INTEGRATED SUPPLY PLANNING
The fifth element is a synchronized supply planning processes, integrated at one end with its internal consumers,manufacturing and logistics, and at the other end, with all suppliers. Supply Planning consists of numerous initiatives such as Supplier Rationalization, Vendor Managed Inventory and Consignment Processing. While it is important to achieve optimal demand-supply matching at the downstream end of the supply chain as discussed under S&OP earlier, it is equally rewarding to have a similar demand-supply matching at other end too. In this case demand would be the requirements from manufacturing functions and supply would be external suppliers or internal component manufacturing units. Based on end customer demand signal, production plans and material requirements plans are firmed up. These material requirements usually partially filled up by existing inventory but the rest comes from fresh procurements. Supply Planning targets this function to achieve increased efficiencies and reduced costs.
Supplier Rationalization: More often than not, a firm may have more suppliers than it may actually need. As firms grow the number of suppliers also increase, usually because of diverse purchase requirements and lack of control over supplier approval process. Obviously during growth phase these aren’t areas that attract a lot of executive attention, but as operations stabilize supplier rationalization presents a good opportunity for cost reduction. This program targets to achieve an optimal supplier base for the firm based on its requirements and delivers benefits both from a financial and business process perspective. Some specific benefits include – increased spend leverage, reduced procurement overheads and better relationships with suppliers. On the flipside, this program can increase dependence on a smaller set of suppliers and may impact the competitiveness amongst
suppliers.
Vendor Managed Inventory: It is a practice where inventory is managed by the vendor instead of the consuming party. This concept is based on the belief that vendors know the supply/production constraints better than the consumers for the supplied material and once the demand signal is shared with them, they will be able to better manage the material flow. This arrangement also reduces the transactions in the entire flow since the consuming party is not concerned about material management at all. VMI takes collaboration among partners to a new level, where an outside party is still owns material in an enterprise and has complete visibility to its usage and consumption.
Though VMI can be beneficial across industries, it is extremely beneficial in industry segments where demand is unpredictable (pharma), fast moving short lifecycle products (consumer electronics) or small margins (automotive). Immediate benefits that accrue from VMI are: lower costs for all parties by reduced inventory, transport, obsolescence, stocktaking etc, smoother utilization levels at vendors by flexible delivery and insight into consumption, reduced overheads due to lesser paperwork, order
entry tasks etc. Implementing VMI requires industry standard compliant IT systems that are capable of communicating across enterprise boundaries.
Consignment Process: This is another one of the models of supplier managed inventory. Also known as the Vendor Owned Inventory (VOI), Consignment Process involves the supplier physically giving the material to the customer at the time and point of use and until that point; supplier retains the cost of holding the inventory and its title. The customer is billed only after the usage of the material and the supplier then replenishes the inventory. This translates into huge benefit for the customer as he is able to show higher inventory turns on his sales though he still has to store and manage this inventory. While the benefit for a supplier may not be so clearly apparent, in reality this model helps the suppliers increase his sales for those products that has some sort of risk involved with it.
Products whose sales are questionable are most apt for following this managed inventory model. New products, expensive products or existing products in new sales channels have an associated sales risk attached to them. The customer might not be willing to buy this product and stock it in lieu of the risk involved. In such a scenario, a supplier might share the risk with the customer by storing the material at the customer location at this cost. As and when the product is used by the customer, the supplier gets paid for it and replenishes the inventory. This convinces the customer to buy this product thereby enabling the supplier to make a sale. Consignment Inventory is a complex model to follow and requires some agreement issues to be sorted out such as payment terms, insurance and loss ownerships, freight and return policies, data exchange and time limits.
For a supplier, it is advisable to go for a consignment process only if the demand in unstable and highly variant or when there is a subtle risk involved in buying or storing the product. A customer might demand consignment inventory to reduce his costs but the supplier has to carefully evaluate before deciding on it. It is a result of a collaborative relationship between the buyer and seller and is successful only in scenarios where it offers shared benefits to the stakeholders. Some of the downsides of this model is its difficulty of execution, requirement of highly advanced technology and complex data requirement and increase in supply costs. Therefore, consignment process is advisable only when the benefits surpass the downsides.