Taking your supplier / customer relationships to the next level of partnership is integral to supporting profitable growth with exceptional customer service and cash flow (ie. inventory turns) levels. Vendor managed inventory (VMI), also called collaborative customer ordering and customer partnership programs, can be integral to maximizing revenue/ service, profitability, and working capital. Whereas SIOP (Sales Inventory Operations Planning) provides the vehicle to turn from reactive to proactive in navigating your demand and supply planning processes to ensure the successful and efficient fulfillment of your customer demand, VMI provides the vehicle to collaboratively manage your customer-supplier relationship to deliver win-win results.

Vendor Managed Inventory

Vendor managed inventory (VMI) is a supply chain strategy where the supplier or manufacturer takes responsibility for managing inventory levels at the customer’s location based on real-time demand and usage data. We see VMI opportunities across industries. It is common for aerospace suppliers to manage inventory at aerospace customers including Boeing. Consumer goods suppliers frequently manage inventory at retailer distribution centers including companies like Walmart. In addition, medical products suppliers manage inventory at production and distribution facilities including Cardinal Health, Baxter or McKesson.

In a traditional manufacturing environment, the buyer monitors inventory levels, places purchase orders, and manages replenishment, also known as distribution requirements planning (DRP), to their facilities / distribution centers to ensure high service levels to customers with greater productivity and minimized inventory levels. In a VMI environment, these responsibilities shift to the supplier. Clearly, it could not shift successfully without communication, collaboration and shared objectives.

Benefits of VMI

There are many benefits of VMI. Most importantly, the benefits are not just for the customer; they are also for the supplier, creating win-win benefits that extrapolate with collaboration. The main benefits we’ve seen include the following:

Sales revenue growth: As the supplier becomes an integral part of the customer’s success, they gain when the customer gains. The better service and performance of the customer, the greater the growth. As expected, this growth extends to their key supply chain partner, creating win-win revenue growth. In addition, as fewer stockouts occur, revenue increases.

Customer service improvement: As the supplier gains insights into the customer’s business and customer needs, the two companies are more aligned and in sync with the demand and supply plans. Not only does service improve (OTIF, on-time-in-full, OTD, on-time-delivery), but lead times also improve. Not only does lead-time improvement create happier customers but it also typically leads to revenue growth.

Inventory turns improvement: As the supplier gains better insight to the customer’s forecast and/or demand requirements by location, more of the “right” inventory can be sent to the “right” place at the “right” time. Since the supplier typically gains more frequent access to demand, they also gain insights into changing conditions so that they can take appropriate actions. Since the supplier also has access to its manufacturing and distribution capabilities, it can optimize its schedules to reduce inventory overall (win-win improvements at the customer and supplier) while improving service.

Manufacturing & logistics efficiencies: Since the supplier gains visibility into the end-to-end supply chain and can control the flow of product so long as it meets the customer’s metric requirements (service, turns, etc.), they can optimize their master plans, capacity and staffing plans, and production schedules to meet customer needs while minimizing costs and maximizing efficiencies. For example, they can run a product requiring a significant changeover for an extended run since they have better insights into demand and supply. From a distribution standpoint, they could adjust quantities to pallet or layer quantities to optimize warehousing efficiencies.

Transportation benefits: There are significant transportation benefits that can be achieved. Instead of shipping several less than truckload shipments, they can combine into a smart load without overstocking the customer and saving transportation costs. Similarly, they can combine multiple customers on a multiple-stop truckload. In addition, the supplier can utilize its supply chain visibility and to adjust the mode of transportation to be less expensive while ensuring customer service levels remain intact.

Case Study: Medical products manufacturer boosts revenue & profitability with VMI

An absorbent products medical products manufacturer was experiencing service issues due to the transition to a new ERP system while also absorbing a significant company purchase. Since the companies had different processes, systems, and data (orders, shipments, invoices) and suffered with typical go-live issues (not understanding how to use the new ERP system to accomplish unique customer requirements and not gaining key insights with reports and analytics), service suffered with their core customers.

Coincidently, their key customer also requested to embark on a VMI journey. If they wanted to maintain the customer long-term, they had to embrace VMI. Thus, the executive team decided to embrace VMI to retain their top customer at a minimum. They hoped they could expand business with a successful rollout.

Key Actions to Prepare for VMI Success

They formed a cross-functional team of supply chain, operations, IT/ ERP and supporting resources. Most importantly, the executive team empowered the team to make decisions and provided the appropriate resources as requested. From the high-level, the team took the following actions:

Collaborated with the customer: The team visited the key customer to meet the key project team members, learn more about VMI and discuss critical steps. Establishing these relationships were vital to success.

Demand planning & replenishment software: Since the supplier had two manufacturing plants with a few distribution sites supporting Canada and the key customer had 25-30 sites with 50-100 skus per site and multiple daily transaction sets (demand, inventory, shipment notices, invoicing, etc.), the equation was more complex and required a software that would support sales forecasting and replenishment planning across the supplier and customer. Forecasting capabilities must be leading edge with artificial intelligence and advanced capabilities embedded to support evolving customer needs. Thus, the team put together a VMI software selection process, visited clients of the finalist to gain additional insights into VMI, and put together training programs to ensure a smooth implementation. To gain ideas and insights on utilizing AI and advanced technologies, download our eBook: AI & Advanced Technologies: How AI Powers Smart Supply Chains & Smarter Decisions.

Data updates: We set up the appropriate EDI transactions and integrations with ERP to support timely updates of data. Receiving daily consumption, inventory and related information was invaluable to staying on top of critical issues, trends, and changing conditions.

VMI education: The cross-functional team found conferences and educational programs to learn more about VMI and ask for best practices and insights from resources currently supporting VMI programs.

Metrics: The customer had a customer scorecard to monitor progress, which drove performance audits. In addition, the supplier set up brief connect meetings with the customer to review progress, bottlenecks, questions and metrics.

Pilot: The team also put together a pilot with the customer, starting with one branch. They coordinated closely to monitor progress and ensure success. They also incorporated insights learned along the way.

Prioritized feedback: The cross-functional team listened to insights from the Sales team, the key customer, and other participants in the supply chain and incorporated ideas for improvement.

VMI Process Upgrades

From a detail point-of-view, the team rolled out several key process upgrades.

Key customer forecasts: The team set the software to develop a forecast for the top few key customers and broke the forecast up by site for the VMI customer so that it would support VMI. It also provided forecast by manufacturing and/or distribution site. By focusing on the key customers, it supported improved insights for the top volume customers while putting the rest into an “all other” bucket. Product categories were visible across all forecasts.

Exception management: One of the keys to success was to focus on exception management. By definition, forecasts will be incorrect at a detailed level (by sku by week by customer). Thus, it is easy to get lost in detail that will not contribute to meaningful results. Instead, we set the sales forecast software to track forecast accuracy and provide exceptions to review. By focusing on those exceptions and picking up the phone to ask the customer detailed questions about demand changes, we gained valuable insights and adjusted the forecast accordingly.

Replenishment planning best practices: The software incorporated replenishment recommendations based on DRP/ replenishment logic incorporating service level targets, forecast accuracy calculations etc. Since the team understood these parameters, they continually reviewed settings, evaluated results and adjusted as it made sense.

Performed a top down review: As issues and / or opportunities arose, we performed a top down review. For example, we could review demand forecasts and inventory levels across sites. If one of our customers’ sites was selling through inventory more quickly than anticipated, we could move inventory from one site to another or prioritize a shipment or production run to address while not impacting other sites.

Optimized production & transportation schedules: Since we could see across the customer and supplier’s sites, we could optimize production and transportation schedules to meet service objectives with the most efficient production runs and transportation lanes and load builds. This led to a 20% reduction in core cost.

Supplier forecasts: Based on the demand plans and conversion to key raw materials, we developed supplier forecasts for key materials. This provided insights to keep the end-to-end supply chain on track and proactive to changing customer conditions. In addition, we prioritized supplier programs and R&D that would best contribute to success.

Tie with SIOP (Sales Inventory Operations Planning): All of the forecast information is incorporated into a rolling 12-month demand plan, which is converted into master production schedules and capacity plans (manufacturing, transportation, inventory) to at least the longest lead-time so that the organization can be resilient to changing conditions while proactively planning strategic changes based on long-term production and replenishment plans.

Customer & EBITDA Results

Not only were the minimum expectations achieved (salvage the customer), but they were greatly exceeded. VMI caused the customer’s metrics to surge as lead-times disappeared; the customer simply had the “right” inventory at the “right” place at the “right” time to eliminate stockouts and serve customers with high levels of service and effectiveness. The customer scorecard was so good that the supplier won awards and received accolades for its performance. Better yet, the supplier was able to reduce inventory by more than 20%, thereby freeing up cash flow, increasing production efficiencies while reducing waste with improved schedules, and dramatically reduced freight costs with improved load planning and supply chain visibility.

Case Study: Aerospace Manufacturer Utilizes VMI to Resurrect Service

An aerospace manufacturer struggled with its number one customer as service levels lagged. Following a recession in the industry after 9/11, most companies cut back and slashed inventory levels. As Boeing increased its ship sets suddenly, the end-to-end supply chain had to ramp up quickly. To add fuel to the fire, rapidly changing conditions impacted down-the-line orders and transaction timing delays caused data inaccuracies and planning complexities. The supplier was not performing well on Boeing’s scorecard. Unfortunately, future business is based on scorecard results, and so it was urgent to turn around the performance.

The aerospace manufacturer was performing VMI for Boeing. In essence, they determined what to ship to Boeing to support their Kanban process. Aerospace is typically low-volume, high-mix manufacturing depicted with production of a wide variety of complex, highly customized, and precision-critical parts in relatively small quantities. This client was no exception. Thus, VMI didn’t require a special software yet it was integral to success.

What We Did to Resurrect Service

Although we followed several best practice project management and planning best practices, the keys to success included the following actions:

Customer collaboration: We met frequently with Boeing to coordinate, ask questions, push back with transaction timing questions, and build relationships. We proactively pushed for adjustments to incorrect data, incorporated feedback and maintained rigor in the twice weekly process.

Dedicated resources: The team dedicated a planner with solid execution skills to the project. Although she didn’t have advanced Excel and ERP skills, she ensured that whatever tasks had to be performed were completed and monitored progress. In addition, the manufacturer requested that a consulting resource dedicate time to the project to shore up the integration with ERP/ MRP, the education and training programs and the tie to SIOP and associated metrics.

Demand planning: We focused on developing a demand plan for Boeing’s items as well as related items impacting bottleneck areas of the operation and other items that used the same components/ materials. We utilized Boeing’s consumption data, inputs from Sales and other customers, market insights and prior trends.

Execution of the demand plan: Developing a sales forecast alone was not sufficient as the planning team was unsure about executing the forecast, due to the prior management’s perspective. In fact, they were so concerned about producing ahead that it required significant efforts and pushing from the executive team to instill the change in process. The team had to believe they would not be held accountable for following the forecast.

SIOP freed up bottleneck capacity: As we rolled out the SIOP process, the team agreed to consensus forecasts and aligned Sales and Operations. We developed capacity projections, providing visibility to upcoming bottlenecks with proposed solutions. Thus, the executive team allocated the appropriate resources to ensure capacity availability and resourced critical skills for bottleneck operations. Quality and engineering resources had to be allocated and prioritized accordingly as well.

Built on momentum: As Boeing’s requirements changed rapidly and the manufacturer had work-in-process (WIP) inventory and/or the appropriate components and capacity to produce rapidly based on the demand plan and related SIOP plans, the team gained confidence and momentum.

Metrics: We tied it together by monitoring key metrics including service, quality, transaction timing, and other key data points required to ensure success.

Results

The most important result is that the team went from poor performance on the Boeing scorecard (which would lead to decreased business if not turned around) to the top performing tier of the scorecard. Not only did this solidify the business with Boeing but it also provided opportunities for expansion in the future. This accomplishment also engaged employees and brought them into the fold so that they could see how they contribute to customer success and they gained insight into the importance of what they do.

In addition, by improving the service levels to Boeing, we gained a better view into Boeing’s requirements and trends. When combined with the confidence gained with the full demand plan, Sales and Customer Service were able to better compete to win additional business with shorter lead-times. Additionally, they were able to charge expedite fees for quick turn around jobs, creating a win-win for the customer and margins. In addition, Purchasing incorporated the enhanced supply chain visibility into their supplier discussions and further increased margins. Suppliers knew what was coming down the pike and could plan accordingly, thus passing on savings for volume commitments.

The Bottom Line

The value of VMI can be dramatic. Simple customer and supplier collaboration can deliver profound win-win results. Although these programs typically start with a customer request, they evolve into a strong partnership with the supplier gaining significant value and return on investment. Forward-looking executives search for opportunities to pursue VMI so that they can demonstrate value-added service and secure their position as a strategic partner for growth and success.

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