Blueprint for Qualification & Implementation of the Supplier- Managed Inventory Program

Author(s):

Drew G. Curtis, C.P.M., CPIM
Drew G. Curtis, C.P.M., CPIM, Strategic Programs Manager, TTI, Inc., Tewksbury, MA 01876, (978)-851-2000, www.ttiinc.com.

83rd Annual International Conference Proceedings - 1998 

Abstract. Manufacturers, besieged by global competition and rapid technology changes, have subsequently increased pressures on their suppliers to deliver product in less than traditional lead-times. In order to accomplish this goal, the proper selection of suppliers and inventory management programs is paramount. This presentation will focus on the selection of suppliers, what it takes to make the programs successful and the most popular types of supplier-managed inventory programs in today's high-tech marketplace.

Global Marketing & Competitive Pressures. Manufacturers' product life cycles and new product time to market are continuously decreasing while pricing pressures are increasing. In order to stay competitive in this environment, companies are changing their manufacturing processes to eliminate non - value - added activities and to produce only what customers want, when they want it.

In order to accomplish these objectives, materials management organizations must be proactive in decreasing purchasing lead-times through innovative materials management programs with suppliers. These programs will require the combined effort of several people from both the customer and supplier organizations. The relationship between customer and supplier will change because of the additional resources of people and money that will be committed from these organizations. Instead of just the traditional buyer-to-salesperson relationship, there will be vital relationships between personnel in MIS, Finance, Warehousing, Traffic and the Quality departments. MIS will be involved because of automated EDI transactions, Finance because of "bonded" inventory expenses, Warehousing because of part picking and labeling requirements, Traffic because of shipping methods and Quality to assure the processes and product are meeting expectations. This re-alignment should set the foundation for both customer and supplier, to work as one to accomplish their material management objectives.

The Importance of the Supplier Evaluation and Selection Process. The supplier becomes an extension of the materials management departments they will be supporting and must have the appropriate materials management support systems in place within their organizations. Past experiences in dealing with suppliers under a traditional purchasing environment are not enough when engaging in supplier-managed inventory programs.

The selection and partnership with a supplier who can presently demonstrate superior capabilities in the supplier-managed inventory program environment and who is poised to lead the way into the next generation of supplier programs, is essential for customers to gain or maintain their competitive edge. The selection process to engage the best suppliers as partners should not be underestimated in this era of supplier reduction. Partnering with suppliers and supplier-managed inventory programs go hand in hand and great care should be taken to make the correct choice and establish a "true partnership." The emphasis at this time should be on selecting your ideal partner based on the supplier's management capabilities and technical competencies, not on piece part material cost objectives--fit the partner to the program; price considerations will fall in line through negotiations.

A "true partnership" where both the customer and supplier work in harmony toward a common inventory management goal can accomplish a great deal and reap substantial rewards for both companies. Customers will reduce their supplier base, decrease their inventory liability while increasing their production flexibility. Suppliers will benefit by solidifying their customer base which will result in better material support and increased communication with customers. Total administrative costs for program management should decrease as the relationship matures to the benefit of both companies. These benefits are contrary to what one would find in a "one-sided partnership."

A "one-sided partnership," where both customer and supplier are preoccupied with their own concerns, will not reap positive long-term benefits. The customer and supplier view themselves as opponents in these relationships (though they won't say so officially!) and don't work as a team to solve the day-to-day materials problems that are bound to occur. There is a lot of tension between the parties and arm twisting to accomplish the customer's objectives. This type of relationship is counter-productive and doomed to failure.

Supplier Survey / Evaluation Tool. I recommend that the procurement person or team, create a supplier survey / evaluation tool that addresses EDI procurement and forecasting capabilities, automated material bonding processes, management personnel and commitment, as well as the other traditional categories of: financial stability, inventory breadth and depth, delivery, quality, service, employee turnover, etc.. (a sample survey will be available at the May '98 presentation). It is imperative that the buyer and/or selection team be objective and as thorough as possible in gathering accurate information during this phase of the supplier-selection process.

There are two key components that are unique to supplier-managed inventory programs that need to be addressed during the evaluation and supplier selection process. They are: Inventory Management and Order Release.

A supplier's inventory management process and capabilities as it relates to supplier-managed programs is often overlooked and/or misunderstood by many customers, yet is probably the most influential factor in success or failure of this type of program. It is not uncommon for customers to remark to the supplier, "I don't care what mechanism you use to accomplish the "bonded" quantity we need, that's your business! You're the material management experts." As a former procurement manager and current value-added program supplier, I vehemently assert that you should care! It's imperative that you qualify the inventory management process as thoroughly as you would any other process.

Inventory Management. Specifically, inventory management in this context means, what planning process will the supplier use to establish a "bond" quantity and assure it will be in stock when needed? Will this process be automated based on an electronic transmission of the customers material requirements planning forecast and uploaded to the supplier's material planning program or will the planning for reservation be done manually by the supplier's personnel? Manual planning is a common occurrence among electronic component distributors and is nothing more than transference of workload from customer to supplier. Manual planning may be acceptable when dealing with a small number of line items (less than 100 or so) but prohibitive when dealing with higher line counts. Always ask the questions, " What will you do with the electronic transmission of my MRP? Will you upload it automatically into your planning system or will you print it out for someone to analyze?" If it is uploaded automatically, have the supplier give you a live demonstration to qualify their capability. Automatic integration of the material forecast is the preferred method to ensure timeliness of material reservation and elimination of data entry errors.

Order Release. The order release is the second aspect of supplier-managed inventory programs. This part of the program is concerned with telling the supplier what to ship and when. Most of the release mechanisms or "triggers" from customers to suppliers to ship product are similar from supplier to supplier. Suppliers are expected to ship the desired quantity of materials to the customer within one to three days of receiving the order release from the customer. The releases for this program should be for current shipments only and should not contain future orders. The five most common methods to trigger the release of materials from the supplier to the customer are: EDI 850 purchase order, Fax purchase order, Scanning of a bar code, EDI 830 with embedded purchase order, or Supplier-determined release.

The EDI 850 Purchase Order is a transaction set regulated by the American National Standards Institute ( ANSI ) that allows customers to place purchase orders with suppliers electronically. The supplier would "bond" material for the customer and not ship product until receipt of the EDI 850 purchase order.

The Fax Purchase Order is the faxing of the customer's purchase order to the supplier. The supplier will release shipment from the "bonded" material once the faxed order is received. Automated faxing is recommended over manual faxing, if this method is used.

The Scanning of a Bar Code, which contains a ship quantity, a part and a purchase order number is a popular method for customers to "trigger" shipments from a supplier. This method is generally used in a demand-pull materials replenishment environment. The bar code label may be affixed or attached to a bin or a shelf, or kept in a three-ring binder at the buyer's desk. The replenishment signal may occur at point of use and be initiated by the supplier or customer, or replenishment notification sent to purchasing to be triggered by the buyer, increasing procurement's control of the process.

The ANSI Transaction Set EDI 830, which is the customer's material requirement forecast, may contain a purchase order segment. This is becoming a popular vehicle for customers engaged in schedule sharing programs because it enables the customer to send a material forecast and the order release to the supplier in one electronic transmission, eliminating the need for other order release methods.

The Supplier-Determined Release allows the supplier to determine the release quantity and when it needs to be shipped to the customer. This method requires the supplier to ship product that has a negative net available within an established horizon.

Types of Supplier-Managed Inventory Programs in the Market. I will define the five most common supplier-managed inventory programs that exist in today's marketplace. They are : MRP Auto-Replenishment, Demand Pull, Consignment, In-House Stores, and Payment Upon Product Completion. Keep in mind the two aspects of all supplier programs-- inventory management and order release-- as you read through this section. Determine where the emphasis is placed within these programs, inventory management, order release or both.

MRP Auto-Replenishment is a weekly schedule sharing program where the customer transmits electronically their material requirements forecast to the supplier via an EDI 830 transaction set or an ASCII flat file. The supplier will upload this information to their material requirements planning program to analyze and determine what quantity will need to be bonded in order to meet the anticipated schedule. The program will also place purchase orders with the supplier's suppliers to ship parts to fill in any shortfalls in the supplier's bonded pipeline. The supplier will then ship product to the customer, if the customer will be in a projected negative inventory position in an agreed upon horizon. For example, the customer and supplier may agree upon a four-week window where the supplier will analyze the customer's requirements, and if the customer has a projected negative net available, the supplier will ship product to cover it.

The customer and supplier will agree upon purchase order numbers, part numbers and resale price prior to the program implementation. The customer will receive the shipment and update their inventory records. The process will continue with the updated transmission of the material requirements forecast to the supplier. The customer will benefit by eliminating purchase order schedule changes, excess inventory carrying costs, flexibility to meet increased demands and reduction of all associated non-value-added activities. The supplier will benefit through the schedule sharing activity and the closer relationship with the customer. The traditional negatives that one associates with traditional MRP "push" planning systems are eliminated due to the short requirement window.

Demand Pull (Kan Ban Systems) programs are inventory-replenishment programs that usually require a supplier to "bond" a percentage of a customer's estimated annual usage at the supplier's facility. The customer may electronically send a materials forecast, or a hard copy of their MRP to the supplier for analysis and establishment of the "bond" quantity. The triggering of shipments from the supplier to the customer may be done by any of the methods we discussed earlier. The most common are the scanning of a bar code and the EDI 850 purchase order. This type of program enables the customer to target inventory levels and only requests suppliers to replenish material that has been consumed. However, care must be exercised by the customer and supplier to manage bin levels and release quantities and make timely adjustments where necessary. The more stable the production environment, the better it is for these programs to operate.

Consignment or Customer-Managed Inventory programs are distinguished by two major criteria. The first is the supplier owns the material that's in the customer's facility until the customers utilizes it in their manufacturing process. Transference of ownership doesn't occur until this time. The second point, is the customer continues to manage the warehousing and material handling operations within their company. These programs may be MRP or demand driven as we've previously discussed. The major benefit to the customer is not paying for material until it's used, and the benefit to the supplier is the "hope" it buys him more customer loyalty. The major negatives to the supplier are increased carrying costs, inventory auditing issues and increased handling / shipping costs.

In-House Stores are similar to consignment programs with the additional characteristic of the supplier managing the logistics operation at the customer's facility. The supplier is assigned secured space in the customer's facility and is responsible for stocking the "store" to agreed-upon inventory levels. The supplier will kit material or replenish point-of-use inventory locations for the customer, assuming the traditional responsibilities of material handlers. The benefits to the customer are they do not pay for materials until they use them, they have reduced their material handling overhead, and eliminated a myriad of non-value transaction-related activities. The negatives to the customer are the storage space assigned to the supplier that could be utilized for manufacturing and a potentially false sense of security regarding inventory availability. The major benefit to the supplier is a cornering of the market if they are the customer's exclusive or primary supplier for the product they sell. The negatives are increased carrying and logistics costs as well as personnel issues.

Payment Upon Product Completion extends the consignment concept to actual product completion or shipment to the supplier's customer's customer. Under this scenario the customer would not take ownership for component materials until the customer produces their final assembly or ships it to their customer. This program could operate in either the customer-managed inventory environment or the In-House store concept. This program extends the suppliers material liability while decreasing the customer's liability. The success of this program is predicated on a good materials management system and an accounting system that can easily identify materials to be invoiced. This program is best utilized in a high volume production environment where the supplier will not be burdened with the cost of carrying low-turnover product.

Roles and Responsibilities of Customers and Suppliers. Roles and responsibilities for both the customer and the supplier should be clearly defined and agreed upon by the management personnel responsible for the success of the supplier-managed inventory program. Quarterly program reviews which include the management team from each company should be conducted in addition to the regular monthly reviews between buyer and salesperson.

An implementation checklist should be developed that identifies all the activities that need to be accomplished prior to going live with the new program. This checklist should identify the person responsible to complete the activity and the targeted completion date. There is always more to do than originally expected and a checklist or Gantt chart will keep the project in line.

A statement of work, which clearly defines the mechanics of the program and persons responsible must be developed and agreed upon by both customer and supplier. This statement of work will detail the process that must be followed in order for the program to work.

Summary. Supplier-Managed Inventory Programs are rapidly becoming standard operating procedure in the high tech electronics industry. The benefits for customers engaging in successful programs are enormous. The challenge is to establish win-win partnerships with exceptional suppliers, who have the ability to meet the customer's needs now and in the future. A least total cost solution will be a major benefit of any well run supplier-managed program. A thorough evaluation and selection process will go a long way in assuring a least total cost solution and success of the program. Open communication between management personnel from both customer and supplier is essential in fostering goodwill and in selecting the best inventory management model(s) for your company.


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