

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Improve Supply Chain Efficiency with Vendor-Managed Inventory

Bruce Rishel, CSCP

May 5, 2008

Proprietary and confidential. © 2008 Perot Systems. All rights reserved. All trademarks are the property of their respective owners.www.perotsystems.com 2

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

• 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

Done right, VMI can lead to many supply chain improvements


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 better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing.

… on average, more than half the improvement in the stability of 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.

The potential importance of vendor managed inventory on the supply chain can not be overstated


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

MD04 - MRP runs and

determines inventory

requirements

Begin VMI replenishment Process

Supplier receives and acknowledge

Purchase Order

Supplier delivers material against

consignment purchase order

MIGO – Warehouse

receives material against

consignment PO

Purchase requisitions created for supplier

owned inventory

ME59S – Consignment purchase orders created

Supplier owned inventory available

for promise and delivery in SAP

End VMI Replenishment

Process


Process Flow - VMI Fulfillment

Begin delivery processing for VMI

VA01 – Sales order created in SAP for VMI

SAP performs an ATP check and confirms

VMI stock available

VL01N/VL10BATCH – SAP Creates a delivery document against the

VMI

Supplier receives

payment for materials issued

from VMI

End delivery processing for VMI


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 Rishel Improve Supply Chain Efficiency With Vendor Managed Inventory

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