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Sapphire Rishel Improve Supply Chain Efficiency With Vendor Managed Inventory
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Sapphire Rishel Improve Supply Chain Efficiency With Vendor Managed Inventory

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Improve Supply Chain Efficiency with Vendor Managed Inventory

Improve Supply Chain Efficiency with Vendor Managed Inventory


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  • 1. Improve Supply Chain Efficiency with Vendor-Managed Inventory Bruce Rishel, CSCP May 5, 2008
  • 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
  • 3. 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
  • 4. 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
  • 5. Reduced Inventory Holding Costs
      • Cost of capital tied up in inventory
      • Cost of warehouse space holding materials
      • Cost of writing off potentially obsolete inventory.
  • 6. Visibility
      • VMI increases the visibility to actual sales
      • VMI reduces forecasting errors that often lead to the bullwhip effect.
  • 7. 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
  • 8. 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.
  • 9. 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
  • 10. Challenges
      • Inventory levels at vendor vs. retailer
      • Priority alignment
      • Reduced retailer control
  • 11. 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
  • 12. Process Flow - VMI Replenishment
  • 13. Process Flow - VMI Fulfillment
  • 14. SAP Solution - Setup
    • Master Data
      • Material master
      • Purchasing info records
      • Source lists
    • Configuration
      • Stock determination
  • 15. SAP Solution – Material Master
  • 16. SAP Solution - Material Master
  • 17. SAP Solution - Material Master
  • 18. SAP Solution – Info Record
  • 19. SAP Solution – Source List
  • 20. SAP Solution – Configuration
  • 21. SAP Solution – Configuration
  • 22. SAP Solution – Configuration
  • 23. 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
  • 24. 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
  • 25. 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
  • 26. 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

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